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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 SEPTEMBER 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
October 31, 1997 was 102,797,841.
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NCR CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
DESCRIPTION PAGE
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited)
Three and nine months ended September 30, 1997 and 1996 3
Condensed Consolidated Balance Sheets (Unaudited)
September 30, 1997 and December 31, 1996 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 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. (a) Exhibits 13
(b) Reports on Form 8-K 13
Signature 14
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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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------ ------------
1997 1996 1997 1996
---- ---- ---- ----
REVENUES
Sales $ 866 $ 926 $ 2,499 $ 2,738
Services 697 732 2,098 2,185
------- ------- ------- -------
TOTAL REVENUES 1,563 1,658 4,597 4,923
------- ------- ------- -------
OPERATING EXPENSES
Cost of sales 608 616 1,744 1,916
Cost of services 524 560 1,600 1,656
Selling, general, and administrative expenses 351 364 1,027 1,075
Research and development expenses 96 89 279 273
------- ------- ------- -------
TOTAL OPERATING EXPENSES 1,579 1,629 4,650 4,920
------- ------- ------- -------
INCOME (LOSS) FROM OPERATIONS (16) 29 (53) 3
Interest expense 4 14 10 40
Other (income), net (13) (14) (43) (17)
------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES (7) 29 (20) (20)
Income tax expense 2 62 9 96
------- ------- ------- -------
NET LOSS $ (9) $ (33) $ (29) $ (116)
======= ======= ======= =======
NET LOSS PER COMMON SHARE $ (.09) $ (.32) $ (.28) $ (1.14)
======= ======= ======= =======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (IN MILLIONS) 102.5 101.4 102.0 101.4
======= ======= ======= =======
See accompanying notes.
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NCR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
SEPTEMBER 30 DECEMBER 31
1997 1996
------- -------
ASSETS
Current assets
Cash and short-term investments $ 1,027 $ 1,203
Accounts receivable, net 1,363 1,457
Inventories 540 439
Other current assets 236 219
------- -------
TOTAL CURRENT ASSETS 3,166 3,318
Rental equipment and service parts, net 245 277
Property, plant, and equipment, net 873 930
Other assets 841 755
------- -------
TOTAL ASSETS $ 5,125 $ 5,280
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 69 $ 28
Accounts payable 300 352
Payroll and benefits liabilities 345 383
Customer deposits and deferred service revenue 330 348
Other current liabilities 810 856
------- -------
TOTAL CURRENT LIABILITIES 1,854 1,967
Long-term debt 36 48
Pension and indemnity liabilities 306 300
Postretirement and postemployment benefits liabilities 817 777
Other liabilities 475 503
Minority interests 279 289
------- -------
TOTAL LIABILITIES 3,767 3,884
------- -------
Commitments and Contingencies
SHAREHOLDERS' EQUITY
Common stock, par value $.01 per share (authorized: 500
million shares; issued and outstanding: 102.7 million
shares at September 30, 1997 and 101.4 million shares at
December 31, 1996) 1 1
Paid-in capital 1,423 1,394
Retained earnings (deficit) (29) --
Other (37) 1
------- -------
TOTAL SHAREHOLDERS' EQUITY 1,358 1,396
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,125 $ 5,280
======= =======
See accompanying notes.
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NCR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
DOLLARS IN MILLIONS
NINE MONTHS ENDED
SEPTEMBER 30
1997 1996
------- -------
OPERATING ACTIVITIES
Net loss $ (29) $ (116)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 278 275
Changes in operating assets and liabilities:
Receivables 94 532
Inventories (101) 62
Other operating assets and liabilities (218) (449)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 24 304
------- -------
INVESTING ACTIVITIES
Short-term investments, net (214) (49)
Expenditures for service parts (90) (177)
Expenditures for property, plant, and equipment (125) (133)
Other investing activities 9 42
------- -------
NET CASH USED IN INVESTING ACTIVITIES (420) (317)
------- -------
FINANCING ACTIVITIES
Short-term borrowings, net 41 (3)
Repayments of long-term debt, net (12) (240)
Transfers from AT&T, net -- 638
Other financing activities 29 --
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 58 395
------- -------
Effect of exchange rate changes on cash and cash equivalents (52) (1)
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (390) 381
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,163 314
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 773 $ 695
======= =======
See accompanying notes.
