NCR: The Numbers Don't Add Up

May 26, 2022 11:00 AM ETNCR Corporation (NCR)BX4 Comments2 Likes
Robert Honeywill profile picture
Robert Honeywill
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Summary

  • In its SEC filings, NCR notes - 'GAAP diluted EPS and non-GAAP diluted EPS may not mathematically reconcile.' In layman's terms, the numbers do not add up.
  • I had a boss once who was fond of gems like, 'figures don't lie, but liars can figure' and 'numbers are dangerous'.
  • Under his mentorship, I developed a healthy skepticism for numbers in financial reports, whether or not they added up.
  • I have filled in the missing gaps in NCR's financial presentations to better understand why and how GAAP and non-GAAP results differ, and of how much concern the differences should be to investors.
  • But of greater concern, the numbers show the hundreds of millions spent on non-GAAP costs of transformation and restructuring, are not bringing the promised savings.
  • Looking for more investing ideas like this one? Get them exclusively at Dividend Growth Income+ Club. Learn More »

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Numbers are dangerous!

NCR: Investment thesis

As discussed in my Feb. 4 article, "NCR: The Blackstone Legacy And What's Ahead", Blackstone (BX) was brought in by NCR (NYSE:NCR) in December 2015 as an experienced technology investor to add value to and accelerate NCR's strategic transformation to an integrated software and services company. Blackstone exited its investment in NCR in Sep. 2019, with the transformation presumably completed. Despite this, the company management has continued on a path of transformation. GAAP to non-GAAP reconciliations reveal a total of $269 million net of tax spent on "Transformation and restructuring costs" over the 2.25 years FY-2020 through Q1-2022. These transformation and restructuring activities were supposed to achieve $150 million in savings in 2021 alone. Detailed analysis reveals savings have not materialized. I believe it is becoming increasingly questionable whether it is appropriate to continue to adjust for these transformation and restructuring costs to arrive at an underlying profit. Even with these adjustments, Q1-2022 non-GAAP earnings on an annualized basis are far below results for FY-2020 and FY-2021, and FY-2019. Below I provide detailed analyses to better explain -

  • GAAP and Non-GAAP reconciliations from a common stockholder's perspective.
  • Changes in revenues and costs and expenses on an increment (decrement) basis over the period FY-2019 to Q1-2022.

NCR: Understanding the GAP between GAAP and non-GAAP net income and net income per share from a common stockholder perspective

The following data is sourced from NCR 8-K filing dated Apr. 26, 2022.

  1. GAAP earnings attributable to NCR common stockholders - For Q1 2022, NCR reported a GAAP net loss of $38 million, equivalent to $0.28 loss per share on a diluted weighted average common shares outstanding basis (135.7 million shares) (see p. 9 exhibit 99.1). The 135.7 million shares are less than the 141.5 million shares that would be applied on a fully diluted basis. This is in accordance with GAAP requirements for the lower share count and thus higher EPS loss to be shown.
  2. GAAP earnings attributable to NCR from continuing operations - For Q1 2022, NCR reported a GAAP net loss of $33 million, and $0.27 loss per share on a diluted basis (see p. 17 exhibit 99.2). The $33 million loss is derived from the loss of $38 million per 1., less loss from discontinued operations of $1 million and less dividends to preferred shareholders $4 million. The $0.27 loss per share shown on p. 17 is a case of "apples and oranges". The loss of $33 million is on an "attributable to NCR" basis, while the Diluted EPS from Continuing Operations is on an "attributable to NCR common stockholders" basis. Reconciliations are shown on p. 25 and it would be helpful for a cross-reference to be included on p. 17
  3. Non-GAAP earnings attributable to NCR from continuing operations - For Q1 2022, NCR reported a non-GAAP profit of $49 million, and $0.33 income per share on a diluted basis (see p. 18 exhibit 99.2). Share count is not shown on p.18, but a figure of 150.7 million shares is disclosed on p. 24 of Exhibit 99.2. The derivation of the 150.7 million shares is shown on p. 25.
  4. Reconciliation of GAAP earnings with non-GAAP earnings (see p. 24 Exhibit 99.2). Once again, contents are a mix of "attributable to NCR" and "attributable to NCR common stockholders". The end result is a construct of "non-GAAP earnings attributable to NCR", considered meaningful by NCR management from an operating perspective. But, I believe for NCR common stockholders, non-GAAP results on an "attributable to NCR common stockholders" basis, would be more meaningful, from their perspective.

NCR: Non-GAAP results on an "attributable to NCR common stockholders" basis

Table 1 below shows adjusted non-GAAP results for NCR on a basis applicable to common stock shareholders.

Table 1

Table 1

Data sources: SEC filings

Table 1 starts with results on a GAAP basis attributable to common stock shareholders. Net income (loss) for the company is adjusted by deducting dividends on convertible preferred shares to arrive at earnings attributable to common stock shareholders. These earnings (losses) are then divided by fully diluted weighted average common shares outstanding. It will be noted in the case of GAAP losses certain share entitlements are excluded from the outstanding shares calculation to ensure the most conservative (highest) loss per share is calculated. As the non-GAAP adjustments result in the elimination of losses, the higher fully diluted share count is used throughout the reconciliation. For purposes of explanation, I have separated non-GAAP adjustments into Category A and Category B.

