1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1997
Commission File Number 001-00395
NCR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 31-0387920
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1700 SOUTH PATTERSON BLVD.
DAYTON, OHIO 45479
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (937) 445-5000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X]
Number of shares of common stock, $.01 par value, outstanding as of July
31, 1997 was 102,363,901.
2
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
DESCRIPTION PAGE
----------- ----
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited)
Three and six months ended June 30, 1997 and 1996 3
Condensed Consolidated Balance Sheets (Unaudited)
June 30, 1997 and December 31, 1996 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six months ended June 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 8
PART II. OTHER INFORMATION
DESCRIPTION PAGE
----------- ----
Item 6. Exhibits and Reports on Form 8-K 13
Signature 14
2
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NCR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------- ------------------------
1997 1996 1997 1996
---- ---- ---- ----
REVENUES
Sales $ 919 $ 937 $ 1,633 $ 1,812
Services 726 742 1,401 1,453
------- ------- ------- -------
TOTAL REVENUES 1,645 1,679 3,034 3,265
------- ------- ------- -------
OPERATING EXPENSES
Cost of sales 647 663 1,136 1,300
Cost of services 559 552 1,076 1,096
Selling, general, and administrative expenses 362 356 676 711
Research and development expenses 96 97 183 184
------- ------- ------- -------
TOTAL OPERATING EXPENSES 1,664 1,668 3,071 3,291
------- ------- ------- -------
INCOME (LOSS) FROM OPERATIONS (19) 11 (37) (26)
Interest expense 4 13 6 26
Other (income), net (25) (6) (30) (3)
------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES 2 4 (13) (49)
Income tax expense 6 22 7 34
------- ------- ------- -------
NET LOSS $ (4) $ (18) $ (20) $ (83)
======= ======= ======= =======
NET LOSS PER COMMON SHARE $ (.04) $ (.18) $ (.20) $ (.82)
======= ======= ======= =======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (IN MILLIONS) 102.1 101.4 101.8 101.4
======= ======= ======= =======
See accompanying notes.
3
4
NCR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
JUNE 30 DECEMBER 31
1997 1996
------- -----------
ASSETS
Current assets
Cash and short-term investments $ 1,156 $1,203
Accounts receivable, net 1,446 1,457
Inventories 517 439
Other current assets 244 219
------- ------
TOTAL CURRENT ASSETS 3,363 3,318
Rental equipment and service parts, net 261 277
Property, plant, and equipment, net 885 930
Other assets 776 755
------- ------
TOTAL ASSETS $ 5,285 $5,280
======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 56 $ 28
Accounts payable 303 352
Payroll and benefits liabilities 330 383
Customer deposits and deferred service revenue 417 348
Other current liabilities 834 856
------- ------
TOTAL CURRENT LIABILITIES 1,940 1,967
Long-term debt 36 48
Pension and indemnity liabilities 310 300
Postretirement and postemployment benefits liabilities 802 777
Other liabilities 469 503
Minority interests 298 289
------- ------
TOTAL LIABILITIES 3,855 3,884
------- ------
Commitments and Contingencies
SHAREHOLDERS' EQUITY
Common stock, par value $.01 per share (authorized: 500
million shares; issued and outstanding: 102.3 million
shares at June 30, 1997 and 101.4 million shares at
December 31, 1996) 1 1
Paid-in capital 1,412 1,394
Retained earnings (deficit) (20) --
Other 37 1
------- ------
TOTAL SHAREHOLDERS' EQUITY 1,430 1,396
------- ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,285 $5,280
======= ======
See accompanying notes.
