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): October 23, 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 October 23, 2014, the Company issued a press release setting forth its third quarter 2014 financial results along with its updated fiscal year 2014 financial outlook and its fourth 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 October 23, 2014, the Company will hold its previously announced conference call to discuss its third quarter 2014 results, its updated fiscal year 2014 financial outlook and its fourth 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 October 23, 2014 |
99.2 | Supplemental materials, dated October 23, 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: October 23, 2014
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Index to 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 October 23, 2014
99.2 Supplemental materials, dated October 23, 2014
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| NEWS RELEASE | |
October 23, 2014
NCR Announces Third Quarter 2014 Results
• | As previously announced, Q3 results below expectations; Results negatively impacted by challenging retail market, difficult global macroeconomic conditions and foreign currency headwinds |
• | Revenue increased 9% to $1.65 billion; 34% growth in software-related revenue to $430 million, including 238% growth in SaaS revenue to $125 million |
• | Non-pension operating income (NPOI) increased 10% to $204 million; GAAP income from operations decreased 72% to $41 million |
• | Non-GAAP diluted EPS of $0.67 versus $0.76 in prior year; GAAP diluted EPS lower than prior year by $0.58, primarily due to restructuring |
• | Free cash flow of $132 million; GAAP net cash provided by operating activities of $124 million |
• | Guidance lowered for full-year 2014 as previously announced on October 20 |
DULUTH, Georgia - NCR Corporation (NYSE: NCR) reported financial results today for the three months ended September 30, 2014.
“Our third quarter results, as previously announced, were disappointing" said Chairman and CEO Bill Nuti. "Our Retail Solutions business was challenged by customers spending more cautiously than anticipated and further delaying solution rollouts. These trends, along with difficult global macroeconomic conditions and foreign currency headwinds, had significant impacts on our performance in the third quarter, and we expect they will continue to impact our Retail Solutions business in the fourth quarter. However, we remain confident in our transformation trajectory and our positioning of the business for long-term growth. This confidence is underscored by the strong performance of our Financial Services business, software and SaaS growth well in excess of overall revenue growth, and the broader trends favoring adoption of omni-channel consumer transaction technologies, where our global leadership position offers significant opportunity. As we conclude the year and look to 2015, we are focused on enhanced execution and efficiency, including our current restructuring program.”
Q3 Financial Summary
Third Quarter | |||||
$ in millions, except per share amounts | 2014 | 2013 | Change | ||
Revenue | $1,647 | $1,508 | 9% * | ||
Income from operations ** | $41 | $145 | (72)% | ||
Non-pension operating income (NPOI) | $204 | $185 | 10% | ||
Diluted earnings per share *** | $— | $0.58 | (100)% | ||
Non-GAAP diluted earnings per share | $0.67 | $0.76 | (12)% | ||
* Revenue growth of 10% on a constant currency basis.
** Income from operations includes $127 million related to the previously announced restructuring plan.
*** Diluted earnings per share includes $0.58 related to the previously announced restructuring plan.
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 most directly comparable GAAP measures elsewhere in this release.
Q3 Supplemental Revenue Information
Third Quarter | ||||||||||
$ in millions | 2014 | 2013 | Change | |||||||
Software-as-a-Service (SaaS) | $ | 125 | $ | 37 | 238 | % | ||||
Software License/Software Maintenance | 157 | 155 | 1 | % | ||||||
Professional Services | 148 | 130 | 14 | % | ||||||
Total Software-Related Revenue | 430 | 322 | 34 | % | ||||||
Hardware | 650 | 626 | 4 | % | ||||||
Other Services | 567 | 560 | 1 | % | ||||||
Total Revenue | $ | 1,647 | $ | 1,508 | 9 | % | ||||
Software-related revenue increased 34% in the third quarter, including 238% growth related to SaaS. Excluding the contribution of Digital Insight, software-related revenue increased 7% and SaaS revenue increased 11%.
Q3 Operating Segment Results
Third Quarter | ||||||||||
$ in millions | 2014 | 2013 | % Change | |||||||
Revenue by segment | ||||||||||
Financial Services | $ | 899 | $ | 767 | 17 | % | ||||
Retail Solutions | 489 | 494 | (1 | )% | ||||||
Hospitality | 168 | 161 | 4 | % | ||||||
Emerging Industries | 91 | 86 | 6 | % | ||||||
Total Revenue | $ | 1,647 | $ | 1,508 | 9 | % | ||||
Operating income by segment | ||||||||||
Financial Services | $ | 144 | $ | 93 | ||||||
% of Financial Services Revenue | 16.0 | % | 12.1 | % | ||||||
Retail Solutions | 24 | 50 | ||||||||
% of Retail Solutions Revenue | 4.9 | % | 10.1 | % | ||||||
Hospitality | 27 | 26 | ||||||||
% of Hospitality Revenue | 16.1 | % | 16.1 | % | ||||||
Emerging Industries | 9 | 16 | ||||||||
% of Emerging Industries Revenue | 9.9 | % | 18.6 | % | ||||||
Segment operating income | $ | 204 | $ | 185 | ||||||
% of Total Revenue | 12.4 | % | 12.3 | % | ||||||
Revenue increased 9% compared to the prior year led by strong growth in Financial Services where branch transformation revenues continued to increase and Digital Insight contributed $93 million of revenue in the third quarter of 2014. Hospitality and Emerging Industries revenue also increased year over year, while Retail Solutions faced reduced customer spending and rollout delays, particularly in the North America market. Foreign currency fluctuations negatively impacted revenue by 1%.
Segment operating income increased 10% compared to the prior year. The increase was led by Financial Services, where growth was driven by a higher mix of software-related revenue. Retail Solutions operating income declined due to challenges in the retail market and lower software license revenue. Hospitality operating income increased due to the
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increase in revenues. Emerging Industries operating income was negatively impacted by onboarding costs associated with managed services contracts and continued investment in Small Business.
Free Cash Flow
Third Quarter | |||||||
$ in millions | 2014 | 2013 | |||||
Net cash provided by operating activities | $ | 124 | $ | 27 | |||
Total capital expenditures | (58 | ) | (66 | ) | |||
Net cash provided by (used in) discontinued operations | 66 | (27 | ) | ||||
Free cash flow | $ | 132 | $ | (66 | ) | ||
Free cash flow increased mainly due to improvements in working capital and recoveries from the Fox River environmental-related matter.
