NCR Corporation Form 10-Q Summary
Entity and period: The supplied filing is for NCR Corporation, not NCR Voyix Corp. It reports unaudited results for the quarter and nine months ended September 30, 2018, compared with the corresponding 2017 periods. Amounts are in millions of dollars unless stated otherwise.
Financial performance
- Third-quarter revenue: $1.550 billion, down 7% year over year (down 5% excluding currency effects). Product revenue fell to $534 million from $657 million, while service revenue increased to $1.016 billion from $1.006 billion.
- Third-quarter profitability: Gross margin was $410 million, or 26.5%, versus $472 million, or 28.4%. Operating income was $125 million versus $199 million. Net income attributable to NCR was $84 million; income attributable to NCR common stockholders was $72 million, or $0.61 basic and $0.56 diluted per share, versus $106 million, or $0.87 basic and diluted, in 2017.
- Nine-month results: Revenue was $4.604 billion, down 3%; gross margin was $1.233 billion, or 26.8%, versus $1.345 billion, or 28.4%. Operating income was $128 million versus $489 million. NCR reported a $41 million net loss attributable to NCR and a $77 million loss attributable to common stockholders, or $0.65 per basic and diluted share; 2017 common-stockholder income was $179 million, or $1.47 basic and $1.41 diluted per share.
- Segments: Third-quarter Software revenue grew 1% to $480 million, but operating margin declined to 26.5% from 31.1%. Services revenue grew 1% to $616 million, with operating margin improving to 14.6% from 14.4%. Hardware revenue fell 21% to $454 million; the segment recorded a $56 million operating loss versus a $2 million loss. For nine months, segment revenue was $1.410 billion Software, $1.827 billion Services and $1.367 billion Hardware; Hardware’s operating loss was $106 million.
- Cash flow: Nine-month operating cash flow was $163 million, down from $270 million. Capital expenditure and capitalized software additions were $104 million and $130 million, respectively; reported free cash flow was negative $94 million versus positive $50 million. Cash, cash equivalents and restricted cash declined $200 million to $343 million, including $334 million of cash and cash equivalents.
- Debt and liquidity: Total debt was approximately $3.15 billion, compared with $2.99 billion at year-end 2017; reported balance-sheet short- and long-term debt totaled $3.127 billion. Cash was $334 million. The revolving credit facility had $1.1 billion of capacity with no borrowings outstanding; the receivables facility had $175 million outstanding and $25 million of capacity. Management said liquidity was sufficient for expected needs over the next 12 months.
- Balance sheet: Current assets were $2.855 billion and current liabilities $2.004 billion at September 30, 2018. Goodwill was $2.589 billion, down from $2.741 billion at year-end, primarily reflecting impairment. NCR repurchased 6.1 million shares for $210 million during the first nine months.
Material changes and drivers
- Hardware weakness was the principal driver of lower revenue and profitability, reflecting reduced ATM, point-of-sale and self-checkout sales, project timing, supply constraints, pricing pressure and unfavorable mix. Management said supply constraints were largely resolved by quarter-end, with production levels exiting the quarter consistent with the planned fourth-quarter ramp.
- Software and Services revenue increased, supported by cloud growth, maintenance and managed services. Services margins improved through process and productivity initiatives; Software margins were pressured by license mix and higher employee expenses.
- NCR recorded $183 million of nine-month impairment charges: $146 million against Hardware goodwill and $37 million against Hardware long-lived assets. Management cited a lower 2018 forecast, reduced expected revenue and gross margins, and weaker projected cash flows.
- Reported nine-month results also included a $38 million loss from discontinued operations, primarily related to the Kalamazoo environmental matter and tax audit settlements. Revenue accounting changes adopted in 2018 had a $2 million opening retained-earnings adjustment; the company disclosed that the new standard affected reported product revenue and earnings versus prior guidance.
Outlook, commentary and risks
- NCR expected $200 million–$250 million of pre-tax transformation and restructuring charges over two years, including $100 million–$150 million in 2018, with estimated annual run-rate savings of approximately $150 million by 2020. It reported $98 million of charges and $60 million of cash payments through September.
- A separate spend-optimization program targeted at least $100 million in 2019 savings. The company expected $75 million–$100 million of pre-tax charges over the following 12 months, including approximately $50 million in fourth-quarter 2018; expected cash impact was $75 million–$100 million in 2018 and 2019.
- On October 19, 2018, NCR agreed to acquire JetPay Corporation for approximately $184 million in cash, subject to regulatory approval and customary closing conditions. NCR planned to use existing cash and revolver capacity and expected a fourth-quarter 2018 close.
- Environmental contingencies include Fox River remediation, for which the net reserve was approximately $18 million at September 30, and Kalamazoo River, for which the reserve was $46 million. NCR appealed the Kalamazoo liability and allocation rulings; future remediation costs remain uncertain, and the filing states the Kalamazoo charge could approximately double under other assumptions that the company did not then consider reasonably estimable or verifiable. A Brazilian tax assessment also remained under appeal, with estimated aggregate risk ranging from zero to approximately $61 million and no accrual recorded.
- Key stated risks include hardware demand and forecasting, supplier and manufacturing execution, restructuring costs and productivity disruption, competition, cybersecurity and data privacy, foreign exchange, leverage and covenant compliance, tax uncertainty, and environmental and legal claims. Management noted that approximately 70% of borrowings were fixed-rate; a 100-basis-point increase in variable rates was estimated to raise nine-month pre-tax interest expense by about $7 million.
Important facts for investors to verify
- Whether Hardware demand, margins and production recovered as anticipated after the reported supply constraints and fourth-quarter ramp.
- Progress and actual cash costs, charges and savings from the two restructuring and spend-optimization programs.
- Debt, receivables-facility usage, covenant headroom and liquidity after the JetPay acquisition and planned environmental and benefit-plan payments.
- Developments in the Kalamazoo and Fox River matters, including appeals, remediation estimates, indemnity recoveries and reserve adequacy.
- Final tax effects of U.S. tax reform and the resolution of tax audits and the Brazilian assessment.