NCR Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The filing is by NCR Corporation, not NCR Voyix Corp. Unless otherwise noted, amounts are in millions of U.S. dollars.
Business context and results
NCR sells software, hardware, payments and related services across Banking, Retail, Hospitality and Other markets. It reorganized its reporting segments effective January 1, 2019 and recast prior-period segment disclosures.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1,783 | $1,550 | $5,029 | $4,604 |
| Gross margin | $507; 28.4% | $410; 26.5% | $1,389; 27.6% | $1,233; 26.8% |
| Operating income | $172 | $125 | $429 | $128 |
| Income from continuing operations | $104 | $87 | $230 | $(1) |
| Net income attributable to NCR | $90 | $84 | $215 | $(41) |
| Net income attributable to common stockholders | $11 | $72 | $111 | $(77) |
| Basic EPS attributable to common stockholders | $0.09 | $0.61 | $0.92 | $(0.65) |
Revenue, margins and segment trends
- Q3 revenue rose 15% reported and 17% at constant currency; nine-month revenue rose 9% and 12%, respectively. Product revenue grew faster than services: Q3 product revenue was $712 versus $534; service revenue was $1,071 versus $1,016.
- Q3 segment revenue grew in Banking (18%), Retail (12%) and Hospitality (12%). Banking benefited from ATM backlog conversion, ATM-related software and services; Retail from payments and self-checkout; Hospitality from cloud, payments and point-of-sale.
- Banking operating income increased to $146 from $102 in Q3, with margin rising to 15.5% from 12.8%. Retail income increased to $36 from $29. Hospitality income fell to $10 from $15, and its margin declined to 4.6% from 7.8%, reflecting investment in small-business and payments solutions.
- Q3 gross margin improvement reflected stronger hardware profitability. Nine-month Retail and Hospitality operating income declined year over year, despite revenue growth.
- Q3 SG&A increased to $271 from $226; R&D was $64 versus $59. Nine-month results included no impairment charges, compared with $183 of impairment charges in 2018, including goodwill and long-lived asset write-downs.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $226, up from $163. Free cash flow, a company-defined non-GAAP measure, was a use of $21 versus a use of $94, after $53 of property and equipment spending, $167 of capitalized software additions and $27 of discontinued-operation operating cash use.
- Cash and cash equivalents were $388 at September 30, 2019, down from $464 at year-end 2018. Current assets were $3,156 and current liabilities $2,346. The company reported $409 of cash, cash equivalents and restricted cash.
- Total debt was approximately $3.66 billion; balance-sheet short- and long-term borrowings were $208 and $3,422. Long-term debt increased from $2,980 at year-end. The company reported approximately $700 of revolving-credit availability; its $200 receivables securitization facility was fully drawn, with no remaining availability.
- In August, NCR refinanced its secured credit facility and issued $500 of 5.750% notes due 2027 and $500 of 6.125% notes due 2029; it redeemed $500 of 4.625% notes due 2021. It subsequently drew the remaining $400 term-loan commitment on October 10, 2019. Management expected to redeem the $400 of 5.875% notes due 2021 before year-end.
- Management said existing cash, operating cash flow and financing were sufficient for the next 12 months, including debt service, benefit-plan contributions, environmental matters and operating needs. This is management’s assessment, not a guarantee.
Material changes, outlook and unusual items
- Q3 common-stockholder earnings were reduced by a $67 deemed dividend associated with the preferred-stock redemption. NCR repurchased 237,673 Series A preferred shares for $302 cash and converted the remaining Blackstone holdings, including accrued dividends, into approximately 9.16 million common shares. This helps explain why NCR-attributable net income rose while common-stockholder net income and EPS fell.
- For 2019, NCR said its spend-optimization program was on track to deliver at least $100 of savings. It expected $60 of pre-tax charges and $70–$80 of cash impact for all transformation and restructuring initiatives; $47 of pre-tax charges and $36 of cash impact had been incurred in the first nine months.
- The D3 Technology acquisition closed July 1 for approximately $84, including $83 paid in cash. It expands digital banking; the company said it did not materially affect reported results.
- Discontinued operations recorded a $15 loss in Q3 and the first nine months, primarily from increased anticipated disposal costs for Japanese environmental waste. The related reserve was $19 at September 30, versus $2 at year-end 2018.
- Environmental contingencies remain significant uncertainties. Reserves at September 30 included $10 net for Fox River and $46 for Kalamazoo. Fox River remediation was expected to finish in 2020; NCR noted possible further reserve changes. A November 2019 arbitration award of $10 to the Fox River contractor was a subsequent event, with NCR expecting co-obligors and indemnitors to bear most of the amount.
- After quarter-end, Boston Consulting Group filed a lawsuit seeking more than $80 and other relief over consulting agreements. NCR said it disputed the allegations and would defend the case; it could not estimate the outcome or liability.
- Key risks cited include economic and industry demand, hardware demand and pricing, execution of the shift toward recurring software and services, competition, cybersecurity and data privacy, product defects, foreign exchange, indebtedness and covenants, pension obligations, restructuring execution, and environmental and legal exposures. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether growth in Banking and recurring software, services and payments continues, and whether Hospitality profitability recovers.
- Debt levels, borrowing capacity, covenant headroom, refinancing costs and completion of the planned note redemption; the October term-loan draw occurred after quarter-end.
- Cash conversion and software investment, including the sustainability of the reported improvement in free cash use.
- The size and timing of Fox River, Kalamazoo and Japanese environmental costs, plus the outcome and potential exposure from the BCG lawsuit.
- The effect of the preferred-stock transaction and resulting common-share dilution on per-share earnings and capital allocation.