UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 29, 2014
NCR CORPORATION
(Exact name of registrant as specified in its charter)
Commission File Number 001-00395
Maryland | 31-0387920 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
3097 Satellite Boulevard
Duluth, Georgia 30096
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (937) 445-5000
N/A
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2 below):
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 2.02. Results of Operations and Financial Condition.
On July 29, 2014, the Company issued a press release setting forth its second quarter 2014 financial results along with its updated fiscal year 2014 financial outlook and its third quarter 2014 financial outlook. A copy of the press release is attached hereto as Exhibit 99.1 and hereby incorporated by reference.
Item 7.01. Regulation FD Disclosure.
On July 29, 2014, the Company will hold its previously announced conference call to discuss its second quarter 2014 results, its updated fiscal year 2014 financial outlook and its third quarter 2014 financial outlook. A copy of supplementary materials that will be referred to in the conference call, and which were posted to the Company’s website, is attached hereto as Exhibit 99.2.
Item 9.01 Financial Statements and Exhibits.
(d) Exhibits:
The following exhibits are attached with this current report on Form 8-K:
Exhibit No. | Description |
99.1 | Press Release issued by the Company, dated July 29, 2014 |
99.2 | Supplemental materials, dated July 29, 2014 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
NCR Corporation | ||
By: | /s/ Robert Fishman | |
Robert Fishman | ||
Senior Vice President and Chief Financial Officer | ||
Date: July 29, 2014
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Index to Exhibits
The following exhibit is attached with this current report on Form 8-K:
Exhibit No. Description
99.1 Press Release issued by the Company, dated July 29, 2014
99.2 Supplemental materials, dated July 29, 2014
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| NEWS RELEASE | |
July 29, 2014
NCR Announces Second Quarter 2014 Results
Software-related revenue growth continues to drive increased operational gross margin
• | Revenue increased 8% to $1.66 billion; 42% growth in software-related revenue to $446 million, including 247% growth in SaaS revenue to $125 million |
• | Non-pension operating income (NPOI) increased 15% to $210 million; GAAP income from operations increased 22% to $169 million |
• | Non-GAAP diluted EPS of $0.68; GAAP diluted EPS of $0.53 |
• | Free cash flow increased $24 million; GAAP net cash provided by operating activities increased $112 million |
• | Announcing restructuring plan to strategically reallocate resources to position NCR to focus on highest growth opportunities; Expected annualized savings to reach approximately $90 million by 2016 |
• | Revenue and non-GAAP guidance reaffirmed for full-year 2014 |
DULUTH, Georgia - NCR Corporation (NYSE: NCR) reported financial results today for the three months ended June 30, 2014.
"We made expected progress and generated solid results during the second quarter. In particular, I was pleased with software-related revenue growth of 42%, and organic software-related revenue growth of 15%" said Chairman and CEO Bill Nuti. "Our performance was led by Financial Services, where we are seeing continued demand for our branch transformation solutions and our expanded software portfolio following the acquisition of Digital Insight earlier this year."
Nuti continued, "As we enter the second half of our fiscal year we are implementing a restructuring plan focused on reallocating our resources to our highest growth, highest margin opportunities; in essence, aligning our resources to the realities of our transformed revenue streams. This is the right time for NCR to take this step now that we have the operational assets we need for the future, and have had time to assess the impact of our acquisitions and organic investments. This action, beyond being strategically sound, is also economically compelling. As a result of this restructuring program, NCR will achieve run-rate savings of approximately $90 million per year by 2016."
Q2 Financial Summary
Second Quarter | |||||
$ in millions, except per share amounts | 2014 | 2013 | Change | ||
Revenue | $1,658 | $1,535 | 8% * | ||
Income from operations | $169 | $139 | 22% | ||
Non-pension operating income (NPOI) | $210 | $182 | 15% | ||
Diluted earnings per share | $0.53 | $0.51 | 4% | ||
Non-GAAP diluted earnings per share | $0.68 | $0.68 | — | ||
* Revenue growth of 9% on a constant currency basis.
In this release, we use the non-GAAP measures non-pension operating income (NPOI), non-GAAP diluted earnings per share, free cash flow and revenue growth on a constant currency basis. These non-GAAP measures are described and reconciled to their corresponding GAAP measures elsewhere in this release.
Q2 Supplemental Revenue Information
Second Quarter | ||||||||||
$ in millions | 2014 | 2013 | Change | |||||||
Software-as-a-Service (SaaS) | $ | 125 | $ | 36 | 247 | % | ||||
Software License/Software Maintenance | 172 | 154 | 12 | % | ||||||
Professional Services | 149 | 124 | 20 | % | ||||||
Total Software-Related Revenue | 446 | 314 | 42 | % | ||||||
Hardware | 637 | 664 | (4 | %) | ||||||
Other Services | 575 | 557 | 3 | % | ||||||
Total Revenue | $ | 1,658 | $ | 1,535 | 8 | % | ||||
Software-related revenue increased 42% in the second quarter, including 247% growth related to SaaS. Excluding the contribution of Digital Insight, software-related revenue increased 15% and SaaS revenue increased 17%.
Q2 Operating Segment Results
Second Quarter | ||||||||||
$ in millions | 2014 | 2013 | % Change | |||||||
Revenue by segment | ||||||||||
Financial Services | $ | 900 | $ | 782 | 15 | % | ||||
Retail Solutions | 503 | 515 | (2 | )% | ||||||
Hospitality | 170 | 158 | 8 | % | ||||||
Emerging Industries | 85 | 80 | 6 | % | ||||||
Total Revenue | $ | 1,658 | $ | 1,535 | 8 | % | ||||
Operating income by segment | ||||||||||
Financial Services | $ | 137 | $ | 95 | ||||||
% of Financial Services Revenue | 15.2 | % | 12.1 | % | ||||||
Retail Solutions | 48 | 49 | ||||||||
% of Retail Solutions Revenue | 9.5 | % | 9.5 | % | ||||||
Hospitality | 23 | 27 | ||||||||
% of Hospitality Revenue | 13.5 | % | 17.1 | % | ||||||
Emerging Industries | 2 | 11 | ||||||||
% of Emerging Industries Revenue | 2.4 | % | 13.8 | % | ||||||
Segment operating income | $ | 210 | $ | 182 | ||||||
% of Total Revenue | 12.7 | % | 11.9 | % | ||||||
Revenue increased 8% compared to the prior year led by strong growth in Financial Services, Hospitality and Emerging Industries. Within Financial Services, branch transformation continued to drive strong growth, and Digital Insight contributed $87 million of revenue in the second quarter of 2014. Retail Solutions results were as expected due to a difficult comparison versus the prior year.
Segment operating income increased 15% and as a percentage of total revenue increased 80 basis points compared to the prior year. The increase was led by Financial Services, where growth was driven by a higher mix of software-
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related revenue. Retail Solutions operating income was as expected, and improved as a percentage of Retail Solutions revenue compared to Q1 2014. Hospitality operating income was lower than the prior year due to a large software transaction in the prior year period, and improved significantly as a percentage of Hospitality revenue compared to Q1 2014. Emerging Industries operating income was negatively impacted by onboarding costs associated with new managed services contracts and continued investment in Small Business.
Free Cash Flow
Second Quarter | |||||||
$ in millions | 2014 | 2013 | |||||
Net cash provided by operating activities | $ | 80 | $ | (32 | ) | ||
Total capital expenditures | (73 | ) | (44 | ) | |||
Net cash (used in) provided by operating activities from discontinued operations | (22 | ) | (25 | ) | |||
Pension discretionary contributions and settlements | 18 | 80 | |||||
Free cash flow | $ | 3 | $ | (21 | ) | ||
Free cash flow increased mainly due to higher net income and improvements in working capital.
More information on NCR’s Q2 2014 earnings, including additional financial information and analysis, is available on NCR’s Investor Relations website at http://investor.ncr.com/.
2014 Outlook
Income from operations (GAAP) and Diluted earnings per share (GAAP) have been revised to reflect the impact of the expected charge of $150 million, or $0.61 per diluted share, to be incurred in connection with the restructuring plan described below. There have been no changes to revenue, non-pension operating income or non-GAAP diluted EPS included in the table below.
$ in millions, except per share amounts | 2014 Guidance | 2013 Actual | |
Revenue | $6,750 - $6,850 (1) | $6,123 | |
Year-over-year revenue growth | 10% - 12% (1) | 7% | |
Income from operations (GAAP) | $580 - $600 (2) (3) | $666 (2) | |
Non-pension operating income (NPOI) | $900 - $920 | $717 | |
Diluted earnings per share (GAAP) | $1.75 - $1.85 (2) (3) | $2.67 (2) | |
Non-GAAP Diluted EPS | $3.00 - $3.10 | $2.81 | |
(1) | Includes 1% of expected unfavorable foreign currency fluctuations. |
(2) | For 2013, includes actuarial mark-to-market pension adjustment; for 2014, excludes actuarial mark-to-market pension adjustments to be determined in Q4 2014. |
(3) | Revised to reflect the expected pre-tax charge of $150 million, or $0.61 per diluted share, related to the restructuring plan described below. |
NCR expects approximately $200 million of other expense, net including interest expense in 2014 and that its full-year 2014 effective income tax rate will be approximately 26%.