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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
September 30 December 31
1997 1996
(In millions) ------ ------
CASH AND SHORT-TERM INVESTMENTS
Cash and cash equivalents $ 773 $1,163
Short-term investments 254 40
------ ------
Total cash and short-term investments $1,027 $1,203
====== ======
INVENTORIES
Finished goods $ 373 $ 297
Work in process and raw materials 167 142
------ ------
Total inventories $ 540 $ 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 various uncertainties, and
accordingly, outcomes are not predictable with assurance. Although NCR believes
that amounts provided in its consolidated 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
costs that may be incurred in excess of those amounts provided as of September
30, 1997 cannot currently be determined.
LEGAL PROCEEDINGS
As of September 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 "musculoskeletal disorders,"
such as carpal tunnel syndrome. As of September 30, 1997, approximately 70 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.
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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) 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 certain other federal agencies (Federal Trustees)
invited NCR, the other PRP companies, and the State 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. 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 could be
reached. In July 1997, the State, 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. NCR and the other
identified PRPs have entered into a series of tolling and standstill agreements
with the Federal Trustees, the State, and USEPA, effectively stopping any
judicial or administrative actions so long as such agreements remain in effect
(currently until December 2, 1997). The State 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'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
September 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.
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4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In October 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants (AICPA) issued Statement of Position
(SOP) 97-2, "Software Revenue Recognition", which supersedes SOP 91-1 of the
same title. SOP 97-2 provides guidance on applying generally accepted accounting
principles for recognizing revenue on software transactions and establishes
criteria for the measurement of revenues for software arrangements consisting of
multiple elements such as future upgrades and additional products or services.
SOP 97-2 is effective for transactions entered into in fiscal years beginning
after December 15, 1997. The impact, if any, on NCR's consolidated financial
position, results of operations, and cash flows, of adopting this SOP has not
been fully determined.
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 on a percentage of revenue basis.
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
1997 1996 1997 1996
------ ------ ------ ------
Revenue:
Sales 55.4% 55.9% 54.4% 55.6%
Services 44.6% 44.1% 45.6% 44.4%
------ ------ ------ ------
Total 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
Gross Margin:
Sales 29.8% 33.5% 30.2% 30.0%
Services 24.8% 23.5% 23.7% 24.2%
------ ------ ------ ------
Total 27.6% 29.1% 27.3% 27.4%
Selling, general, and administrative expenses 22.5% 22.0% 22.3% 21.8%
Research and development expenses 6.1% 5.4% 6.1% 5.5%
------ ------ ------ ------
Income (loss) from operations (1.0)% 1.7% (1.1)% 0.1%
====== ====== ====== ======
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
REVENUE
Revenue for the three months ended September 30, 1997 was $1,563 million, a
decrease of 6% from the third quarter of 1996. When adjusted for the unfavorable
impact of quarter-to-quarter changes in foreign currency exchange rates, revenue
decreased by 1% compared to the third quarter of 1996.
Sales revenue decreased 6% to $866 million in the third quarter of 1997 compared
to the third quarter of 1996. Revenue gains from the year ago quarter in retail
products of 14% and financial products of 2% were more than offset by revenue
declines in computer products of 18% and systemedia products of 11%. Revenue
decreased for computer products due partly to reduced AT&T Corp. (AT&T) sales
and declines in the mid-range server business. Services revenue decreased 5% to
$697 million in the third quarter of 1997 compared to the third quarter of 1996,
despite a 14% increase in revenue from professional services over the same
period. The increase in professional services revenue was not sufficient to
offset a decline of 8% in customer services revenue. The decline in customer
services revenue was primarily the result of an overall decrease in sales
revenue which impacts the maintenance contract business, the transition of AT&T
to self-maintenance, and unfavorable impacts from foreign currency caused by the
continued strengthening of the U.S. dollar.
Revenue in the third quarter of 1997 compared with the third quarter of 1996
increased by 2% in the Asia Pacific region, decreased by 10% in the Americas,
and decreased by 5% 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 10% in Asia Pacific and
increased 7% in EMEA. The Americas region comprised approximately 50% of NCR's
total third quarter 1997 revenue, EMEA approximately 30%, and Asia Pacific
approximately 20%.
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OPERATING EXPENSES
Gross margin decreased 1.5 percentage points of revenue to 27.6% in the third
quarter of 1997 from 29.1% in the third quarter of 1996. Sales gross margins
decreased 3.7 percentage points to 29.8% for the third quarter of 1997 due
largely to the mix and value of products sold in the quarter and continued
strengthening of the U.S. dollar. Services gross margins increased 1.3
percentage points to 24.8% during the third quarter of 1997 in part due to
actions taken to reduce the cost of infrastructure in the customer services
business.
