NCR Corporation — FY2020 Form 10-K
Period and context: This is NCR Corporation’s annual report for the fiscal year ended December 31, 2020, filed February 26, 2021—not a standalone Q4 filing. The filing identifies the registrant as NCR Corporation, rather than NCR Voyix. NCR provides software, services, payments technology and hardware across Banking, Retail, Hospitality, and Telecommunications and Technology (T&T). The year was substantially affected by COVID-19.
Financial results and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $6.207 billion | $6.915 billion |
| Operating income | $221 million | $611 million |
| Net income (loss) attributable to NCR common stockholders | $(110) million; $(0.86) diluted EPS | $454 million; $3.36 diluted EPS |
| Adjusted EBITDA (non-GAAP) | $896 million; 14.4% of revenue | $1.058 billion; 15.3% of revenue |
| Cash provided by operating activities | $641 million | $634 million |
| Free cash flow (non-GAAP) | $448 million | $281 million |
| Cash and cash equivalents at year-end | $338 million | $509 million |
| Total debt at year-end | $3.318 billion | $3.559 billion |
Gross margin fell to 24.6% from 27.8%; excluding specified restructuring and acquisition-amortization costs, management reported a decline to 27.3% from 28.4%. Current assets were $2.478 billion and current liabilities $2.088 billion. NCR reported $999 million of borrowing availability under its secured credit facility. Free cash flow is a company-defined non-GAAP measure and includes a $70 million discretionary pension contribution in 2020.
Material changes and business trends
- Revenue declined 10%. Product revenue fell 25%, including ATM revenue down 29% and self-checkout/POS revenue down 23%; the transition from perpetual licenses to recurring arrangements also reduced recognized revenue. Service revenue declined 1%.
- Software and services were 71.7% of revenue ($4.452 billion), versus 65.5% in 2019. Recurring revenue increased 5% to $3.338 billion, or 53.8% of revenue, versus 46.0% in 2019.
- Segment revenue: Banking $3.098 billion (down 12%); Retail $2.080 billion (down 6%); Hospitality $684 million (down 19%); and T&T $345 million (up 1%). Hospitality segment operating income fell to $7 million from $56 million.
- Debt actions included issuing $1.5 billion of senior notes and redeeming $1.3 billion of notes due 2022 and 2023. The refinancing extended weighted-average maturity, but FY2020 interest expense rose to $218 million from $197 million; NCR recorded a $20 million debt-extinguishment loss.
- Q4 revenue was $1.631 billion versus $1.886 billion a year earlier. Q4 operating loss was $63 million, compared with operating income of $182 million in Q4 2019. Fourth-quarter charges included transformation actions and discontinued-operations environmental costs.
Outlook, risks, contingencies and unusual items
- NCR withdrew its 2020 full-year outlook on March 31, 2020. Management expected COVID-19 to weigh on the business into 2021 and anticipated negative effects across segments, with hardware revenue most exposed and recurring revenue more resilient. The 80/60/20 strategy—80% software and services revenue, 60% recurring revenue and 20% adjusted EBITDA margin—is a strategic target, not specific near-term guidance.
- In Q4 2020, NCR recorded approximately $202 million of pre-tax transformation charges: about $155 million non-cash and $47 million cash, with management expecting $150 million of savings in 2021. The filing warns that additional cash and non-cash charges could occur in 2021.
- At year-end, pension obligations were underfunded by $667 million. NCR expected approximately $66 million of 2021 contributions across pension, postemployment and postretirement plans.
- Environmental reserves were approximately $28 million for Fox River, $164 million for Kalamazoo River and $20 million for Ebina. The Kalamazoo reserve increased from $81 million in 2019; future remediation costs and expected contributions from co-obligors and indemnitors remain uncertain. Estimated environmental liability payments in the contractual-obligations table totaled $191 million.
- A March 2020 tornado damaged a fulfillment center; approximately $118 million of inventory was written off with an offsetting insurance receivable, with no net cost-of-sales impact. The company also reported insurance receivables for related expenses.
- In January 2021, NCR agreed to acquire Cardtronics for $39 per share, subject to approvals and other conditions, and expected closing in mid-2021. The transaction was expected to require substantial additional borrowing. NCR also completed acquisitions of Freshop and Terafina after year-end.
- Other material risks include COVID-19 and customer payment capacity, execution of the shift to cloud and recurring revenue, supplier and hosting disruptions, cybersecurity and privacy, competition, foreign exchange, debt covenants and variable-rate borrowings, and goodwill or deferred-tax-asset impairment. The auditor identified Hospitality goodwill valuation and U.S. deferred-tax-asset realizability as critical audit matters.
- The filing reports a January 2021 lender waiver concerning an administrative error in leverage-ratio calculations and related interest underpayments. It also says 2019 cash-flow statements were revised for immaterial errors in classification and presentation; the revisions did not affect income or balance sheets.
Important facts for investors to verify
- Whether recurring-revenue growth and the software-and-services mix can improve as hardware demand and segment profitability recover.
- Cash generation, capitalized software spending and the company-defined free-cash-flow reconciliation, including pension contributions.
- Debt and covenant capacity after the proposed Cardtronics acquisition, its financing terms, and the associated integration and synergy assumptions.
- The timing and ultimate cost of Kalamazoo, Fox River and Ebina obligations, including collectability of co-obligor and indemnitor contributions.
- The effect of Q4 transformation actions on 2021 costs and whether the stated $150 million savings are achieved.
- Developments in U.S. tax-asset recoverability and the disclosed environmental, litigation and cybersecurity exposures.