4
5
NCR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
DOLLARS IN MILLIONS
SIX MONTHS ENDED JUNE 30
------------------------
1997 1996
---- ----
OPERATING ACTIVITIES
Net loss $ (20) $ (83)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 186 175
Changes in operating assets and liabilities:
Receivables 11 733
Inventories (78) 61
Other operating assets and liabilities (25) (537)
------- -----
NET CASH PROVIDED BY OPERATING ACTIVITIES 74 349
------- -----
INVESTING ACTIVITIES
Purchases of short-term investments, net (277) (17)
Expenditures for service parts (66) (58)
Expenditures for property, plant, and equipment (83) (173)
Other investing activities 15 18
------- -----
NET CASH USED IN INVESTING ACTIVITIES (411) (230)
======= =====
FINANCING ACTIVITIES
Short-term borrowings, net 28 (6)
Repayments of long-term debt, net (12) (231)
Transfers from AT&T, net -- 595
Other financing activities 18 --
------- -----
NET CASH PROVIDED BY FINANCING ACTIVITIES 34 358
------- -----
Effect of exchange rate changes on cash and cash equivalents (21) (7)
------- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (324) 470
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,163 314
------- -----
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 839 $ 784
======= =====
See accompanying notes.
5
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by NCR
Corporation ("NCR") without audit pursuant to the rules and regulations of the
Securities and Exchange Commission and, in the opinion of management, include
all adjustments (consisting of normal recurring adjustments) necessary for a
fair presentation of the consolidated results of operations, financial position,
and cash flows for each period presented. The consolidated results for interim
periods are not necessarily indicative of results to be expected for the full
year. These financial statements should be read in conjunction with NCR's 1996
Annual Report to Shareholders and Form 10-K for the year ended December 31,
1996.
2. SUPPLEMENTAL BALANCE SHEET INFORMATION
June 30 December 31
1997 1996
------- -----------
(In millions)
CASH AND SHORT-TERM INVESTMENTS
Cash and cash equivalents $ 839 $1,163
Short-term investments 317 40
------ ------
Total cash and short-term investments $1,156 $1,203
====== ======
INVENTORIES
Finished goods $ 342 $ 297
Work in process and raw materials 175 142
------ ------
Total inventories $ 517 $ 439
====== ======
3. CONTINGENCIES
In the normal course of business, NCR is subject to various regulations,
proceedings, lawsuits, claims, and other matters, including actions under laws
and regulations related to the environment and health and safety, among others.
Such matters are subject to the resolution of many uncertainties, and
accordingly, outcomes are not predictable with assurance. Although NCR believes
that amounts provided in its financial statements are adequate in light of the
probable and estimable liabilities, there can be no assurances that the amounts
required to discharge alleged liabilities from various lawsuits, claims, legal
proceedings, and other matters, and to comply with applicable laws and
regulations, will not exceed the amounts reflected in NCR's consolidated
financial statements or will not have a material adverse effect on its
consolidated financial condition, results of operations, or cash flows. Any
amounts of costs that may be incurred in excess of those amounts provided as of
June 30, 1997 cannot presently be determined.
LEGAL PROCEEDINGS
As of June 30, 1997, there were a number of individual product liability claims
pending against NCR alleging that its products, including personal computers,
supermarket bar code scanners, cash registers, and check encoders, caused
so-called "repetitive strain injuries" or "cumulative trauma disorders," such as
carpal tunnel syndrome. As of June 30, 1997, approximately 80 such claims were
pending against NCR. In such lawsuits, the plaintiff typically alleges that the
injury was caused by the design of the product at issue or a failure to warn of
alleged hazards. These plaintiffs generally seek compensatory damages and, in
many cases, punitive damages. Most other manufacturers of these products have
also been sued by plaintiffs on similar theories. Ultimate resolution of the
litigation against NCR may substantially depend on the outcome of similar
matters of this type pending in various courts. NCR has denied the merits and
basis for the pending claims against it and intends to continue to contest these
cases vigorously.
NCR was named as one of the defendants in a purported class-action suit filed in
November 1996 in Florida. The complaint seeks, among other things, damages from
the defendants in the aggregate amount of $200 million, trebled, plus attorneys'
fees, based on state antitrust and common-law claims of unlawful restraints of
trade, monopolization, and unfair business practices. The portions of the
complaint pertinent to NCR, among other things, assert a purported agreement
between Siemens-Nixdorf entities (Siemens) and NCR regarding the servicing of
certain "ultra-high speed printers" manufactured by Siemens and the agreement's
impact upon independent service organizations, brokers, and end-users of such
printers. The amount of any liabilities or other costs, if any, that may be
incurred in connection with this matter cannot currently be determined.
