NCR Corporation (NCR Voyix per request metadata) — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2020. The filing registrant is NCR Corporation; the supplied metadata uses the later name NCR Voyix Corp. Amounts are in U.S. dollars unless stated otherwise.
Business context and financial performance
NCR provides technology, software and services to banking, retail and hospitality customers. Results were materially affected by COVID-19, particularly lower hardware sales and reduced activity among hospitality and certain retail customers.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $1,484 million | $1,710 million | $2,987 million | $3,246 million |
| Gross margin | $372 million; 25.1% | $471 million; 27.5% | $769 million; 25.7% | $882 million; 27.2% |
| Operating income | $89 million | $157 million | $166 million | $257 million |
| Net income | $64 million | $88 million | $88 million | $126 million |
| Diluted EPS | $0.44 | $0.58 | $0.57 | $0.81 |
| Interest expense | $57 million | $45 million | $107 million | $90 million |
| Operating cash flow | Not presented by quarter in the supplied filing text | $283 million | $71 million | |
| Free cash flow (non-GAAP) | Not presented by quarter in the supplied filing text | $149 million | $(78) million |
Q2 revenue fell 13% year over year, or 12% on a constant-currency basis; first-half revenue fell 8%, or 7% constant currency. Recurring revenue, including maintenance, cloud and payments, rose to $814 million in Q2 from $776 million; product revenue declined to $481 million from $664 million. Management attributed gross-margin compression to lower revenue and the mix shift away from higher-margin perpetual software licenses.
Liquidity, debt and cash flow
- At June 30, cash and cash equivalents were $1.681 billion, versus $509 million at December 31, 2019. Total debt was $4.73 billion, versus approximately $3.56 billion at year-end, including $217 million of short-term borrowings and $4.473 billion of long-term debt.
- Cash provided by operations was $283 million for the first half, compared with $71 million a year earlier, primarily reflecting working-capital improvements. Free cash flow was $149 million, versus use of $78 million; the measure is non-GAAP and includes $6 million of cash from discontinued operations in 2020.
- To bolster liquidity, NCR drew the remaining $630 million available on its revolving facility in March and issued $400 million of 8.125% senior unsecured notes due 2025 in April. The revolving facility had $1.07 billion outstanding at June 30; the receivables securitization facility had $200 million outstanding.
- Management said available cash, operating cash flow and financing were sufficient for the next 12 months’ expected operating needs, debt service, pension contributions and environmental payments. This assessment depends on uncertain pandemic developments.
Material changes versus the prior comparable period
- Revenue declines were broad-based. Q2 segment revenue fell 12% in Banking, 13% in Retail and 21% in Hospitality; first-half declines were 6%, 11% and 17%, respectively. Hospitality reported no Q2 operating income and a first-half operating loss of $9 million, compared with $13 million and $29 million of income in the prior-year periods.
- Q2 Banking ATM hardware revenue declined 25%; first-half ATM hardware revenue declined 18%. Retail also faced comparison with a large prior-year customer hardware rollout. The Other segment’s first-half revenue increased 13%.
- Operating income and EPS declined despite lower SG&A and R&D spending. Higher average debt balances and higher rates on unsecured notes raised interest expense.
- Cash rose substantially following additional borrowings and note proceeds. Debt increased as NCR used financing to strengthen pandemic liquidity.
Outlook, management commentary, risks and unusual items
- NCR withdrew its 2020 full-year outlook on March 31, 2020 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 Hospitality and Retail most affected, hardware more exposed and recurring revenue expected to be more resilient.
- Management described priorities including customer continuity and safety, cost control and liquidity, investment in strategic software and services growth platforms, and a longer-term shift toward recurring revenue. Measures included salary reductions, reduced capital spending, contractor and travel cuts, and freezes on hiring and merit increases.
- Tax benefits materially supported reported earnings: Q2 included a $48 million benefit from releasing a valuation allowance on U.S. foreign tax credits and related tax accounting. First-half tax benefit was $33 million versus $24 million of tax expense in 2019. The filing also identifies $5 million of non-material tax corrections recorded in the first half.
- A March tornado damaged inventory at a Tennessee fulfillment center. NCR wrote off approximately $105 million of inventory with an offsetting insurance receivable and no net cost-of-sales impact; a further $45 million remained under assessment. By June 30, it had received $91 million in advances and recorded a $14 million receivable for the inventory loss. Cash flow included $95 million of insurance advances.
- NCR revised previously issued cash-flow statements for errors related to client funds and settlement cash, including reclassification and cash-balance corrections. Management said the errors were not material to prior financial statements; the revisions did not affect previously reported income statements or balance sheets. The filing presents the revised first-half 2019 cash-flow comparison.
- Environmental exposures include a $26 million net reserve for Fox River remediation and an $80 million reserve for Kalamazoo River. Approval of the Kalamazoo consent decree remained pending, and the filing notes that the reserve could more than double under other cost assumptions the company did not then consider reasonably estimable or verifiable. A Japanese environmental-waste reserve was $20 million.
- Boston Consulting Group sued NCR seeking more than $80 million and other relief; NCR disputed the allegations and said it could not predict the outcome or estimate possible liability. The filing also discusses environmental and other legal matters, with no assurance that ultimate costs will not exceed recorded amounts.
- COVID-19, customer payment risk, supply and manufacturing disruption, cybersecurity, indebtedness and covenants, foreign exchange, pension obligations, and environmental matters are among the identified risks. NCR reported disclosure controls were effective and no material second-quarter change in internal control over financial reporting.
Most important facts for investors to verify
- Whether revenue, margins and segment profitability recover as pandemic restrictions ease, particularly in Hospitality and Retail, and whether recurring revenue offsets weaker hardware and license sales.
- Whether operating cash flow and liquidity remain adequate after the one-time insurance proceeds and pandemic-related financing; monitor debt balances, interest costs and credit-facility covenant headroom.
- How much of the $48 million discrete tax benefit is nonrecurring and how future tax provisions compare with underlying pretax earnings.
- Insurance recovery and remaining inventory assessment for the Tennessee tornado, including the $45 million still under review.
- Approval and expected costs of the Kalamazoo consent decree, Fox River remediation closeout, and outcomes of the BCG lawsuit and other contingencies.
- That the cash-flow revisions are reflected consistently in future comparative filings; the filing says the revisions did not affect earnings or balance sheets.