2023-10-17 10:35:43 ET
Summary
- NCR Corporation has completed its split into two separate publicly listed entities: NCR Voyix Corporation and NCR Atleos Corporation.
- NCR's reporting of non-GAAP results is not a sound reflection of actual performance and this appears likely to continue with the separate entities.
- The share price has enjoyed a run up on the back of the proposed spinoff and now is likely an opportune time to sell.
Investment Thesis
I have written extensively on NCR Corporation (NCR) in the past, analyzing and discussing management's never ending transformation efforts. In my most recent article in May 2023, " NCR: A New Twist To A Never-Ending Transformation ", I observed that NCR was now adopting a new approach to transformation, with a proposed split of the company into two separate publicly listed entities. The spinoff of the ATM business was completed as of 5:00pm NY time on October 16, 2023, and the separate companies will begin trading under the following tickers on October 17, 2023.
- NCR Corporation, which is now known as NCR Voyix Corporation and the ticker will change from (NCR) to (VYX), but the CUSIP will not change.
- NCR Atleos Corporation (NATL)
Details of the proposed split were summarized in the following excerpts from a September 28, 2023 SEC filing,
NCR Voyix Corporation, which will focus on digital commerce, including NCR's Retail, Restaurant and Digital Banking businesses...
NCR Atleos Corporation ("NCR Atleos"), which will hold NCR's ATM-focused businesses, including NCR's Self-Service Banking, Payments & Network and Telecommunications and Technology businesses...
This separation will be accomplished by a pro rata distribution (the "Spin-Off") to Company common stockholders of one (1) share of NCR Atleos common stock for every two (2) shares of Company common stock held as of 5:00 p.m. local New York City time on October 2, 2023, the record date for the Spin-Off.
In connection with the Spin-Off, NCR Atleos, or one of its subsidiaries, has entered into financing arrangements providing for indebtedness in an aggregate principal amount of up to $3,435 million, of which approximately $2,935 million ... which will be used, ... to, among other things, finance the payment of a cash distribution to the Company, which the Company intends to use to repay a portion of its existing indebtedness.
It has been possible to trade NCR Atleos rights under the ticker NATL.WI since October 11. Using this information it is possible to estimate the market cap and the share price of both NCR Atleos and NCR Voyix at market open on October 17, 2023, as per Table 1 below.
Table 1
Based on Table 1 calculations the NCR Voyix share price should be around $16.68 at open on October 17, 2023. This assumes the combined market cap of the two separate companies is around the same as the market cap of NCR prior to the split, and that NCR Atleos share price remains around the last traded price of $20.80, and the combined market cap of the companies remains around the market cap of NCR immediately prior to spinoff.
In my previous article I rated NCR a Hold, "... primarily due to the likelihood of increased interest engendered by the proposed split, and there remains a possibility of a sale of the company. Either could lift the share price above current levels." The share price has increased by 10.26%, from $24.56 at date of the previous article to $27.08 pre spinoff at market close on October 16, 2023. My concerns at the lack of disclosure and the confusing disclosure in the company's reporting is only increased by the SEC's letter in response to the initial NCR Atleos registration filings. The SEC, in a June 6, 2023, letter to NCR Atleos, in response to its registration statement wrote,
You present total segment Adjusted EBITDA and total adjusted EBITDA, which are non-GAAP measures and should be separately reconciled to their most directly comparable GAAP measure, net income attributable to NCR ATMCo. However, once total segment adjusted EBITDA is reconciled to the comparable GAAP measure, it would appear such measure may include adjustments that are inconsistent with the applicable non-GAAP guidance. In this regard, adjusting for "corporate and other" expenses would appear to present a non-GAAP measure that excludes normal, cash operating expenses. As you do not appear to incorporate total segment adjusted EBITDA or total adjusted EBITDA in your discussion of adjusted EBITDA by segment, please revise to remove such measures from your disclosures here. Refer to Item 10(e)(1)(i)((B)) of Regulation S-K and Questions 100.01 and 104.04 of the Non-GAAP C&DIs.
and
Please explain further the adjustment for restricted cash settlement activity in your non-GAAP free cash flow measure. Tell us, and revise to disclose, what a free cash flow measure excluding restricted cash flow activity is intending to convey and how it is useful to investors. Also, please revise the title of this measure as your calculation appears to differ from the standard calculation of free cash flow (i.e. cash flows from operations less capital expenditures). Refer to Item 10(e)(1)(i)((C)) of Regulation S-K and Question 102.07 of the non-GAAP C&DIs.