More information on NCR’s Q3 2014 earnings, including additional financial information and analysis, is available on NCR’s Investor Relations website at http://investor.ncr.com/.
2014 Outlook
As announced on October 20, 2014, the Company lowered guidance for the full-year 2014 which is reflected as current 2014 guidance in the following table.
$ in millions, except per share amounts | Current 2014 Guidance | Prior 2014 Guidance | 2013 Actual | |||||
Revenue | $6,575 - $6,625 | (1) | $6,750 - $6,850 | (1) | $6,123 | (1) | ||
Year-over-year revenue growth | 7% - 8% | (1) | 10% - 12% | (1) | 7% | (1) | ||
Income from operations (GAAP) | $499 - $519 | (2) | $580 - $600 | (2) | $666 | (2) | ||
Non-pension operating income (NPOI) | $810 - $830 | $900 - $920 | $717 | |||||
Diluted earnings per share (GAAP) | $1.30 - $1.40 | (2) | $1.75 - $1.85 | (2) | $2.67 | (2) | ||
Non-GAAP Diluted EPS | $2.60 - $2.70 | $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. |
NCR expects approximately $215 million of other expense, net including interest expense in 2014 and that its full-year 2014 effective income tax rate will be approximately 25%.
Related to the previously announced restructuring plan, NCR recorded a charge of $130 million in third quarter of 2014 included in income from continuing operations. In total, NCR expects to incur a pre-tax charge in the range of approximately $150 million to $200 million that will be included in income from continuing 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.
Q4 2014 Outlook
For the fourth quarter of 2014, the Company expects non-pension operating income (NPOI) to be in the range of $241 million to $261 million, compared to $221 million in the fourth quarter of 2013, and income from operations to be in the range of $181 million to $201 million, compared to $297 million in the fourth quarter of 2013. NCR expects its fourth
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quarter 2014 effective income tax rate to be approximately 30% and other expense, net including interest expense to be approximately $55 million.
2014 Third Quarter Earnings Conference Call
A conference call is scheduled for today at 4:30 p.m. (EDT) to discuss the third quarter results and guidance for fourth 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 800-218-2154 and entering the participant passcode 7299877.
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 expected trends, and market and economic conditions affecting NCR and its business; the transformation of NCR's business and expectations for growth; the expected growth of NCR's software and SaaS revenue; NCR's recently announced restructuring plan and its costs, expected benefits and results; and NCR's 2014 financial outlook (including in the sections entitled “2014 Outlook” and “Q4 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 including, in particular, market conditions in the retail industry; the impact of our indebtedness and its terms on our financial and operating activities; our ability to successfully introduce new solutions and compete 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
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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.
Reconciliation of Diluted Earnings Per Share (GAAP) to Non-GAAP Diluted Earnings Per Share (non-GAAP)
Q3 2014 Actual | Q3 2013 Actual | Current 2014 Guidance | Prior 2014 Guidance | 2013 Actual | |||||||||||||
Diluted EPS (GAAP) | $ | — | $ | 0.58 | $1.30 - $1.40 | $1.75 - $1.85 | $ | 2.67 | |||||||||
Pension (benefit) expense | (0.05 | ) | 0.02 | 0.03 | 0.03 | (0.34 | ) | ||||||||||
Restructuring plan | 0.58 | — | 0.66 | 0.61 | — | ||||||||||||
Acquisition-related costs | 0.02 | 0.06 | 0.11 | 0.11 | 0.21 | ||||||||||||
Acquisition-related amortization of intangibles | 0.12 | 0.09 | 0.47 | 0.47 | 0.29 | ||||||||||||
Acquisition-related purchase price adjustments | — | 0.01 | 0.02 | 0.02 | 0.06 | ||||||||||||
OFAC and FCPA Investigations (1) | — | — | 0.01 | 0.01 | 0.01 | ||||||||||||
Japan valuation reserve release | — | — | — | — | (0.09 | ) | |||||||||||
Non- GAAP Diluted EPS | $ | 0.67 | $ | 0.76 | $2.60 - $2.70 | $3.00 - $3.10 | $ | 2.81 | |||||||||
Reconciliation of Income from Operations (GAAP) to Non-pension Operating Income (non-GAAP)
$ in millions | Q3 2014 Actual | Q3 2013 Actual | Current 2014 Guidance | Prior 2014 Guidance | 2013 Actual | Q4 2014 Guidance | Q4 2013 Actual | |||||||||||||||||
Income from Operations (GAAP) | $ | 41 | $ | 145 | $499 - $519 | $580 - $600 | $ | 666 | $181 - $201 | $ | 297 | |||||||||||||
Pension (benefit) expense | 1 | 5 | 8 | 8 | (78 | ) | 6 | (99 | ) | |||||||||||||||
Restructuring plan | 127 | — | 147 | 150 | — | 20 | — | |||||||||||||||||
Acquisition-related costs | 5 | 14 | 28 | 33 | 46 | 3 | 2 | |||||||||||||||||
Acquisition-related amortization of intangibles | 29 | 17 | 120 | 121 | 65 | 31 | 17 | |||||||||||||||||
Acquisition-related purchase price adjustments | 1 | 3 | 6 | 6 | 15 | — | 3 | |||||||||||||||||
OFAC and FCPA Investigations (1) | — | 1 | 2 | 2 | 3 | — | 1 | |||||||||||||||||
Non-pension Operating Income (non-GAAP) | $ | 204 | $ | 185 | $810 - $830 | $900 - $920 | $ | 717 | $241 - $261 | $ | 221 | |||||||||||||
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 | 9% | (1)% | 10% | ||
(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 September 30 | |||||||||||||||
Three Months | Nine Months | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Revenue | |||||||||||||||
Products | $ | 721 | $ | 701 | $ | 2,077 | $ | 2,111 | |||||||
Services | 926 | 807 | 2,746 | 2,342 | |||||||||||
Total Revenue | 1,647 | 1,508 | 4,823 | 4,453 | |||||||||||
