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NCR > SEC Filings for NCR > Form 10-Q on 26-Oct-2012All Recent SEC Filings

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Form 10-Q for NCR CORP


26-Oct-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)

Overview
The following were the significant events for the third quarter of 2012, each of which is discussed more fully in later sections of this MD&A:
Revenue increased approximately 6% from the prior year period;

Gross margin improvement continued to be driven by growth in software revenues;

Continued to realize the benefits of our cost reduction initiatives; and

Implemented phase two of pension strategy by successfully completing high yield bond offering and $500 million contribution to U.S. qualified pension plan, as previously announced.

In the third quarter of 2012, we continued to pursue our core strategic initiatives to provide maximum value to our stakeholders. These strategic initiatives and actions are as follows:
Gain profitable share - We seek to optimize our investments in demand creation to increase NCR's market share in areas with the greatest potential for profitable growth, which include opportunities in self-service technologies with our core financial services, retail, and hospitality customers as well as the shift of the business model to focus on growth of higher margin software and services. We focus on expanding our presence in our core industries, while seeking additional growth by:

?         penetrating market adjacencies in single and multi-channel self-service
          segments;


?         expanding and strengthening our geographic presence and sales coverage
          across customer tiers through use of the indirect channel; and


?         leveraging NCR Services and Consumables solutions to grow our share of
          customer revenue, improve customer retention, and deliver increased
          value to our customers.


   Expand into emerging growth industry segments - We are focused on broadening
    the scope of our self-service solutions from our existing customers to expand
    these solution offerings to customers in newer industry-vertical markets
    including telecommunications and technology as well as travel and gaming. We
    expect to grow our business in these industries through integrated service
    offerings in addition to targeted acquisitions and strategic partnerships.


   Pursue strategic acquisitions that promote growth and improve gross margin -
    We are continually and currently exploring potential acquisition
    opportunities in the ordinary course of business to identify acquisitions
    that can accelerate the growth of our business and improve our gross margin
    mix, with a particular focus on software-oriented transactions. We may fund
    acquisitions through either equity or debt, including drawings under our
    senior secured credit facility.


   Build the lowest cost structure in our industry - We strive to increase the
    efficiency and effectiveness of our core functions and the productivity of
    our employees through our continuous improvement initiatives.


   Enhance our global service capability - We continue to identify and execute
    various initiatives to enhance our global service capability. We also focus
    on improving our service positioning, increasing customer service attach
    rates for our products and improving profitability in our services business.
    Our service capability can provide us a competitive advantage in winning
    customers and it provides NCR with an attractive and stable revenue source.


   Innovation of our people - We are committed to solution innovation across all
    customer industries. Our focus on innovation has been enabled by closer
    collaboration between NCR Services and our Industry Solutions Group, as well
    as a model to apply best practices across all industries through one
    centralized research and development organization and one business decision
    support function. Innovation is also driven through investments in training
    and developing our employees by taking advantage of our new world-class
    training centers. We expect that these steps and investments will accelerate
    the delivery of new innovative solutions focused on the needs of our
    customers and changes in consumer behavior.


   Enhancing the customer experience - We are committed to providing a customer
    experience to drive loyalty, focusing on product and software solutions based
    on the needs of our customers, a sales force enabled with the consultative
    selling model to better leverage the innovative solutions we are bringing to
    market, and sales and support service teams focused on delivery and customer
    interactions. We continue to rely on the Customer Loyalty Survey to measure
    our current state and set a course for our future state where we aim to
    continuously improve with solution innovations as well as through the
    execution of our service delivery programs.

Embedded in the core initiatives, we have an underlying set of strategic imperatives that align with our financial objectives for


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2012 and beyond. These imperatives are to deliver disruptive innovation; to emphasize the migration of our revenue to higher margin software and services revenue; and to more fully enable our sales force with a consultative selling model that better leverages the innovation we are bringing to the market. We expect to continue with these initiatives for the remainder of 2012 and beyond, as we refine our business model and position the Company for growth and profitability.

