Business context and reporting period
The supplied filing is NCR Corporation’s Form 10-K for the fiscal year ended December 31, 2015—not a filing identified as NCR Voyix Corp. It reports annual results and unaudited fourth-quarter data. NCR provides hardware, software and services for financial services, retail, hospitality, travel, and telecommunications and technology customers.
NCR’s strategy emphasized growing higher-margin software, cloud and services revenue and supporting customers’ digital and omnichannel operations. It reorganized management around solutions beginning January 1, 2016.
Financial results and liquidity
Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $6,373 | $6,591 |
| Gross margin | $1,469; 23.1% | $1,732; 26.3% |
| Operating income | $135 | $353 |
| Net income (loss) attributable to NCR common stockholders | $(182) | $191 |
| Diluted earnings (loss) per share | $(1.09) | $1.12 |
| Cash provided by operating activities | $681 | $524 |
| Free cash flow (company-defined, non-GAAP) | $409 | $313 |
| Cash and cash equivalents at year-end | $328 | $511 |
| Total debt at year-end | $3,252 | $3,618 |
Free cash flow is defined by NCR as operating cash flow plus cash flows from discontinued operations, less capital expenditures and capitalized software additions, plus discretionary pension contributions and settlements. NCR reported $3,286 million of debt obligations on an undiscounted principal basis in its contractual-obligations table; reported balance-sheet debt includes debt issuance costs.
Year-end current assets were $2,549 million and current liabilities were $1,781 million. NCR reported $722 million of available borrowing capacity under its senior secured credit facility and up to $200 million under its receivables facility; no amount was outstanding under the receivables facility. Management said it expected existing cash, operating cash flows and financing to cover requirements for the next 12 months.
Revenue declined 3% year over year, although constant-currency revenue increased 3%; the stronger U.S. dollar reduced the reported comparison by approximately 6%. Product revenue fell 6% and services revenue fell 1%. Software-related revenue was approximately flat at $1,747 million. Fourth-quarter revenue was $1,680 million, operating income $138 million, and net income attributable to NCR $24 million.
By segment, Financial Services revenue was $3,319 million and segment operating income $518 million; Retail Solutions, $2,001 million and $156 million; Hospitality, $686 million and $115 million; and Emerging Industries, $367 million and $41 million. Segment operating income excludes pension expense and other specified adjustments and should not be equated with GAAP operating income.
Material changes and unusual items
- Gross margin fell to 23.1% from 26.3%. Services gross margin declined to 22.7% from 26.8%, while product gross margin declined to 23.6% from 25.6%. Pension expense and revenue mix contributed to the deterioration.
- Full-year pension expense was $464 million, versus $152 million in 2014. This included a $427 million settlement loss from transferring the UK London pension plan to an insurer. NCR reported a $579 million underfunded pension obligation at year-end and expected approximately $71 million of pension, postemployment and postretirement contributions in 2016.
- NCR reported a $174 million consolidated net loss and $55 million of income tax expense despite a pretax loss. The effective tax rate was negative 58%; no tax benefit was recorded on the UK pension settlement charge because of a UK deferred-tax valuation allowance.
- In December 2015, NCR issued $820 million of Series A convertible preferred stock to Blackstone and repurchased $1 billion of common stock through a modified Dutch auction at $26.75 per share. The preferred stock carries a cumulative 5.5% dividend, initially payable in kind, and could convert into approximately 27.4 million common shares, about 17% of year-end common shares on an as-converted basis.
- The restructuring program generated $74 million of charges in 2015. NCR estimated annualized savings of approximately $105 million beginning in 2016 and projected $20 million to $25 million of restructuring-related opportunities for 2016.
- NCR recorded a $34 million impairment related to the planned sale of its Interactive Printer Solutions business, including $16 million of goodwill impairment. The asset sale agreement was signed in January 2016 and was expected to close during 2016.
Outlook, risks and contingencies
The filing provides no specific 2016 revenue or earnings guidance. Management’s stated priorities were to expand software, cloud and services, improve service profitability, invest selectively in innovation, and continue cost actions. NCR cited economic and credit conditions, foreign exchange, competitive pricing, execution of its business-model transformation, customer adoption, and servicing substantial debt as important uncertainties.
Other material risks include $3.25 billion of debt, restrictive covenants and variable-rate exposure; pension funding and actuarial volatility; cybersecurity, privacy and product-quality risks; reliance on selected suppliers and third parties; and tax uncertainty. NCR disclosed a $26 million net Fox River environmental reserve and an $18 million reserve for Kalamazoo River litigation expenses. Fox River liability and cost allocation remained uncertain, with further litigation anticipated. A Brazilian tax assessment had an estimated risk range of zero to approximately $54 million, with no accrual recorded. NCR also reserved $20 million against amounts owed in connection with terminated Oman airport-project subcontracting arrangements.
NCR stated that it maintained effective internal control over financial reporting, and its independent auditor issued an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Confirm the intended issuer: the supplied document is NCR Corporation’s 2015 10-K, not a filing under the name NCR Voyix Corp.
- Assess how much of the 2015 operating and earnings decline reflects the $427 million pension settlement loss and other specified charges, versus underlying business performance.
- Track whether the projected restructuring savings are realized and whether software, cloud and recurring services grow while margins recover.
- Review debt covenant headroom, upcoming maturities, cash generation, and the preferred stock’s dividends, conversion and repurchase rights.
- Monitor outcomes and potential cash exposure from Fox River, Kalamazoo River, the Brazil tax assessment and the Oman subcontract claims.