6
7
ENVIRONMENTAL MATTERS
NCR's facilities and operations are subject to a wide range of environmental
protection laws in the U.S. and other countries related to solid and hazardous
waste disposal, the control of air emissions and water discharges, and the
mitigation of impacts to the environment from past operations and practices. NCR
has investigatory and remedial activities underway at a number of currently and
formerly owned or operated facilities to comply, or to determine compliance,
with applicable environmental protection laws. NCR has been identified, either
by a government agency or by a private party seeking contribution to site
cleanup costs, as a potentially responsible party (PRP) at a number of sites
pursuant to a variety of statutory schemes, both State and Federal, including
the Federal Water Pollution Control Act (FWPCA) and comparable State statutes,
and the Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended (CERCLA), and comparable State statutes.
In February 1996, NCR received notice from the U.S. Department of the Interior,
Fish & Wildlife Service (USF&WS) that USF&WS considers NCR a PRP under the FWPCA
and CERCLA with respect to alleged natural resource restoration and damages to
the Fox River and related Green Bay environment (Fox River System) due to, among
other things, sediment contamination in the Fox River System allegedly resulting
from liability arising out of NCR's former carbonless paper manufacturing
operations at Appleton and Combined Locks, Wisconsin. USF&WS has also notified a
number of other manufacturing companies of their status as PRPs under the FWPCA
and CERCLA for natural resource restoration and damages in the Fox River System
resulting from their ongoing or former paper manufacturing operations in the Fox
River Valley. In addition, NCR has been identified, along with a number of other
companies, by the Wisconsin Department of Natural Resources (State Trustee) with
respect to alleged liability arising out of alleged past discharges that have
contaminated sediments in the Fox River System. In December 1996, USF&WS, two
Native American tribes, and other federal agencies (Federal Trustees) invited
NCR, the other PRP companies, and the State Trustee to enter into settlement
negotiations over these environmental claims. In January 1997, NCR and the other
PRP companies reached agreement on an interim settlement with the State Trustee.
The Federal Trustees are not party to that agreement. In January 1997, the
Federal Trustees notified NCR and the other PRPs of the Federal Trustees' intent
to commence a natural resource damages lawsuit under CERCLA and the FWCPA within
60 days of the notice, unless a negotiated resolution of their claims was
reached. In March 1997, NCR and the other identified PRPs entered into a tolling
agreement with the Federal Trustees, effectively staying the 60-day notice for
an additional 60 days. In July 1997, the State Trustee, the United States
Environmental Protection Agency (USEPA), and the Federal Trustees entered into a
Memorandum of Agreement (MOA). The MOA states that it provides a framework under
which the parties to that agreement can coordinate remedial and restoration
studies and actions regarding the Fox River, including the assertion of claims
against the PRPs. In June 1997, USEPA announced its intention to propose the Fox
River for inclusion on the National Priorities List; shortly thereafter, the
State of Wisconsin announced its opposition to such listing. In July 1997, the
USEPA sent the PRPs a Special Notice Letter calling for formal negotiations on
the preparation of a remedial investigation and feasibility study (RI/FS) on the
Fox River; on July 15, 1997, the PRPs agreed to enter into such negotiations.
The Special Notice Letter also requested an extension of the tolling agreement
for an additional period. The State Trustee has recently proposed that it, the
PRPs, USEPA, and the Federal Trustees enter into a more comprehensive agreement
by early 1998. NCR expects there will be further discussions over the next few
months about the preparation of an RI/FS and the State Trustee's proposal for a
more comprehensive agreement. An estimate of NCR's ultimate share, if any, of
such cleanup costs or natural resource restoration and damages liability cannot
be made with certainty at this time due to (i) the unknown magnitude, scope, and
source of any alleged contamination, (ii) the absence of selected remedial
objectives and methods, and (iii) the uncertainty of the amount and scope of any
alleged natural resource restoration and damages. NCR believes that there are
additional PRPs who may be liable for such natural resource damages and
remediation costs. Further, in 1978, NCR sold the business to which the claims
apply and believes the claims described above are the responsibility of the
buyer and its former parent company pursuant to the terms of the sale agreement.