NCR announced a restructuring plan to strategically reallocate resources to position NCR to focus on our highest growth, highest margin opportunities in the software-driven consumer transaction technologies industry. The program is centered on ensuring our people and processes are aligned with our continued transformation and include: rationalizing our product portfolio to eliminate overlap and redundancy; end-of-lifeing older commodity product lines that are costly to maintain and provide little to no return; moving lower productivity services positions to our new
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centers of excellence due to the positive impact of services innovation; and reducing layers of management and organizing around divisions to improve decision-making, accountability and strategic execution.
NCR expects to incur a related pre-tax charge in the range of approximately $150 million to $200 million that will be included in income from operations, with approximately $150 million recorded in 2014 and the remainder recorded in 2015. The estimate includes both severance and asset related charges. The cash impact of the restructuring plan is expected to be approximately $50 million in 2014 and $50 million in 2015. Annualized savings are expected to reach approximately $90 million by 2016.
Q3 2014 Outlook
For the third quarter of 2014, the Company expects non-pension operating income (NPOI) to be in the range of $215 million to $225 million, compared to $185 million in the third quarter of 2013 and income from operations to be in the range of $50 million to $60 million, compared to $145 million in the third quarter of 2013. Income from operations includes an estimated pre-tax charge of $125 million in the third quarter of 2014 related to the restructuring plan described above. NCR expects its third quarter 2014 effective income tax rate to be approximately 28% and other expense, net including interest expense to be approximately $50 million.
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2014 Second Quarter Earnings Conference Call
A conference call is scheduled for today at 4:30 p.m. (EST) to discuss the second quarter results and guidance for third quarter and full-year 2014. Access to the conference call and accompanying slides, as well as a replay of the call, is available on NCR's web site at http://investor.ncr.com/. Additionally, the live call can be accessed by dialing 888-245-0932 and entering the participant passcode 2819778.
About NCR Corporation
NCR Corporation (NYSE: NCR) is the global leader in consumer transaction technologies, turning everyday interactions with businesses into exceptional experiences. With its software, hardware, and portfolio of services, NCR enables more than 485 million transactions daily across the financial, retail, hospitality, travel, telecom and technology industries. NCR solutions run the everyday transactions that make your life easier.
NCR is headquartered in Duluth, Georgia with over 29,000 employees and does business in 180 countries. NCR is a trademark of NCR Corporation in the United States and other countries. NCR encourages investors to visit its web site which is updated regularly with financial and other important information about NCR.
Web site: www.ncr.com
Twitter: @NCRCorporation
Facebook: www.facebook.com/ncrcorp
LinkedIn: http://linkd.in/ncrgroup
YouTube: www.youtube.com/user/ncrcorporation
News Media Contact
Lou Casale
NCR Corporation
212.589.8415
lou.casale@ncr.com
Investor Contact
Tracy Krumme
NCR Corporation
212.589.8569
tracy.krumme@ncr.com
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Note to Investors This release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements use words such as “expect,” “anticipate,” “outlook,” “intend,” “believe,” “will,” “should,” “would,” “could” and words of similar meaning. Statements that describe or relate to NCR’s future plans, goals, intentions, strategies or financial outlook, and statements that do not relate to historical or current fact, are examples of forward-looking statements. The forward-looking statements in this release include statements about the transformation of NCR and its business; the demand for NCR's branch transformation and financial services software solutions; NCR's recently announced restructuring plan and its costs, expected benefits and results; NCR's anticipated growth; and NCR's 2014 financial outlook (including in the sections entitled “2014 Outlook” and “Q3 2014 Outlook”). Forward-looking statements are based on our current beliefs, expectations and assumptions, which may not prove to be accurate, and involve a number of known and unknown risks and uncertainties, many of which are out of NCR's control. Forward-looking statements are not guarantees of future performance, and there are a number of important factors that could cause actual outcomes and results to differ materially from the results contemplated by such forward-looking statements, including those factors relating to: domestic and global economic and credit conditions; the impact of our indebtedness and its terms on our financial and operating activities; our ability to successfully introduce new solutions and compete and in the information technology industry; the transformation of our business model and our ability to sell higher-margin software and services; defects or errors in our products; manufacturing disruptions; the historical seasonality of our sales; foreign currency fluctuations; the availability and success of acquisitions, divestitures and alliances, including the acquisition of Digital Insight; our pension strategy and underfunded pension obligation; the success of our recently announced restructuring plan; tax rates; compliance with data privacy and protection requirements; reliance on third party suppliers; development and protection of intellectual property; workforce turnover and the ability to attract and retain skilled employees; environmental exposures from our historical and ongoing manufacturing activities; and uncertainties with regard to regulations, lawsuits, claims and other matters across various jurisdictions. Additional information concerning these and other factors can be found in the Company's filings with the U.S. Securities and Exchange Commission, including the Company’s most recent annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Any forward-looking statement speaks only as of the date on which it is made. The Company does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Non-GAAP Financial Measures While NCR reports its results in accordance with Generally Accepted Accounting Principles in the United States, or GAAP, in this release NCR also uses the non-GAAP measures listed and described below.
Non-Pension Operating Income and Non-GAAP Diluted Earnings Per Share. NCR’s non-pension operating income and non-GAAP diluted earnings per share are determined by excluding pension expense and special items, including amortization of acquisition related intangibles, from NCR’s GAAP income (loss) from operations. Due to the significant change in its pension expense from year to year and the non-operational nature of pension expense and these special items, NCR's management uses non-pension operating income and non-GAAP diluted earnings per share to evaluate year-over-year operating performance, to manage and determine the effectiveness of its business managers and as a basis for incentive compensation. NCR believes these measures are useful for investors because they provide a more complete understanding of NCR's underlying operational performance, as well as consistency and comparability with NCR's past reports of financial results.
Free Cash Flow. NCR defines free cash flow as net cash provided by/used in operating activities and cash flow provided by/used in discontinued operations less capital expenditures for property, plant and equipment, additions to capitalized software, discretionary pension contributions and settlements. NCR's management uses free cash flow to assess the financial performance of the Company and believes it is useful for investors because it relates the operating cash flow of the Company to the capital that is spent to continue and improve business operations. In particular, free cash flow indicates the amount of cash generated after capital expenditures which can be used for, among other things, investment in the Company's existing businesses, strategic acquisitions, strengthening the Company's balance sheet, repurchase of Company stock and repayment of the Company's debt obligations. Free cash flow does not represent the residual cash flow available for discretionary expenditures since there may be other nondiscretionary expenditures that are not deducted from the measure. Free cash flow does not have a uniform definition under GAAP and, therefore, NCR's definition may differ from other companies' definitions of this measure.
Revenue Growth on a Constant Currency Basis. NCR’s period-over-period revenue growth on a constant currency basis excludes the effects of foreign currency translation. Due to the variability of foreign exchange rates from period to period, NCR’s management uses revenue on a constant currency basis to evaluate period-over-period operating performance. Revenue growth on a constant currency basis is calculated by translating prior period revenue at current period monthly average exchange rates.
NCR's definitions and calculations of these non-GAAP measures may differ from similarly-titled measures reported by other companies and cannot, therefore, be compared with similarly-titled measures of other companies. These non-GAAP measures should not be considered as substitutes for, or superior to, results determined in accordance with GAAP. These non-GAAP measures are reconciled to their corresponding GAAP measures elsewhere in this release or in the tables below.
