Filing summary
Entity and period: The supplied filing is NCR Corporation’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2016, not a filing for NCR Voyix Corp. Investors should verify the entity and historical-period match before relying on this summary. Amounts are in millions of U.S. dollars, except per-share data.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $1,677 | $1,613 | $4,741 | $4,693 |
| Gross margin | $477; 28.4% | $457; 28.3% | $1,303; 27.5% | $993; 21.2% |
| Operating income (loss) | $189 | $168 | $453 | $(3) |
| Income (loss) from continuing operations | $109 | $103 | $215 | $(198) |
| Net income (loss) attributable to NCR common stockholders | $92 | $98 | $176 | $(206) |
| Diluted EPS | $0.68 | $0.57 | $1.36 | $(1.22) |
Q3 operating margin was approximately 11.3%, versus 10.4% a year earlier; nine-month operating margin was approximately 9.6%, compared with a slight operating loss in 2015. Q3 revenue rose 4% reported and 10% on the company’s adjusted constant-currency basis, which also excludes the IPS divestiture. Nine-month revenue rose 1% reported and 5% on that adjusted basis.
Q3 segment revenue was Software $468 (up 8%), Services $591 (up 5%) and Hardware $618 (approximately flat). Software license revenue grew 25% and cloud revenue 7%. Nine-month segment revenue was Software $1,339 (up 4%), Services $1,708 (up 5%) and Hardware $1,694 (down 5%). Segment operating income increased in Software and Services for Q3; Hardware segment margin was 4.5%, versus 4.9%.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $369, down from $416. The company’s non-GAAP free cash flow was $179, compared with $225; its calculation includes discontinued-operation cash flow and deducts capital expenditures and capitalized software spending.
- Cash and cash equivalents were $318 at September 30, 2016, versus $328 at year-end 2015. Current assets were $2,751 and current liabilities $2,002. Accounts receivable rose to $1,387 from $1,251 and inventory to $776 from $643.
- Short-term borrowings were $256 and long-term debt $3,033, for total reported debt of $3,289; cash less reported debt implies net debt of approximately $2,971. The $200 receivables securitization facility was fully drawn. The revolving credit facility had $20 outstanding against $1.1 billion of commitments.
- The company reported a maximum secured-facility leverage covenant ratio of 4.35 to 1.00 and an interest-coverage minimum of 3.50 to 1.00. Management said liquidity was sufficient for anticipated requirements over the next 12 months.
Material changes and notable items
- Revenue and profitability improved, particularly in Software and Services. The prior-year nine-month results included a $427 pension settlement loss related to the UK London pension plan; pension mark-to-market adjustments materially depressed 2015 comparisons. The 2015 nine-month gross margin included $302 of pension mark-to-market adjustments.
- NCR sold all but the Middle East and Africa assets of its Interactive Printer Solutions business on May 27, 2016, receiving $47 cash and recording a $1 loss. The remaining MEA assets and liabilities were no longer classified as held for sale at quarter-end.
- NCR repurchased 10.0 million common shares for $250 during the first nine months; none were repurchased in Q3. The company also had a new $300 repurchase authorization available at quarter-end, subject to debt-agreement restrictions.
- The $820 Series A preferred investment from Blackstone carries a cumulative 5.5% dividend and is convertible at $30 per common share. Preferred dividends reduced income attributable to common stockholders; diluted weighted-average shares were 155.4 million in Q3 2016 versus 172.3 million in Q3 2015, reflecting, among other factors, the preferred stock’s as-converted treatment and the lower common share count.
Outlook, risks and contingencies
- NCR described a strategic shift toward higher-margin software and services, recurring revenue, cloud and mobile offerings, alongside sales and services transformation and cost management. It expected approximately $105 of annualized restructuring run-rate savings in 2016 and estimated $20–$25 of restructuring-related opportunities for 2016. These are management expectations, not consolidated earnings guidance.
- Management cited economic and credit conditions, financial-services spending, currency movements, emerging-market collections, competition and pricing, product adoption, execution of transformation initiatives, indebtedness, pension obligations, cybersecurity and regulatory matters among key risks.
- Environmental and legal matters remain significant uncertainties. The Fox River net reserve was approximately $15 at September 30, down from $26 at year-end; related litigation trials were scheduled for 2017, and remediation completion was expected to extend to 2018. The Kalamazoo River litigation reserve was approximately $5, with the parties awaiting a court judgment on allocation.
- A Brazilian federal tax assessment had an estimated possible loss range of zero to approximately $71, with no accrual recorded. The company also maintained an approximately $20 reserve for certain Oman project claims. NCR continued cooperating with authorities regarding historical Syria-related matters and noted possible fines or other remedial measures.
- Foreign subsidiaries held $305 of cash; repatriation could trigger additional U.S. and foreign taxes. The receivables facility was expected to be renewed before its November 2016 maturity. The filing also says the company is evaluating the effects of new revenue-recognition, lease and stock-compensation accounting standards.
Key facts for investors to verify
- Confirm the filing belongs to the intended issuer: the document identifies NCR Corporation, not NCR Voyix Corp.
- Assess whether reported growth remains persuasive after considering foreign exchange, the IPS divestiture and the unusually weak 2015 pension-related comparison.
- Review debt, covenant headroom, the fully drawn receivables facility and the company’s ability to renew it.
- Track working-capital use: receivables and inventories increased, while operating and free cash flow declined year over year.
- Monitor environmental litigation, the Brazilian tax assessment, Oman receivables and other contingencies for changes in reserves or cash exposure.
- Consider preferred-stock dividends, potential conversion dilution and the limits on common-stock repurchases under financing agreements.