NCR Corporation Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2020. The filing is by NCR Corporation, not NCR Voyix Corp. Unless otherwise stated, amounts are in millions of dollars.
Business context and results
NCR sells hardware, software and services across Banking, Retail and Hospitality, with a strategy focused on growing recurring software and services revenue. Results were significantly affected by COVID-19 and by the shift from perpetual software licenses to recurring revenue.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1,589 | $1,783 | $4,576 | $5,029 |
| Gross margin | $427; 26.9% | $507; 28.4% | $1,196; 26.1% | $1,389; 27.6% |
| Operating income | $118 | $172 | $284 | $429 |
| Net income attributable to NCR common stockholders | $25 | $11 | $99 | $111 |
| Diluted EPS attributable to common stockholders | $0.19 | $0.09 | $0.76 | $0.90 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $495 | $226 |
| Free cash flow, non-GAAP | Not separately stated for quarter | Not separately stated for quarter | $299 | $(21) |
- Q3 revenue fell 11% year over year; nine-month revenue fell 9%. Product revenue declined to $521 from $712 in Q3 and to $1,476 from $1,915 for the nine-month period. Service revenue was broadly flat.
- Recurring revenue rose to $848 in Q3 from $806 and to $2,464 for nine months from $2,357. Management said the accelerated shift from perpetual licenses reduced the year-over-year revenue comparison by $27 in Q3.
- Q3 segment revenue: Banking $777, down 18%; Retail $556, up 3%; Hospitality $173, down 20%; Other $83, down 3%. Banking and Hospitality weakness was principally tied to lower hardware demand and pandemic effects. Retail benefited from self-checkout and services.
- Q3 operating income fell to $118 from $172. Nine-month operating income was $284 versus $429. Q3 gross margin contracted 1.5 percentage points; management cited lower revenue and mix shift toward recurring revenue, including lower software-license revenue.
- Nine-month free cash flow improved to $299 from negative $21, reflecting higher operating cash flow and working-capital improvements. It included $110 of insurance proceeds advanced for the Nashville-area fulfillment-center disruption. Capitalized software additions were $177; property and equipment spending was $23.
Balance sheet, liquidity and financing
- At September 30, cash and cash equivalents were $1,605, versus $509 at year-end 2019. Total current assets were $3,997 and current liabilities $2,278.
- Debt was reported as approximately $4,530 in principal obligations in MD&A. The balance sheet showed $222 of short-term borrowings and $4,266 of long-term debt. Management stated liquidity was sufficient for the next 12 months, including operating needs, debt service, pension contributions and environmental payments.
- During Q3, NCR issued $1,100 of senior notes and redeemed $1,300 of notes due 2022 and 2023, recording a $20 debt-extinguishment loss, including a $15 cash premium. The new notes mature in 2028 and 2030. Earlier in 2020, NCR issued $400 of 8.125% notes due 2025.
- After quarter-end, NCR repaid $470 of revolving-credit borrowings and repurchased approximately 132,000 preferred shares for $144. At September 30, $1,070 was outstanding on the $1,100 revolving facility; the receivables securitization facility had $212 outstanding against capacity of up to $300.
- Interest expense rose to $60 in Q3 from $53 and to $167 for nine months from $143, primarily due to higher average debt balances and rates. Approximately 55% of borrowings were fixed-rate.
Outlook, risks and unusual items
- NCR withdrew its 2020 full-year outlook in March and did not provide replacement numerical guidance in this filing. Management expected COVID-19 to weigh on business for the remainder of 2020 and into 2021, with hardware most affected and recurring revenue more resilient. It was evaluating possible Q4 charges, which could include cash and non-cash items.
- Management cited pandemic-related customer demand, payment and installation risks; supply-chain and manufacturing disruption; execution of the software-and-services transition; cybersecurity and data privacy; foreign exchange; indebtedness; and pension obligations among key risks.
- The March 2020 tornado damaged a third-party-operated fulfillment center. NCR wrote off approximately $103 of inventory with an offsetting insurance receivable, was assessing another $45 of inventory, and had received $102 in insurance advances by September 30. It also recorded $11 of related expenses and received $8 in insurance payments for those costs.
- A former consultant, Boston Consulting Group, sued NCR seeking more than $80 and other relief. NCR disputed the allegations; it said it could not predict the outcome or estimate possible liability.
- Environmental reserves included a $26 net reserve for the Fox River matter and a $78 net reserve for Kalamazoo River. Approval of the Kalamazoo consent decree remained pending; remediation costs and ultimate exposure involve significant uncertainty. The Ebina, Japan environmental reserve was $20.
- NCR revised previously issued cash-flow statements for errors involving JetPay-related client funds and restricted cash. The company said the errors were not material to prior financial statements and did not affect previously reported income statements or balance sheets; the comparative nine-month 2019 cash flow figures in this filing are revised.
- Nine-month income tax benefit was $33 versus $28 expense in 2019, driven mainly by discrete benefits, including a $48 benefit related to U.S. foreign tax credits. Management also recorded immaterial corrections to prior-period tax errors.
Important facts for investors to verify
- Whether demand, hardware sales and customer payment performance recover as pandemic impacts evolve, particularly in Banking and Hospitality.
- Whether recurring revenue growth can offset lower perpetual-license and hardware sales without further margin deterioration.
- Cash generation quality, including working-capital effects and insurance advances, and debt repayment capacity under the credit-facility covenants.
- Final insurance recovery and inventory assessment for the tornado loss, and any potential Q4 pandemic-related charges or asset impairments.
- Developments in the BCG litigation and environmental matters, especially approval and costs associated with the Kalamazoo settlement.
- Post-quarter preferred-stock repurchases, revolving-credit repayment, and the resulting impact on cash, debt and preferred dividends.