-- NCR Corp., a U.S. provider of hardware, software, and services solutions to the financial services, retail, and hospitality sectors, plans to raise $500 million to fund some of its unfunded pension liabilities, to offer lump-sum payments to deferred vested participants, and $125 million for general corporate purposes.
-- In addition, we are assigning a 'BBB-' to the existing revolving credit facility and term loan with a recovery rating of '2'. This is a change from the preliminary rating of 'BBB' with a preliminary recovery rating of '1' and reflects the increased use of secured debt in the capital structure.
-- We are affirming our 'BB+' corporate credit rating on NCR.
-- The stable outlook reflects NCR's growing earnings and good cash flow generation, and our expectation that leverage will keep dropping. Rating Action On Aug. 1, 2012, Standard & Poor's Ratings Services assigned a 'BBB-' issue-level rating with a recovery rating of '2' to Duluth, Ga.-based NCR Corp.'s proposed incremental $125 million revolving credit facility and $125 million incremental term loan A. We also affirmed our 'BB+' corporate credit rating on the company. The rating outlook is stable. In addition, we are assigning a 'BBB-' to the existing revolving credit facility and term loan with a recovery rating of '2'. This is a change from the preliminary rating of 'BBB' with a preliminary recovery rating of '1' and reflects the increased use of secured debt in the capital structure. We expect to assign a 'BB' issue-level rating to NCR's proposed $500 million senior notes issue (to be filed and sold in September), with a recovery rating of '5', indicating expectations for modest (10%-30%) recovery of principal in the event of a payment default. Rationale The rating reflects our view of NCR's financial risk profile as "significant" (according to our criteria), with adjusted debt leverage likely to decline after a slight uptick as result of the contemplated transaction. We view NCR's business risk profile as "satisfactory." In addition to $740 million funded debt (which largely arose from the 2011 Radiant acquisition), NCR has substantial pension and postretirement health liabilities, which we view as debt-like obligations, and include in our adjusted leverage calculation. Unfunded gross pension and postretirement benefits of $1.39 billion and postemployment benefit obligations of $264 million totaled $1.654 billion as of December 2011 ($1.075 billion on a tax-adjusted basis). The present series of transactions--a planned funding and an offer of lump-sum payments to deferred vested participants--will substantially reduce the outstanding unfunded pension liability and reduce future funding needs. As a result, total unfunded obligations may drop by as much as $800 million. These transactions are the latest step NCR has undertaken since 2010 to reduce earnings volatility and funding requirements associated with its pensions. It earlier began to reallocate its domestic pension portfolio, and expects it to be 100% fixed income by year-end 2012. NCR enjoys leading positions in the financial, retail and hospitality, and specialty retail automation segments, which generate relatively predictable earnings. The 2011 merger with Radiant Systems bolstered its presence in the specialty retail and hospitality industries. We expect revenues overall to grow in the mid- to upper-single digits over the intermediate term, reflecting new products, international expansion, and cross-selling opportunities. However, continuing economic weakness could pressure revenue and profit growth. NCR delivers hardware, software, and services solutions. Financial self-service and retail store automation, including related services, account for nearly 90% of revenues. Products include ATMs (where NCR is the leading global provider), self-checkout technology, and point-of-sale (POS) workstations. POS is the largest component of the retail segment and is a mature and moderately cyclical industry. NCR recently introduced a cloud-based POS platform aimed at the small and midsized business (SMB) segment. It has the potential to significantly boost revenues and NCR's position in that segment. Associated--and growing--service revenues provide some stability and scale to NCR's global customer service operations. The acquired Radiant Systems business is a leader in providing POS hardware and software solutions to the quick-service and casual part of the hospitality industry, and to specialty and convenience store and entertainment markets. Although a leader, penetration in these areas is relatively low, offering NCR growth potential domestically and internationally. We expect NCR to continue generating positive free cash flows, benefiting from modest capital expenditures and improving margins. We view NCR's financial risk profile as significant, reflecting its increased leverage following the Radiant acquisition in 2011. The proposed transactions will help reduce NCR's unfunded pension liabilities and improve future earnings and cash flows, as required pension contributions and other associated expenses will drop. Post-acquisition year-end 2011 adjusted leverage was 3.7x, and it had dropped to 2.9x by June 2012, reflecting debt paydowns from internal cash flows and asset sales, and growing earnings. The proposed transactions will slightly increase leverage at first, because debt largely replaces unfunded employee obligations, which we treat as debt. We expect leverage to drop because of the positive economics of the transaction, and increased earnings, which will be further aided by reduced pension expenses. Proceeds from the $100 million sale of certain assets related to its Entertainment business in the second quarter of 2012 were applied to debt reduction. Liquidity NCR's liquidity is "adequate." Cash balances as of second-quarter 2012 totaled $377 million. NCR has a $700 million revolver with $25 million drawn. It expects to contribute less than $200 million after taking into consideration the transaction. Relevant aspects of NCR's liquidity are as follows:
-- We expect sources to uses of cash to be more than 2x in the near-to-intermediate term.
-- Net sources are likely to be positive, even if EBITDA drops 20% from current levels.
-- We do not expect NCR to pay any dividends and believe share repurchases will continue at modest levels, funded by internal cash generation and essentially to offset dilution.
-- No material acquisitions are likely in the near term and we assume NCR will use the proceeds from any asset sales to reduce debt.
-- Existing leverage covenants in the credit facility are expected to be modified to provide for the additional borrowing and ensure adequate headroom. Recovery analysis For the complete recovery analysis, see the recovery report on NCR, to be published shortly on RatingsDirect. Outlook The rating outlook on NCR Corp. is stable. We expect leverage to continue dropping to below 3x area over the coming year, given earnings growth and free cash flow. We could lower our rating if leverage rises to the high-3x area if a macroeconomic slowdown or operating pressures in NCR's businesses pressure margins and limit cash flow available for debt reduction. We could raise our rating if stronger-than-expected earnings growth and free cash flow, along with asset sales, allows leverage to drop and stay at the low-2x level. Related Criteria And Research
-- Industry Economic Outlook: Despite Economic Headwinds, Global Technology Shows Balanced Ratings Trend, July 9, 2012
-- Issuer Ranking: Global Technology Ratings, Strongest To Weakest, June 29, 2012
-- Performance For U.S. Semiconductor Equipment Makers Has Been Volatile, But Ratings Remain Stable, June 11, 2012
-- Top 10 Investor Questions: How Will The Global Technology Industry Fare Amid An Economy In Flux?, April 26, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Methodology And Assumptions On Risks In The Global High Technology Industry, Oct. 15, 2009
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List NCR Corp. Ratings Affirmed Corporate Credit Rating BB+/Stable/-- New Rating NCR Corp. Senior Secured $125 mil fltg rate revolver due 2017 BBB-
Recovery Rating 2 $125 mil fltg rate term ln due 2017 BBB-
Recovery Rating 2 $700 mil term bank ln due 2016 BBB-
Recovery Rating 2 $700 mil revolver bank ln due 2016 BBB-
Recovery Rating 2 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.