In this connection, NCR has commenced litigation against the buyer to enforce
its position.
It is difficult to estimate the future financial impact of environmental laws,
including potential liabilities. NCR accrues environmental provisions when it is
probable that a liability has been incurred and the amount of the liability is
reasonably estimable. Management expects that the amounts provided as of June
30, 1997 will be paid out over the period of investigation, negotiation,
remediation, and restoration for the applicable sites, which may be 30 years or
more. Provisions for estimated losses from environmental remediation are,
depending on the site, based primarily on internal and third-party environmental
studies, estimates as to the number and participation level of any other PRPs,
the extent of the contamination, and the nature of required remedial and
restoration actions. Accruals are adjusted as further information develops or
circumstances change. The amounts provided for environmental matters in NCR's
consolidated financial statements are the estimated gross undiscounted amount of
such liabilities, without deductions for insurance or third-party indemnity
claims. In those cases where insurance carriers or third-party indemnitors have
agreed to pay any amounts and management believes that collectibility of such
amounts is probable, the amounts are reflected as receivables in the
consolidated financial statements.
7
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following table displays selected components of NCR's consolidated
statements of operations, expressed as a percentage of revenue.
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------- ------------------------
1997 1996 1997 1996
----- ----- ----- -----
Sales revenue 55.9% 55.8% 53.8% 55.5%
Services revenue 44.1% 44.2% 46.2% 44.5%
----- ----- ----- -----
Total revenue 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Sales gross margin 29.6% 29.2% 30.4% 28.3%
Services gross margin 23.0% 25.6% 23.2% 24.6%
----- ----- ----- -----
Total gross margin 26.7% 27.6% 27.1% 26.6%
Selling, general, and administrative expenses 22.0% 21.2% 22.3% 21.8%
Research and development expenses 5.8% 5.8% 6.0% 5.6%
----- ----- ----- -----
Operating income (loss) (1.1)% 0.6% (1.2)% (0.8)%
===== ===== ===== =====
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
REVENUE
Revenue for the three months ended June 30, 1997 was $1,645 million, a decrease
of 2% from the second quarter of 1996. When adjusted for the unfavorable impact
of quarter-to-quarter changes in foreign currency exchange rates, revenue
increased by 1% compared to the second quarter of 1996.
Sales revenue decreased 2% to $919 million in the second quarter of 1997
compared to the second quarter of 1996. Revenue gains from the year ago quarter
in retail products of 25% and financial products of 13% were more than offset by
revenue declines in computer products of 19% and systemedia products of 9%.
Revenue increased for NCR's enterprise servers used in scalable data warehousing
applications but was not sufficient to offset declines in other parts of the
computer business. Services revenue decreased 2% to $726 million in the second
quarter of 1997 compared to the second quarter of 1996. Revenue from
professional services increased by 9% in the second quarter of 1997 from the
year ago quarter despite the adverse currency rate impacts. The increase in
professional services revenue was not sufficient to offset a decline of 3% in
customer services revenue. Customer services revenue was impacted by the
decrease in sales revenue and unfavorably influenced by foreign currency rate
impacts.
Revenue in the second quarter of 1997 compared with the second quarter of 1996
increased by 1% in the Asia Pacific region, decreased by 2% in the Americas, and
decreased by 6% in Europe/Middle East/Africa (EMEA). When adjusted for the
unfavorable impact of quarter-to-quarter changes in foreign currency exchange
rates, revenue on a local currency basis increased 8% in Asia Pacific and
increased 1% in EMEA. The Americas region made up 48% of NCR's total second
quarter 1997 customer revenue, EMEA region comprised 29%, and Asia Pacific
region 23%.