Cost of products | 547 | 524 | 1,554 | 1,577 | |||||||||||
Cost of services | 696 | 569 | 1,969 | 1,666 | |||||||||||
Total gross margin | 404 | 415 | 1,300 | 1,210 | |||||||||||
% of Revenue | 24.5 | % | 27.5 | % | 27.0 | % | 27.2 | % | |||||||
Selling, general and administrative expenses | 232 | 217 | 724 | 678 | |||||||||||
Research and development expenses | 59 | 53 | 186 | 163 | |||||||||||
Restructuring-related charges | 72 | — | 72 | — | |||||||||||
Income from operations | 41 | 145 | 318 | 369 | |||||||||||
% of Revenue | 2.5 | % | 9.6 | % | 6.6 | % | 8.3 | % | |||||||
Interest expense | (46 | ) | (23 | ) | (135 | ) | (70 | ) | |||||||
Other (expense) income, net | (14 | ) | (3 | ) | (24 | ) | (4 | ) | |||||||
Total other (expense), net | (60 | ) | (26 | ) | (159 | ) | (74 | ) | |||||||
(Loss) income before income taxes and discontinued operations | (19 | ) | 119 | 159 | 295 | ||||||||||
% of Revenue | (1.2 | )% | 7.9 | % | 3.3 | % | 6.6 | % | |||||||
Income tax (benefit) expense | (19 | ) | 19 | 14 | 44 | ||||||||||
Income from continuing operations | — | 100 | 145 | 251 | |||||||||||
Income (loss) from discontinued operations, net of tax | 15 | — | 15 | (1 | ) | ||||||||||
Net Income | 15 | 100 | 160 | 250 | |||||||||||
Net income attributable to noncontrolling interests | — | 2 | 2 | 5 | |||||||||||
Net income attributable to NCR | $ | 15 | $ | 98 | $ | 158 | $ | 245 | |||||||
Amounts attributable to NCR common stockholders: | |||||||||||||||
Income from continuing operations | $ | — | $ | 98 | $ | 143 | $ | 246 | |||||||
Income (loss) from discontinued operations, net of tax | 15 | — | 15 | (1 | ) | ||||||||||
Net income | $ | 15 | $ | 98 | $ | 158 | $ | 245 | |||||||
Net income per share attributable to NCR common stockholders: | |||||||||||||||
Net income per common share from continuing operations | |||||||||||||||
Basic | $ | — | $ | 0.59 | $ | 0.85 | $ | 1.49 | |||||||
Diluted | $ | — | $ | 0.58 | $ | 0.84 | $ | 1.46 | |||||||
Net income per common share | |||||||||||||||
Basic | $ | 0.09 | $ | 0.59 | $ | 0.94 | $ | 1.48 | |||||||
Diluted | $ | 0.09 | $ | 0.58 | $ | 0.92 | $ | 1.45 | |||||||
Weighted average common shares outstanding | |||||||||||||||
Basic | 168.2 | 166.2 | 167.7 | 165.1 | |||||||||||
Diluted | 171.3 | 170.0 | 171.1 | 168.8 | |||||||||||
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| NCR CORPORATION CONSOLIDATED REVENUE AND OPERATING INCOME SUMMARY (Unaudited) (in millions) | Schedule B |
For the Periods Ended September 30 | |||||||||||||||||||||
Three Months | Nine Months | ||||||||||||||||||||
2014 | 2013 | % Change | 2014 | 2013 | % Change | ||||||||||||||||
Revenue by segment | |||||||||||||||||||||
Financial Services | $ | 899 | $ | 767 | 17 | % | $ | 2,593 | $ | 2,263 | 15 | % | |||||||||
Retail Solutions | 489 | 494 | (1 | )% | 1,482 | 1,498 | (1 | )% | |||||||||||||
Hospitality | 168 | 161 | 4 | % | 487 | 450 | 8 | % | |||||||||||||
Emerging Industries | 91 | 86 | 6 | % | 261 | 242 | 8 | % | |||||||||||||
Total Revenue | $ | 1,647 | $ | 1,508 | 9 | % | $ | 4,823 | $ | 4,453 | 8 | % | |||||||||
Operating income by segment | |||||||||||||||||||||
Financial Services | $ | 144 | $ | 93 | $ | 384 | $ | 245 | |||||||||||||
% of Revenue | 16.0 | % | 12.1 | % | 14.8 | % | 10.8 | % | |||||||||||||
Retail Solutions | 24 | 50 | 108 | 140 | |||||||||||||||||
% of Revenue | 4.9 | % | 10.1 | % | 7.3 | % | 9.3 | % | |||||||||||||
Hospitality | 27 | 26 | 62 | 74 | |||||||||||||||||
% of Revenue | 16.1 | % | 16.1 | % | 12.7 | % | 16.4 | % | |||||||||||||
Emerging Industries | 9 | 16 | 15 | 37 | |||||||||||||||||
% of Revenue | 9.9 | % | 18.6 | % | 5.7 | % | 15.3 | % | |||||||||||||
Subtotal-segment operating income | $ | 204 | $ | 185 | $ | 569 | $ | 496 | |||||||||||||
% of Revenue | 12.4 | % | 12.3 | % | 11.8 | % | 11.1 | % | |||||||||||||
Pension expense | 1 | 5 | 2 | 21 | |||||||||||||||||
Other adjustments (1) | 162 | 35 | 249 | 106 | |||||||||||||||||
Total income from operations | $ | 41 | $ | 145 | $ | 318 | $ | 369 | |||||||||||||
(1) | Other adjustments for the three months ended September 30, 2014 include $127 million related to the restructuring plan, $29 million of acquisition-related amortization of intangible assets, $5 million of acquisition-related costs, and $1 million of acquisition-related purchase price adjustments; other adjustments for the three months ended September 30, 2013 include $17 million of acquisition-related amortization of intangible assets, $14 million of acquisition-related costs, $3 million of acquisition-related purchase price adjustments and $1 million of legal costs related to the previously disclosed OPAC and FCPA investigations. Other adjustments for the nine months ended September 30, 2014 include $127 million related to the restructuring plan, $89 million of acquisition-related amortization of intangible assets, $25 million of acquisition-related costs, $6 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 nine months ended September 30, 2013 include $48 million of acquisition-related amortization of intangible assets, $44 million of acquisition-related costs, $12 million of acquisition-related purchase price adjustments and $2 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 |
September 30, 2014 | June 30, 2014 | December 31, 2013 | |||||||||
Assets | |||||||||||
Current assets | |||||||||||
Cash and cash equivalents | $ | 424 | $ | 483 | $ | 528 | |||||
Restricted cash | — | — | 1,114 | ||||||||
Accounts receivable, net | 1,454 | 1,464 | 1,339 | ||||||||
Inventories | 777 | 816 | 790 | ||||||||
Other current assets | 557 | 627 | 568 | ||||||||
