NCR Corporation (filing identifies registrant as NCR Corporation)
Period: Form 10-K for the fiscal year ended December 31, 2018. The filing also provides unaudited fourth-quarter results; it is not a standalone Q4 filing. The company’s businesses include software, services and hardware for financial, retail, hospitality, and technology customers.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $6.405 billion | $6.516 billion |
| Gross margin | $1.675 billion; 26.2% | $1.855 billion; 28.5% |
| Operating income | $191 million | $691 million |
| Net income (loss) attributable to NCR | $(88) million | $232 million |
| Net income (loss) attributable to common stockholders | $(137) million; diluted EPS $(1.16) | $123 million; diluted EPS $0.97 |
| Cash from operations | $572 million | $752 million |
| Free cash flow (company-defined, non-GAAP) | $223 million | $450 million |
| Cash and cash equivalents at year-end | $464 million | $537 million |
| Total debt | $3.165 billion carrying value; approximately $3.183 billion principal | $2.991 billion selected-data total |
Current assets were $3.023 billion and current liabilities were $2.282 billion at year-end. The company reported $980 million of secured borrowing availability under its credit facility and $100 million under its receivables facility. Management said available cash, operating cash flow and financing were sufficient for expected needs over the next 12 months.
By segment, Software revenue was $1.912 billion, up 1%, with operating income of $492 million (25.7% margin); Services revenue was $2.460 billion, up 4%, with operating income of $321 million (13.0% margin); Hardware revenue was $2.033 billion, down 9%, with an operating loss of $125 million (6.1% negative margin). Recurring revenue grew 3% to $2.970 billion, or 46% of total revenue.
Material changes versus 2017
- Total revenue fell 2%, principally due to lower hardware sales. Software cloud revenue grew 7%, while software license revenue declined 8%; Services grew 4%.
- Gross margin fell to 26.2% from 28.5%. Excluding disclosed restructuring/transformation costs and acquisition-intangible amortization, the company reported a decline from 29.4% to 28.1%.
- Operating income dropped to $191 million from $691 million. Results included $227 million of asset impairment charges, including a $146 million Hardware goodwill impairment, $37 million of long-lived asset impairment, and a $44 million write-off of abandoned software projects.
- Hardware’s operating loss widened from $5 million to $125 million, reflecting lower revenue, unfavorable mix, pricing pressure, and costs to address supply constraints. Management said constraints were largely resolved by year-end.
- Operating cash flow decreased $180 million and free cash flow decreased $227 million, attributed principally to lower earnings and working capital; cash used in discontinued operations also rose.
Outlook, management commentary and risks
- For 2019, management targeted at least $100 million in savings from spend optimization. It expected approximately $60 million of pretax charges and $70–$80 million of cash impact for initiatives. The filing does not provide a clear numerical revenue or earnings forecast.
- Management planned to invest in strategic growth platforms, shift revenue toward recurring software and services, improve customer care and product introductions, and continue restructuring Hardware manufacturing. From January 1, 2019, the company began managing and reporting by industry rather than the prior solution-based model.
- NCR acquired JetPay in December 2018 for an aggregate cash purchase price of $193 million, expanding into end-to-end payment processing; it also acquired Zipscene and StopLift during 2018. JetPay’s preliminary purchase-price allocation included $96 million of goodwill.
- Key risks include substantial indebtedness and restrictive covenants, variable-rate borrowing, execution of the business transformation and cost programs, competition and hardware demand, cybersecurity and data privacy, dependence on suppliers and contract manufacturers, foreign exchange, and pension funding needs. The company expected approximately $60 million of pension, postemployment and postretirement contributions in 2019.
- Environmental matters remain significant: year-end net reserves were approximately $17 million for the Fox River and $47 million for the Kalamazoo River. Fox River cleanup was expected to finish in 2019 or 2020; the Kalamazoo reserve reflects uncertainty over future remedies and costs. NCR appealed the Kalamazoo liability and allocation rulings.
- Other unusual items include a 187% effective tax rate, affected by low pretax income and U.S. tax reform adjustments, and a $52 million discontinued-operations loss, primarily related to environmental matters and tax audit settlements. The auditor issued an unqualified opinion on the financial statements and internal controls; JetPay was excluded from the internal-control assessment due to its recent acquisition.
Most important facts for investors to verify
- Whether recurring software and services growth and the stated 2019 cost savings offset continued Hardware weakness and margin pressure.
- The assumptions and cash-flow implications behind the $227 million impairment, particularly the Hardware unit’s outlook and remaining asset values.
- Debt maturities, covenant headroom, refinancing needs, and the effect of variable interest rates; principal debt was approximately $3.183 billion.
- Potential ultimate exposure and timing of Fox River and Kalamazoo cleanup costs, including co-obligor recoveries and litigation outcomes.
- JetPay integration, acquisition economics, and the performance of the new payment-processing business.
- Effects of revenue-recognition adoption and the 2019 industry-segment reporting change when comparing periods.