The concerns raised by SEC were due to NCR including similar constructs for financial disclosures in the registration statement as they use for regular quarterly reporting. I have drawn attention to this in past articles. Notwithstanding the SEC letter, NCR and presumably the separate companies intend to persist with their present reporting constructs. Their response to the SEC letter in respect to free cash flow was to continue with the "NCR" methodology but add qualifications in the final registration statement , to satisfy SEC concerns.
NCR Atleos's management uses a non-GAAP measure called "Adjusted free cash flow-unrestricted" to assess the financial performance and liquidity of NCR Atleos. We define Adjusted free cash flow-unrestricted as net cash provided by operating activities less capital expenditures for property, plant and equipment, less additions to capitalized software, plus/minus the change in restricted cash settlement activity, and plus non-recurring or discretionary pension contributions and settlements. Restricted cash settlement activity represents the net change in amounts collected on behalf of, but not yet remitted to, certain of the Company's merchant customers or third-party service providers that are pledged for a particular use or restricted to support these obligations. These amounts can fluctuate significantly period to period based on the number of days for which settlement to the merchant has not yet occurred or day of the week on which a reporting period ends. We believe Adjusted free cash flow-unrestricted information is useful for investors because it indicates the amount of cash available after these adjustments for, among other things, investments in NCR Atleos's existing businesses, and strategic acquisitions. Adjusted free cash flow-unrestricted does not represent the residual cash flow available, since there may be other non-discretionary expenditures that are not deducted from the measure. Adjusted free cash flow-unrestricted does not have a uniform definition under GAAP, and therefore NCR Atleos's definition may differ from other companies' definitions of this measure. This non-GAAP measure should not be considered a substitute for, or superior to, cash flows from operating activities under GAAP.
Note - bolding by author.
My analysis of NCR's reporting over the last 3.5 years since the Blackstone exit shows total Adjusted Free Cash Flows reported by NCR total $1.454 billion. Despite these significant Free Cash Flows, NCR has made no dividend payments to shareholders and net debt has increased by $1.812 billion, with net debt as a percentage of net debt plus equity increasing from 67.0% to 72.7%.
Summary and conclusions
The share price has increased by over 10% since my May article when I suggested a Hold to see if there might be an uplift in share price as a result of the proposed spinoff, or any sale. I do not believe this leopard will change its spots and now would likely be an opportune time to exit. Table 1 provides indicative share prices for both NCR Voyix and NCR Atleos post spinoff and around or above those prices I currently downgrade NCR from Hold to Sell. On the basis past history is a useful guide in assessing future directions, I have summarized below the performance of NCR over the past 3.5 years.
NCR Financial Performance Analysis FY 2020 to H1 2023
In my May 2023 article, linked above, I summarized,
In 2019, Blackstone exited its investment in NCR after 4 years in control, with its task of transforming NCR to an integrated software and services company presumably completed. Nevertheless, the new management continued on their own planned path of transformation, continuing to spend $100s of millions of dollars in the process, without discernible benefit to the bottom line. Even before the new transformation is completed, the company has now switched plans from integration to disintegration, with a planned spin to create two separate companies. Don't get me wrong, the company appears to have an excellent suite of products, software and services, ably and professionally delivered. My concern is the rhetoric around transformation and profit and free cash flow performance is not matched by actual results - the numbers don't add up.
Present NCR CEO, Mike Hayford, started in that position in 2018 around 12 months ahead of the Blackstone exit in 2019, and will exit that position after the planned split of the company which is to take effect on October 16, 2023. As I have written previously, the company's reporting of results leaves much to be desired, with a lack of disclosure related to KPIs by segment and the many adjustments to GAAP results to get to reported non-GAAP results. Below I take a look at the performance of the company over the last 4 years under Mr Hayford's control, utilizing my "equity bucket" approach. The equity bucket approach analyzes changes in shareholders' equity between periods and provides a "catch all" review of the results of management's actions.
