Business context and reporting period
This is NCR Corporation’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2010. The filing describes NCR’s ATM, point-of-sale, self-service, software, and support-services businesses across the Americas, EMEA, and Asia Pacific and Japan. The supplied company metadata says NCR Voyix Corp.; the filing itself names NCR Corporation.
Financial performance
Amounts are in millions of dollars except per-share data. Third-quarter and nine-month comparisons are against the respective 2009 periods.
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Revenue | $1,207 | $1,135 | $3,413 | $3,267 |
| Gross margin | $246; 20.4% | $224; 19.7% | $678; 19.9% | $637; 19.5% |
| Operating income | $34 | $29 | $47 | $58 |
| Net income attributable to NCR | $83 | $15 | $95 | $23 |
| Diluted EPS | $0.51 | $0.09 | $0.59 | $0.14 |
Q3 product revenue grew 11% to $600 million and services revenue grew 2% to $607 million. For nine months, product revenue rose 8% to $1,655 million and services revenue rose 2% to $1,758 million. Management attributed growth to entertainment/DVD kiosks and higher product and service volumes in several regions. Q3 gross margin improved partly on product mix and lower service-delivery costs; entertainment business losses remained a drag. Nine-month operating income declined despite higher revenue and gross margin, amid increased pension, SG&A, and R&D costs.
Cash flow, balance sheet, and liquidity
- Operating cash flow for the first nine months was $61 million, versus $150 million in 2009. The company’s non-GAAP free cash flow was negative $106 million, versus positive $2 million, reflecting lower operating cash flow and higher capital spending.
- Cash and equivalents were $360 million at September 30, 2010, down from $451 million at year-end 2009. Capital expenditures were $135 million and capitalized software additions were $43 million for the nine months.
- Short-term borrowings were zero and long-term debt was $10 million. NCR had a $500 million unsecured revolving credit facility with no borrowings outstanding; availability was reduced by $21 million for letters of credit. The company reported compliance with facility covenants.
- Current assets were $2,486 million and current liabilities were $1,461 million. Pension and indemnity liabilities totaled $1,248 million; postretirement and postemployment liabilities were $327 million.
- NCR repurchased approximately 1.5 million shares for $20 million during the first nine months, all in Q3.
Material changes and unusual items
- Net income benefited materially from a $40 million release of a valuation allowance on Japanese deferred tax assets, reflecting sustained profitability there. The Q3 tax benefit was $45 million; the nine-month tax benefit was $35 million.
- Discontinued operations included environmental insurance-settlement income of $5 million after tax in Q3 and $16 million after tax for nine months. NCR changed the presentation of certain environmental costs and recoveries to discontinued operations; the change did not alter net income.
- The 2009 comparison included a $22 million investment impairment and a $6 million litigation charge in other expense. For the nine months of 2009, a Japanese subsidiary revenue correction reduced product revenue by $10 million and cost of products by $7 million, lowering gross margin and net income by $3 million.
- Q3 2010 included $6 million of headquarters-relocation costs and a $6 million gain on a French office-building sale. Nine-month relocation costs were $18 million; the $38 million sale proceeds also supported investing cash flow.
- Organizational realignment was completed in June 2010; NCR reported approximately $40 million in incremental annualized savings.
Outlook, risks, and contingencies
- NCR gave no numerical revenue or earnings guidance in the provided filing text. Management said it would continue its growth, self-service, emerging-industry, cost-reduction, global-service, and innovation initiatives through the remainder of 2010 and beyond.
- Management expected approximately $170 million of pension, postemployment, and postretirement contributions in 2010, including $100 million to international pension plans, $10 million to the executive pension plan, $13 million to the U.S. postretirement plan, and $47 million to postemployment plans. It anticipated no 2010 contribution to the U.S. qualified pension plan.
- NCR said it expected liquidity from cash, operating cash flows, and existing financing to meet the next 12 months’ operating needs, benefit-plan contributions, and Fox River remediation payments. Actual cash generation and remediation costs remain uncertain.
- The Fox River environmental matter is a major contingency. The net reserve was approximately $204 million at September 30, 2010, versus $202 million at year-end 2009. NCR estimated total cleanup costs at $933 million and natural-resource damages at $76 million; the potential natural-resource-damage range was zero to $246 million, while the federal government had previously indicated claims could be as high as $382 million. NCR said cleanup payments could continue through at least approximately 2019, followed by decades of monitoring.
- On October 14, 2010, federal and Wisconsin authorities sued NCR and 11 other parties over Fox River response costs, natural-resource damages, and compliance with the cleanup order. NCR said the claims against it were already contemplated in its reserve, but liability remains uncertain and could materially affect results, cash flows, or financial condition.
- Other disclosed exposures include tax audits, a pending appeal concerning retiree death benefits, foreign-currency movements, customer credit risk, and pension-cost volatility. NCR planned to adopt revised multiple-deliverable revenue guidance on January 1, 2011 and was evaluating its effects.
Most important facts for investors to verify
- How much of reported earnings growth is sustainable after excluding the Japanese tax-allowance release and environmental insurance recoveries.
- Whether operating cash flow recovers and inventory and capital spending convert into cash; nine-month free cash flow was negative $106 million.
- Updated Fox River reserve assumptions, allocation among responsible parties, litigation outcomes, indemnitor collectibility, and cleanup-cost overruns.
- Whether the stated 2010 benefit-plan contributions and liquidity expectations are achieved.
- The effect of the 2011 revenue-recognition changes and ongoing foreign-exchange exposure on reported results.