OPERATING EXPENSES
Gross margin as a percentage of revenue decreased 0.9 percentage points from
27.6% in the second quarter of 1996 to 26.7% in the second quarter of 1997.
Sales gross margins increased 0.4 percentage points to 29.6% for the second
quarter of 1997. Services gross margins were down 2.6 percentage points to 23.0%
for the second quarter of 1997. Services gross margins declined primarily due to
lower reported revenue against a cost structure developed to support higher
revenue levels.
Selling, general, and administrative expenses increased $6 million or 2% in the
second quarter of 1997 from the year ago quarter. As a percentage of revenue,
selling, general, and administrative expenses were 22.0% in the second quarter
of 1997 and 21.2% in the same period of 1996. The increase was entirely driven
by additional investments in selling expense; general and administrative expense
declined from the year ago quarter. Research and development expenses decreased
$1 million to $96 million in the second quarter of 1997. As a percentage of
revenue, research and development expenses were 5.8% in both the second quarter
of 1997 and 1996.
8
9
INCOME (LOSS) BEFORE INCOME TAXES
NCR reported an operating loss of $19 million in the second quarter of 1997
compared to an operating profit of $11 million in the second quarter of 1996.
Interest expense was $4 million in the second quarter of 1997 compared to $13
million in the second quarter of 1996. The decrease in interest expense was the
result of reduced debt levels in 1997 compared to 1996. Other income, net of
expenses, was $25 million in the second quarter of 1997 compared to $6 million
in the second quarter of 1996. The increase in other income results from higher
interest income on increased levels of cash and short-term investments and
positive impacts in 1997 of certain foreign exchange contracts and insurance
proceeds related to a prior year loss.
NCR reported income before taxes of $2 million in the second quarter of 1997
compared to a income before taxes of $4 million in the second quarter of 1996.
NET LOSS
The provision for income taxes was $6 million in the second quarter of 1997
compared to $22 million in the second quarter of 1996. NCR's tax provision
results from a normal provision for income taxes in those foreign tax
jurisdictions where its subsidiaries are profitable, and an inability to reflect
tax benefits from net operating losses and tax credits, primarily in the United
States.
Net loss was $4 million in the second quarter of 1997 and $18 million in the
same period in 1996.
SIX MONTHS 1997 COMPARED TO SIX MONTHS 1996
REVENUE
Revenue for the first six months of 1997 was $3,034 million, a decrease of 7%
from the comparable period last year. When adjusted for the unfavorable impact
in foreign currency exchange rates, revenue decreased by 4% compared to the
year-to-date period in 1996.
Sales revenue decreased 10% to $1,633 million in the first six months of 1997
compared to the same period of 1996. Revenue gains in retail products of 10% and
financial products of 2% were more than offset by revenue declines in computer
products of 16%, PCs/entry level server products of 27% and systemedia products
of 9%. The decrease in PCs\entry level server products revenue was due to NCR's
decision to longer sell these products through high-volume indirect channels.
Services revenue decreased 4% to $1,401 million in the first six months of 1997
compared to the same period of 1996. Revenue for professional services increased
by 7% in the first six months of 1997 despite the adverse currency rate impacts.
The increase in professional services revenue was not sufficient to offset a
decline of 5% in customer services revenue.
Revenue in the first six months of 1997 compared with the first six months of
1996 increased by 1% in the Asia Pacific region, decreased by 7% in the
Americas, and decreased by 12% in EMEA. When adjusted for the unfavorable impact
in foreign currency exchange rates, revenue on a local currency basis increased
8% in Asia Pacific and decreased 5% in EMEA. The Americas region made up 49% of
NCR's total first six months 1997 revenues, EMEA region comprised 29%, and Asia
Pacific region comprised 22%.
OPERATING EXPENSES
Gross margin as a percentage of revenue increased 0.5 percentage points from
26.6% in the first six months of 1996 to 27.1% in the first six months of 1997.
Sales gross margins increased 2.1 percentage points to 30.4% for the first six
months of 1997. Services gross margins were down 1.4 percentage points to 23.2%
for the first six months of 1997.