Results from Operations

Three Months Ended September 30, 2012 Compared to Three Months Ended
September 30, 2011

The following table shows our results for the three months ended September 30:
                                                     Three months ended September 30
In millions                                             2012                2011
Revenue                                                $1,435              $1,360
Gross margin                                            $358                $299
Gross margin as a percentage of revenue                 24.9%               22.0%
Operating expenses
   Selling, general and administrative expenses         $217                $227
   Research and development expenses                     52                  44
Income from operations                                   $89                 $28

The following table shows our revenues and gross margins from products and services for the three months ended September 30:

                                                   Three months ended September 30
In millions                                           2012                2011
Product revenue                                       $712                $677
Cost of products                                       536                 533
Product gross margin                                  $176                $144
Product gross margin as a percentage of revenue       24.7%               21.3%
Services revenue                                      $723                $683
Cost of services                                       541                 528
Services gross margin                                 $182                $155
Services gross margin as a percentage of revenue      25.2%               22.7%

The following table shows our revenues by theater for the three months ended September 30:

                                                                                      % Increase
                                                                                      (Decrease)
                                                                           % Increase  Constant
In millions                      2012   % of Total     2011   % of Total   (Decrease)  Currency
Americas                         $712      50%         $636      47%          12%        13%
Europe                           371       26%         369       27%           1%        10%
Asia Middle East Africa (AMEA)   352       24%         355       26%          (1)%        2%
Consolidated revenue            $1,435     100%       $1,360     100%          6%         9%

Revenue

For the three months ended September 30, 2012 compared to the three months ended September 30, 2011, revenue increased 6% due to higher product sales and services revenue in the Americas theater and higher product sales in the Europe and AMEA theaters. The acquisition of Radiant during the third quarter of 2011 also led to an incremental increase in product sales and services revenue in the Americas theater. Foreign currency fluctuations unfavorably impacted the quarter-over-quarter comparison by 3%. Our product revenue increased 5% and our services revenue increased 6% quarter-over-quarter.

Revenue in the Americas theater increased primarily due to growth in product sales and services revenue in the financial services


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and hospitality lines of business, partially offset by declines in product sales in the retail solutions line of business. Revenue in the Europe theater increased due to growth in product sales in the hospitality line of business offset by declines in product sales and services revenue in the retail solutions line of business. Revenue in the AMEA theater decreased mainly due to declines in product sales and services revenue in the financial services line of business partially offset by growth in product sales and services revenue in the hospitality and telecommunications and technology lines of business.

Gross Margin

Gross margin as a percentage of revenue in the third quarter of 2012 was 24.9% compared to 22.0% in the third quarter of 2011. Product gross margin in the third quarter of 2012 was 24.7% compared to 21.3% in the third quarter of 2011. Product gross margin was negatively impacted by $4 million of acquisition related amortization of intangibles, or 0.6% as a percentage of product revenue in the third quarter of 2012. Product gross margin was also negatively impacted by $1 million in higher pension expense, or 0.1% as a percentage of product revenue in the third quarter of 2012. After considering the effect of these items, the increase in product gross margin was primarily due to a favorable sales mix with an increase in software revenue. Services gross margin in the third quarter of 2012 was 25.2% compared to 22.7% in the third quarter of 2011. Services gross margin was positively impacted by $8 million in lower pension expense, or 1.1% as a percentage of services revenue, period over period. After considering the effect of pension expense, the increase in services gross margin was due to lower labor and service delivery costs and continued focus on overall cost containment.

Effects of Pension, Postemployment, and Postretirement Benefit Plans

Gross margin and operating expenses for the three months ended September 30,
2012 and 2011 were impacted by certain employee benefit plans as shown below:
                        Three months ended September 30
In millions                 2012                2011
Pension expense             $50                 $62
Postemployment expense       8                   17
Postretirement benefit      (4)                 (4)
Total expense               $54                 $75

During the three months ended September 30, 2012, NCR incurred $50 million of pension expense compared to $62 million in the third quarter of 2011. The decrease in pension expense was primarily due to a reduction in amortization of the actuarial losses for plans which have less than 10% active participants where, as of January 1, 2012, the amortization is now being calculated based on average remaining life expectancy rather than remaining service period. This change reflects our ongoing accounting policy for the evolving demographics of our pension plans, and was effective for the U.S. qualified pension plan and our largest U.K. plan beginning in the first quarter of 2012. The decrease in postemployment expense was primarily the result of $6 million of Radiant acquisition related severance costs incurred in 2011.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $217 million in the third quarter of 2012 as compared to $227 million in the third quarter of 2011. As a percentage of revenue, these expenses were 15.1% in the third quarter of 2012 compared to 16.7% in the third quarter of 2011. Pension costs included in selling, general and administrative expenses were $14 million in the third quarter of 2012 as compared to $18 million in the third quarter of 2011. Selling, general and administrative expenses in the third quarter of 2012 also included $4 million of acquisition related integration costs and $6 million of acquisition related amortization of intangibles. Selling, general and administrative expenses in the third quarter of 2011 also included $24 million of acquisition related transaction costs, $6 million of acquisition related severance costs and $3 million of acquisition related amortization of intangibles. After considering these items, selling, general and administrative expenses increased as a percentage of revenue primarily due to additional investment in sales resources.

