NCR Corporation (issuer identified in the filing; metadata names NCR Voyix Corp.) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unless stated otherwise, financial amounts are in millions of dollars. The filing is unaudited.
Business context and reporting period
NCR described itself as a software- and services-led technology provider serving retail, hospitality, digital banking, payments and ATM markets. Its stated strategy was to grow software and services and increase recurring revenue. The filing continued to target a separation into a digital commerce company and an ATM company in Q4 2023, subject to customary conditions; the Board also remained open to alternative transactions.
Financial performance and liquidity
- Q2 revenue: $1.986 billion, down 1% reported year over year and flat excluding foreign exchange. Product revenue fell 6% to $576 million; service revenue rose 2% to $1.410 billion.
- First-half revenue: $3.877 billion, essentially flat reported and up 2% on a constant-currency basis. Recurring revenue was $2.491 billion, up 4%, and represented 64% of revenue versus 62% a year earlier.
- Profit and margins: Q2 operating income increased to $148 million from $103 million; GAAP gross margin was 27.1% versus 23.6%. Net income attributable to NCR common stockholders was $15 million, or $0.11 per diluted share, versus $37 million, or $0.26. First-half operating income was $258 million versus $136 million; common-stockholder net income was $20 million versus a loss of $1 million.
- Adjusted EBITDA (non-GAAP): Q2 was $389 million versus $339 million; first-half was $691 million versus $610 million. The measure excludes items including separation, restructuring, acquisition amortization and cyber-incident costs.
- Cash flow: First-half operating cash flow was $544 million versus $118 million. Adjusted free cash flow-unrestricted, a company-defined non-GAAP measure, was $363 million versus negative $10 million. Management attributed the operating cash-flow improvement largely to favorable working-capital movements.
- Cash and liquidity: June 30 cash and cash equivalents were $547 million; restricted cash was $254 million. The company reported $943 million of available revolving-credit borrowing capacity. Management said current liquidity and financing were sufficient for expected obligations.
- Debt and interest: Total debt was reported as approximately $5.47 billion excluding deferred fees. Interest expense rose 36% in Q2 to $91 million and 34% in the first half to $174 million, primarily due to higher variable rates. The company had $328 million outstanding on its revolving facility and weighted-average rates of 7.38% on that facility and 7.63% on the term loan facility.
- Segment trends: Q2 Adjusted EBITDA increased in Retail, Hospitality and Self-Service Banking, while declining in Digital Banking; Payments & Network was slightly higher. First-half EBITDA increased in Retail, Hospitality and Self-Service Banking but declined in Digital Banking and Payments & Network.
Material changes versus the prior comparable period
- Revenue mix continued shifting toward services and recurring revenue, while product revenue and hardware-related activity weakened. Management attributed hardware declines partly to its move toward recurring service arrangements.
- Gross-margin improvement reflected lower fuel, shipping and component costs, cost actions, and a more favorable software-and-services mix; higher interest rates increased vault-cash rental costs and partly offset those benefits.
- Higher interest expense and Q2 income-tax expense weighed on GAAP earnings despite improved operating income. Q2 tax expense was $30 million versus approximately zero a year earlier; first-half expense was $44 million versus $13 million.
- First-half operating cash flow improved substantially, largely from working capital. The filing’s adjusted free-cash-flow calculation also reflects capital spending, restricted-cash settlement activity, pension contributions and trade-receivables-facility movements.
Outlook, risks, contingencies and unusual items
- Separation: The company targeted Q4 2023 completion of the planned separation, but warned it might be delayed, changed or not completed. Potential risks include execution costs, required approvals and consents, financing access, credit-rating impacts, tax consequences and disruption to customer, supplier or employee relationships. The filing provided no specific financial guidance.
- Cyber incident: A ransomware incident caused an April 2023 data-center outage affecting certain Aloha cloud and Counterpoint functionality. NCR recorded $11 million of response, remediation and investigation costs in Q2. It said the incident was limited to specific services and did not affect financial-reporting systems, while noting its assessment remained ongoing and the full impact was not yet known.
- Environmental matters: The Kalamazoo River reserve was $88 million at June 30. NCR said alternative remediation assumptions could make the reserve more than approximately double, although those costs were not then considered reasonably estimable or verifiable. The Fox River remediation obligations were completed, but a $22 million liability remained subject to final reconciliation with indemnitors; a related $54 million receivable had uncertain collection timing.
- Legal matter: In the CloudofChange patent case, a loss of up to $13 million was considered reasonably possible but not probable; no accrual was recorded. NCR said it was appealing.
- Macroeconomic and market risks: Management cited supply-chain pressures, foreign-exchange movements, higher interest rates, commodity and energy costs, and geopolitical challenges, and expected these to continue to weigh on the business in the short term. A hypothetical 100-basis-point increase in variable rates was estimated to add about $13 million to first-half pre-tax interest expense and about $9 million to quarterly vault-cash rental expense, excluding swap effects.
- Other unusual items: The company recorded a $10 million out-of-period expense adjustment in Q1 to correct an understatement of operating expenses and an employee liability in Q4 2022; management said it was not material to prior statements or expected to be material for 2023. Q2 separation costs were $52 million.
Most important facts for investors to verify
- Confirm the issuer identity and the status, timing, structure, financing and expected costs of the planned separation.
- Track recurring-revenue growth against product and hardware declines, and assess whether margin gains persist after cost reductions and one-time adjustments.
- Review debt maturities, covenant headroom, variable-rate exposure and liquidity needs, including separation-related financing requirements.
- Monitor the ransomware incident’s customer impact, recovery progress, additional costs, potential claims and any change in management’s materiality assessment.
- Assess future cash requirements and uncertainty around environmental reserves, indemnitor contributions and receivable collection, particularly for Kalamazoo and Fox River.
- Distinguish GAAP earnings and cash flow from management’s non-GAAP Adjusted EBITDA and Adjusted free cash flow-unrestricted measures, including their exclusions and working-capital effects.