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Reconciliation of Diluted Earnings Per Share (GAAP) to Non-GAAP Diluted Earnings Per Share (non-GAAP)
Q2 2014 Actual | Q2 2013 Actual | 2014 Guidance | 2013 Actual | |||||||||||
Diluted EPS (GAAP) | $ | 0.53 | $ | 0.51 | $1.75 - $1.85 | $ | 2.67 | |||||||
Pension (benefit) expense | — | 0.03 | 0.03 | (0.34 | ) | |||||||||
Restructuring plan | — | — | 0.61 | — | ||||||||||
Acquisition-related costs | 0.03 | 0.06 | 0.11 | 0.21 | ||||||||||
Acquisition-related amortization of intangibles | 0.11 | 0.07 | 0.47 | 0.29 | ||||||||||
Acquisition-related purchase price adjustments | 0.01 | 0.01 | 0.02 | 0.06 | ||||||||||
OFAC and FCPA Investigations (1) | — | — | 0.01 | 0.01 | ||||||||||
Japan valuation reserve release | — | — | — | (0.09 | ) | |||||||||
Non- GAAP Diluted EPS | $ | 0.68 | $ | 0.68 | $3.00 - $3.10 | $ | 2.81 | |||||||
Reconciliation of Income from Operations (GAAP) to Non-pension Operating Income (non-GAAP)
$ in millions | Q2 2014 Actual | Q2 2013 Actual | 2014 Guidance | 2013 Actual | Q3 2014 Guidance | Q3 2013 Actual | |||||||||||||||
Income from Operations (GAAP) | $ | 169 | $ | 139 | $580 - $600 | $ | 666 | $50 - $60 | $ | 145 | |||||||||||
Pension (benefit) expense | 2 | 9 | 8 | (78 | ) | 3 | 5 | ||||||||||||||
Restructuring plan | — | — | 150 | — | 125 | — | |||||||||||||||
Acquisition-related costs | 6 | 14 | 33 | 46 | 6 | 14 | |||||||||||||||
Acquisition-related amortization of intangibles | 30 | 17 | 121 | 65 | 30 | 17 | |||||||||||||||
Acquisition-related purchase price adjustments | 2 | 3 | 6 | 15 | 1 | 3 | |||||||||||||||
OFAC and FCPA Investigations (1) | 1 | — | 2 | 3 | — | 1 | |||||||||||||||
Non-pension Operating Income (non-GAAP) | $ | 210 | $ | 182 | $900 - $920 | $ | 717 | $215 - $225 | $ | 185 | |||||||||||
Reconciliation of Revenue Growth (GAAP) to Revenue Growth on a Constant Currency Basis (non-GAAP)
Revenue Growth % (GAAP) | Favorable (unfavorable) FX impact | Constant Currency Revenue Growth % (non-GAAP) | |||
Total Revenue | 8% | (1)% | 9% | ||
(1) Estimated expenses for 2014 will be affected by, among other things, the status and progress of these matters. There can be no assurance that the Company will not be subject to fines or other remedial measures as a result of OFAC’s, the SEC’s or the DOJ’s investigations.
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| NCR CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in millions, except per share amounts) | Schedule A |
For the Periods Ended June 30 | |||||||||||||||
Three Months | Six Months | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Revenue | |||||||||||||||
Products | $ | 722 | $ | 743 | $ | 1,356 | $ | 1,410 | |||||||
Services | 936 | 792 | 1,820 | 1,535 | |||||||||||
Total Revenue | 1,658 | 1,535 | 3,176 | 2,945 | |||||||||||
Cost of products | 531 | 550 | 1,007 | 1,053 | |||||||||||
Cost of services | 647 | 559 | 1,273 | 1,097 | |||||||||||
Total gross margin | 480 | 426 | 896 | 795 | |||||||||||
% of Revenue | 29.0 | % | 27.8 | % | 28.2 | % | 27.0 | % | |||||||
Selling, general and administrative expenses | 247 | 232 | 492 | 461 | |||||||||||
Research and development expenses | 64 | 55 | 127 | 110 | |||||||||||
Income from operations | 169 | 139 | 277 | 224 | |||||||||||
% of Revenue | 10.2 | % | 9.1 | % | 8.7 | % | 7.6 | % | |||||||
Interest expense | (46 | ) | (26 | ) | (89 | ) | (47 | ) | |||||||
Other (expense) income, net | (3 | ) | (3 | ) | (10 | ) | (1 | ) | |||||||
Total other (expense), net | (49 | ) | (29 | ) | (99 | ) | (48 | ) | |||||||
Income before income taxes and discontinued operations | 120 | 110 | 178 | 176 | |||||||||||
% of Revenue | 7.2 | % | 7.2 | % | 5.6 | % | 6.0 | % | |||||||
Income tax expense | 29 | 23 | 33 | 25 | |||||||||||
Income from continuing operations | 91 | 87 | 145 | 151 | |||||||||||
Loss from discontinued operations, net of tax | — | — | — | (1 | ) | ||||||||||
Net Income | 91 | 87 | 145 | 150 | |||||||||||
Net income attributable to noncontrolling interests | 1 | 1 | 2 | 3 | |||||||||||
Net income attributable to NCR | $ | 90 | $ | 86 | $ | 143 | $ | 147 | |||||||
Amounts attributable to NCR common stockholders: | |||||||||||||||
Income from continuing operations | $ | 90 | $ | 86 | $ | 143 | $ | 148 | |||||||
Loss from discontinued operations, net of tax | — | — | — | (1 | ) | ||||||||||
Net income | $ | 90 | $ | 86 | $ | 143 | $ | 147 | |||||||
Net income per share attributable to NCR common stockholders: | |||||||||||||||
Net income per common share from continuing operations | |||||||||||||||
Basic | $ | 0.54 | $ | 0.52 | $ | 0.85 | $ | 0.90 | |||||||
Diluted | $ | 0.53 | $ | 0.51 | $ | 0.84 | $ | 0.88 | |||||||
Net income per common share | |||||||||||||||
Basic | $ | 0.54 | $ | 0.52 | $ | 0.85 | $ | 0.89 | |||||||
Diluted | $ | 0.53 | $ | 0.51 | $ | 0.84 | $ | 0.87 | |||||||
Weighted average common shares outstanding | |||||||||||||||
Basic | 167.9 | 165.2 | 167.5 | 164.5 | |||||||||||
Diluted | 170.9 | 168.8 | 171.0 | 168.1 | |||||||||||
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| NCR CORPORATION CONSOLIDATED REVENUE AND OPERATING INCOME SUMMARY (Unaudited) (in millions) | Schedule B |
For the Periods Ended June 30 | |||||||||||||||||||||
Three Months | Six Months | ||||||||||||||||||||
2014 | 2013 | % Change | 2014 | 2013 | % Change | ||||||||||||||||
Revenue by segment | |||||||||||||||||||||
Financial Services | $ | 900 | $ | 782 | 15 | % | $ | 1,694 | $ | 1,496 | 13 | % | |||||||||
Retail Solutions | 503 | 515 | (2 | )% | 993 | 1,004 | (1 | )% | |||||||||||||
Hospitality | 170 | 158 | 8 | % | 319 | 289 | 10 | % | |||||||||||||
Emerging Industries | 85 | 80 | 6 | % | 170 | 156 | 9 | % | |||||||||||||
Total Revenue | $ | 1,658 | $ | 1,535 | 8 | % | $ | 3,176 | $ | 2,945 | 8 | % | |||||||||
Operating income by segment | |||||||||||||||||||||
Financial Services | $ | 137 | $ | 95 | $ | 240 | $ | 152 | |||||||||||||
% of Revenue | 15.2 | % | 12.1 | % | 14.2 | % | 10.2 | % | |||||||||||||
Retail Solutions | 48 | 49 | 84 | 90 | |||||||||||||||||
% of Revenue | 9.5 | % | 9.5 | % | 8.5 | % | 9.0 | % | |||||||||||||
Hospitality | 23 | 27 | 35 | 48 | |||||||||||||||||
% of Revenue | 13.5 | % | 17.1 | % | 11.0 | % | 16.6 | % | |||||||||||||
Emerging Industries | 2 | 11 | 6 | 21 | |||||||||||||||||
% of Revenue | 2.4 | % | 13.8 | % | 3.5 | % | 13.5 | % | |||||||||||||
Subtotal-segment operating income | $ | 210 | $ | 182 | $ | 365 | $ | 311 | |||||||||||||
% of Revenue | 12.7 | % | 11.9 | % | 11.5 | % | 10.6 | % | |||||||||||||
Pension expense | 2 | 9 | 1 | 16 | |||||||||||||||||
Other adjustments (1) | 39 | 34 | 87 | 71 | |||||||||||||||||
Total income from operations | $ | 169 | $ | 139 | $ | 277 | $ | 224 | |||||||||||||
(1) | Other adjustments for the three months ended June 30, 2014 include $30 million of acquisition-related amortization of intangible assets, $6 million of acquisition-related costs, $2 million of acquisition-related purchase price adjustments and $1 million of legal costs related to previously disclosed OFAC and FCPA investigations; other adjustments for the three months ended June 30, 2013 include $17 million of acquisition-related amortization of intangible assets, $14 million of acquisition-related costs and $3 million of acquisition-related purchase price adjustments. Other adjustments for the six months ended June 30, 2014 include $60 million of acquisition-related amortization of intangible assets, $20 million of acquisition-related costs, $5 million of acquisition-related purchase price adjustments and $2 million of legal costs related to previously disclosed OFAC and FCPA investigations; other adjustments for the six months ended June 30, 2013 include $31 million of acquisition-related amortization of intangible assets, $30 million of acquisition-related costs, $9 million of acquisition-related purchase price adjustments and $1 million of legal costs related to previously disclosed OFAC and FCPA investigations. |
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| NCR CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in millions, except per share amounts) | Schedule C |
June 30, 2014 | March 31, 2014 | December 31, 2013 | |||||||||
Assets | |||||||||||
Current assets | |||||||||||
Cash and cash equivalents | $ | 483 | $ | 515 | $ | 528 | |||||
Restricted cash | — | — | 1,114 | ||||||||
Accounts receivable, net | 1,464 | 1,442 | 1,339 | ||||||||
Inventories | 816 | 820 | 790 | ||||||||
Other current assets | 627 | 608 | 568 | ||||||||
Total current assets | 3,390 | 3,385 | 4,339 | ||||||||
Property, plant and equipment, net | 402 | 390 | 352 | ||||||||
Goodwill | 2,791 | 2,789 | 1,534 | ||||||||
Intangibles, net | 994 | 1,024 | 494 | ||||||||
Prepaid pension cost | 520 | 495 | 478 | ||||||||
Deferred income taxes | 247 | 252 | 441 | ||||||||
Other assets | 505 | 493 | 470 | ||||||||
