NCR Corporation (identified in the request as NCR Voyix) — Q2 2017 Form 10-Q
Entity and period: The filing is for NCR Corporation, for the quarter and six months ended June 30, 2017; it is not filed under the NCR Voyix name. Figures are in U.S. dollars; financial statement amounts are in millions except per-share data. The interim statements are unaudited.
Business context and results
NCR reported results across Software, Services and Hardware. Its strategy emphasized software-led solutions, cloud and mobile offerings, services productivity and higher-margin business. Management said Q2 revenue declined 2% year over year, but grew 3% on a non-GAAP adjusted constant-currency basis that also excludes the prior-year Interactive Printer Solutions (IPS) divestiture.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $1,593 | $1,620 | $3,071 | $3,064 |
| Gross margin | $463; 29.1% | $446; 27.5% | $876; 28.5% | $826; 27.0% |
| Operating income | $178 | $163 | $295 | $264 |
| Net income | $102 | $74 | $159 | $106 |
| Net income attributable to NCR common stockholders | $90 | $63 | $73 | $84 |
| Diluted EPS, total | $0.67 | $0.49 | $0.57 | $0.65 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $138 | $144 |
| Free cash flow (company-defined, non-GAAP) | Not stated for quarter | Not stated for quarter | $6 | $26 |
Q2 diluted EPS from continuing operations was $0.64, compared with $0.49. For the first half, common-stockholder income and EPS were affected by $62 million of preferred-stock deemed dividends related to modification and redemption; the company reported $58 million for redemption and $4 million for modification.
Segments and material period comparisons
- Software: Q2 revenue increased 3% to $464 million; segment operating income fell to $128 million from $144 million. Cloud revenue grew 9% in the quarter. First-half revenue rose 5% to $916 million, while operating income declined to $253 million from $259 million. Management cited revenue mix and increased R&D spending.
- Services: Q2 revenue rose 2% to $588 million and operating income increased to $75 million from $49 million. First-half revenue was up 3% to $1,145 million and operating income rose to $120 million from $83 million. The filing attributes profit improvement to process improvements and a higher mix of value-added services.
- Hardware: Q2 revenue decreased 9% to $541 million, primarily reflecting the prior-year IPS divestiture; adjusted constant-currency growth excluding that divestiture was 1%. First-half revenue fell 6% to $1,010 million, but adjusted constant-currency growth excluding the divestiture was 7%. ATM revenue weakened, partly offset by POS and self-checkout growth. Segment operating income was $12 million in Q2 and $2 million for the half.
Consolidated gross margin improved 160 basis points in Q2 and 150 basis points for the first half. Management cited mix, productivity and efficiency gains, particularly in Services and Hardware; Software margin weakened. Q2 R&D expense rose to $58 million from $50 million, and first-half R&D rose to $125 million from $103 million, reflecting planned investment. No restructuring charges were recorded in the 2017 quarter or first half; the comparable 2016 periods included charges.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $377 million, down from $498 million at year-end 2016. Total debt was approximately $3.28 billion: $267 million short-term borrowings and $3.015 billion long-term debt.
- Cash from operations was $138 million for the first half, versus $144 million a year earlier. Company-defined free cash flow was $6 million, versus $26 million, after $43 million of capital expenditures, $84 million of capitalized software additions and $5 million of discontinued-operation operating cash outflow.
- The $1.1 billion revolving credit facility had $40 million drawn. The $200 million receivables securitization facility was fully drawn, leaving no availability under that facility. Management stated it believed existing cash, operating cash flows and financing were sufficient for obligations and operating needs over the next 12 months.
- First-half financing included $350 million of common-stock repurchases, versus $250 million in the prior-year period. The company reported approximately $300 million remaining under its March 2017 repurchase authorization and $143 million under its dilution-offset program at quarter-end, subject to debt-document restrictions.
Outlook, risks and unusual items
The filing provides no specific full-year revenue or earnings guidance. Management described priorities including sales execution, services transformation, software and cloud investment, innovation and cost discipline. It noted that further restructuring activities could be identified as transformation initiatives proceed.
- Business and market risks: Demand for ATM and other financial hardware, competitive pricing, customer adoption, foreign exchange, economic and trade uncertainty, cybersecurity and data privacy, hosting disruptions, and collection risks in subcontracting relationships could affect results. The company has exposure to about 50 functional currencies and reported that currency movements reduced Q2 revenue by 2% year over year.
- Debt and liquidity: Debt covenants, debt servicing and access to financing are risks. A hypothetical 100-basis-point increase in variable rates was estimated to raise first-half pre-tax interest expense by about $6 million. Approximately 67% of borrowings were fixed-rate at quarter-end.
- Environmental matters: The net Fox River reserve was approximately $18 million, down from $27 million at year-end. A proposed consent decree remained subject to court approval; remediation was expected to continue through 2017 and 2018, and the company described potential future reserve changes and residual liability risks. A Kalamazoo River liability-allocation decision was pending.
- Other contingencies: NCR had not accrued a Brazilian tax assessment estimated at approximately $51 million, and described a possible exposure range of zero to approximately $73 million. For an Oman project dispute, it maintained an approximately $20 million reserve for claims it considered not to meet its probable-recovery standard.
- Regulatory and unusual items: OFAC advised NCR in May 2017 that it would not seek monetary penalties concerning the previously disclosed Syria matter and issued a cautionary letter as its final enforcement response. Q2 discontinued-operations income of $5 million was driven by an insurance settlement. A new revenue-recognition standard was planned for adoption in 2018; the company expected earlier recognition for some contingent revenue and changes to accounting for certain contract acquisition costs, while continuing to assess the overall effect.
Important facts for investors to verify
- Confirm the issuer and corporate-name context: this is NCR Corporation’s 2017 filing, not an NCR Voyix filing.
- Review whether adjusted constant-currency growth adequately reflects underlying performance; it excludes both foreign exchange effects and the IPS divestiture and is non-GAAP.
- Track Software profitability and R&D spending against cloud and software growth, alongside sustained Services margin improvement and Hardware/ATM trends.
- Assess cash conversion, working-capital needs, capitalized software spending, share repurchases and the company’s capacity to service approximately $3.28 billion of debt.
- Monitor court outcomes and reserve changes for the Fox River and Kalamazoo matters, and developments in the Brazilian tax assessment and Oman receivable dispute.
- Evaluate the impact of preferred-stock dividends, conversion potential and deemed dividends on common-stockholder earnings and dilution.