Total current assets | 3,212 | 3,390 | 4,339 | ||||||||
Property, plant and equipment, net | 398 | 402 | 352 | ||||||||
Goodwill | 2,773 | 2,791 | 1,534 | ||||||||
Intangibles, net | 962 | 994 | 494 | ||||||||
Prepaid pension cost | 506 | 520 | 478 | ||||||||
Deferred income taxes | 245 | 247 | 441 | ||||||||
Other assets | 514 | 505 | 470 | ||||||||
Total assets | $ | 8,610 | $ | 8,849 | $ | 8,108 | |||||
Liabilities and stockholders’ equity | |||||||||||
Current liabilities | |||||||||||
Short-term borrowings | $ | 85 | $ | 83 | $ | 34 | |||||
Accounts payable | 705 | 678 | 670 | ||||||||
Payroll and benefits liabilities | 203 | 188 | 191 | ||||||||
Deferred service revenue and customer deposits | 529 | 563 | 525 | ||||||||
Other current liabilities | 486 | 464 | 461 | ||||||||
Total current liabilities | 2,008 | 1,976 | 1,881 | ||||||||
Long-term debt | 3,660 | 3,840 | 3,320 | ||||||||
Pension and indemnity plan liabilities | 513 | 529 | 532 | ||||||||
Postretirement and postemployment benefits liabilities | 172 | 169 | 169 | ||||||||
Income tax accruals | 189 | 178 | 189 | ||||||||
Environmental liabilities | 48 | 101 | 121 | ||||||||
Other liabilities | 76 | 87 | 99 | ||||||||
Total liabilities | 6,666 | 6,880 | 6,311 | ||||||||
Redeemable noncontrolling interests | 12 | 15 | 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 September 30, 2014, June 30, 2014, and December 31, 2013, respectively | — | — | — | ||||||||
Common stock: par value $0.01 per share, 500.0 shares authorized, 168.4, 168.0, and 166.6 shares issued and outstanding as of September 30, 2014, June 30, 2014, and December 31, 2013, respectively | 2 | 2 | 2 | ||||||||
Paid-in capital | 446 | 438 | 433 | ||||||||
Retained earnings | 1,530 | 1,515 | 1,372 | ||||||||
Accumulated other comprehensive loss | (60 | ) | (14 | ) | (38 | ) | |||||
Total NCR stockholders' equity | 1,918 | 1,941 | 1,769 | ||||||||
Noncontrolling interests in subsidiaries | 14 | 13 | 14 | ||||||||
Total stockholders' equity | 1,932 | 1,954 | 1,783 | ||||||||
Total liabilities and stockholders' equity | $ | 8,610 | $ | 8,849 | $ | 8,108 | |||||
9
| NCR CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in millions) | Schedule D |
For the Periods Ended September 30 | |||||||||||||||
Three Months | Nine Months | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Operating activities | |||||||||||||||
Net income | $ | 15 | $ | 100 | $ | 160 | $ | 250 | |||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||||||||||
Loss from discontinued operations | (15 | ) | — | (15 | ) | 1 | |||||||||
Depreciation and amortization | 69 | 52 | 211 | 149 | |||||||||||
Stock-based compensation expense | 7 | 12 | 26 | 34 | |||||||||||
Deferred income taxes | (38 | ) | 2 | (28 | ) | (8 | ) | ||||||||
Gain on sale of property, plant and equipment and other assets | — | (9 | ) | (2 | ) | (14 | ) | ||||||||
Impairment of long-lived and other assets | 8 | — | 8 | — | |||||||||||
Changes in assets and liabilities: | |||||||||||||||
Receivables | 11 | (85 | ) | (77 | ) | (152 | ) | ||||||||
Inventories | 41 | (16 | ) | 14 | (41 | ) | |||||||||
Current payables and accrued expenses | 31 | 10 | 33 | (24 | ) | ||||||||||
Deferred service revenue and customer deposits | (33 | ) | (35 | ) | 2 | 21 | |||||||||
Employee benefit plans | 47 | (20 | ) | (12 | ) | (152 | ) | ||||||||
Other assets and liabilities | (19 | ) | 16 | (85 | ) | (48 | ) | ||||||||
Net cash provided by operating activities | 124 | 27 | 235 | 16 | |||||||||||
Investing activities | |||||||||||||||
Expenditures for property, plant and equipment | (22 | ) | (36 | ) | (88 | ) | (80 | ) | |||||||
Proceeds from sales of property, plant and equipment | — | 8 | — | 10 | |||||||||||
Additions to capitalized software | (36 | ) | (30 | ) | (109 | ) | (75 | ) | |||||||
Business acquisition, net | (5 | ) | — | (1,647 | ) | (696 | ) | ||||||||
Changes in restricted cash | — | — | 1,114 | — | |||||||||||
Other investing activities, net | — | (1 | ) | 4 | 5 | ||||||||||
Net cash used in investing activities | (63 | ) | (59 | ) | (726 | ) | (836 | ) | |||||||
Financing activities | |||||||||||||||
Tax withholding payments on behalf of employees | (4 | ) | (1 | ) | (28 | ) | (28 | ) | |||||||
Short term borrowings, net | (7 | ) | (7 | ) | 2 | (1 | ) | ||||||||
Payments on term credit facilities | (17 | ) | — | (20 | ) | (35 | ) | ||||||||
Borrowings on term credit facilities | — | 300 | 250 | 300 | |||||||||||
Payments on revolving credit facility | (273 | ) | (350 | ) | (528 | ) | (845 | ) | |||||||
Borrowings on revolving credit facility | 120 | 120 | 690 | 845 | |||||||||||
Debt issuance costs | — | (9 | ) | (3 | ) | (12 | ) | ||||||||
Proceeds from employee stock plans | 3 | 7 | 10 | 52 | |||||||||||
Other financing activities | — | — | (3 | ) | — | ||||||||||
Net cash (used in) provided by financing activities | (178 | ) | 60 | 370 | 276 | ||||||||||
Cash flows from discontinued operations | |||||||||||||||
Net cash provided by (used in) discontinued operations | 66 | (27 | ) | 28 | (51 | ) | |||||||||
Effect of exchange rate changes on cash and cash equivalents | (8 | ) | (1 | ) | (11 | ) | (14 | ) | |||||||
Decrease in cash and cash equivalents | (59 | ) | — | (104 | ) | (609 | ) | ||||||||
Cash and cash equivalents at beginning of period | 483 | 460 | 528 | 1,069 | |||||||||||
Cash and cash equivalents at end of period | $ | 424 | $ | 460 | $ | 424 | $ | 460 | |||||||
10