Selling, general, and administrative expenses decreased $13 million or 4% in the
third quarter of 1997 from the year ago quarter. The decline was a result of
continued expense reduction efforts. The entire decline was in general and
administrative expenses, as selling expenses increased slightly during the
quarter. As a percentage of revenue, selling, general, and administrative
expenses were 22.5% in the third quarter of 1997 and 22.0% in the same period of
1996. Research and development expenses increased $7 million to $96 million in
the third quarter of 1997. As a percentage of revenue, research and development
expenses were 6.1% in the third quarter of 1997 and 5.4% in the same period of
1996. Overall, operating expenses were favorably impacted by the quarter-to-date
changes in foreign currency exchange rates.
During AT&T's ownership of NCR, the assets of NCR's domestic pension plans were
held as part of a master trust managed by AT&T. In the third quarter of 1997,
the valuation of the December 31, 1996 assets attributable to the AT&T, Lucent
Technologies Inc., and NCR pension plans was finalized as called for under the
Employee Benefit Agreement previously entered into between NCR and AT&T. In that
connection, the valuation of assets utilized by NCR to determine its 1997
pension expense was increased by approximately $230 million. As a result, gross
margins and expenses were favorably impacted in the quarter by a year-to-date
increase in return on pension assets calculated using the 1997 estimated
long-term rate of return on assets of 9.5%, which was increased from the 1996
rate of 9.0%.
INCOME (LOSS) BEFORE INCOME TAXES
NCR reported a loss from operations of $16 million in the third quarter of 1997
compared to income from operations of $29 million in the year ago quarter.
Overall reductions in expenses were not sufficient to offset declines in revenue
and gross margin for the quarter or the negative impacts from foreign currency.
Interest expense was $4 million in the third quarter of 1997 compared to $14
million in the third quarter of 1996. The decrease in interest expense was the
result of reduced debt levels in 1997 compared to 1996. Other income, net was
$13 million in the third quarter of 1997 and was comparable to the $14 million
in the third quarter of 1996.
NCR reported loss before taxes of $7 million in the third quarter of 1997
compared to income before taxes of $29 million in the third quarter of 1996.
NET LOSS
The provision for income taxes was $2 million in the third quarter of 1997
compared to $62 million in the third 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 in certain tax
jurisdictions, primarily in the United States.
Net loss was $9 million in the third quarter of 1997 compared to $33 million in
the same period of 1996.
NINE MONTHS 1997 COMPARED TO NINE MONTHS 1996
REVENUE
Revenue for the first nine months of 1997 was $4,597 million, a decrease of 7%
from the comparable nine month period last year. When adjusted for the
unfavorable impact in foreign currency exchange rates, revenue decreased 3%
compared to the same year-to-date period in 1996.
Sales revenue decreased 9% to $2,499 million in the first nine months of 1997
compared to the same period of 1996. Revenue gains in retail products of 11% and
financial products of 2% were more than offset by revenue declines in computer
products of 17%, PCs/entry level server products of 19% and systemedia products
of 9%. The decrease in PCs/entry level server products revenue was due to NCR's
decision to no longer sell these products through high-volume indirect channels.
In addition, computer product sales to AT&T declined during the first nine
months of 1997 compared to 1996. Services revenue decreased 4% to $2,098 million
in the first nine months of 1997 compared to the same period of 1996. Revenue
for professional services increased by 9% in the first nine months of 1997. The
increase in professional services revenue was not sufficient to offset a decline
of 6% in customer services revenue.
Revenue in the first nine months of 1997 compared with the same period of 1996
increased by 1% in the Asia Pacific region, decreased by 8% in the Americas, and
decreased by 10% in EMEA. When adjusted for the unfavorable impact of foreign
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currency exchange rates, revenue on a local currency basis increased 9% in Asia
Pacific and decreased 1% in EMEA. The Americas region comprised approximately
50% of NCR's total first nine months 1997 revenue, EMEA approximately 29%, and
Asia Pacific region approximately 21%.
OPERATING EXPENSES
Gross margin as a percentage of revenue of 27.3% for first nine months of 1997
was comparable to the 27.4% of the same period in 1996.