Total assets | $ | 8,849 | $ | 8,828 | $ | 8,108 | |||||
Liabilities and stockholders’ equity | |||||||||||
Current liabilities | |||||||||||
Short-term borrowings | $ | 83 | $ | 64 | $ | 34 | |||||
Accounts payable | 678 | 695 | 670 | ||||||||
Payroll and benefits liabilities | 188 | 183 | 191 | ||||||||
Deferred service revenue and customer deposits | 563 | 587 | 525 | ||||||||
Other current liabilities | 464 | 479 | 461 | ||||||||
Total current liabilities | 1,976 | 2,008 | 1,881 | ||||||||
Long-term debt | 3,840 | 3,885 | 3,320 | ||||||||
Pension and indemnity plan liabilities | 529 | 532 | 532 | ||||||||
Postretirement and postemployment benefits liabilities | 169 | 170 | 169 | ||||||||
Income tax accruals | 178 | 182 | 189 | ||||||||
Environmental liabilities | 101 | 111 | 121 | ||||||||
Other liabilities | 87 | 92 | 99 | ||||||||
Total liabilities | 6,880 | 6,980 | 6,311 | ||||||||
Redeemable noncontrolling interests | 15 | 14 | 14 | ||||||||
Stockholders' equity | |||||||||||
NCR stockholders' equity: | |||||||||||
Preferred stock: par value $0.01 per share, 100.0 shares authorized, no shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively | — | — | — | ||||||||
Common stock: par value $0.01 per share, 500.0 shares authorized, 168.0, 167.8 and 166.6 shares issued and outstanding as of June 30, 2014, March 31, 2014 and December 31, 2013, respectively | 2 | 2 | 2 | ||||||||
Paid-in capital | 438 | 426 | 433 | ||||||||
Retained earnings | 1,515 | 1,425 | 1,372 | ||||||||
Accumulated other comprehensive loss | (14 | ) | (33 | ) | (38 | ) | |||||
Total NCR stockholders' equity | 1,941 | 1,820 | 1,769 | ||||||||
Noncontrolling interests in subsidiaries | 13 | 14 | 14 | ||||||||
Total stockholders' equity | 1,954 | 1,834 | 1,783 | ||||||||
Total liabilities and stockholders' equity | $ | 8,849 | $ | 8,828 | $ | 8,108 | |||||
10
| NCR CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in millions) | Schedule D |
For the Periods Ended June 30 | |||||||||||||||
Three Months | Six Months | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Operating activities | |||||||||||||||
Net income | $ | 91 | $ | 87 | $ | 145 | $ | 150 | |||||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | |||||||||||||||
Loss from discontinued operations | — | — | — | 1 | |||||||||||
Depreciation and amortization | 73 | 50 | 142 | 97 | |||||||||||
Stock-based compensation expense | 9 | 12 | 19 | 22 | |||||||||||
Deferred income taxes | 7 | (1 | ) | 10 | (10 | ) | |||||||||
Gain on sale of property, plant and equipment and other assets | (1 | ) | (1 | ) | (2 | ) | (5 | ) | |||||||
Changes in assets and liabilities: | |||||||||||||||
Receivables | (22 | ) | (76 | ) | (88 | ) | (67 | ) | |||||||
Inventories | 3 | 22 | (27 | ) | (25 | ) | |||||||||
Current payables and accrued expenses | 2 | 2 | 2 | (34 | ) | ||||||||||
Deferred service revenue and customer deposits | (24 | ) | (17 | ) | 35 | 56 | |||||||||
Employee benefit plans | (38 | ) | (98 | ) | (59 | ) | (132 | ) | |||||||
Other assets and liabilities | (20 | ) | (12 | ) | (66 | ) | (64 | ) | |||||||
Net cash provided by (used in) operating activities | 80 | (32 | ) | 111 | (11 | ) | |||||||||
Investing activities | |||||||||||||||
Expenditures for property, plant and equipment | (34 | ) | (20 | ) | (66 | ) | (44 | ) | |||||||
Proceeds from sales of property, plant and equipment | — | 2 | — | 2 | |||||||||||
Additions to capitalized software | (39 | ) | (24 | ) | (73 | ) | (45 | ) | |||||||
Business acquisition, net | — | (15 | ) | (1,642 | ) | (696 | ) | ||||||||
Changes in restricted cash | — | — | 1,114 | — | |||||||||||
Other investing activities, net | 8 | 1 | 4 | 6 | |||||||||||
Net cash used in investing activities | (65 | ) | (56 | ) | (663 | ) | (777 | ) | |||||||
Financing activities | |||||||||||||||
Tax withholding payments on behalf of employees | (2 | ) | (2 | ) | (24 | ) | (27 | ) | |||||||
Short term borrowings, net | 3 | 5 | 9 | 6 | |||||||||||
Payments on term credit facilities | (3 | ) | (17 | ) | (3 | ) | (35 | ) | |||||||
Borrowings on term credit facilities | — | — | 250 | — | |||||||||||
Payments on revolving credit facility | (195 | ) | (75 | ) | (255 | ) | (495 | ) | |||||||
Borrowings on revolving credit facility | 170 | 160 | 570 | 725 | |||||||||||
Debt issuance costs | (1 | ) | (1 | ) | (3 | ) | (3 | ) | |||||||
Proceeds from employee stock plans | 2 | 27 | 7 | 45 | |||||||||||
Other financing activities | (2 | ) | — | (3 | ) | — | |||||||||
Net cash (used in) provided by financing activities | (28 | ) | 97 | 548 | 216 | ||||||||||
Cash flows from discontinued operations | |||||||||||||||
Net cash used in discontinued operations | (22 | ) | (25 | ) | (38 | ) | (24 | ) | |||||||
Effect of exchange rate changes on cash and cash equivalents | 3 | (7 | ) | (3 | ) | (13 | ) | ||||||||
Decrease in cash and cash equivalents | (32 | ) | (23 | ) | (45 | ) | (609 | ) | |||||||
Cash and cash equivalents at beginning of period | 515 | 483 | 528 | 1,069 | |||||||||||
Cash and cash equivalents at end of period | $ | 483 | $ | 460 | $ | 483 | $ | 460 | |||||||
11
1 Q2 2014 EARNINGS CONFERENCE CALL BILL NUTI, CHAIRMAN AND CEO JOHN BRUNO, EVP BOB FISHMAN, CFO July 29, 2014
2 NOTES TO INVESTORS FORWARD-LOOKING STATEMENTS. Comments made during this conference call and in these materials contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that describe or relate to NCR's future plans, goals, intentions, strategies or financial outlook, and statements that do not relate to historical or current fact, are examples of forward-looking statements. The forward-looking statements in these materials include statements about the anticipated growth of NCR's software-related revenue (and the components thereof) and operational gross margins, the costs and expected benefits and results of NCR's recently announced restructuring plan, the expected financial and other benefits from the acquisition of Digital Insight, the future growth and transformation of NCR and its lines of business, the expected benefits of NCR's recently announced voluntary lump sum offer to retirees under its U.S. pension plan, NCR's 2014 financial outlook and NCR's goals for 2014. Forward-looking statements are based on our current beliefs, expectations and assumptions, which may not prove to be accurate, and involve a number of known and unknown risks and uncertainties, many of which are out of NCR's control. Forward-looking statements are not guarantees of future performance, and there are a number of important factors that could cause actual outcomes and results to differ materially from the results contemplated by such forward-looking statements, including those factors listed in Item 1a "Risk Factors" of NCR's Annual Report on Form 10-K and those factors detailed from time to time in NCR's other SEC reports. These materials are dated July 29, 2014, and NCR does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. NON-GAAP MEASURES. While NCR reports its results in accordance with generally accepted accounting principles in the United States (GAAP), comments made during this conference call and these materials will include the following "non-GAAP" measures: non-pension operating income (NPOI), non-GAAP diluted earnings per share (non-GAAP diluted EPS), free cash flow (FCF), adjusted free cash flow (adjusted FCF), operational gross margin, operational gross margin rate, expenses (non-GAAP), adjusted EBITDA, effective tax rate, non-GAAP net income and constant currency. These measures are included to provide additional useful information regarding NCR's financial results, and are not a substitute for their comparable GAAP measures. Explanations of these non-GAAP measures and reconciliations of these non-GAAP measures to their directly comparable GAAP measures are included in the accompanying "Supplementary Non-GAAP Materials" and are available on the Investor Relations page of NCR's website at www.ncr.com. Descriptions of many of these non-GAAP measures are also included in NCR's SEC reports. USE OF CERTAIN TERMS. As used in these materials, the term "software-related revenue" includes software license, software maintenance, software as a service (SaaS) and professional services revenue associated with software delivery, and the term "recurring revenue" means the sum of SaaS, hardware maintenance and software maintenance revenue. Investors are cautioned that in NCR's prior earnings releases and presentation materials, NCR used the term "software revenue," which does not include professional services revenue associated with software delivery. Therefore software revenue in such releases and presentation materials will not be directly comparable to software-related revenue in these materials. These presentation materials and the associated remarks made during this conference call are integrally related and are intended to be presented and understood together.