1 Q3 2014 EARNINGS CONFERENCE CALL BILL NUTI, CHAIRMAN AND CEO BOB FISHMAN, CFO October 23, 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 revenue, software-related revenue (and the components thereof) and operational gross margins; the anticipated effects of the recent rulings in the Fox River appeals, including with respect to cash flow and related reserves; the expected benefits of NCR's recently announced voluntary lump sum offer to retirees under its U.S. pension plan; the future growth and transformation of NCR and its lines of business; NCR's 2014 financial outlook; and the costs and expected benefits and results of NCR's recently announced restructuring plan. 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 October 23, 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 ▪ Orders down 27% driven by challenges primarily in North America with additional weakness in Europe ▪ Backlog up 9% but further delays in solution rollouts ▪ Q3 revenue and operating margin down due to continued weakness in the North America market and lower software license revenue ▪ Software-related revenue up 1%; SaaS revenue flat Financial Highlights Revenue $489M Operating Income $24M -1% y/y -52% y/y • Challenging retail market impacting results • Weak same store sales comparisons and financial results • Data security concerns shifting IT priorities, resources & capital spending • Ongoing retail consolidation among customer base • Announced Michael Bayer as new SVP & President • Maintained strong market position in North America and globally • Continued demand for Retalix solutions as reflected by Retalix order growth • Enabling integration of consumer mobile payment applications through point-of-sale and mobile commerce channels RETAIL SOLUTIONS Q3 2014 Update Performance Highlights Operating Margin 4.9% -520 bps Key Developments
4 Q3 2014 FINANCIAL HIGHLIGHTS (1) NPOI as a percentage of revenue. REVENUE Q3 2013 Q3 2014 $1.51 billion Up 9% y/y / Up 10% constant currency Recurring revenue up 18%, 41% of total OPERATIONAL GROSS MARGIN Q3 2013 Q3 2014 28.6% 28.9% Up 30 bps y/y NPOI Up 10% y/y; lower than expected Q3 NPOI margin(1) of 12.4% FREE CASH FLOW Excluding $93 million recoveries from the Fox River environmental-related matter, FCF up $105M Q3 2013 Q3 2014 $185 million $204 million Q3 2013 Q3 2014 ($66) million $132 million $1.65 billion
5 SOFTWARE-RELATED REVENUE GROWTH Q3 2014 Q3 2013 $37 Q3 • Q3 Software-related revenue up 34% y/y; up 7% excluding Digital Insight • Q3 Professional Services revenue up 14% y/y • Q3 SaaS revenue up 238% y/y; up 11% excluding Digital Insight $430 SaaS Professional Services SW Licenses & SW Maintenance $155 FY 2013 FY 2014e $1,271 $1,700 - $1,725 FY 2012 ($'s in Millions) • FY2014 target lowered to $1,700 - $1,725 from $1,775 - $1,825 • 2014 growth now expected to be ~34-36%; up ~8-10% y/y excluding Digital Insight $130 $148 $125 $157 FY $616 $145 $510 $466 $94 $345 ~$650 ~$490 ~$575 $322 $905
6 ($ in Millions) $5,730 $6,575 - $6,625 SOFTWARE-RELATED REVENUE POSITIVELY IMPACTING MARGINS $5,291 $6,123 Operational Gross Margin 22.0% 23.5% 24.9% 26.8% 28.5% ~29.5% ~750bp 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% ~40% 43% ~26% 21% ~34% 36%
7 Seventh Circuit Favorable Rulings in Fox River Appeals ▪ Overturned decisions that held NCR 100% liable for certain Fox River cleanup costs ▪ Vacated cleanup injunction and declaratory judgment as to NCR ▪ Upheld ruling that NCR does not have “arranger liability” at the Fox River ▪ Cases will return to trial court for further proceedings ▪ NCR will pursue others for cleanup participation and costs; may have favorable impact on remediation cash flow ▪ Rulings and other items have favorable impact to Fox River reserve - reduced from $95M at Q2 2014 to $57M at Q3 2014 New Four-Party Funding Agreement regarding Fox River & Certain Future Sites ▪ Collected $93M against API Fox obligation, effectively ending API arbitration ▪ Secured funding from 3 parties, including API, Windward and BAT ▪ Four companies now working together to pursue claims against other parties to maximize recoveries FURTHER EXECUTION AGAINST LEGACY ISSUES U.S. Retiree Lump Sum Offer ▪ Offered ~20,000 U.S. retirees the opportunity to convert their annuity benefit to a lump-sum during Q3 ▪ ~50% of the eligible retirees chose the lump-sum option ▪ Lump-sum of nearly $800M will be paid in Q4 from plan assets reducing enterprise risk by eliminating more than a quarter of NCR’s U.S. pension liability ▪ Action will be NPV positive as it materially reduces ongoing PBGC fixed premiums and plan recordkeeping costs Significant progress on Fox River in September 2014 Favorable rulings reduce reserve and may improve cash flow New funding agreement provides cash flow predictability Pension Phase III Update: Executing NPV-positive pension transactions to add value & reduce risk for shareholders
8 Revenue $1,647 $1,508 9 % (1) / 10%(2) Operational Gross Margin 476 431 10 % Operational Gross Margin Rate 28.9% 28.6% Expenses (non-GAAP) 272 246 11 % % of Revenue 16.5% 16.3% NPOI 204 185 10 % % of Revenue 12.4% 12.3% Non-GAAP Diluted EPS(3) $0.67 $0.76 (12)% Q3 OPERATIONAL RESULTS 2014 2013 % Change (1) As reported. (2) On a constant currency basis. (3) Decrease primarily related to higher interest expense and unfavorable foreign currency fluctuations. $ millions, except per share amounts For the three months ended September 30
9 Revenue $1,647 $1,508 9 % Gross Margin (1) 404 415 (3)% Gross Margin Rate 24.5% 27.5% Expenses (1) 363 270 34 % % of Revenue 22.0% 17.9% Income from Operations (1) 41 145 (72)% % of Revenue 2.5% 9.6% GAAP Diluted EPS(1) $— $0.58 (100)% Q3 GAAP RESULTS $ millions, except per share amounts 2014 2013 % Change For the three months ended September 30 (1) Includes the impact of the previously announced restructuring plan. See further detail on slide 27.