Selling, general, and administrative expenses decreased $48 million or 4% in the
first nine months of 1997. The decrease in 1997 was primarily the result of
NCR's continued focus on expense reduction. As a percentage of revenue, selling,
general, and administrative expenses were 22.3% in the first nine months of 1997
and 21.8% in the same period of 1996. Research and development expenses
increased $6 million to $279 million in the first nine months of 1997. As a
percentage of revenue, research and development expenses were 6.1% in the first
nine months of 1997 and 5.5% in the same period of 1996. The increase in 1997
was primarily the result of NCR's continued investment in new products, systems,
and solutions. Overall, operating expenses were favorably impacted by the
year-to-date changes in foreign currency exchange rates.
INCOME (LOSS) BEFORE INCOME TAXES
NCR reported a loss from operations of $53 million in the first nine months of
1997 compared to income from operations of $3 million in the same period of
1996. Reductions in expenses were not sufficient to offset declines in revenue
and gross margin for the first nine months of 1997. Interest expense was $10
million in the first nine months of 1997 compared to $40 million in the same
period of 1996. The $30 million decrease in interest expenses was the result of
reduced debt levels in 1997 compared to 1996. Other income, net was $43 million
in the first nine months of 1997 compared to $17 million in the first nine
months of 1996. The $26 million increase is largely attributable to higher
interest income on increased levels of cash and short-term investments, the
positive impact in prior quarters of certain foreign currency contracts, and
insurance proceeds related to a prior year loss.
NCR reported a loss before taxes of $20 million in the first nine months of both
1997 and 1996.
NET LOSS
The provision for income taxes was $9 million in the first nine months of 1997
compared to $96 million in the same period 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 $29 million in the first nine months of 1997 and $116 million in
the same period in 1996.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
NCR's cash and short-term investments totaled $1,027 million at September 30,
1997 compared to $1,203 million at December 31, 1996.
Net cash provided by operating activities was $24 million in the first nine
months of 1997 and $304 million in the first nine months of 1996. Receivable
balances decreased $94 million through September 30, 1997 compared to a
decrease of $532 million in the same period in 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 resulting from the sale of
NCR's Switzerland data services business in 1996. Inventory balances increased
$101 million in the first nine months of 1997 compared to a decrease of $62
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 nine months of
1997 is consistent with historical inventory increases generally experienced
during the first three quarters of the year. Cash required for other operating
purposes decreased to $218 million in the first nine months of 1997 from $449
million in the same period of 1996 primarily due to significant payments made
in the first nine months of 1996 relating to NCR's 1995 restructuring.
Net cash used in investing activities was $420 million in the first nine months
of 1997 and $317 million in the same period of 1996. In 1997, NCR purchased $214
million of short-term investments as a part of its overall cash management
strategy. Capital expenditures were $215 million for the first nine months of
1997 and $310 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 activities, and expenditures for facilities to support
sales and marketing activities.
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Net cash provided by financing activities was $58 million in the first nine
months of 1997 and $395 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, $240 million of debt was repaid in the first nine 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.
On October 15, 1997, NCR announced the fundamental realignment of its global
business structure. The operational changes include realignment of the
country-centered sales and professional services organizations within NCR's
business units and implementation of various global business processes to
simplify NCR's organizational structure and improve efficiency. Approximately
1,000 infrastructure and support jobs are expected to be eliminated during 1998
as a result of implementing global business processes. The expense savings
expected from the realignment have not been fully determined, but the changes
are expected to create clearer accountability, increase delivery speed, and
reduce costs.
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:
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 (R) and
Microsoft Windows NT (R) 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.
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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, 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.
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 international 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.
UNIX is a registered trademark in the United States and other countries,
exclusively licensed through X/OPEN Company Limited. WINDOWS NT is a registered
trademark of Microsoft Corporation.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3 Amended and Restated Bylaws
10 July 13, 1995 Letter Agreement between Lars Nyberg
and AT&T Corp., assumed by NCR pursuant to the
Employee Benefits Agreement between NCR and AT&T
Corp. dated November 20, 1996
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
On October 21, 1997, NCR filed a Current Report on Form 8-K,
including unaudited condensed consolidated balance sheets as of
September 30, 1997, and unaudited condensed consolidated statements
of operations, consolidated revenue summary, and condensed
consolidated statements of cash flows for the quarter ended September
30, 1997, with respect to its Information Release on its third
quarter financial results.
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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: November 10, 1997 By: /s/ JOHN L. GIERING
--------------------------------------
John L. Giering, Senior Vice-President
and Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT
NO.
---
3 Amended and Restated Bylaws
10 July 13, 1995 Letter Agreement between Lars Nyberg and AT&T Corp.,
assumed by NCR pursuant to the Employee Benefits Agreement between
NCR and AT&T Corp. dated November 20, 1996
27 Financial Data Schedule