Research and Development Expenses

Research and development expenses were $52 million in the third quarter of 2012 as compared to $44 million in the third quarter of 2011. As a percentage of revenue, these costs were 3.6% in the third quarter of 2012 as compared to 3.2% in the third quarter of 2011. Pension costs included in research and development expenses for the third quarter of 2012 and 2011, were $6 million and $7 million, respectively. After considering this item, research and development expenses increased as a percentage of revenue due to continued investment across all lines of business as well as increased spending following the acquisition of Radiant in the


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third quarter of 2011.

Interest and Other Expense Items

Interest expense was $7 million in the third quarter of 2012 compared to $3 million in the third quarter of 2011. Interest expense increased in the third quarter of 2012 as a result of borrowings under the Company's Secured Credit Facility. Other expense, net was zero in the third quarter of 2012 compared to other expense, net of $1 million in the third quarter of 2011.

Provision for Income Taxes

Income tax provisions for interim (quarterly) periods are based on estimated annual income tax rates calculated separately from the effect of significant or unusual items. Income tax represented expense of $23 million for the three months ended September 30, 2012 compared to expense of $2 million for the three months ended September 30, 2011. The increase in income tax expense was primarily driven by increased income from continuing operations and an unfavorable mix of earnings, partially offset by the $5 million adjustment described in Note 1, "Basis of Presentation and Summary of Significant Accounting Policies"of the Condensed Consolidated Financial Statements.

NCR is subject to numerous federal, state and foreign tax audits. While NCR believes that appropriate reserves exist for issues that might arise from these audits, should these audits be settled, the resulting tax effect could impact the tax provision and cash flows in future periods.

Income from Discontinued Operations

During the third quarter of 2012, loss from discontinued operations was $1 million, net of tax, related to an additional operating loss from the Entertainment business.

Loss from discontinued operations was $7 million, net of tax, in the third quarter of 2011, which included the operating loss from the Entertainment business.

Revenue and Operating Income by Segment

The Company manages and reports its businesses in the following four segments:

Financial Services - We offer solutions to enable customers in the financial services industry to reduce costs, generate new revenue streams and enhance customer loyalty. These solutions include a comprehensive line of ATM and payment processing hardware and software, and related installation, maintenance, and managed and professional services. We also offer a complete line of printer consumables.

Retail Solutions - We offer solutions to customers in the retail industry designed to improve selling productivity and checkout processes as well as increase service levels. These solutions primarily include retail-oriented technologies, such as Point of Sale (POS) terminals and bar-code scanners, as well as innovative self-service kiosks, such as self-checkout. We also offer installation, maintenance, and managed and professional services and a complete line of printer consumables.

Hospitality (formerly Hospitality and Specialty Retail) - We offer technology solutions to customers in the hospitality industry, serving businesses that range from a single restaurant to global chains and the world's largest sports stadiums. Our solutions include Point of Sale (POS) hardware and software solutions, installation, maintenance, and managed and professional services and a complete line of printer consumables.

Emerging Industries - We offer maintenance as well as managed and professional services for third-party computer hardware provided to select manufacturers, primarily in the telecommunications industry, who value and leverage our global service capability. Also included in the Emerging Industries segment are solutions designed to enhance the customer experience for the travel and gaming industries, including self-service kiosks, as well as related installation, maintenance, and managed and professional services.

As of January 1, 2012, the specialty retail customer accounts that were formerly part of the Hospitality and Specialty Retail segment are now included in the Retail Solutions segment, and the hospitality customer accounts that were formerly part of the Retail Solutions segment are now included in the Hospitality segment. As a result, the former Hospitality and Specialty Retail segment has been renamed Hospitality. Prior period information has not been reclassified to conform to the current period presentation, as the change was not considered material.

Segments are measured for profitability by the Company's chief operating decision maker based on revenue and segment operating


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income. For purposes of discussing our operating results by segment, we exclude the impact of certain items (described below) from segment operating income, consistent with the manner by which management reviews each segment, evaluates performance, and reports our segment results under accounting principles generally accepted in the United States of America (otherwise known as GAAP). This format is useful to investors because it allows analysis and comparability of operating trends. It also includes the same information that is used by NCR management to make decisions regarding the segments and to assess our financial performance.

The effect of pension expense on segment operating income, which was $50 million in the third quarter of 2012 and $62 million in the third quarter of 2011, has been excluded from the operating income for each reporting segment presented below. Additionally, we have excluded other significant, non-recurring items from our segment operating results. Our segment results are reconciled to total Company results reported under GAAP in Note 13, "Segment Information and Concentrations" of the Notes to Condensed Consolidated Financial Statements.

