Business context and reporting period
This is NCR Corporation’s unaudited Form 10-Q for the quarter and six months ended June 30, 2013. The filing is for NCR Corporation, not a company identified in the filing as NCR Voyix Corp. NCR sells hardware, software and services across financial services, retail, hospitality and emerging industries. Its strategy emphasizes software and services growth and a shift toward a software-driven business model.
Results include Retalix from its February 6, 2013 acquisition date. Accordingly, reported year-over-year comparisons are not fully like-for-like.
Financial results and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $1.535bn | $1.409bn | $2.945bn | $2.653bn |
| Gross margin | $426m; 27.8% | $374m; 26.5% | $795m; 27.0% | $689m; 26.0% |
| Operating income | $139m | $130m | $224m | $208m |
| Net income attributable to NCR | $86m | $102m | $147m | $152m |
| Diluted EPS | $0.51 | $0.62 | $0.87 | $0.93 |
| Operating cash flow | Not separately reported for the quarter | $(11)m | $120m | |
| Free cash flow (non-GAAP) | Not separately reported for the quarter | $(124)m | $8m |
Q2 revenue rose 9% year over year, while NCR-attributable net income fell 16% and diluted EPS fell from $0.62 to $0.51. For the first half, revenue increased 11% and operating income 8%, while attributable net income decreased 3%. Higher interest expense—$26m in Q2 versus $8m, and $47m for the half versus $17m—partly offset operating improvement.
At June 30, cash was $460m, down from $1.069bn at year-end 2012. Total debt was $2.164bn, comprising $85m short-term borrowings and $2.079bn long-term debt, versus $1.963bn total debt at year-end. Current assets were $3.076bn and current liabilities $1.838bn. Operating cash flow deteriorated mainly due to an $80m settlement of U.S. non-qualified pension plans and working-capital changes. Investing cash outflow was $777m, including $696m for acquisitions. Financing activities provided $216m. Management said liquidity was sufficient for expected requirements over the next 12 months.
Material changes and operating drivers
- Services revenue grew 13% in Q2 and products revenue 5%. Management cited software growth, higher Retail Solutions and Hospitality activity, and Retalix’s contribution. Q2 foreign exchange reduced reported revenue growth by about 1 percentage point.
- Q2 product gross margin improved to 26.0% from 24.6%; services gross margin improved to 29.4% from 28.4%. Product margin benefited from sales mix, including software; service margin benefited partly from supplier reimbursement of prior costs.
- Retail Solutions Q2 revenue was $515m versus $409m and segment operating income $49m versus $28m; Retalix contributed $82m revenue and $16m operating income in Q2. Emerging Industries revenue and operating income declined to $80m and $11m, from $84m and $19m.
- SG&A rose to $232m from $195m in Q2, reflecting acquisition-related items and investment in sales resources. Q2 operating income also included $34m of “other adjustments,” mainly acquisition-related costs, amortization and purchase-price adjustments.
- NCR changed its pension accounting methodology retrospectively, accelerating recognition of asset-value changes and actuarial gains or losses. The change reduced retained earnings by $1.050bn at December 31, 2012; the filing presents adjusted comparative results.
Outlook, risks and unusual items
The filing does not provide specific consolidated revenue, earnings or EPS guidance. Management said it would continue pursuing profitable growth, software and services mix improvement, cost efficiency, service capability and strategic acquisitions. It anticipated approximately $259m of 2013 contributions to employee benefit plans and about $48m of 2013 Fox River-related remediation and other payments, assuming co-obligor payments. A July 25, 2013 credit-facility refinancing increased the term loan facility to $1.115bn and revolving facility capacity to $850m; this occurred after quarter-end.
Major contingencies include Fox River cleanup and related litigation, with a net reserve of approximately $109m at June 30, 2013, and Kalamazoo River environmental litigation, for which a decision was expected in 2013. NCR warned Fox River costs and liability allocation remain uncertain and could materially affect cash flows, earnings or financial condition. The company was also responding to SEC and DOJ inquiries concerning FCPA allegations and winding down past Syria operations under OFAC licenses; it said fines or other remedial measures could not be ruled out. Other risks include substantial debt and covenant compliance, variable interest rates, foreign exchange exposure, tax audits, pension obligations and competitive and economic conditions.
Unusual period items include a $16m one-time tax benefit in the first half from retroactive tax relief; special early-retirement benefit costs partly offset by pension curtailment and settlement gains; and the prior-year Q2 comparison benefiting from discontinued-operation income, including the Entertainment business sale and a Teradata-related tax benefit.
Important facts for investors to verify
- Confirm the issuer and security identity: this filing names NCR Corporation, while the request identifies NCR Voyix Corp.
- Assess organic growth separately from Retalix’s acquired revenue and determine whether software and services growth and margin gains are sustainable.
- Review cash conversion, working-capital movements, pension funding needs and the sources and use of acquisition financing; first-half free cash flow was negative $124m.
- Monitor debt, interest expense, covenant headroom and the terms and effects of the post-quarter July 25 refinancing.
- Track Fox River reserve assumptions, appeals and recovery from API/BAT, insurers and indemnitors, as well as the Kalamazoo case and FCPA/OFAC matters.
- Account for the retrospective pension-method change and the impact of tax benefits and other unusual items when comparing earnings.