3 Q2 2014 FINANCIAL HIGHLIGHTS (1) Post AT&T Spin-off, excluding Teradata. (2) NPOI as a percentage of revenue. REVENUE Q2 2013 Q2 2014 $1.54 billion Up 8% y/y / Up 9% constant currency Recurring revenue up 21%, 42% of total OPERATIONAL GROSS MARGIN Q2 2013 Q2 2014 28.9% 30.0% All-time high operational gross margin of 30.0% NPOI Up 15% y/y All-time high(1) Q2 NPOI margin(2) of 12.7% FREE CASH FLOW Up due to increased net income and improvements in working capital Q2 2013 Q2 2014 $182 million $210 million Q2 2013 Q2 2014 ($21) million $3 million ▪ 18th consecutive quarter of y/y revenue and NPOI growth ▪ 19th consecutive quarter of meeting or beating EPS consensus estimate ▪ Record(1) Q2 NPOI & strong improvement in free cash flow generation $1.66 billion
4 STRONG SOFTWARE-RELATED REVENUE GROWTH Q2 2014 Q2 2013 $36 Q2 • Q2 Software-related revenues up 42% y/y; up 15% excluding Digital Insight • Q2 Professional Services revenue up 20% y/y • Q2 SaaS revenue up 247% y/y; up 17% excluding Digital Insight $446 SaaS Professional Services SW Licenses & SW Maintenance $154 FY 2013 FY 2014e $1,271 $1,775 - $1,825 FY 2012 ($'s in Millions) • On target to generate ~$1.8B in software- related revenue in FY2014 • 2014 estimated software-related revenue growth of 40-44%; up ~11-16% y/y excluding Digital Insight $124 $149 $125 $172 FY $616 $145 $510 $466 $94 $345 ~$725 ~$500 ~$575 $314 $905
5 ($ in Millions) $5,730 $6,750 - $6,850 SOFTWARE-RELATED REVENUE POSITIVELY IMPACTING MARGINS $5,291 $6,123 Operational Gross Margin 22.0% 23.5% 24.9% 26.8% 28.5% ~31% ~900bp from 2009 $4,711 $4,579 Software-Related Revenue Hardware Revenue Other Services Revenue (Hardware Maintenance, Transaction Services) FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014e 45% 43% 45% 13% 12% 38% 46% 16% 14% 42% 45% 41% ~41% 43% ~26% 21% ~33% 36%
6 ALIGNING RESOURCES FOR THE NEW NCR Next Step Implementing a restructuring plan to strategically reallocate resources to our highest growth, highest margin revenue streams The timing is right to realign our resources with the new NCR, now that we have the operational assets we need for our future Established a strong track record ▪ Addressing legacy issues ▪ Executing strategic initiatives ▪ Expanding margins Made significant investments ▪ Organic investments ▪ M&A ▪ Strategic alliances Transformed NCR ▪ Hardware to software-driven, hardware-enabled solutions company
7 KEY RESTRUCTURING INITIATIVES ▪ Expected annualized savings reaching ~$90M by 2016 ▪ Income statement charge of ~$150M to ~$200M, with majority in Q3 2014 and the remainder in Q4 2014 and 2015 ▪ Cash impact of ~$50M in 2014 and ~$50M in 2015 Moving lower productivity Services positions to our new centers of excellence due to the positive impact of services innovation Reducing layers of management and organizing around Divisions, improving decision-making, accountability and strategic execution Rationalizing hardware and software product lines to eliminate overlap and redundancy Proactively ‘end-of-life’ing’ older commodity hardware product lines that are costly to maintain yet provide little-to-no-return Product line-up Services productivity Portfolio rationalization Focused execution
8 FINANCIAL SERVICES Q2 2014 Update Performance HighlightsFinancial Highlights Revenue $900M Operating Income $137M +15% y/y +44% y/y ▪ Excluding Digital Insight, order growth of 14% driven by North America and Europe, small & mid- sized banks, software and Branch Transformation ▪ Backlog up 17%, due to significant growth in software-related revenue ▪ Increased operating margin driven by a higher mix of software-related revenue ▪ Excluding Digital Insight, Q2 core revenue up 4% y/y and operating margin up 140 bps ▪ Software-related revenue up 106%; up 28% excluding Digital Insight ▪ Balanced performance globally; Customers added in Americas and Europe (including Russia) ▪ Strong revenue and order growth in North America ▪ Branch Transformation solutions generated strong results ▪ Branch Transformation y/y orders and revenues up 78% and 46%, respectively ▪ 19 new Interactive Services customers; customer wins globally ▪ Introduced NCR Interactive Banker: tablet-based teller software synced to advanced kiosks ▪ Multi-channel banking solutions deployed globally ▪ Digital Insight winning industry recognition and customers ▪ Received 2014 Confirmit ACE Award for its long-term commitment to overall customer satisfaction ▪ Continued to cross-sell Digital Insight customers Operating Margin 15.2% +310 bps Key Developments
9 UPDATE: DIGITAL INSIGHT ACQUISITION Creates one of the most powerful FinTech companies with the most comprehensive suite of retail banking solutions ▪ Uniquely positions NCR software within the FinTech industry with an end-to-end technology platform for seamless banking services across both physical and digital channels ▪ Demonstrates commitment to be the global leader in omni-channel retail banking transformation enabling effortless transactions across multiple touch points ▪ Positions NCR for long-term growth, greater recurring revenue, accelerated margin expansion and earnings appreciation ▪ Expect to be slightly accretive to non-GAAP diluted EPS for FY2014 and ~$0.15 accretive for FY2015 ▪ Closed transaction on Jan. 10; Integration progressing well ▪ Q2 revenue of $87M and operating income of $27M, in-line with expectations ▪ Customers continue to see value of NCR's omni-channel solutions ▪ Renewals of existing customer base up ~25% y/y ▪ ATM cross-sell program ahead of plan ▪ NCR-owned data center installed; Transition customer and applications from mid-2014 through early 2015 ▪ 73% y/y increase in mobile active user rates ▪ 5.7M total mobile users vs. 3.3M last year Key Acquisition objective Progress update
10 ▪ Orders up 11% driven by Europe and AMEA offset by challenges in North America ▪ Backlog up 32%; Rollout of large orders pushing revenue to end of year & 2015 ▪ Q2 revenue and operating income as expected ▪ Operating margin improved 220 basis points over Q1 2014 ▪ Software-related revenue up 14%; SaaS revenue up 8% Financial Highlights Revenue $503M Operating Income $48M -2% y/y -2% y/y ▪ Strong revenue and order growth in Europe ▪ Despite weak North American retail market, continue to maintain strong position ▪ Customer demand for NCR Retail Solutions, inclusive of Retalix, is strong ▪ Recent media stories concerning Target are being reported inaccurately ▪ NCR maintains self-checkout leadership ▪ RBR ranks NCR #1 in self-checkout technology with 71% global ship share ▪ Customer wins for both point of sale and self-checkout solutions ▪ Expanding retail presence in China ▪ Established new business partner, Shanghai Anmao; Already winning business ▪ New self-checkout pilot at Rainbow Department Stores, one of the Top 100 Chain Retailers in China RETAIL SOLUTIONS Q2 2014 Update Performance Highlights Operating Margin 9.5% Flat y/y Key Developments
11 ▪ Revenue growth across Americas and Europe ▪ Operating margin lower y/y due to a large software transaction in Q2 2013 ▪ Operating margin improved 540 basis points over Q1 2014 ▪ Software-related revenue down 4% ▪ SaaS revenue up 16% ▪ SaaS application sites up 16% y/y Financial Highlights Revenue $170M Operating Income $23M +8% y/y -15% y/y HOSPITALITY Q2 2014 Update Performance Highlights Operating Margin 13.5% -360 bps Key Developments ▪ Expanding presence in key international markets ▪ New customers in Mexico, Australia and New Zealand ▪ Further penetration into North America SMB market ▪ 19% revenue growth y/y ▪ Broad-based customer wins span multiple customer segments and technologies ▪ Launched NCR Silver Pro, a cloud-based POS solution for North American small restaurants; Demonstrates leverage of innovative offerings across different Lines of Business