10 Q3 REVENUE BY SEGMENT Financial Services $899 $767 17 % 18 % Excluding Digital Insight $806 5 % 6 % Retail Solutions 489 494 (1)% (1)% Hospitality 168 161 4 % 4 % Emerging Industries 91 86 6 % 6 % Total Revenue $1,647 $1,508 9 % 10 % Excluding Digital Insight $1,554 3 % 4 % 2014 2013 % Change % Change (Constant Currency) $ millions For the three months ended September 30
11 Q3 OPERATING INCOME BY SEGMENT For the three months ended September 30 2014 2013 Financial Services $144 $93 % of Financial Services Revenue 16.0% 12.1% Retail Solutions 24 50 % of Retail Solutions Revenue 4.9% 10.1% Hospitality 27 26 % of Hospitality Revenue 16.1% 16.1% Emerging Industries 9 16 % of Emerging Industries Revenue 9.9% 18.6% NPOI $204 $185 % of Total Revenue 12.4% 12.3% $ millions
12 FINANCIAL SERVICES Q3 2014 Update Performance HighlightsFinancial Highlights Revenue $899M Operating Income $144M +17% y/y +55% y/y • Core order growth of 7% driven by North America community financial institutions, Europe, Southeast Asia, and MEA ▪ Backlog up 14% driven by Branch Transformation and software demand ▪ Operating margin increased 55% with half from the core, driven by mix shift, and half from Digital Insight ▪ Core revenue up 5% y/y and operating margin up 240 bps ▪ Software-related revenue up 96%; up 20% excluding Digital Insight ▪ Balanced performance globally, led by North America, Europe and MEA • Continued strong performance for Branch Transformation • Branch Transformation y/y orders and revenues up 90% and 125%, respectively • 13 new Interactive Services customers; customer wins globally • Digital Insight performing ahead of expectations • Q3 revenue of $93 million and operating income of $27 million • 20% year-to-date increase in customer renewals • Continued strong mobile growth - 6.4M mobile active users vs. 4.6M last year • NCR-owned data centers installed; Transition customer and applications from mid-2014 through early 2015 Operating Margin 16.0% +390 bps Key Developments
13 ▪ Revenue growth across North America and Europe ▪ Operating margin up 260 bps over Q2 2014 ▪ Software-related revenue down 2% ▪ SaaS revenue up 21% ▪ SaaS application sites up 21% y/y Financial Highlights Revenue $168M Operating Income $27M +4% y/y +4% y/y HOSPITALITY Q3 2014 Update Performance Highlights Operating Margin 16.1% Flat y/y Key Developments ▪ Customer wins across product areas including venue management solutions, restaurant operations and consumer engagement solutions • Expanding partnership with Yum Brands in key international markets • Continuing to advance North America SMB market strategy • 13% revenue growth y/y • Enabling integration of consumer mobile payment applications through point-of-sale and mobile commerce channels
14 EMERGING INDUSTRIES Q3 2014 Update Telecom & Technology ▪ Globe Telecom (Phillipines) using NCR Bill Pay solution to provide differentiated customer service Travel ▪ Added omni-channel capabilities to NCR Wayfinding • Deployment with Spring Airlines (Japan) • Delivered a record 35M mobile airline boarding passes in Q3 2014, up 203% y/y Small Business (NCR Silver) • Increased adoption of NCR Silver; Customer base up 28% over Q2 2014 and up 195% y/y • Strengthened platform through enabling online and mobile ordering including Apple Pay support and extending customer support to 24/7 • NCR Silver won American Business Award for ‘Best Business-to-Business Product’ Revenue $91M Operating Income $9M -$7M y/y +6% y/y ▪ Telecom & Technology revenue up 14% ▪ Travel revenue down 23% ▪ Small Business continues to gain momentum ▪ Operating income negatively impacted by costs related to onboarding managed services contracts and continued investment in Small Business Performance HighlightsFinancial Highlights Operating Margin 9.9% vs. 18.6% Q3 2013 Key Developments
15 Q3 SUPPLEMENTAL REVENUE INFORMATION SaaS $125 $37 238 % Software License and Software Maintenance 157 155 1 % Professional Services 148 130 14 % Total Software-Related Revenue 430 322 34 % Hardware 650 626 4 % Other Services 567 560 1 % Total Revenue $1,647 $1,508 9 % 2014 2013 % Change $ millions For the three months ended September 30
16 FREE CASH FLOW Q3 2014 Q3 2013 FY 2014e FY 2013 Cash Provided by Operating Activities $124 $27 $442 - $477 $281 Net capital expenditures (58) (66) (250) - (260) (226) Cash Provided by (Used In) Discontinued Operations 66 (27) 0 - (5) (52) Pension discretionary contributions and settlements — — 48 204 Free Cash Flow (Used) (1) $132 ($66) ~$225 - $275 $207 (1) FY 2014e free cash flow includes the estimated cash impact of ~$50 million related to the previously announced restructuring plan. $ millions
17 FREE CASH FLOW GENERATION Current 2014e Prior 2014e 2013 Free Cash Flow (FCF) ~$225 - $275 ~$250 - $300 $207 plus: Pension 50 50 79 plus: Discontinued Ops 0-5 (2) 45-55 (1) 52 plus: Acquisition-related costs 25-35 25-35 43 plus: Restructuring plan 50 50 — Adjusted FCF ~$350 - $415 ~$420 - $490 $381 Adjusted FCF as a % of non-GAAP net income ~80% ~85% 80% $ millions, except metrics (1) Prior 2014 estimate included approximately $45 million of anticipated recoveries related to the Fox River environmental matter offset by $90 million to $100 million net remediation and transaction costs related to environmental matters. (2) Current 2014 estimate includes $93 million of recoveries received in Q3 2014 related to the Fox River environmental matter offset by $93 million to $98 million net remediation and transaction costs related to environmental matters.
18 NET DEBT & EBITDA METRICS 2013 Q1 2014 Q2 2014 Q3 2014 Debt $3.4 $3.9 $3.9 $3.7 Cash 0.5 0.5 0.5 0.4 Net Debt $2.9 $3.4 $3.4 $3.3 Adjusted EBITDA $0.9 $0.9 (1) $1.0 (1) $1.0 (1) Net Debt / Adjusted EBITDA 3.2x 3.7x 3.4x 3.3x $ in billions, except metrics (1) Adjusted EBITDA for the trailing twelve-month period.
