NCR Corporation (not NCR Voyix Corp.) — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. This filing is for NCR Corporation; the supplied company label “NCR Voyix Corp” does not match the registrant named in the filing. Financial amounts are in U.S. dollars, millions, except per-share data.
Financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $1,444 | $1,476 |
| Gross margin | $380; 26.3% | $390; 26.4% |
| Operating income | $101 | $95 |
| Net income attributable to NCR | $32 | $40 |
| Net income attributable to common stockholders | $21 | $40 |
| Basic / diluted EPS | $0.16 / $0.16 | $0.24 / $0.23 |
| Operating cash flow | $23 | $79 |
| Free cash flow (company-defined, non-GAAP) | $(29) | $24 |
Revenue declined 2% reported and was approximately flat excluding currency effects. Product revenue fell to $548 from $604, while service revenue rose to $896 from $872. Recurring revenue, including maintenance and cloud, increased to $687 from $664. Operating expenses included $2 of restructuring charges versus $15 in the prior-year quarter. Interest expense was $46, including a $4 write-off of deferred financing fees related to the credit facility refinancing. The effective tax comparison was unfavorable: tax expense was $13 versus $2.
Business and segment changes
Effective January 1, 2016, NCR reorganized management and reporting around solution-based segments: Software, Services and Hardware. Segment revenue and operating income were respectively $419 and $115 for Software, $543 and $34 for Services, and $482 and $(10) for Hardware. Compared with the prior year, Software revenue rose 1%, Services rose 4%, and Hardware declined 11%. Hardware weakness reflected lower ATM, POS and printer solutions revenue; self-checkout revenue grew 61%. Segment operating income declined in all three segments.
By theater, Americas revenue grew 3% reported (5% constant currency); EMEA declined 6% (3% constant currency), and Asia Pacific declined 10% (6% constant currency). Management attributed pressure principally to macroeconomic conditions in parts of EMEA and APJ and unfavorable foreign exchange.
Balance sheet, debt and liquidity
- March 31 cash was $333, versus $328 at year-end 2015; current assets were $2,705 and current liabilities $1,984.
- Total debt was approximately $3.52 billion, including $250 of short-term borrowings and $3,269 of long-term debt. The company reported approximately $841 of unused revolving-credit capacity; its $200 receivables securitization facility was fully drawn.
- On March 31, NCR refinanced its senior secured credit facility: a $900 term loan and a $1.1 billion revolving facility, with $231 outstanding on the revolver and $28 of letters of credit. The facility contains leverage and interest-coverage covenants and is secured by specified assets.
- Cash from operations fell to $23 from $79. Capital spending and capitalized software additions totaled $40; free cash flow was negative $29, including $12 of cash used by discontinued operations.
- NCR repurchased 8.6 million shares for $209 during the quarter. Common shares outstanding were approximately 123.9 million as of April 15, 2016. Series A preferred dividends reduced income available to common stockholders; the preferred stock carries a 5.5% cumulative dividend and could convert into up to 27.8 million common shares.
Management stated it believed liquidity was sufficient for the next 12 months, including debt service, benefit contributions, remediation and operating needs. Approximately $319 of cash was held by foreign subsidiaries and could incur additional taxes if repatriated.
Outlook, risks and unusual matters
- No specific revenue, earnings or EPS guidance was provided. NCR expected approximately $105 of annualized restructuring savings in 2016 and estimated $20–$25 of restructuring-related opportunities for the year. Expected 2016 contributions were $35 to international pension plans, $33 to postemployment plans and $3 to postretirement plans.
- Key stated risks include weak economic conditions and customer spending, especially in financial services and emerging markets; currency movements; competitive pricing and market-share pressure; product adoption and execution; collection risk in subcontracting relationships; debt and covenant management; pension obligations; and legal, regulatory and environmental matters.
- Environmental and legal exposures include Fox River remediation (net reserve approximately $23 at quarter-end; scheduled 2017 trials and uncertain allocation of liability) and Kalamazoo River litigation (approximately $13 reserved for litigation expenses; allocation decision pending). A Brazilian tax assessment was approximately $46, with estimated aggregate risk of zero to approximately $57; NCR had not accrued it. An Oman project receivable claim of approximately $40 remained outstanding, against which NCR had recorded a $20 reserve.
- The company continued cooperating with OFAC regarding its former Syria operations. Its license to transact with the Commercial Bank of Syria was due to expire April 30, 2016; the renewal application remained pending. NCR disclosed a bank account balance of approximately $3,468 and guarantees that generated no revenue or profit during the quarter.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It stated there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the issuer identity: this is an NCR Corporation 2016 filing, not a filing under the name NCR Voyix Corp.
- Review the credit agreement’s leverage and interest-coverage covenants, borrowing availability, maturities and refinancing terms.
- Assess whether operating cash flow and liquidity can support debt service, planned repurchases and benefit contributions amid negative free cash flow.
- Track the Hardware segment’s recovery, ATM rollout costs, self-checkout growth and the durability of Software and Services growth.
- Monitor Fox River and Kalamazoo litigation, the Brazil tax assessment, Oman collections and the Syria license matter for changes in exposure or cash requirements.
- Evaluate the preferred stock’s cumulative dividend, potential dilution and impact on earnings attributable to common stockholders.