ATLANTA--(BUSINESS WIRE)--NCR Corporation (NYSE: NCR) reported financial results today for the three months ended September 30, 2020. Third quarter and other recent highlights include:

• Year to date cash flow provided by operating activities of $495 million ($226 million in 2019);
  Year to date free cash flow of $299 million (free cash outflow of $21 million in 2019)
• Revenue of $1.59 billion down 11%; Recurring revenue up 5%
• GAAP diluted EPS of $0.19; Non-GAAP diluted EPS of $0.54
• Executing strategy to shift the mix to more software, services and recurring revenue
• Reduced leverage and simplified capital structure

“Our third quarter performance reflects solid execution of our strategy and the resiliency of our solutions in a difficult operating environment that continues to be impacted by COVID-19,” said Michael Hayford, President and Chief Executive Officer. “We generated healthy recurring revenue growth in the quarter and implemented productivity improvement initiatives to drive accelerated margin expansion. EBITDA margin expanded to 15.7%, representing sequential and year-over-year improvement. In addition, we delivered strong free cash flow and have recently taken steps to reduce our leverage and simplify our capital structure. Looking ahead, we still face a challenging operating environment but we remain confident in our ability to execute our strategy and grow recurring revenue, drive cash flow generation and expand margins. Our liquidity position remains solid and we are focused on finishing the year strong. We are positioning NCR to drive success for our customers and long-term sustainable growth for our stakeholders.”

In this release, we use certain non-GAAP measures, including presenting certain measures on a constant currency basis. These non-GAAP measures include "free cash flow" and others with the words “non-GAAP," or "constant currency" in their titles. These non-GAAP measures are listed, described and reconciled to their most directly comparable GAAP measures under the heading "Non-GAAP Financial Measures" later in this release.

Third Quarter 2020 Operating Results

Revenue

Third quarter revenue of $1,589 million was down 11% year over year. Foreign currency fluctuations did not have an impact on the revenue comparison. The COVID-19 pandemic had a significant impact to revenue and the shift from selling perpetual software licenses to recurring revenue lowered revenue by $27 million. The following table shows revenue for the third quarter:

Banking revenue decreased 18% due to the continued impact of the COVID-19 pandemic driven by a 40% decline in ATM hardware revenue. An accelerated shift from selling perpetual software licenses to recurring revenue also impacted the year-over-year revenue comparison. Foreign currency fluctuations had an unfavorable impact of 1% on the revenue comparison.

Retail revenue increased 3% due to an increase in self-checkout revenue and services revenue, partially offset by lower point-of-sale revenue. Foreign currency fluctuations had a favorable impact of 1% on the revenue comparison.

Hospitality revenue decreased 20% driven primarily by a decline in hardware revenue. Foreign currency fluctuations did not have an impact on the revenue comparison.

Gross Margin

Third quarter gross margin of $427 million decreased from $507 million in the prior year period. Gross margin rate was 26.9%, down from 28.4%. Third quarter gross margin (non-GAAP) of $446 million decreased from $513 million in the prior year period. Gross margin rate (non-GAAP) was 28.1%, down from 28.8%. The decreases in gross margin rate, both GAAP and non-GAAP, were driven by the reduction in revenue impacted by the COVID-19 pandemic as well as the impact from the shift to recurring revenue.

Operating Expenses

Third quarter operating expenses of $309 million decreased from $335 million in the prior year period. Third quarter operating expenses (non-GAAP) of $288 million decreased from $311 million in the prior year period. The decreases in operating expenses, both GAAP and non-GAAP, were primarily due to a reduction from initiatives implemented earlier in the year to address the business impacts from COVID-19, including among others, salary reductions, elimination of certain contractors and curtailing travel, as well as productivity improvement initiatives executed late in the third quarter, partially offset by an increase in account receivable reserves.

Operating Income

Third quarter income from operations of $118 million decreased from income from operations of $172 million in the prior year period. Third quarter operating income (non-GAAP) of $158 million decreased from $202 million in the prior year period. The decreases in operating income, both GAAP and non-GAAP, were driven by impacts to gross margin and operating expenses described above.

