NCR Corporation 2016 Form 10-K Summary
Entity and period: The filing is NCR Corporation’s annual report for the fiscal year ended December 31, 2016, not a filing by NCR Voyix Corp. The report also provides unaudited fourth-quarter results. Unless noted, financial amounts are in millions of dollars.
Business context
NCR supplied software, services and hardware for financial services, retail, hospitality, travel, and telecommunications and technology customers. Effective January 1, 2016, it reorganized reporting into Software, Services and Hardware segments. Its strategy emphasized software-led omni-channel solutions, cloud and mobile offerings, higher-margin services, sales enablement and cost efficiency. In May 2016, NCR sold substantially all of its Interactive Printer Solutions business, excluding Middle East and Africa operations, for $47 million.
Financial performance
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $6,543 | $6,373 |
| Gross margin | $1,782; 27.2% | $1,469; 23.1% |
| Operating income | $599 | $135 |
| Net income (loss) attributable to NCR | $270 | $(178) |
| Net income (loss) attributable to common stockholders | $221 | $(182) |
| Diluted EPS | $1.71 | $(1.09) |
| Cash provided by operating activities | $894 | $681 |
| Free cash flow (non-GAAP) | $628 | $409 |
Revenue rose 3% as reported, or 7% on the company’s adjusted constant-currency basis excluding the IPS divestiture. Software revenue grew 5% to $1,841; Services grew 4% to $2,306; Hardware was essentially flat at $2,396. Software operating margin was 31.3%, Services 8.7%, and Hardware 2.6%.
Management attributed stronger operating cash flow to higher operating income and improved working capital. Free cash flow is a company-defined non-GAAP measure; 2016 calculation also deducts $73 of property and equipment spending, $154 of capitalized software additions and $39 of cash used in discontinued operations.
Liquidity, debt and capital
- At year-end, cash and cash equivalents were $498, compared with $328 a year earlier. Total debt was approximately $3.08 billion in principal amount; balance-sheet debt carrying value was about $3.05 billion.
- The $1.10 billion revolving credit facility and $200 million receivables securitization facility had no borrowings outstanding at year-end. The company stated it expected adequate liquidity for its obligations and operating needs over the next 12 months.
- Current assets were $2,757 and current liabilities $1,965. Cash held by foreign subsidiaries was $428; repatriation could trigger additional taxes.
- Approximately 72% of borrowings were fixed-rate. A hypothetical 100-basis-point increase in variable rates was estimated to raise annual pre-tax interest expense by about $10.
- NCR repurchased $250 of common stock in 2016. It authorized a new $300 repurchase program, with the full amount available at year-end, subject to debt restrictions and market conditions. It paid no common-stock cash dividend.
Changes, outlook and notable items
- Reported gross margin increased materially year over year, but the comparison was affected by pension charges: 2015 included a $427 UK pension settlement loss, while 2016 included $85 of pension mark-to-market adjustments. Excluding identified pension, restructuring and acquisition-amortization items, management said gross margin was slightly down, reflecting new-hardware launch investment, partly offset by software growth.
- Net income improved from a 2015 loss. The 2016 results included $49 of Series A preferred-stock dividends attributable against common-stock earnings. The preferred stock carries a cumulative 5.5% dividend, generally paid in kind during its first 16 payment dates, and was convertible into as many as 29.0 million common shares at year-end.
- The 2014 restructuring program was substantially complete. NCR reported $19 of restructuring charges in 2016 and expected approximately $105 in annualized run-rate savings from the program. Pension, postemployment and postretirement contributions expected for 2017 totaled approximately $88.
- The filing gives no specific numerical 2017 revenue or earnings guidance. Management identified foreign exchange, economic and geopolitical uncertainty, competition and pricing, execution of the shift to software and services, cybersecurity and data-center reliability, and debt servicing as important risks.
- Environmental matters remain significant. The Fox River net reserve was reported at approximately $27 at year-end; a proposed January 2017 consent decree was expected to require an additional $14 reserve and commit NCR to complete remediation, expected over 2017–2018. Court approval was pending. The Kalamazoo River reserve was approximately $2.
- Other contingencies include an approximately $20 reserve for unpaid amounts associated with Oman airport-project subcontracting; an unaccrued Brazilian tax assessment with estimated exposure of zero to approximately $70; and possible OFAC penalties related to the wind-down of Syria operations. The SEC had informed NCR it did not intend to recommend an enforcement action on the FCPA allegations described in the filing.
- The auditor reported that the financial statements were fairly presented under U.S. GAAP and that internal control over financial reporting was effective as of December 31, 2016.
Most important facts for investors to verify
- Whether the proposed Fox River consent decree was approved, the final remediation obligations and the resulting reserve and cash costs.
- Whether reported earnings and margin improvement persist after accounting for pension remeasurement, restructuring, acquisition amortization and other unusual items.
- Progress in growing software, cloud and managed-services revenue and improving the comparatively low Hardware segment margin.
- Debt covenant headroom, refinancing and maturity needs, variable-rate exposure, and the liquidity impact of pension funding and preferred-stock dividends or redemption rights.
- Outcomes of the Brazilian tax assessment, Oman subcontract recovery and OFAC matter, as well as foreign-exchange and customer-collection risks.