In the segment discussions below, we have disclosed the impact of foreign currency fluctuations as it relates to our segment revenue due to its significance during the quarter.

Financial Services Segment

The following table presents the Financial Services revenue and segment
operating income for the three months ended September 30:

                                              Three months ended September 30
In millions                                      2012                2011
Revenue                                          $791                $770
Operating income                                  $80                 $81
Operating income as a percentage of revenue      10.1%               10.5%

Financial Services revenue increased 3% during the third quarter of 2012 as compared to the third quarter of 2011. Revenue growth was primarily generated from higher product sales and services revenue mainly in the Americas theater offset by declines in product sales and services revenue in the AMEA theater. Foreign currency fluctuations negatively impacted the quarter-over-quarter revenue comparison by 5%.

Operating income was $80 million in the third quarter of 2012 as compared to $81 million in the third quarter of 2011. The slight decrease in the Financial Services operating income was driven by increased mix of revenue from emerging markets and continued investment in services and research and development.

Retail Solutions Segment

The following table presents the Retail Solutions revenue and segment operating
income for the three months ended September 30:

                                             Three months ended September 30
In millions                                      2012                2011
Revenue                                          $421                $466
Operating income                                 $28                 $19
Operating income as a percentage of revenue      6.7%                4.1%

Retail Solutions revenue decreased 10% during the third quarter of 2012 as compared to the third quarter of 2011. The decrease in revenue was primarily driven by a decline in product sales in the Americas theater and declines in product sales and services revenue in the Europe theater. Further contributing to the decline was the impact from the movement of specialty retail and hospitality accounts between the Retail Solutions segment and the Hospitality segment, as described above. Foreign currency fluctuations negatively impacted the quarter-over-quarter revenue comparison by 2%.

Operating income was $28 million in the third quarter of 2012 as compared to $19 million in the third quarter of 2011. The increase in the Retail Solutions operating income was primarily due to the favorable mix of revenue and the movement of accounts, as described above.

Hospitality Segment


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The following table presents the Hospitality revenue and segment operating income for the three months ended September 30:

                                              Three months ended September 30
In millions                                      2012                2011
Revenue                                          $129                 $36
Operating income                                  $23                 $5
Operating income as a percentage of revenue      17.8%               13.9%

The Hospitality segment generated revenue of $129 million in the third quarter of 2012 compared to $36 million in the third quarter of 2011. In each period, the revenue is driven largely by product sales and services revenue in the Americas theater.

Operating income for Hospitality was $23 million in the third quarter of 2012 compared to $5 million in the third quarter of 2011.

The company completed its acquisition of Radiant Systems on August 24, 2011. Because the acquisition was completed during the third quarter of 2011, the revenue and operating income results being reflected for the Hospitality segment are partial, and reflect only the period from August 24, 2011 through the end of the third quarter of 2011.

Emerging Industries Segment

The following table presents the Emerging Industries revenue and segment
operating income for the three months ended September 30:


                                              Three months ended September 30
In millions                                      2012                2011
Revenue                                           $94                 $88
Operating income                                  $22                 $18
Operating income as a percentage of revenue      23.4%               20.5%

Emerging Industries revenue increased 7% during the third quarter of 2012 as compared to the third quarter of 2011. The increase in revenue was driven primarily by higher product sales and services revenue in the AMEA theater partially offset by declines in product sales and services revenue in the Americas theater. Foreign currency fluctuations negatively impacted the quarter-over-quarter revenue comparison by 3%.

Operating income was $22 million in the third quarter of 2012 and $18 million in the third quarter of 2011. The increase in the Emerging Industries operating income was primarily due to improved product and services mix and lower service delivery costs.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

The following table shows our results for the nine months ended September 30:

                                                 Nine months ended September 30
In millions                                          2012               2011
Revenue                                             $4,088             $3,690
Gross margin                                        $1,013              $797
Gross margin as a percentage of revenue             24.8%              21.6%
Operating expenses
   Selling, general and administrative expenses      $619               $562
   Research and development expenses                 155                125
Income from operations                               $239               $110

The following table shows our revenues and gross margins from products and services for the nine months ended September 30:


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                                                  Nine months ended September 30
In millions                                           2012               2011
Product revenue                                      $1,988             $1,747
Cost of products                                     1,515              1,371
Product gross margin                                  $473               $376
Product gross margin as a percentage of revenue      23.8%              21.5%
Services revenue                                     $2,100             $1,943
Cost of services                                     1,560              1,522
Services gross margin                                 $540               $421
Services gross margin as a percentage of revenue     25.7%              21.7%

The following table shows our revenues by theater for the nine months ended September 30:

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