NCR Voyix Corp quarterly report, Q2 FY2016

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NCR Corporation — Q2 2016 Form 10-Q

Business context and reporting period. This filing is for NCR Corporation, for the quarter and six months ended June 30, 2016; it predates the NCR Voyix name. NCR sells software, services and hardware, including banking and retail technology. Management’s strategy emphasized growing higher-margin software and services and recurring revenue. Effective January 1, 2016, the company reorganized its reporting segments into Software, Services and Hardware.

Key financial results

  • Revenue: Q2 revenue was $1.620 billion, up 1% year over year; six-month revenue was $3.064 billion, down 1%. Excluding foreign-exchange effects and adjusting for the IPS divestiture, growth was 4% in Q2 and 2% for six months, a non-GAAP comparison.
  • Revenue mix: Q2 Software revenue rose 3% to $452 million and Services rose 6% to $574 million; Hardware fell 5% to $594 million. For the six months, Software rose 2% to $871 million, Services rose 5% to $1.117 billion, and Hardware fell 7% to $1.076 billion. Recurring revenue, including maintenance and cloud, was $690 million in Q2 and $1.377 billion for six months.
  • Profit and margins: Q2 operating income was $163 million versus an operating loss of $266 million in Q2 2015; six-month operating income was $264 million versus a loss of $171 million. Q2 net income attributable to NCR was $76 million ($0.49 diluted EPS); six-month net income attributable to NCR was $108 million ($0.65 diluted EPS). Gross margin was 27.5% in Q2 and 27.0% for six months. Comparisons with 2015 are substantially affected by the prior-year UK London pension settlement and related mark-to-market charges; excluding those items, management said gross margin declined, mainly due to new ATM product rollout costs and challenging markets.
  • Segments: Q2 operating income was $144 million for Software (31.9% margin), $49 million for Services (8.5%), and $14 million for Hardware (2.4%). Hardware’s lower revenue and profit reflected ATM/POS declines, the IPS sale, and initial costs for a new ATM family, partly offset by self-checkout growth.
  • Cash flow: Six-month operating cash flow was $144 million, down from $246 million. Capital spending and capitalized software totaled $98 million; reported free cash flow, NCR’s non-GAAP measure after discontinued-operation cash flows, was $26 million versus $119 million. Working-capital movements included cash uses of $121 million for receivables and $123 million for inventory, partly offset by $131 million from deferred service revenue and customer deposits.
  • Debt and liquidity: At June 30, cash was $332 million and total debt was approximately $3.46 billion. Current liabilities were $2.017 billion against current assets of $2.753 billion. The company reported approximately $925 million of availability under its revolving credit facility; its $200 million receivables securitization facility was fully drawn. Management stated it believed liquidity was sufficient for the next 12 months. The secured facility includes leverage and interest-coverage covenants.

Changes, outlook and notable items

  • Q2 revenue growth was led by the Americas; EMEA and Asia-Pacific were weak. The U.S. dollar reduced Q2 reported revenue growth by about one percentage point, according to the filing.
  • NCR completed the first phase of the Interactive Printer Solutions sale on May 27 for $47 million in cash. The remaining Middle East and Africa transfer was expected in Q3 2016; related assets and liabilities of $11 million and $4 million, respectively, remained classified as held for sale at quarter-end.
  • The 2014 restructuring program was expected to generate approximately $105 million of annualized run-rate savings in 2016; estimated 2016 restructuring-related opportunities were $20–$25 million. These are management estimates, not a full-year earnings forecast.
  • NCR repurchased $250 million of common stock in the first half. After quarter-end, the board authorized a new $300 million repurchase program. Repurchases are subject to market conditions and debt-agreement restrictions.
  • The Series A preferred stock issued to Blackstone carries a 5.5% cumulative dividend and is convertible at $30 per common share; up to 28.2 million common shares could be issued upon conversion as of June 30. Preferred dividends reduced earnings attributable to common shareholders.
  • Management cited risks including economic and financial-services spending conditions, foreign exchange, competition and pricing, product adoption and execution, emerging-market subcontractor collections, debt servicing, pension obligations, and environmental, legal and regulatory matters.

Contingencies and unusual items

  • The Fox River environmental matter had a net reserve of approximately $19 million at June 30, down from $26 million at year-end. Liability allocation and remediation costs remain uncertain; trials were scheduled for 2017, and remediation completion was pushed from 2017 to 2018.
  • For the Kalamazoo River matter, the court had found NCR liable as an arranger, but allocation of liability remained undecided. The litigation-expense reserve was approximately $10 million at June 30.
  • A Brazilian tax assessment was estimated at approximately $50 million including penalties and interest; NCR had not accrued it and estimated possible loss from zero to approximately $64 million.
  • In an Oman airport-project dispute, approximately $40 million of delivered goods and services had been unpaid. A June 2016 agreement provided for payment of a substantial portion of receivables, while a previously recorded $20 million reserve remained in place.
  • NCR reported continued cooperation with authorities concerning historical Syria and FCPA-related matters. The SEC staff had notified NCR in June 2015 that it did not intend to recommend an enforcement action on the FCPA matters; the filing said no assurance could be given regarding possible OFAC fines or other measures.

Investor verification priorities

  • Check whether software and services growth, recurring revenue, and Hardware stabilization continued after Q2, and distinguish reported growth from NCR’s adjusted constant-currency measure.
  • Track operating cash flow and free cash flow, especially receivables and inventory, and assess whether liquidity remains adequate as facilities mature and debt is serviced.
  • Review secured-credit covenant headroom and restrictions on repurchases, and assess the effects of preferred dividends and potential conversion dilution.
  • Monitor completion and proceeds of the IPS divestiture and whether restructuring savings are realized as projected.
  • Follow Fox River and Kalamazoo liability allocation, the Brazilian tax appeal, and recovery of the Oman receivable; outcomes could affect cash flows and results.