12 EMERGING INDUSTRIES Q2 2014 Update Telecom & Technology ▪ Global field services and support agreement with CradlePoint ▪ Maintenance and deployment services agreement with Easynet, the largest independent network and hosting integrator in Europe Travel ▪ Powering air travel innovation worldwide ▪ Extended customer self-service check-in capabilities at Dubai International Airport ▪ Delivered a record 11M mobile airline boarding passes in June 2014, up 200% y/y Small Business ▪ Increased adoption of NCR Silver; Customer base up 32% over Q1 2014 and 276% y/y Revenue $85M Operating Income $2M -$9M y/y +6% y/y ▪ Telecom & Technology revenue up 22% ▪ Travel revenue down, minimal impact given size ▪ Small Business tracking to business plan; gaining momentum ▪ Operating income negatively impacted by onboarding costs related to managed services contracts and continued investment in Small Business Performance HighlightsFinancial Highlights Operating Margin 2.4% vs. 13.8% Q2 2013 Key Developments
13 Q2 2014 SUMMARY • Q2 as expected; Strong software/SaaS growth, both with Digital Insight and organically • Financial Services continues to execute well, both strategically and tactically • Strong branch transformation and software growth • Orders/ backlog up solidly; both volume and mix • Continued strong performance from Digital Insight; positive feedback from customers • Retail Solutions results as expected • Orders/backlog up significantly but slower conversion expected into 2015 • US market conditions remain under pressure, however maintaining share; rest-of-world continues to be solid • Progress in Hospitality • Margin expansion vs. Q1 2014 was a good sign; tough Y/Y compare • Continued significant growth in core Radiant, vs. legacy NCR Hospitality accounts • Good Y/Y improvement in FCF generation; Y/Y linearity improved, continued focus • Restructuring will strategically reallocate resources to highest growth, highest margin opportunities and deliver run-rate savings reaching ~$90M by 2016 • Revenue and non-GAAP guidance reaffirmed for full-year 2014
14 FINANCIAL PERFORMANCE & GUIDANCE July 29, 2014
15 Revenue $1,658 $1,535 8% (1) / 9%(2) Operational Gross Margin 498 443 12% Operational Gross Margin Rate 30.0% 28.9% Expenses (non-GAAP) 288 261 10% % of Revenue 17.4% 17.0% NPOI 210 182 15% % of Revenue 12.7% 11.9% Non-GAAP Diluted EPS $0.68 $0.68 —% Q2 OPERATIONAL RESULTS 2014 2013 % Change (1) As reported. (2) On a constant currency basis. $ millions, except per share amounts For the three months ended June 30
16 Revenue $1,658 $1,535 8% Gross Margin 480 426 13% Gross Margin Rate 29.0% 27.8% Expenses 311 287 8% % of Revenue 18.8% 18.7% Income from Operations 169 139 22% % of Revenue 10.2% 9.1% GAAP Diluted EPS $0.53 $0.51 4% Q2 GAAP RESULTS $ millions, except per share amounts 2014 2013 % Change For the three months ended June 30
17 Q2 REVENUE BY SEGMENT Financial Services $900 $782 15 % 16 % Excluding Digital Insight $813 4 % 5 % Retail Solutions 503 515 (2)% (2)% Hospitality 170 158 8 % 8 % Emerging Industries 85 80 6 % 6 % Total Revenue $1,658 $1,535 8 % 9 % Excluding Digital Insight* $1,571 2 % 3 % 2014 2013 % Change % Change (Constant Currency) $ millions For the three months ended June 30
18 Q2 OPERATING INCOME BY SEGMENT For the three months ended June 30 2014 2013 Financial Services $137 $95 % of Financial Services Revenue 15.2% 12.1% Retail Solutions 48 49 % of Solutions Revenue 9.5% 9.5% Hospitality 23 27 % of Hospitality Revenue 13.5% 17.1% Emerging Industries 2 11 % of Emerging Industries Revenue 2.4% 13.8% NPOI $210 $182 % of Total Revenue 12.7% 11.9% $ millions
19 Q2 SUPPLEMENTAL REVENUE INFORMATION SaaS $125 $36 247 % Software License and Software Maintenance 172 154 12 % Professional Services 149 124 20 % Total Software-Related Revenue 446 314 42 % Hardware 637 664 (4)% Other Services 575 557 3 % Total Revenue $1,658 $1,535 8 % 2014 2013 % Change $ millions For the three months ended June 30
20 FREE CASH FLOW Q2 2014 Q2 2013 FY 2014e FY 2013 Cash Provided by Operating Activities $80 ($32) $519 - $549 $281 Net capital expenditures (73) (44) (250) - (260) (226) Cash Provided by (Used In) Discontinued Operations (22) (25) (45) - (55) (52) Pension discretionary contributions and settlements 18 80 46 204 Free Cash Flow (Used) (1) $3 ($21) ~$250 - $300 $207 (1) FY 2014e free cash flow revised for the estimated cash impact of ~$50 million related to the recently announced restructuring plan. $ millions
21 FREE CASH FLOW GENERATION 2014e 2013 Free Cash Flow (FCF) (1) ~$250 - $300 $207 plus: Pension 50 79 plus: Discontinued Ops 45-55 52 plus: Acquisition-relatedcosts 25-35 43 plus: Restructuring plan 50 — Adjusted FCF ~$420 - $490 $381 Adjusted FCF as a % of non-GAAP net income ~85% 80% $ millions, except metrics (1) FY 2014e free cash flow revised for the estimated cash impact of ~$50 million related to the recently announced restructuring plan.
22 NET DEBT & EBITDA METRICS 2013 Q1 2014 Q2 2014 Debt $3.4 $3.9 $3.9 Cash 0.5 0.5 0.5 Net Debt $2.9 $3.4 $3.4 Adjusted EBITDA $0.9 $0.9 (1) $1.0 (1) Net Debt / Adjusted EBITDA 3.2x 3.7x 3.4x $ in billions, except metrics (1) Adjusted EBITDA for the trailing twelve-month period. Goal of reducing Net Debt / Adjusted EBITDA to ~3.0x by the end of 2014
23 2014e 2013 Revenue $6,750 - $6,850 (1) $6,123 Year-over-Year Revenue Growth 10% - 12% (1) 7% Income from Operations (GAAP)(2) (4) $580 - $600 $666 Non-Pension Operating Income (NPOI) $900 - $920 $717 Adjusted EBITDA $1,085 - $1,105 $886 Diluted EPS (GAAP)(2) (4) $1.75 - $1.85 $2.67 Non-GAAP Diluted EPS(3) $3.00 - $3.10 $2.81 Free Cash Flow (4) $250 - $300 $207 FY 2014 GUIDANCE $ in millions, except per share amounts (1) Includes 1% of unfavorable foreign currency fluctuations (2) Income from operations and diluted earnings per share guidance excludes the impact of the actuarial mark to market pension adjustment that will be determined in the fourth quarter of 2014. (3) 2014 guidance includes expected other expense (income), net (OIE) of $200M, which incorporates $185M of interest expense, a 26% tax rate and a share count of 172M. 2013 results include OIE of $112M,which incorporates $103M of interest expense, a 22% tax rate and a share count of 169M. (4) Revised to reflect the estimated pre-tax charge of $150 million, or $0.61 per diluted share, and the estimated cash impact of ~$50 million related to the recently announced restructuring plan.
24 2014 SEGMENT REVENUE GUIDANCE Line of Business 2014e FY 2013 Financial Services 15-17% $3,115 Financial Services excluding Digital Insight 4-5% Retail 3-5% $2,034 Hospitality 8-10% $626 Emerging Industries 10-14% $348 Total 10-12% $6,123 $ in millions
25 Q3 2014 GUIDANCE Q3 2014e Q3 2013 Income from Operations (GAAP) (1) $50 - $60 $145 Non-Pension Operating Income (Non-GAAP) $215 - $225 $185 Tax rate 28% 18% Other expense ~$50 $26 $ millions (1) Q3 2014e income from operations reflects the estimated pre-tax charge of $125 million related to the recently announced restructuring plan.
