NCR Corporation — Form 10-Q Summary
Entity and period: The supplied filing is NCR Corporation’s unaudited quarterly report for the quarter and nine months ended September 30, 2013, not a filing under the name NCR Voyix Corp. Unless noted otherwise, amounts are in millions of dollars.
Business context and reporting period
NCR provides hardware, software and services for financial services, retail, hospitality and emerging-industry customers. Management’s stated strategy emphasizes software and services growth, innovation, customer loyalty and acquisitions. The February 2013 Retalix acquisition expanded Retail Solutions; its results are included from February 6, 2013.
Key financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $1,508 | $1,435 | $4,453 | $4,088 |
| Gross margin | $415; 27.5% | $382; 26.6% | $1,210; 27.2% | $1,071; 26.2% |
| Operating income | $145 | $129 | $369 | $337 |
| Net income attributable to NCR | $98 | $87 | $245 | $239 |
| Diluted EPS | $0.58 | $0.53 | $1.45 | $1.46 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $16 | $(280) |
| Free cash flow (non-GAAP) | Not provided for quarter | Not provided for quarter | $(190) | $(476) |
Q3 revenue rose 5% (7% in constant currency); service revenue increased 12%, while product revenue declined 2%. For the nine-month period, revenue grew 9% (11% in constant currency), with product revenue up 6% and service revenue up 12%. Services gross margin improved to 29.5% in Q3 and 28.9% year to date; management cited favorable revenue mix and lower delivery costs.
Cash and cash equivalents were $460 at September 30, 2013, down from $1,069 at December 31, 2012. Total debt was $2,227, up from $1,963, including $2,212 of long-term debt and $15 of short-term borrowings. The revolving facility had approximately $833 of available borrowing capacity. Current assets were $3,242 and current liabilities $1,753.
Material changes versus comparable periods
- Q3 operating income increased to $145 from $129, while nine-month operating income increased to $369 from $337. Gross margin improved in both comparisons.
- Higher service revenue and Retail Solutions growth supported results. Retalix contributed $80 of Q3 revenue and $212 for the post-acquisition period through September; it contributed $39 of nine-month segment operating income.
- Interest expense increased to $23 from $7 in Q3 and to $70 from $24 for nine months, primarily reflecting interest on senior unsecured notes.
- Q3 Financial Services revenue fell to $767 from $799, but segment operating income rose to $93 from $84. Retail Solutions revenue and operating income increased to $494 and $50, respectively, from $421 and $28. Emerging Industries revenue was flat at $86, while operating income declined to $16 from $18.
- Cash from operations improved year over year, chiefly because the prior-year period included a $500 discretionary U.S. pension contribution. Nine-month 2013 operating cash flow remained modest and free cash flow remained negative.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific revenue or earnings forecast. Management said it intended to continue its growth, software-and-services mix, cost-efficiency and strategic-acquisition initiatives, and believed available cash, operating cash flow and financing were sufficient for requirements over the next 12 months.
- Cash requirements: NCR expected approximately $320 of 2013 employee benefit plan contributions, including a $100 discretionary contribution to the U.S. qualified pension plan made October 1, after quarter-end. It expected approximately $55 of net Fox River-related remediation and other payments in 2013.
- Debt and covenants: The July 2013 amended secured credit facility included a $1.12 billion term loan and an $850 million revolver, with financial covenants and restrictions on additional debt, distributions and other actions. Variable rates, leverage, refinancing and covenant compliance are identified risks.
- Environmental contingencies: The Fox River net reserve was approximately $101 at September 30, 2013. The company faced appeals and cost-sharing disputes, including an approximately $76 judgment, while cleanup cost estimates were $827 and potential natural-resource damages ranged from zero to $246. In the Kalamazoo River matter, a court found NCR liable as an arranger but had not determined its share or damages.
- Compliance and legal matters: NCR was responding to SEC and DOJ requests concerning FCPA allegations and had disclosed potential Syria-related sanctions issues to OFAC; it said it was cooperating and implementing remediation. The filing states fines or other measures remain possible. It also disclosed related shareholder litigation.
- Accounting and unusual items: NCR retrospectively changed pension accounting to recognize actuarial gains and losses faster. It corrected a previously reported adjustment between retained earnings and accumulated other comprehensive loss; the correction did not affect reported operating results or cash flows and was deemed not material to previously reported interim statements. Nine-month tax expense included approximately $16 of benefit from tax legislation and a $10 valuation-allowance release. Q3 SG&A included a $7 gain on sale of an office property; nine-month services costs benefited from a supplier reimbursement.
- Other risks: Currency movements, competition and pricing, technology and product-cycle changes, execution of the software-and-services transition, acquisition integration, pension funding and customer credit are among the risks discussed. The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer and period: this source is NCR Corporation’s 2013 Q3 10-Q; the provided NCR Voyix Corp metadata does not match the filing.
- Assess the sustainability of revenue and margin growth, particularly the contribution from Retalix and the shift toward software and services.
- Review liquidity after the October pension contribution, negative free cash flow, acquisition spending and planned remediation payments.
- Monitor debt levels, variable-rate exposure, covenant headroom and future interest expense.
- Track Fox River and Kalamazoo River liability estimates, appeals, indemnity and insurance recoveries, and the outcome of FCPA/OFAC matters.
- Consider comparability effects of the retrospective pension-accounting change and the disclosed retained-earnings/AOCI correction.