19 Current 2014 Guidance Prior 2014 Guidance 2013 Revenue $6,575 - $6,625 (1) $6,750 - $6,850 (1) $6,123 Year-over-Year Revenue Growth 7% - 8% (1) 10% - 12% (1) 7% Income from Operations (GAAP)(2) (4) $499 - $519 $580 - $600 $666 Non-Pension Operating Income (NPOI) $810 - $830 $900 - $920 $717 Adjusted EBITDA $1,001 - $1,021 $1,085 - $1,105 $886 Diluted EPS (GAAP)(2) (4) $1.30 - $1.40 $1.75 - $1.85 $2.67 Non-GAAP Diluted EPS(3) $2.60 - $2.70 $3.00 - $3.10 $2.81 Free Cash Flow (4) $225 - $275 $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 now includes expected other expense (income), net (OIE) of $215M, which incorporates $185M of interest expense, a 25% 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) Includes the estimated pre-tax charge of $150 million, or $0.66 per diluted share, and the estimated cash impact of ~$50 million related to the previously announced restructuring plan.
20 2014 SEGMENT REVENUE GUIDANCE Line of Business Current 2014e Prior 2014e FY 2013 Financial Services 15% - 16% 15% - 17% $3,115 Financial Services excluding Digital Insight 4% - 5% 4% - 5% Retail (2)% - (3)% 3% - 5% $2,034 Hospitality 5% - 7% 8% - 10% $626 Emerging Industries 1% - 4% 10% - 14% $348 Total 7% - 8% (1) 10% - 12% (1) $6,123 $ in millions (1) Includes 1% of unfavorable foreign currency fluctuations.
21 Q4 2014 GUIDANCE Q4 2014e Q4 2013 Income from Operations (GAAP) $181 - $201 (1) $297 Non-Pension Operating Income (Non- GAAP) $241 - $261 $221 Tax rate 30% 25% Other expense ~$55 $32 $ millions(1) Includes an estimated pre-tax charge of $20 million related to the previously announced restructuring plan.
22 Q3 2014 SUMMARY • Software and SaaS y/y revenue increased; outlook adjusted but expect continued growth • Financial Services performed well • Strong performance driven by branch transformation and software growth • Solid order and backlog growth • Continued strong performance from Digital Insight benefiting from customer renewals, mobile growth and synergies/cross-sell program • Retail Solutions continues to face headwinds • Continued challenges in North America but market position remains steady • Backlog up but further delays causing slower revenue conversion • Operating margins impacted by weaker software–related growth • Hospitality – executing strategy and growing global footprint • Added new customers in key geographies • Further progress executing SMB strategy – revenues and customers growing • Previously announced restructuring plan on track to deliver run-rate savings reaching ~$90M by 2016 • Full year 2014 guidance lowered due to challenging retail market, difficult global macroeconomic conditions and foreign currency headwinds but remain confident in our positioning for long-term growth
SUPPLEMENTARY NON-GAAP MATERIALS
24 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.
25 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.
26 Income from Operations (GAAP) to Non-Pension Operating Income (non-GAAP) and Adjusted EBITDA (non-GAAP) in millions Q3 2014 LTM Q2 2014 LTM Q1 2014 LTM FY 2013 Current FY 2014e Prior FY 2014e Q4 2014e Income from Operations (GAAP) $615 $719 $689 $666 $499 - $519 $580 - $600 $181 - $201 Pension Expense (Benefit) (97) (93) (86) (78) 8 8 6 Restructuring Plan 127 — — — 147 150 20 Acquisition-Related Amortization of Intangibles 106 94 81 65 120 121 31 Acquisition-Related Costs 27 36 44 46 28 33 3 Acquisition-Related Purchase Price Adjustment 9 11 12 15 6 6 — OFAC and FCPA Investigations(1) 3 4 3 3 2 2 — Non-Pension Operating Income (non-GAAP) $790 $771 $743 $717 $810 - $830 $900 - $920 $241 - $261 Depreciation and Amortization 164 159 149 143 160 155 Ongoing Pension Expense (6) (11) (12) (15) (4) (10) Stock Compensation Expense 33 38 41 41 35 40 Adjusted EBITDA $981 $957 $921 $886 $1,001 -$1,021 $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.
27 in millions (except per share amounts) Q3 QTD 2014 GAAP Restructuring plan Acquisition- related amortization of intangibles Acquisition- related costs Acquisition- related purchase price adjustments OFAC and FCPA Investigations Pension (expense) benefit Q3 QTD 2014 non-GAAP Product revenue $721 $— $— $— $— $— $— $721 Service revenue 926 — — — — — — 926 Total revenue 1,647 — — — — — — 1,647 Cost of products 547 (9) (9) — (1) — — 528 Cost of services 696 (46) (6) — — — (1) 643 Gross margin 404 55 15 — 1 — 1 476 Gross margin rate 24.5% 3.3% 0.9% —% 0.1% —% 0.1% 28.9% Selling, general and administrative expenses 232 — (14) (5) — — — 213 Research and development expenses 59 — — — — — — 59 Restructuring-related charges 72 (72) — — — — — — Total expenses 363 (72) (14) (5) — — — 272 Total expense as a % of revenue 22.0% (4.4)% (0.8)% (0.3)% —% —% —% 16.5% Income (loss) from operations 41 127 29 5 1 — 1 204 Income (loss) from operations as a % of revenue 2.5% 7.7% 1.7% 0.3% 0.1% —% 0.1% 12.4% Interest and Other (expense) income, net (60) 3 — — — — — (57) Income (loss) from continuing operations before income taxes (19) 130 29 5 1 — 1 147 Income tax expense (benefit) (19) 31 9 1 1 — 9 32 Effective tax rate 100% 22% Income (loss) from continuing operations — 99 20 4 — — (8) 115 Net income (loss) attributable to noncontrolling interests — — — — — — — — Income (loss) from continuing operations (attributable to NCR) $— $99 $20 $4 $— $— ($8) $115 Diluted earnings per share $— $0.58 $0.12 $0.02 $— $— ($0.05) $0.67 GAAP TO NON-GAAP RECONCILIATION Q3 2014 QTD
28 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
