NCR Corporation (NCR Voyix metadata) — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; fourth-quarter figures are included below where disclosed. Amounts are in U.S. dollars.
Business context
NCR provided software, services, payments solutions and hardware for banking, retail, hospitality, and telecommunications and technology customers. It reorganized management and reporting around industry segments beginning in 2019 and continued shifting toward an as-a-Service model with more recurring software and services revenue.
Financial results and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $6.915 billion | $6.405 billion |
| Gross margin | $1.921 billion; 27.8% | $1.675 billion; 26.2% |
| Operating income | $611 million | $191 million |
| Net income (loss) attributable to NCR | $564 million | $(88) million |
| Net income (loss) attributable to common stockholders | $454 million | $(137) million |
| Diluted EPS attributable to common stockholders | $3.36 | $(1.16) |
| Cash provided by operating activities | $628 million | $572 million |
| Free cash flow (non-GAAP) | $275 million | $223 million |
- Revenue rose 8% reported and 10% at constant currency. Recurring revenue increased 6% to $3.145 billion, about 45% of total revenue. Service revenue was $4.234 billion and product revenue was $2.681 billion.
- Cash and cash equivalents were $509 million; total debt was approximately $3.59 billion, or about $3.08 billion net of cash. The company reported $807 million available under its senior secured credit facility. Current assets were $3.144 billion and current liabilities $2.538 billion.
- Interest expense rose to $197 million from $168 million. Approximately 64% of borrowings were fixed-rate; management estimated a 100-basis-point increase in variable rates would add about $11 million of annual pretax interest expense.
- Segment revenue and operating income: Banking $3.512 billion and $514 million; Retail $2.217 billion and $144 million; Hospitality $843 million and $56 million; Other $343 million and $44 million.
- Fourth-quarter 2019 revenue was $1.886 billion, operating income $182 million, and net income attributable to common stockholders $343 million; diluted EPS was $2.43.
Changes versus prior period and unusual items
- Revenue grew across all segments. Banking increased 10%, driven partly by 29% growth in ATM revenue; Retail rose 6%, Hospitality 3%, and Other 11%.
- Gross margin improved from 26.2% to 27.8%. Excluding transformation and restructuring costs and acquisition-related intangible amortization, management reported margin of 28.4% versus 28.1% in 2018.
- Operating income included $147 million of adjustments, including $58 million of transformation and restructuring costs and $86 million of acquisition-related intangible amortization. In 2018, asset impairment charges were $227 million, including goodwill and long-lived asset impairments.
- The 2019 tax benefit was $273 million, including a $264 million net benefit related to transfers of intangible assets among subsidiaries and $74 million from releases of foreign valuation allowances. The unusually low effective tax rate of negative 80% materially boosted reported earnings; the filing does not present this benefit as a recurring operating result.
- Free cash flow increased despite a $68 million rise in capitalized software additions to $238 million. Property, plant and equipment capital expenditures fell to $91 million, partly because headquarters construction spending had occurred in the prior period.
- NCR completed six acquisitions for $203 million, including D3 Technology and Zynstra, and spent $302 million repurchasing Blackstone-owned preferred shares; remaining Blackstone preferred shares were converted into about 9.16 million common shares.
Outlook, management commentary and principal risks
- Management did not provide a specific revenue or earnings forecast in the supplied filing text. For 2020, it targeted $90 million of annualized run-rate savings by year-end from organizational, offering, sales and delivery-model improvements, with $40 million expected to be realized during 2020. It expected approximately $78 million of pension, postemployment and postretirement plan contributions in 2020.
- The company’s strategy is to grow recurring software and services revenue, invest in strategic growth platforms, improve customer experience and execution, and optimize costs. Management cautioned that the transition may pressure revenue and margins and that investment returns or adoption may be slower than anticipated.
- Liquidity risks include substantial indebtedness, variable-rate borrowings, restrictive covenants and significant debt service. Total contractual obligations were $6.724 billion, including $3.591 billion of debt principal, $1.063 billion of estimated interest, $733 million of lease obligations and $117 million of estimated environmental payments.
- Pension plans were underfunded by $693 million at year-end, up from $633 million. Lower discount rates contributed to the increase; future funding needs depend on markets, assumptions and regulation.
- Environmental reserves included $16 million net for Fox River, $81 million for Kalamazoo River and $19 million for Ebina. The Fox River remediation was expected to finish in 2020. The Kalamazoo settlement remained subject to court approval, and future remediation costs remain uncertain.
- A former consultant sued NCR seeking more than $80 million; NCR disputed the claim and said it would defend the case. The filing also identifies cybersecurity, privacy, product quality, cloud-hosting disruptions, competition, foreign currency, supplier concentration and economic conditions as material risks.
- The Wuhan coronavirus was identified as a potential supply-chain risk as of the report date; NCR said it had mitigated certain supplier shortages and reported no impact then on current orders or production lead times, while the eventual effects were uncertain.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. The audit highlighted uncertain tax positions and the valuation of deferred tax assets arising from intangible-asset transfers as critical audit matters.
Most important facts for investors to verify
- How much of 2019’s earnings improvement is sustainable after excluding the large, nonrecurring tax benefit and other adjustments?
- Whether recurring software and services growth and the targeted 2020 cost savings are achieved without weakening margins or customer service.
- Debt repayment capacity, covenant headroom, refinancing costs and cash available after preferred-stock, pension and other obligations.
- Actual outcomes and cash requirements for the Kalamazoo, Fox River and Ebina environmental matters, and resolution of the consultant lawsuit.
- Whether ATM-driven Banking growth continues and whether Retail and Hospitality segment profitability stabilizes.
- Potential effects of supply-chain disruptions, cybersecurity incidents, foreign exchange and customer spending conditions on results.