Selling, general, and administrative expenses decreased $35 million or 5% in the
first six months of 1997. As a percentage of revenue, selling, general, and
administrative expenses were 22.3% in the first six months of 1997 and 21.8% in
the same period of 1996. The decrease in 1997 was primarily the result of NCR's
continued focus on expense discipline and the favorable impact on expenses of
foreign currency exchange rates. Research and development expenses decreased $1
million to $183 million in the first six months of 1997. As a percentage of
revenue, research and development expenses were 6.0% in the first six months of
1997 and 5.6% in the first six months of 1996.
9
10
INCOME (LOSS) BEFORE INCOME TAXES
NCR reported an operating loss of $37 million in the first six months of 1997
compared to an operating loss of $26 million in the first six months of 1996.
Interest expense was $6 million in the first six months of 1997 compared to $26
million in the second quarter of 1996. Other income, net of expenses, was $30
million in the first six months of 1997 compared to $3 million in the first six
months of 1996.
NCR reported a loss before taxes of $13 million in the first six months of 1997
compared to a loss before taxes of $49 million in the first six months of 1996.
NET LOSS
The provision for income taxes was $7 million in the first six months of 1997
compared to $34 million in the first six months of 1996. NCR's tax provision
results from a normal provision for income taxes in those foreign tax
jurisdictions where its subsidiaries are profitable, and an inability to reflect
tax benefits from net operating losses and tax credits, primarily in the United
States.
Net loss was $20 million in the first six months of 1997 and $83 million in the
same period in 1996.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
NCR's cash and short-term investments totaled $1,156 million at June 30, 1997
compared to $1,203 million at December 31, 1996.
Net cash provided by operating activities was $74 million in the first six
months of 1997 and $349 million in the first six months of 1996. Receivable
balances were essentially flat at June 30, 1997 compared to December 31, 1996,
but decreased $733 million in the first six months of 1996 due largely to NCR's
decision to no longer sell PC/entry level servers through high-volume indirect
channels and a reduction in receivable balances due to the sale of NCR's
Switzerland data services business. Inventory balances increased $78 million in
the first six months of 1997 compared to a decrease of $61 million in the
comparable period of 1996. The decrease in 1996 resulted from overall improved
supply line management and an increased focus on inventory management practices.
The increase in inventory in the first six months of 1997 is consistent with
historical inventory increases generally experienced during the first three
quarters of the year. Cash required for other operating assets and liabilities
decreased from $537 million in the first six months of 1996 to $25 million in
the same period of 1997 primarily due to payments made in the first half of 1996
relating to NCR's 1995 restructuring.
Net cash used in investing activities was $411 million in the first six months
of 1997 and $230 million in the same period of 1996. In 1997, NCR purchased $277
million of short-term investments as a part of its overall cash management
strategy. Capital expenditures were $149 million for the first half of 1997 and
$231 million for the comparable period in 1996. Capital expenditures generally
relate to expenditures for reworkable parts used to service customer equipment,
expenditures for equipment and facilities used in manufacturing and research and
development, and expenditures for facilities to support sales and marketing
activities.
Net cash provided by financing activities was $34 million in the first six
months of 1997 and $358 million in the same period of 1996. In 1996, NCR relied
on AT&T to provide financing for its operations. The cash flows reflected as
transfers from AT&T in the consolidated statements of cash flows for 1996
represent capital infusions that were used to fund NCR's ongoing operations. In
addition, $231 million of debt was repaid in the first six months of 1996.
NCR believes that cash flows from operations, its credit facility, and other
short- and long-term financings, if any, will be sufficient to satisfy its
future working capital, research and development, capital expenditure, and other
financing requirements for the foreseeable future.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Management's Discussion and Analysis contains information based on management's
beliefs and forward-looking statements that involve a number of risks,
uncertainties, and assumptions. There can be no assurances that actual results
will not differ materially from the forward-looking statements as a result of
various factors, including, but not limited to, the following:
10
11
NCR's ability to improve its operating results depends significantly upon its
ability to profitably grow revenue, improve gross margins, maintain expense
discipline, and improve its effective tax rate. There can be no assurances that
NCR will not face unforeseen costs, delays or other impediments in the
implementation of its strategy and business plan, that its strategy and business
plan will generate the expected benefits, or that NCR's strategy will be
successful. The success of NCR's strategy will also depend, among other things,
upon the technologies, actions, products, and strategies of NCR's current and
future competitors, general domestic and foreign economic and business
conditions, the condition of the information technology industry and the
industries in which NCR's customers operate, and other factors, including those
described below.