Table 2.1
Over the last 3.5 years following Blackstone's exit. Net assets used in operations have increased by $2,143 million. This increase has been funded by net $331 million increase in equity and $1,812 million increase in debt net of cash. The high proportion of debt used to finance net operating asset increases has resulted in net debt as a percentage of net debt plus equity to increase from 67.0% to 72.7% between December 2019 and June 2023. The net equity increase of $331 million is comprised of a $451 million increase in common stock shareholders' equity, offset by a $120 million decrease in preferred stock equity. Details of the $451 million change in common stock shareholders' equity over the past 3.5 years are included in Table 2.2 below.
Table 2.2
I often find companies report earnings that should flow into and increase shareholders' equity. But often the increase in shareholders' equity does not materialize. Also, there can be distributions out of equity that do not benefit shareholders. Hence, the term "leaky equity bucket."
Explanatory comments on Table 2.2 for the period end FY-2019 to end Q2-2023.
- Reported net income (non-GAAP) over the 3.5-year period totals $1,164 million, equivalent to diluted net income per common stock share of $8.39.
- Over the 3.5-year period, the non-GAAP net income excludes $1,128 million of GAAP losses (EPS effect $8.20) of items regarded as unusual or of a non-recurring nature in order to better show the underlying profitability of NCR. An analysis of these non-GAAP adjustments appears in Table 2.3 below.
- Other comprehensive income includes such things as foreign exchange translation adjustments in respect to buildings, plant, and other facilities located overseas and changes in valuation of assets in the pension fund - these are not passed through net income as they fluctuate without affecting operations and can easily reverse in the following period. Nevertheless, they do impact the value of shareholders' equity at any point in time. For NCR, these items amounted to negative $43 million (EPS effect $0.31) over the 3.5-year period.
- The company has a stock compensation plan under which shares are purchased to settle equity awards. Amount recorded in the income statement for stock compensation is similar to the amount paid to purchase shares to settle equity awards. The effect is a reduction of $2 million (EPS effect negative $0.03) compared to reported income.
- By the time we take the above-mentioned items into account, we find, over the 3.5-year period, the reported non-GAAP EPS of $8.39 ($1,164 million) has decreased to a loss from operations of $0.16 per share ($9 million), with a corresponding reduction in shareholders' equity.
- Distributions by way of share repurchases of $41 million further reduced shareholders' equity, bringing the total reduction from operations and distributions to $50 million.
- Additional equity of $501 million was raised through share issues for LibertyX acquisition $68 million and for employee stock based compensation $433 million.
- None of the $451 million increase in equity over the 3.5 year period was generated from operations. The whole of the $451 million came from capital of $501 million raised through share issues offset by losses of $9 million from operations and share repurchases of $41 million.
- It follows there was no net cash flow generated from operations over the 3.5 years, despite management's reporting of non-GAAP free cash flows of $1,454 million as per Table 2.3 below.
Table 2.3
Comments on Table 2.3 - Non-GAAP adjustments
- Category A adjustments appear to be reasonable add backs to GAAP results in order to measure management performance.
- Category B adjustments also appear to be reasonable add backs to GAAP results in order to show underlying profitability of normal operations. It should be noted however that these are real costs requiring real cash outlays and management should be accountable for these items. It is nonsensical to exclude these in arriving at free cash flows.
- Category C adjustments appear to be costs incurred in the running of the business and I question exclusion in arriving at non-GAAP results, and of course they should not be excluded in arriving at free cash flows.
- Without these many adjustments, NCR total net earnings over the last 3.5 years is a loss.
- As mentioned further above, the SEC had similar criticisms in relation to NCR's approach to non-GAAP reporting of earnings and free cash flows.
- For a better understanding of free cash flow analyses, and limitations on its usefulness as a performance measure, I recommend interested readers take a look at my 2019 article, " Free Cash Flows: Let's Have A Discussion Towards A Better Understanding ".
Summary & Conclusions
The spinoff of the ATM business appears to have provided a boost to the share price. Despite management efforts to present results in the best light possible, the foregoing balance sheet analysis shows performance is lacking, and there are no indications the spinoff, per se, will bring improvement. NCR stock is downgraded from Hold to Sell.
For further details see:
NCR: Spinoff Of ATM Business Completed - Expect 'Spin' To Continue - Downgrade To Sell