26 Improve Free Cash Flow generation and working capital Further expand software/SaaS and services contribution and improve margin profile Use strong, growing NPOI to de-lever the balance sheet Implement next stage of cost reduction initiatives and complete final stages of pension strategy Continue steady execution, commitment to innovation, and deliver differentiation and value to customers 2014 Goals Execute against megatrends informing our businesses Position lines of business to grow faster than overall markets
SUPPLEMENTARY NON-GAAP MATERIALS
28 NON-GAAP MEASURES While NCR reports its results in accordance with generally accepted accounting principles (GAAP) in the United States, comments made during this conference call and in these materials will include non-GAAP measures. These measures are included to provide additional useful information regarding NCR's financial results, and are not a substitute for their comparable GAAP measures. NPOI, Non-GAAP Diluted EPS, Operational Gross Margin, Operational Gross Margin Rate, Expenses (non-GAAP), Effective Tax Rate and Non-GAAP Net Income. NCR's non-pension operating income (NPOI), non-GAAP net income and non-GAAP diluted earnings per share (non-GAAP diluted EPS) are determined by excluding pension expense and special items, including amortization of acquisition related intangibles, from NCR's GAAP income (loss) from operations. NCR also determines operational gross margin, operational gross margin rate, expenses (non-GAAP) and effective tax rate (non-GAAP) by excluding pension expense and these special items from its GAAP gross margin, gross margin rate, expenses and effective tax rate. Due to the significant change in its pension expense from year to year and the non-operational nature of pension expense and these special items, NCR's management uses these non-GAAP measures to evaluate year-over-year operating performance. NCR also uses NPOI and non-GAAP diluted EPS to manage and determine the effectiveness of its business managers and as a basis for incentive compensation. NCR believes these measures are useful for investors because they provide a more complete understanding of NCR's underlying operational performance, as well as consistency and comparability with NCR's past reports of financial results. Free Cash Flow and Adjusted Free Cash Flow. NCR defines free cash flow as net cash provided by/used in operating activities and cash flow provided by/used in discontinued operations less capital expenditures for property, plant and equipment, additions to capitalized software, discretionary pension contributions and settlements. NCR defines adjusted free cash flow as free cash flow plus required pension contributions, cash provided by/used in discontinued operations, and cash flow impact of special items. NCR's management uses free cash flow and adjusted free cash flow to assess the financial performance of the Company and believes they are useful for investors because they relate the operating cash flow of the Company to the capital that is spent to continue and improve business operations. In particular, free cash flow and adjusted free cash flow indicate the amount of cash generated after capital expenditures which can be used for, among other things, investment in the Company's existing businesses, strategic acquisitions, strengthening the Company's balance sheet, repurchase of Company stock and repayment of the Company's debt obligations. Free cash flow and adjusted free cash flow do not represent the residual cash flow available for discretionary expenditures since there may be other nondiscretionary expenditures that are not deducted from the measures. Free cash flow (FCF) and adjusted free cash flow (adjusted FCF) do not have uniform definitions under GAAP and, therefore, NCR's definitions may differ from other companies' definitions of these measures.
29 NON-GAAP MEASURES Adjusted EBITDA. NCR believes that Adjusted EBITDA (adjusted earnings before interest, taxes, depreciation and amortization) provides useful information to investors because it is an indicator of the strength and performance of the Company's ongoing business operations, including its ability to fund discretionary spending such as capital expenditures, strategic acquisitions and other investments. NCR determines Adjusted EBITDA for a given period based on its GAAP income (loss) from continuing operations plus interest expense, net; plus income tax expense (benefit); plus depreciation and amortization; plus other income (expense); plus pension expense (benefit); and plus special items included in the definition of NPOI. NCR believes that its ratio of net debt to Adjusted EBITDA provides useful information to investors because it is an indicator of the company's ability to meet its future financial obligations. Revenue Growth on a Constant Currency Basis. NCR's period-over-period revenue growth on a constant currency basis excludes the effects of foreign currency translation. Due to the variability of foreign exchange rates from period to period, NCR's management uses revenue growth on a constant currency basis to evaluate period-over-period operating performance. Revenue growth on a constant currency basis is calculated by translating prior period revenue at current period monthly average exchange rates. NCR management's definitions and calculations of these non-GAAP measures may differ from similarly-titled measures reported by other companies and cannot, therefore, be compared with similarly-titled measures of other companies. These non-GAAP measures should not be considered as substitutes for, or superior to, results determined in accordance with GAAP. These non- GAAP measures are reconciled to their corresponding GAAP measures in the following slides and elsewhere in these materials. These reconciliations and other information regarding these non-GAAP measures are also available on the Investor Relations page of NCR's website at www.ncr.com.
30 Income from Operations (GAAP) to Non-Pension Operating Income (non-GAAP) and Adjusted EBITDA (non-GAAP) in millions Q2 2014 LTM Q1 2014 LTM FY 2013 FY 2014e Q3 2014e Income from Operations (GAAP) $719 $689 $666 $580 - $600 $50 - $60 Pension Expense (Benefit) (93) (86) (78) 8 3 Restructuring Plan — — — 150 125 Acquisition-Related Amortization of Intangibles 94 81 65 121 30 Acquisition-Related Costs 36 44 46 33 6 Acquisition-Related Purchase Price Adjustment 11 12 15 6 1 OFAC and FCPA Investigations(1) 4 3 3 2 — Non-Pension Operating Income (non- GAAP) $771 $743 $717 $900 - $920 $215 - $225 Depreciation and Amortization 159 149 143 155 Ongoing Pension Expense (11) (12) (15) (10) Stock Compensation Expense 38 41 41 40 Adjusted EBITDA $957 $921 $886 $1,085 -$1,105 GAAP TO NON-GAAP RECONCILIATION (1) Estimated expenses for 2014 will be affected by, among other things, the status and progress of these matters. There can be no assurance that the Company will not be subject to fines or other remedial measures as a result of OFAC's, the SEC's or the DOJ's investigations.
31 in millions (except per share amounts) Q2 QTD 2014 GAAP Acquisition- related amortization of intangibles Acquisition- related costs Acquisition- related purchase price adjustments OFAC and FCPA Investigations Pension (expense) benefit Q2 QTD 2014 non-GAAP Product revenue $722 $— $— $— $— $— $722 Service revenue 936 — — — — — 936 Total revenue 1,658 — — — — — 1,658 Cost of products 531 (10) — (1) — — 520 Cost of services 647 (6) — (1) — — 640 Gross margin 480 16 — 2 — — 498 Gross margin rate 29.0% 1.0% —% 0.1% —% —% 30.0% Selling, general and administrative expenses 247 (14) (6) — (1) (1) 225 Research and development expenses 64 — — — — (1) 63 Total expenses 311 (14) (6) — (1) (2) 288 Total expense as a % of revenue 18.8% (0.8)% (0.4)% —% (0.1)% (0.1)% 17.4% Income (loss) from operations 169 30 6 2 1 2 210 Income (loss) from operations as a % of revenue 10.2% 1.8% 0.4% 0.1% 0.1% 0.1% 12.7% Interest and Other (expense) income, net (49) — — — — — (49) Income (loss) from continuing operations before income taxes 120 30 6 2 1 2 161 Income tax expense (benefit) 29 10 1 — 1 2 43 Effective tax rate 24% 27% Income (loss) from continuing operations 91 20 5 2 — — 118 Net income (loss) attributable to noncontrolling interests 1 — — — — — 1 Income (loss) from continuing operations (attributable to NCR) $90 $20 $5 $2 $— $— $117 Diluted earnings per share $0.53 $0.11 $0.03 $0.01 $— $— $0.68 GAAP TO NON-GAAP RECONCILIATION Q2 2014 QTD