The markets for many of NCR's offerings are characterized by rapidly changing
technology, evolving industry standards and a movement toward common industry
standards making differentiation more difficult, frequent new product
introductions, and the increasing commoditization of products, including servers
and other computer products. NCR's operating results depend to a significant
extent on its ability to design, develop, or otherwise obtain and introduce new
products, services, systems, and solutions that are competitive in the
marketplace. The success of these and other new offerings is dependent on many
factors, including proper identification of customer needs, cost, timely
completion and introduction, differentiation from offerings of NCR's
competitors, and market acceptance. The ability to successfully introduce new
competitive products, services offerings, and solutions could have a significant
impact on NCR's results of operations.
Due to NCR's focus on providing complex integrated solutions to customers, NCR
frequently relies on third parties to provide significant elements of NCR's
offerings, which must be integrated with the elements provided by NCR. NCR has
from time to time formed alliances with third parties that have complementary
products, services, and skills. These business practices often require NCR to
rely on the performance and capabilities of third parties which are beyond NCR's
control. NCR's reliance on third parties introduces a number of risks to NCR's
business. In addition to the risk of non-performance by alliance partners or
other third parties, the need to integrate elements provided by NCR with those
of third parties could result in delays in the introduction of new products,
services, systems, or solutions. Further, the failure of any of these third
parties to provide products or services that conform to NCR's specifications or
quality standards could impair the ability of NCR to offer solutions that
include such third party elements or may impair the quality of such solutions.
Any of these factors could have an adverse impact on NCR's financial condition
or results of operations.
A number of NCR's products and systems rely on specific suppliers for
microprocessors, operating systems, and other central components. For example,
NCR's computer systems are based on microprocessors and related peripheral chip
technology designed by Intel Corporation. NCR incorporates UNIX(1) and Microsoft
Windows NT(2) operating systems into its products and utilizes Oracle
Corporation and Informix Corporation's commercial databases for NCR's Scalable
Data Warehousing and High Availability Transaction Processing solutions. The
failure of any of these technologies to remain competitive, either individually
or as part of a system or solution, or the failure of these providers to
continue such technologies, could adversely impact NCR's financial condition or
results of operations.
NCR also uses many standard parts and components in its products and systems,
and believes there are a number of competent vendors for most parts and
components. However, a number of important components are developed by and
purchased from single sources due to price, quality, technology, or other
considerations. In some cases, those components are available only from single
sources. The process of substituting new producers of such parts could adversely
impact NCR's results of operations.
NCR faces significant competition in the geographic areas where it operates. Its
markets are characterized by continuous, rapid technological change, short
product life cycles, frequent product performance improvements, price
reductions, and the need to introduce products in a timely manner in order to
take advantage of market opportunities. Product development or manufacturing
delays, changes in product costs, and delays in customer purchases of existing
products in anticipation of new product introductions are among the factors that
may adversely impact the transition from current products to new products. In
addition, the timing of introductions of new products and services offered by
NCR's competitors could impact the future operating results of NCR, particularly
when these introductions coincide or precede NCR's own new products, services,
systems and solutions introductions. Likewise, some of NCR's new products,
services, systems and solutions may replace or compete with NCR's current
offerings. NCR's future operating results will also depend upon its ability to
forecast the proper mix of products, services, systems and solutions to meet the
demands of its customers.
