NCR Corporation Form 10-Q Summary
Period: Three months ended March 31, 2017; comparisons are to the three months ended March 31, 2016 unless stated otherwise. The filing is by NCR Corporation, not a company identified in the filing as NCR Voyix Corp.
Business context and results
NCR reported three segments: Software, Services and Hardware. Its strategy emphasized software-led solutions, cloud and mobile offerings, higher-value services, and operational transformation. Results are unaudited interim figures; management cautions they are not necessarily indicative of full-year results.
| Metric | Q1 2017 | Q1 2016 | Change / note |
|---|---|---|---|
| Revenue | $1.478 billion | $1.444 billion | Up 2% reported; up 9% adjusted for currency and the IPS divestiture, a non-GAAP comparison |
| Gross margin | $413 million; 27.9% | $380 million; 26.3% | Margin up 1.6 percentage points |
| Operating income | $117 million | $101 million | Up $16 million |
| Income from continuing operations | $57 million | $32 million | Up $25 million |
| Net income attributable to NCR common stockholders | Loss of $17 million; $(0.14) per share | Income of $21 million; $0.16 per share | 2017 includes preferred-stock dividends and $62 million of deemed dividends relating to modification and redemption |
| Operating cash flow | $43 million | $23 million | Up $20 million |
| Free cash flow, non-GAAP | $(12) million | $(29) million | Improved by $17 million |
Segments and material changes
- Software: Revenue of $452 million, up 8%; segment operating income of $125 million versus $115 million. License revenue grew 29% and cloud revenue 6%.
- Services: Revenue of $557 million, up 3%; segment operating income rose to $45 million from $34 million, with margin improving to 8.1% from 6.3%.
- Hardware: Revenue of $469 million, down 3% reported, but up 15% adjusted for currency and the prior-year IPS divestiture; segment operating loss remained $10 million. ATM revenue declined, partly offset by growth in self-checkout and point-of-sale.
- Reported revenue growth was affected by unfavorable currency of 1% and the IPS divestiture comparison of 6%. Management attributed gross-margin expansion to mix, transformation and productivity gains.
- Research and development expense increased to $67 million from $53 million, reflecting planned investment in software and hardware solutions. Interest expense declined to $39 million from $46 million.
Financial position and liquidity
- At March 31, 2017, cash and cash equivalents were $401 million, down from $498 million at year-end. Current assets were $2.780 billion and current liabilities $2.159 billion.
- Total debt was approximately $3.33 billion: $252 million short-term borrowings and $3.076 billion long-term debt. The $200 million receivables securitization facility was fully drawn; approximately $1.0 billion remained available under the revolving credit facility.
- Operating cash flow was $43 million; capital expenditures were $11 million and capitalized software additions $41 million. The company repurchased 7.4 million common shares for $350 million during the quarter.
- Management stated it believed available cash, operating cash flows and financing were sufficient for the next 12 months, including debt service, benefit contributions and environmental payments. The filing also notes that foreign-held cash may incur additional taxes if repatriated.
Outlook, risks and unusual items
- The filing provides no specific full-year revenue or earnings guidance. Management described 2017 priorities including sales execution, services transformation, software-model evolution and investment in innovation.
- Expected 2017 contributions were $30 million to international pension plans, $55 million to postemployment plans and $3 million to postretirement plans.
- The proposed Fox River consent decree was awaiting court approval. NCR agreed to complete remediation, expected during 2017–2018; the net reserve was approximately $19 million at March 31, 2017. Management said the ultimate cost remained uncertain and could materially affect results or cash flows.
- Other contingencies include a Brazilian tax assessment with estimated exposure of zero to approximately $75 million, for which no accrual was recorded; an Oman subcontract claim with an approximately $20 million reserve; and a Kalamazoo River reserve of approximately $1 million. The filing also discusses ongoing regulatory, legal and environmental matters.
- The senior secured credit facility imposes leverage and interest-coverage covenants and restrictions on additional debt and distributions. Principal risks cited include foreign exchange, economic and trade uncertainty, cybersecurity and data privacy, competition, customer adoption, subcontractor collectability, and the ability to manage indebtedness.
- Adoption of share-based compensation accounting changed the presentation of excess tax benefits; NCR recorded an approximately $39 million adjustment to beginning retained earnings. The change may contribute to future tax-rate volatility.
Important facts for investors to verify
- Whether the court approved the proposed Fox River consent decree and how remediation spending and reserve estimates subsequently changed.
- Debt, facility availability, covenant compliance and cash-flow trends, particularly given the fully drawn receivables facility and substantial share repurchases.
- Whether software growth, services margin improvement and adjusted hardware growth continued, and how these compare with reported results after currency and divestiture effects.
- Developments in the Brazilian tax assessment, Oman claim and Kalamazoo River litigation, including any changes in exposure or reserves.
- The effect of preferred-stock dividends, deemed dividends, potential conversion dilution and further repurchases on common-stockholder earnings and share count.