Category A adjustments -

The adjustments included under category A either have no real cost impact on the company's operations, or are in relation to past actions and events that have no implications for future results. So, yes, losses from discontinued operations are a cost to shareholders, but they would not be expected to be a recurring cost, and are not a cost initiated by management's current actions. Pension mark-to-market adjustments do impact shareholder funds, but these items can fluctuate either way over time and can reasonably be excluded from determination of underlying operating results. I regard acquisition-related amortization of intangibles as an arbitrary accounting-based allocation of a portion of profits, in an attempt to more correctly judge the return on capital invested in early periods. It does not represent a current cost to shareholders and is correctly added back for calculating economic performance.

Category B adjustments -

I am always concerned with these types of adjustments, particularly transformation and restructuring costs. These exercises are generally carried out with the promise of significant future cost savings. NCR President and CEO, Mike Hayford on Q4 2020 earnings call,

As we discussed last quarter, we have taken actions to replace the temporary cash cost savings when the pandemic began with permanent expense savings. We entered 2021 with $150 million in cost savings that are expected to drive margin expansion.

Looking at Table 1, non-GAAP results were up by ~$150 million from $211 million in FY-2020 to $364 million for FY-2021. This improvement is more likely to arise from a depressed result in FY-2020 due to COVID, rather than savings due to transformation and restructuring activities. In Q1-2022, the non-GAAP earnings of $45 million represent annualized earnings of $180 million, far below either FY-2020 or 2021 earnings. And the $45 million is after adding back of $19 million for losses related to Russia. This is a real cost to shareholders, not just an accounting adjustment, and it is hard to see Russia contributing to NCR's future results. Further detailed analyses below demonstrate NCR has neither cut operating costs or improved margins on an adjusted non-GAAP basis, despite $269 million spent by management on transformation and restructuring activities.

Changes in revenues and costs and expenses on an increment (decrement) basis over the period FY-2019 to Q1-2022

Table 2 below shows NCR performance over the period FY-2019 to FY-2021. FY-2019 is relevant as that is the year Blackstone exited its investment in NCR after ~4 years of undertaking a transformation and restructuring exercise to accelerate NCR's strategic transformation to an integrated software & services company.

Table 2

Table 2

Data sources: SEC filings

As for many companies, NCR current growth is a mirage as comparisons are to a 2020 year depressed by COVID. Comparing FY-2021 to FY-2019 reveals NCR total revenues have grown by just 3.5% over the two-year period, from $6,915 million to $7,156 million. It is encouraging the higher-margin Service revenues have grown by 17.2% over the two years, more than offsetting the decline of 18.2% in Product revenues. Despite the more favorable mix of Service and Product revenue in FY-2021, and the overall 3.5% growth in total revenue, total margin has barely changed from FY-2019. This is due to decline in margin percentage for both Product (20.8% down to 16.8%) and Service (33.3% down to 32.7%). For the two-year period, operating expenses have increased by 2.7% from FY-2019 $1, 208 million to FY-2021 $1,241 million. The result is non-GAAP income from operations has remained virtually flat at $751 million in FY-2021 compared to $758 million in FY 2019. From the foregoing analysis, it is difficult to see how there have been any savings from the transformation and restructuring, let alone the mooted $150 million for FY-2021 alone.

Table 3 below compares NCR performance for the periods Q1-2020 to Q1-2022.

Table 3

Table 3

Data sources: SEC filings

Revenue growth for Q1-2022 appears encouraging in comparison to corresponding quarters in both 2021 and 2020 (although Q1-2020 may have been depressed to some extent by the initial onset of COVID). Decline in gross margin percentages remains a concern. This is particularly so for Product with declines from 18.1% in 2020 to 16.0% in 2021 and 6.6% in 2022. Bear in mind these are all based on adjusted non-GAAP numbers with all unusual expenses including those related to Russia removed. Total operating expenses increased from $300 million for Q1-2020 to $325 million for Q1-2022. As for Table 2 analysis, it is difficult to see from Table 3 where any savings, let alone mooted savings of $150 million per year, are coming through in the figures.

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This article was written by

Robert Honeywill profile picture
7.91K Followers
I am a retired accountant with a background in large mining projects, from feasibility to full-scale operation, large scale primary industry and food processing, commercialisation of university intellectual property, and consulting to small businesses, government departments and insolvency practitioners. I have gained a wealth of experience from having the extreme good fortune to work, in a cooperative environment, with so many people far more intelligent and smarter than me; from scientists and engineers with MBA qualifications, to University professors across a range of disciplines. Through the accident of mergers, acquisitions and dispositions, I held, at various times, financial controller positions within Utah International Inc, General Electric Inc, and BHP Billiton organizations. If I have a special skill, it is in methods of assessment of projects with long lives, where costs are front loaded and/or future revenues are subject to considerable degrees of uncertainty. In relation to stocks, I have a theory, using projections to calculate a present value per share is far less useful for a share buying decision, than using those same projections for calculating future value per share for determining potential exit value and rate of return.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. I do not recommend that anyone act upon any investment information without first consulting an investment advisor and/or a tax advisor as to the suitability of such investments for their specific situation. Neither information nor any opinion expressed in this article constitutes a solicitation, an offer, or a recommendation to buy, sell, or dispose of any investment, or to provide any investment advice or service. An opinion in this article can change at any time without notice.

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