The significant competition in the information technology industry has decreased
gross margins for many companies in recent years and could continue to do so in
the future. Future operating results will depend in part on NCR's ability to
mitigate such margin pressure by maintaining a favorable mix of products,
services, systems, solutions and other revenues and by achieving component cost
reductions and operating efficiencies. Changes in the mix of products, services,
systems, and solutions revenues could cause operating results to vary. NCR's
future operating results may depend on its recognition of and expansion into new
and emerging markets. Failure to recognize and penetrate these markets in a
timely fashion with the proper mix of products, services, systems, and solutions
could have an adverse affect on NCR's financial condition or results of
operations.
NCR's success is dependent on, among other things, its ability to attract and
retain the highly-skilled technical, sales, and other personnel necessary to
enable NCR to successfully develop and sell new and existing products, services,
systems and solutions.
11
12
NCR's sales are historically seasonal, with revenue higher in the fourth quarter
of each year. Consequently, during the three quarters ending in March, June, and
September, NCR has historically experienced less favorable results than in the
quarter ending in December. Such seasonality also causes NCR's working capital
cash flow requirements to vary from quarter to quarter depending on the
variability in the volume, timing, and mix of product sales. In addition, in
many quarters, a large portion of NCR's revenue is realized in the third month
of the quarter. Operating expenses are relatively fixed in the short term and
often cannot be materially reduced in a particular quarter if revenue falls
below anticipated levels for such quarter.
NCR's foreign operations are subject to a number of risks inherent in operating
abroad. Such operations may be adversely affected by a variety of factors, many
of which cannot be readily foreseen and over which NCR has no control. A
significant change in the value of the dollar or other functional currencies
against the currency of one or more countries where NCR recognizes revenues or
earnings or maintains net asset investments may adversely impact future
operating results. NCR attempts to mitigate a portion of such changes through
the use of foreign currency contracts.
NCR's tax rate is dependent upon the proportion of taxable earnings derived from
those international subsidiaries where NCR is historically profitable and
reports a normal provision for income taxes, in relation to its total
consolidated results of operations. To the extent that NCR is unable to reflect
tax benefits from net operating losses and tax credits, arising primarily in the
United States, to offset provisions for income taxes attributable to its
profitable foreign subsidiaries, NCR's overall effective tax rate could
increase.
In the normal course of business, NCR is subject to regulations, proceedings,
lawsuits, claims, and other matters, including actions under laws and
regulations related to the environment and health and safety, among others. Such
matters are subject to the resolution of many uncertainties, and accordingly,
outcomes are not predictable with assurance. Although NCR believes that amounts
provided in its financial statements are currently adequate in light of the
probable and estimable liabilities, there can be no assurances that the amounts
required to discharge alleged liabilities from lawsuits, claims, and other legal
proceedings and environmental matters, and to comply with applicable
environmental laws, will not impact future operating results.
(1) UNIX is a registered trademark in the United States and other countries,
exclusively licensed through X/OPEN Company Limited.
(2) WINDOWS NT is a registered trademark of Microsoft Corporation.
12
13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Letter Agreement with Lars Nyberg Regarding Employee
Benefits, dated May 9, 1997.
10.2 Change-in-Control Agreement by and between NCR
Corporation and Lars Nyberg.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
On June 24, 1997, NCR filed a Current Report on Form 8-K with
respect to its expected second quarter 1997 financial results.
On July 22, 1997, NCR filed a Current Report on Form 8-K,
including unaudited condensed consolidated balance sheets as
of June 30, 1997, and unaudited condensed consolidated
statements of operations, consolidated revenue summary, and
condensed consolidated statements of cash flows for the
quarter ended June 30, 1997, with respect to its Press Release
on its second quarter financial results.
13
14
SIGNATURE
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NCR CORPORATION
Date: August 13, 1997 By: /s/ John L. Giering
--------------------------------------
John L. Giering, Senior Vice-President
and Chief Financial Officer
14
15
EXHIBIT INDEX
Exhibit No. Description
10.1 Letter Agreement with Lars Nyberg Regarding Employee
Benefits, dated May 9, 1997.
10.2 Change-in-Control Agreement by and between NCR
Corporation and Lars Nyberg.
27 Financial Data Schedule