29 in millions (except per share amounts) Q3 YTD 2014 GAAP Restructuring plan Acquisition- related amortization of intangibles Acquisition- related costs Acquisition- related purchase price adjustments OFAC and FCPA Investigations Pension (expense) benefit Q3 YTD 2014 non-GAAP Product revenue $2,077 — — — — — — $2,077 Service revenue 2,746 — — — — — — 2,746 Total revenue 4,823 — — — — — — 4,823 Cost of products 1,554 (9) (29) — (4) — — 1,512 Cost of services 1,969 (46) (18) — (2) — — 1,903 Gross margin 1,300 55 47 — 6 — — 1,408 Gross margin rate 27.0% 1.1% 1% —% 0.1% —% —% 29.2% Selling, general and administrative expenses 724 — (42) (25) — (2) (1) 654 Research and development expenses 186 — — — — — (1) 185 Restructuring-related charges 72 (72) — — — — — — Total expenses 982 (72) (42) (25) — (2) (2) 839 Total expense as a % of revenue 20.4% (1.5)% (0.9)% (0.6)% —% —% —% 17.4% Income (loss) from operations 318 127 89 25 6 2 2 569 Income (loss) from operations as a % of revenue 6.6% 2.7% 1.9% 0.5% 0.1% —% —% 11.8% Interest and Other (expense) income, net (159) 3 — — — — — (156) Income (loss) from continuing operations before income taxes 159 130 89 25 6 2 2 413 Income tax expense (benefit) 14 31 29 6 2 1 10 93 Effective tax rate 9% 23% Income (loss) from continuing operations 145 99 60 19 4 1 (8) 320 Net income (loss) attributable to noncontrolling interests 2 — — — — — — 2 Income (loss) from continuing operations (attributable to NCR) $143 $99 $60 $19 $4 $1 ($8) $318 Diluted earnings per share $0.84 $0.58 $0.35 $0.11 $0.02 $0.01 ($0.05) $1.86 GAAP TO NON-GAAP RECONCILIATION Q3 2014 YTD
30 in millions (except per share amounts) Q3 YTD 2013 GAAP Acquisition- related amortization of intangibles Acquisition- related costs Acquisition- related purchase price adjustments OFAC and FCPA Investigations Pension (expense) benefit Q3 YTD 2013 non-GAAP Product revenue $2,111 — — — — — $2,111 Service revenue 2,342 — — — — — 2,342 Total revenue 4,453 — — — — — 4,453 Cost of products 1,577 (27) — — — — 1,550 Cost of services 1,666 — — (12) — (12) 1,642 Gross margin 1,210 27 — 12 — 12 1,261 Gross margin rate 27.2% 0.5% —% 0.3% —% 0.3% 28.3% Selling, general and administrative expenses 678 (21) (44) — (2) (6) 605 Research and development expenses 163 — — — — (3) 160 Total expenses 841 (21) (44) — (2) (9) 765 Total expense as a % of revenue 18.9% (0.5)% (1.0)% —% —% (0.2)% 17.2% Income (loss) from operations 369 48 44 12 2 21 496 Income (loss) from operations as a % of revenue 8.3% 1.0% 1.0% 0.3% —% 0.5% 11.1% Interest and Other (expense) income, net (74) — — — — — (74) Income (loss) from continuing operations before income taxes 295 48 44 12 2 21 422 Income tax expense (benefit) 44 12 14 4 1 9 84 Effective tax rate 15% 20% Income (loss) from continuing operations 251 36 30 8 1 12 338 Net income (loss) attributable to noncontrolling interests 5 — — — — — 5 Income (loss) from continuing operations (attributable to NCR) $246 $36 $30 $8 $1 $12 $333 Diluted earnings per share $1.46 $0.21 $0.18 $0.04 $0.01 $0.07 $1.97 GAAP TO NON-GAAP RECONCILIATION Q3 2013 YTD
31 in millions (except per share amounts) Q4 QTD 2013 GAAP Acquisition- related amortization
of intangibles Acquisition- related costs Acquisition- related purchase price adjustments OFAC and FCPA Investigations Japan valuation reserve release Pension (expense) benefit Q4 QTD 2013 non-GAAP Product revenue $801 — — — — — — $801 Service revenue 869 — — — — — — 869 Total revenue 1,670 — — — — — — 1,670 Cost of products 575 (9) — (1) — — 2 567 Cost of services 565 — — (2) — — 56 619 Gross margin 530 9 — 3 — — (58) 484 Gross margin rate 31.7% 0.5% —% 0.2% —% —% -3.4% 29.0% Selling, general and administrative expenses 193 (8) (2) — (1) — 28 210 Research and development expenses 40 — — — — — 13 53 Total expenses 233 (8) (2) — (1) — 41 263 Total expense as a % of revenue 14.0% (0.5)% (0.1)% —% (0.1)% —% 2.4% 15.7% Income (loss) from operations 297 17 2 3 1 — (99) 221 Income (loss) from operations as a % of revenue 17.8% 0.9% 0.1% 0.2% 0.1% —% (5.9)% 13.2% Interest and Other (expense) income, net (38) — 6 — — — — (32) Income (loss) from continuing operations before income taxes 259 17 8 3 1 — (99) 189 Income tax expense (benefit) 54 5 2 1 — 15 (29) 48 Effective tax rate 21% 25% Income (loss) from continuing operations 205 12 6 2 1 (15) (70) 141 Net income (loss) attributable to noncontrolling interests (1) — — — — — — (1) Income (loss) from continuing operations (attributable to NCR) $206 $12 $6 $2 $1 ($15) ($70) $142 Diluted earnings per share $1.21 $0.07 $0.03 $0.01 $0.01 ($0.09) ($0.41) $0.83 GAAP TO NON-GAAP RECONCILIATION Q4 2013 QTD
32 in millions (except per share amounts) FY 2013 GAAP Acquisition- related amortization of intangibles Acquisition- related costs Acquisition- related purchase price adjustments OFAC and FCPA Investigations Japan valuation reserve release Pension (expense) benefit FY 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 FY 2013
33 GAAP TO NON-GAAP RECONCILIATION FY 2014e Diluted EPS (GAAP) $1.30 - $1.40 Pension Expense (Benefit) 0.03 Restructuring Plan 0.66 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 $2.60 - $2.70 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.
34 GAAP TO NON-GAAP RECONCILIATIONS FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 Gross Margin as a % of Revenue (GAAP) 22.0% 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)
35 GAAP TO NON-GAAP RECONCILIATIONS Revenue Growth % (GAAP) to Revenue Growth % on a Constant Currency Basis (non-GAAP) Q3 2014 Revenue Growth % (GAAP) 9% Unfavorable foreign currency fluctuation impact 1% Revenue Growth % on a Constant Currency Basis (non-GAAP) 10%
36