Other Expense/Income

Third quarter other expense (GAAP) of $86 million increased from $64 million in the prior year period. The increase in other expense (GAAP) was primarily driven by $20 million associated with the early extinguishment of bonds. Third quarter other expense (non-GAAP) of $66 million increased from $58 million. The increase in other expense, (non-GAAP) was due to $7 million of higher interest expense, partially offset by a decrease in foreign currency losses.

Income Tax Expense/Benefit

Third quarter income tax expense of zero decreased from an income tax expense of $4 million in the prior year period. The third quarter effective income tax rate was 0%, compared to 4% in the prior year period. The decrease in income tax expense (GAAP) was primarily driven by lower income before taxes, partially offset a decrease in discrete tax benefits. In the prior year period, the discrete tax benefits were primarily the release of a $25 million valuation allowance related to certain non-US deferred tax assets.

Third quarter income tax expense (non-GAAP) of $14 million decreased from $34 million in the prior year period. The third quarter effective income tax rate (non-GAAP) was 15%, compared to 24% in the prior year period. The decrease in income tax expense (non-GAAP) was primarily driven by an increase in discrete tax benefits, as well as lower income before taxes.

Net Income from Continuing Operations Attributable to NCR

Third quarter net income from continuing operations attributable to NCR of $31 million decreased from $105 million in the prior year period. The decrease in net income from continuing operations attributable to NCR was driven by impacts to gross margin and operating expenses described above.

Adjusted EBITDA

Third quarter adjusted EBITDA of $249 million decreased from $278 million in the prior year period. The decrease in Adjusted EBITDA was driven by impacts to gross margin and operating expenses described above.

Cash Flow

Third quarter cash provided by operating activities of $212 million increased from cash provided by operating activities of $155 million in the prior year period. Third quarter free cash flow was $150 million, compared to free cash flow of $57 million in the prior year period. The increases in cash provided by operating activities and free cash flow were both driven primarily by working capital improvements.

Capital Structure Update

We are taking steps to reduce our finance leverage and simplify our capital structure. In August, we closed two new bond offerings for $650 million at 5.00% and $450 million at 5.25% with maturities of 8- and 10- years. We used a portion of the proceeds to redeem the $600 million 5.00% senior notes and the $700 million 6.375% senior notes. In total, we redeemed $1.3 billion of debt and issued $1.1 billion of debt to delever by $200 million. At the beginning of the fourth quarter we repurchased 132,000 shares of the outstanding Series A Convertible Preferred Stock for $144 million, which represented approximately 32% of NCR's outstanding convertible preferred stock. Additionally, early in the fourth quarter, we paid down $470 million of the revolver based on the strong free cash flow performance year to date and our confidence in the outlook for our business.

Impact from COVID-19

We continue to navigate through the challenging times presented by COVID-19, with a sharp focus on safeguarding our employees and helping our customers. Despite the unprecedented environment, our teams are executing at a high level and we are advancing our strategy.

While it is difficult to project how disruptive and protracted the pandemic will be, we do expect it will negatively impact our business for the remainder of 2020 and into 2021. We expect all of our segment results to be negatively impacted by the COVID-19 pandemic. We expect our hardware revenues to be most impacted while our recurring revenue streams is expected to be more resilient.

The COVID-19 pandemic is complex and rapidly evolving. The ultimate impact on our overall financial condition and operating results will depend on the currently unknowable duration and severity of the pandemic, as well as any additional governmental and public actions taken in response. We are in the process of evaluating the long-term impact that COVID-19 may have on our business model which may result in charges in the fourth quarter of 2020. These charges may include both cash and non-cash items. There can be no assurance that the measures we have taken or will take will completely offset the negative impact of COVID-19.

About NCR Corporation

NCR Corporation (NYSE: NCR) is a leading software- and services-led enterprise provider in the financial, retail and hospitality industries. NCR is headquartered in Atlanta, Ga., with 36,000 employees globally. NCR is a trademark of NCR Corporation in the United States and other countries.

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