32 in millions (except per share amounts) Q2 QTD 2013 GAAP Acquisition- related amortization of intangibles Acquisition- related costs Acquisition- related purchase price adjustments OFAC and FCPA Investigations Pension (expense) benefit Q2 QTD 2013 non-GAAP Product revenue $743 — — — — — $743 Service revenue 792 — — — — — 792 Total revenue 1,535 — — — — — 1,535 Cost of products 550 (9) — — — — 541 Cost of services 559 — — (3) — (5) 551 Gross margin 426 9 — 3 — 5 443 Gross margin rate 27.8% 0.6% —% 0.2% —% 0.3% 28.9% Selling, general and administrative expenses 232 (8) (14) — — (3) 207 Research and development expenses 55 — — — — (1) 54 Total expenses 287 (8) (14) — — (4) 261 Total expense as a % of revenue 18.7% (0.5)% (0.9)% —% —% (0.3)% 17.0% Income (loss) from operations 139 17 14 3 — 9 182 Income (loss) from operations as a % of revenue 9.1% 1.1% 0.9% 0.2% —% 0.6% 11.9% Interest and Other (expense) income, net (29) — — — — — (29) Income (loss) from continuing operations before income taxes 110 17 14 3 — 9 153 Income tax expense (benefit) 23 6 4 1 — 4 38 Effective tax rate 21% 25% Income (loss) from continuing operations 87 11 10 2 — 5 115 Net income (loss) attributable to noncontrolling interests 1 — — — — — 1 Income (loss) from continuing operations (attributable to NCR) $86 $11 $10 $2 $— $5 $114 Diluted earnings per share $0.51 $0.07 $0.06 $0.01 $— $0.03 $0.68 GAAP TO NON-GAAP RECONCILIATION Q2 2013 QTD
33 in millions (except per share amounts) Q2 YTD 2014 GAAP Acquisition- related amortization of intangibles Acquisition- related costs Acquisition- related purchase price adjustments OFAC and FCPA Investigations Pension (expense) benefit Q2 YTD 2014 non-GAAP Product revenue $1,356 — — — — — $1,356 Service revenue 1,820 — — — — — 1,820 Total revenue 3,176 — — — — — 3,176 Cost of products 1,007 (20) — (3) — — 984 Cost of services 1,273 (12) — (2) — 1 1,260 Gross margin 896 32 — 5 — (1) 932 Gross margin rate 28.2% 1% —% 0.2% —% —% 29.3% Selling, general and administrative expenses 492 (28) (20) — (2) (1) 441 Research and development expenses 127 — — — — (1) 126 Total expenses 619 (28) (20) — (2) (2) 567 Total expense as a % of revenue 19.5% (0.9)% (0.6)% —% (0.1)% (0.1)% 17.9% Income (loss) from operations 277 60 20 5 2 1 365 Income (loss) from operations as a % of revenue 8.7% 1.9% 0.6% 0.2% 0.1% —% 11.5% Interest and Other (expense) income, net (99) — — — — — (99) Income (loss) from continuing operations before income taxes 178 60 20 5 2 1 266 Income tax expense (benefit) 33 20 5 1 1 1 61 Effective tax rate 19% 23% Income (loss) from continuing operations 145 40 15 4 1 — 205 Net income (loss) attributable to noncontrolling interests 2 — — — — — 2 Income (loss) from continuing operations (attributable to NCR) $143 $40 $15 $4 $1 $— $203 Diluted earnings per share $0.84 $0.23 $0.09 $0.02 $0.01 $— $1.19 GAAP TO NON-GAAP RECONCILIATION Q2 2014 YTD
34 in millions (except per share amounts) Q2 YTD 2013 GAAP Acquisition- related amortization of intangibles Acquisition- related costs Acquisition- related purchase price adjustments OFAC and FCPA Investigations Pension (expense) benefit Q2 YTD 2013 non-GAAP Product revenue $1,410 — — — — — $1,410 Service revenue 1,535 — — — — — 1,535 Total revenue 2,945 — — — — — 2,945 Cost of products 1,053 (17) — — — — 1,036 Cost of services 1,097 — — (9) — (9) 1,079 Gross margin 795 17 — 9 — 9 830 Gross margin rate 27.0% 0.6% —% 0.3% —% 0.3% 28.2% Selling, general and administrative expenses 461 (14) (30) — (1) (5) 411 Research and development expenses 110 — — — — (2) 108 Total expenses 571 (14) (30) — (1) (7) 519 Total expense as a % of revenue 19.4% (0.5)% (1.0)% —% —% (0.3)% 17.6% Income (loss) from operations 224 31 30 9 1 16 311 Income (loss) from operations as a % of revenue 7.6% 1.1% 1.1% 0.3% —% 0.5% 10.6% Interest and Other (expense) income, net (48) — — — — — (48) Income (loss) from continuing operations before income taxes 176 31 30 9 1 16 263 Income tax expense (benefit) 25 11 10 3 — 7 56 Effective tax rate 14% 21% Income (loss) from continuing operations 151 20 20 6 1 9 207 Net income (loss) attributable to noncontrolling interests 3 — — — — — 3 Income (loss) from continuing operations (attributable to NCR) $148 $20 $20 $6 $1 $9 $204 Diluted earnings per share $0.88 $0.12 $0.12 $0.03 $0.01 $0.05 $1.21 GAAP TO NON-GAAP RECONCILIATION Q2 2013 YTD
35 in millions (except per share amounts) Q3 QTD 2013 GAAP Acquisition- related amortization of intangibles Acquisition- related costs Acquisition- related purchase price adjustments OFAC and FCPA Investigations Pension (expense) benefit Q3 QTD 2013 non-GAAP Product revenue $701 — — — — — $701 Service revenue 807 — — — — — 807 Total revenue 1,508 — — — — — 1,508 Cost of products 524 (10) — — — — 514 Cost of services 569 — — (3) — (3) 563 Gross margin 415 10 — 3 — 3 431 Gross margin rate 27.5% 0.7% —% 0.2% —% 0.2% 28.6% Selling, general and administrative expenses 217 (7) (14) — (1) (1) 194 Research and development expenses 53 — — — — (1) 52 Total expenses 270 (7) (14) — (1) (2) 246 Total expense as a % of revenue 17.9% (0.5)% (0.9)% —% (0.1)% (0.1)% 16.3% Income (loss) from operations 145 17 14 3 1 5 185 Income (loss) from operations as a % of revenue 9.6% 1.1% 1.0% 0.2% 0.1% 0.3% 12.3% Interest and Other (expense) income, net (26) — — — — — (26) Income (loss) from continuing operations before income taxes 119 17 14 3 1 5 159 Income tax expense (benefit) 19 1 4 1 1 2 28 Effective tax rate 16% 18% Income (loss) from continuing operations 100 16 10 2 — 3 131 Net income (loss) attributable to noncontrolling interests 2 — — — — — 2 Income (loss) from continuing operations (attributable to NCR) $98 $16 $10 $2 $— $3 $129 Diluted earnings per share $0.58 $0.09 $0.06 $0.01 $— $0.02 $0.76 GAAP TO NON-GAAP RECONCILIATION Q3 2013 QTD
36 in millions (except per share amounts) Q4 YTD 2013 GAAP Acquisition- related amorti zation
of intangibles Acquisition- related costs Acquisition- related
purchase price adjustments OFAC and FCPA Investigations Japan valuation reserve release Pension (expense) benefit Q4 YTD 2013
non-GAAP Product revenue $2,912 — — — — — — $2,912 Service revenue 3,211 — — — — — — 3,211 Total revenue 6,123 — — — — — — 6,123 Cost of products 2,152 (36) — (1) — — 2 2,117 Cost of services 2,231 — — (14) — — 44 2,261 Gross margin 1,740 36 — 15 — — (46) 1,745 Gross margin rate 28.4% 0.6% —% 0.2% —% —% -0.7% 28.5% Selling, general and administrative expenses 871 (29) (46) — (3) — 22 815 Research and development expenses 203 — — — — — 10 213 Total expenses 1,074 (29) (46) — (3) — 32 1,028 Total expense as a % of revenue 17.5% (0.5)% (0.7)% —% —% —% 0.5% 16.8% Income (loss) from operations 666 65 46 15 3 — (78) 717 Income (loss) from operations as a % of revenue 10.9% 1.1% 0.8% 0.2% —% —% -1.3% 11.7% Interest and Other (expense) income, net (112) — 6 — — — — (106) Income (loss) from continuing operations before income taxes 554 65 52 15 3 — (78) 611 Income tax expense (benefit) 98 17 16 5 1 15 (20) 132 Effective tax rate 18% 22% Income (loss) from continuing operations 456 48 36 10 2 (15) (58) 479 Net income (loss) attributable to noncontrolling interests 4 — — — — — — 4 Income (loss) from continuing operations (attributable to NCR) $452 $48 $36 $10 $2 ($15) ($58) $475 Diluted earnings per share $2.67 $0.29 $0.21 $0.06 $0.01 ($0.09) ($0.34) $2.81 GAAP TO NON-GAAP RECONCILIATION Q4 2013 YTD
37 GAAP TO NON-GAAP RECONCILIATION FY 2014e Diluted EPS (GAAP) $1.75 - $1.85 Pension Expense (Benefit) 0.03 Restructuring Plan 0.61 Acquisition-Related Costs 0.11 Acquisition-Related Amortization of Intangibles 0.47 Acquisition-Related Purchase Price Adjustment 0.02 OFAC and FCPA Investigations(1) 0.01 Non-GAAP Diluted EPS $3.00 - $3.10 Diluted Earnings per Share (GAAP) to Non-GAAP Diluted Earnings per Share (non-GAAP) (1) Estimated expenses for 2014 will be affected by, among other things, the status and progress of these matters. There can be no assurance that the Company will not be subject to fines or other remedial measures as a result of OFAC's, the SEC's or the DOJ's investigations.
38 GAAP TO NON-GAAP RECONCILIATIONS FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 Gross Margin as a % of Revenue (GAAP) 22% 22.9% 18.0% 28.7% 28.4% Pension expense (benefit) (0.5)% 0.6% 6.8% (2.2)% (0.7)% Impairment of assets related to an equity investment 0.5% - - - - Acquisition-related purchase price adjustments - - - - 0.2% Acquisition-related amortization of intangibles - - 0.1% 0.3% 0.6% Operational Gross Margin Rate (non- GAAP) 22.0% 23.5% 24.9% 26.8% 28.5% Gross Margin as a % of Revenue (GAAP) to Operational Gross Margin Rate (non-GAAP)
39 GAAP TO NON-GAAP RECONCILIATIONS Revenue Growth % (GAAP) to Revenue Growth % on a Constant Currency Basis (non-GAAP) Q2 2014 Revenue Growth % (GAAP) 8% Unfavorable foreign currency fluctuation impact 1% Revenue Growth % on a Constant Currency Basis (non-GAAP) 9%
40