NCR Corporation Form 10-Q Summary
Reporting period and entity: Quarter ended September 30, 2022; comparisons are with the three and nine months ended September 30, 2021. The filing is by NCR Corporation, not NCR Voyix Corporation. Amounts are in U.S. dollars; financial statement amounts are generally in millions.
Business context
NCR describes itself as a software- and services-led technology provider serving retail, hospitality, digital banking, payments and ATM markets. Its reportable segments are Retail, Hospitality, Digital Banking, Payments & Network, and Self-Service Banking. The company continued its strategy of expanding software, payments and recurring revenue. Segment reporting was realigned effective January 1, 2022, with prior-period segment disclosures recast.
Financial results and key metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $1,972 | $1,901 | $5,835 | $5,122 |
| Gross margin | $491; 24.9% | $520; 27.4% | $1,373; 23.5% | $1,390; 27.1% |
| Operating income | $187 | $157 | $323 | $351 |
| Net income attributable to NCR | $69 | $12 | $76 | $33 |
| Diluted EPS attributable to common stockholders | $0.46 | $0.06 | $0.45 | $0.15 |
| Adjusted EBITDA (non-GAAP) | $380 | $352 | $990 | $891 |
Q3 revenue rose 4% reported and 8% excluding foreign-exchange effects; nine-month revenue rose 14% reported and 18% constant currency. Q3 product revenue increased 13%, while service revenue was flat. Nine-month product and service revenue increased 11% and 15%, respectively. Recurring revenue was $1,222 (62% of revenue) in Q3 and $3,618 (62%) year to date, compared with $1,181 (62%) and $2,984 (58%) in the respective 2021 periods.
Q3 operating margin improved to 9.5% from 8.3%, but gross margin fell to 24.9% from 27.4%. Management attributed margin pressure to fuel and component costs, supply-chain challenges and higher interest costs on vault cash arrangements, partly offset by pricing and cost actions. For the first nine months, operating income declined despite revenue growth; gross margin fell to 23.5% from 27.1%.
Cash flow and liquidity: Operating cash flow for the first nine months was $245, down from $807 in 2021. Capital expenditures were $72 and capitalized software additions were $217; company-defined free cash flow was negative $38, versus positive $360. Management cited unfavorable working-capital movements; the 2021 comparison included a $274 benefit from the initial sale of trade receivables. At September 30, cash and cash equivalents were $434, restricted cash was $302, and total current assets and liabilities were $3,191 and $2,770, respectively. Revolver borrowing capacity was approximately $718.
Debt: Total debt was approximately $5.77 billion, excluding deferred financing fees, compared with $5.56 billion at year-end 2021. Long-term debt on the balance sheet was $5.611 billion and short-term borrowings were $106. The company reported higher interest expense: $74 in Q3 versus $68, and $204 year to date versus $174. Its credit facility includes a leverage covenant that tightens to 4.75:1.00 for quarters ending on or after December 31, 2022.
Material changes and segment performance
- Q3 segment revenue increased in Retail (6%), Hospitality (6%), Digital Banking (7%) and Payments & Network (11%); Self-Service Banking was flat. These are reported growth rates.
- Q3 segment Adjusted EBITDA increased in Retail (23%), Hospitality (16%), Digital Banking (15%) and Payments & Network (3%); Self-Service Banking declined 3%. Nine-month Retail and Self-Service Banking Adjusted EBITDA declined 7% and 6%, respectively.
- Payments & Network’s large nine-month increase reflects the inclusion of Cardtronics, acquired in June 2021, for more of the 2022 comparative period, as well as LibertyX cryptocurrency-related revenue. The company acquired LibertyX in January 2022 and an India ATM business in July 2022.
- Research and development expense declined to $40 in Q3 from $69, and to $164 year to date from $204. Management attributed the reductions to increased capitalization and cost-mitigation measures.
- Operating cash flow and free cash flow weakened substantially year over year. The comparison is affected by working capital and the prior-year receivables transaction, as well as 2022 cash needs for receivables and inventory.
Outlook, risks, contingencies and unusual items
- Planned separation: Announced September 15, 2022, NCR planned to separate into a digital commerce company and an ATM-focused company, targeting completion by the end of 2023. The tax-free structure and timing depend on customary conditions, SEC filings and audited financial statements. The filing provides no clear numerical earnings or revenue guidance.
- Macroeconomic and operating risks: Management expected near-term pressure from supply-chain constraints, component, labor and freight costs, inflation, energy prices, higher interest rates, currency movements, COVID-19 effects and geopolitical disruption. NCR had ceased Russian operations and recorded a $22 pre-tax loss related to the wind-down in the first nine months; no such loss was recorded in Q3.
- Environmental matters: The Kalamazoo River reserve was $93 at September 30, 2022, net of expected contributions; costs and timing remain uncertain, with remediation expected to continue through the 2030s. The filing says the reserve could more than approximately double under assumptions management did not consider reasonably estimable or verifiable. The Fox River net reserve was $25. NCR reported that its Fox River remedial obligations were completed and the EPA issued a certificate of completion in October 2022.
- Legal matter: In the CloudofChange patent dispute, a $13 ruling was issued in October 2022. NCR said a loss up to $13 was reasonably possible but not probable as of the filing and recorded no accrual; it appealed.
- Separation risks: Completion is not assured. The company cited execution costs, management distraction, potential customer, supplier and employee disruption, financing and credit-rating uncertainty, and the possibility that the separated businesses may not realize expected benefits.
- Other items: Q3 included $17 of transformation and restructuring costs. Nine-month results included $93 of such costs, $130 of acquisition-related intangible amortization, $9 of acquisition-related costs and the $22 Russia item in the Adjusted EBITDA reconciliation. Adjusted EBITDA and free cash flow are non-GAAP measures and should be considered alongside GAAP results.
- Management stated that it believed current cash, operating cash flow and financing sources were sufficient to meet expected obligations. Disclosure controls were assessed as effective; implementation of a new ERP system began in Q3, and the company said it would continue evaluating any effect on internal controls.
Important facts for investors to verify
- Confirm the registrant and period: this is NCR Corporation’s Q3 2022 filing; the supplied company label, NCR Voyix Corp, does not match the filing’s registrant name.
- Track whether revenue growth converts into sustainable gross margin and operating cash flow, and assess the effects of foreign exchange and working-capital movements.
- Review debt, floating-rate exposure, covenant headroom, revolver availability and the company’s ability to service debt as interest rates change.
- Monitor separation conditions, costs, financing plans, tax treatment and progress toward the stated end-2023 target.
- Assess the range and timing of environmental remediation exposure, expected indemnitor contributions, and the outcome of the CloudofChange appeal.
- Compare reported GAAP results with management’s non-GAAP adjustments, including restructuring, acquisition-related costs and Russia-related items.