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UNITED STATES
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 quarterly period ended March 31, 2001
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. Yes X No __
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Number of shares of common stock, $0.01 par value per share, outstanding as of
April 30, 2001 was 96,479,528.
TABLE OF CONTENTS
PART I. Financial Information
Description Page
----------- ----
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended March 31, 2001 and 2000 3
Condensed Consolidated Balance Sheets (Unaudited)
March 31, 2001 and December 31, 2000 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 2001 and 2000 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II. Other Information
Description Page
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Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
2
Part I. Financial Information
Item 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
In millions, except per share amounts
Three Months Ended March 31
2001 2000
------------- ---------------
Revenue
Products $ 690 $ 629
Services 686 626
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Total Revenue 1,376 1,255
Cost of Products 442 412
Cost of Services 524 485
Selling, General and Administrative Expenses 353 306
Research and Development Expenses 76 70
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Total Operating Expenses 1,395 1,273
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(Loss) from Operations (19) (18)
Interest (Expense) (4) (2)
Other Income/(Expense), Net (3) 15
--------- -----------
(Loss) before Income Taxes and Cumulative Effect of Accounting Change (26) (5)
Income Tax Expense/(Benefit) (147) -
--------- -----------
Income/(Loss) before Cumulative Effect of Accounting Change 121 (5)
Cumulative Effect of Accounting Change, Net of Tax (4) -
--------- -----------
Net Income/(Loss) $ 117 $ (5)
========= ===========
Net Income/(Loss) per Common Share
Basic before Cumulative Effect of Accounting Change $ 1.26 $ (0.05)
Cumulative Effect of Accounting Change (0.04) -
--------- -----------
Basic $ 1.22 $ (0.05)
========= ===========
Diluted before Cumulative Effect of Accounting Change $ 1.22 $ (0.05)
Cumulative Effect of Accounting Change (0.04) -
--------- -----------
Diluted $ 1.18 $ (0.05)
========= ===========
Weighted Average Common Shares Outstanding
Basic 95.7 93.9
Diluted 99.3 96.5
See notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
In millions, except per share amounts
March 31 December 31
2001 2000
---------------- ---------------
Assets
Current assets
Cash, cash equivalents and short-term investments $ 325 $ 357
Accounts receivable, net 1,092 1,338
Inventories 329 288
Other current assets 250 251
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Total Current Assets 1,996 2,234
Reworkable service parts, net 219 218
Property, plant and equipment, net 730 742
Other assets 1,851 1,912
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Total Assets $ 4,796 $ 5,106
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Liabilities and Stockholders' Equity
Current liabilities
Short-term borrowings $ 123 $ 96
Accounts payable 406 521
Payroll and benefits liabilities 221 260
Customer deposits and deferred service revenue 432 344
Other current liabilities 401 615
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Total Current Liabilities 1,583 1,836
Long-term debt 10 11
Pension and indemnity liabilities 323 332
Postretirement and postemployment benefits liabilities 446 466
Other liabilities 542 676
Minority interests 21 27
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Total Liabilities 2,925 3,348
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Commitments and Contingencies (Note 5)
Stockholders' Equity
Preferred stock: par value $0.01 per share, 100.0 shares
authorized, no shares issued or outstanding at
March 31, 2001 and December 31, 2000, respectively - -
Common stock: par value $0.01 per share, 500.0 shares
authorized, 99.3 and 95.2 shares issued and outstanding
at March 31, 2001 and December 31, 2000, respectively 1 1
Paid-in capital 1,155 1,156
Retained earnings 761 644
Accumulated other comprehensive income (46) (43)
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Total Stockholders' Equity 1,871 1,758
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Total Liabilities and Stockholders' Equity $ 4,796 $ 5,106
=========== ===========
See notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
In millions
Three Months Ended March 31
2001 2000
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Operating Activities
Net Income/(Loss) $ 117 $ (5)
Adjustments to reconcile net income/(loss) to net cash
provided by/(used in) operating activities:
Depreciation and amortization 105 94
Deferred income taxes (131) 2
Net gain on sales of assets 1 1
Changes in assets and liabilities:
Receivables 248 74
Inventories (40) 12
Current payables (184) (136)
Customer deposits and deferred service revenue 88 134
Timing of disbursements for employee severance
and pension (59) (69)
Other assets and liabilities (122) (83)
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Net Cash Provided by Operating Activities 23 24
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Investing Activities
Short-term investments, net (10) (20)
Net expenditures and proceeds for service parts (25) (31)
Expenditures for property, plant and equipment (53) (64)
Proceeds from sales of property, plant and equipment 2 23
Business acquisitions and investments (3) (25)
Other investing activities, net (7) (27)
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Net Cash (Used in) Investing Activities (96) (144)
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Financing Activities
Purchases of Company common stock (34) (2)
Short-term borrowings, net 27 2
Long-term borrowings, net (1) (2)
Other financing activities, net 34 24
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Net Cash Provided by Financing Activities 26 22
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Effect of exchange rate changes on cash and cash equivalents 5 (15)
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(Decrease) in Cash and Cash Equivalents (42) (113)
Cash and Cash Equivalents at Beginning of Period 347 571
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Cash and Cash Equivalents at End of Period $ 305 $ 458
========= ========
See notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been prepared
by NCR Corporation (NCR or the Company) 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 2000 Annual Report to Stockholders and Form 10-K for the
year ended December 31, 2000.
Certain prior year amounts have been reclassified to conform to the 2001
presentation.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
NCR adopted Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133), as amended by
Statement of Financial Accounting Standards No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an Amendment of FASB
Statement No. 133" (SFAS 138), on January 1, 2001. SFAS 133 and SFAS 138 require
that all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. For fair value hedge transactions in which the Company is
hedging changes in the fair value of an asset, liability or firm commitment,
changes in the fair value of the derivative instrument will be offset in the
income statement by changes in the hedged item's fair value. For cash flow hedge
transactions in which the Company is hedging the variability of cash flows
related to a variable rate asset, liability or a forecasted transaction, changes
in the fair value of the derivative instrument will generally be reported in
other comprehensive income. The gains and losses on the derivative instrument
that are reported in other comprehensive income will be reclassified to earnings
in the periods in which earnings are impacted by the variability of the cash
flows of the hedged item. To the extent that a qualifying hedge is terminated or
ceases to be effective as a hedge, any deferred gains and losses recorded in
other comprehensive income to that point continue to be deferred and are
included in the basis of the underlying transaction. To the extent anticipated
transactions are no longer likely to occur, the related hedges are closed with
gains or losses recognized in earnings in the current period.
On January 1, 2001, NCR recorded net-of-tax, cumulative-effect-type losses of $6
million and $4 million, in accumulated other comprehensive income and net
income, respectively, to recognize at fair value all derivative instruments that
will be designated as hedging instruments.
3. SUPPLEMENTAL FINANCIAL INFORMATION (in millions)
Three Months Ended
March 31
---------------------
Comprehensive Income 2001 2000
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Net income $ 117 $ (5)
Other comprehensive income/(loss), net of tax:
Unrealized gain/(loss) on securities 6 (8)
SFAS 133 unrealized gain 6 -
Additional minimum pension liability (6) 6
Currency translation adjustments (9) (10)
-------- --------
Total comprehensive income $ 114 $ (17)
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6
March 31 December 31
2001 2000
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Cash, Cash Equivalents and Short-Term Investments
Cash and cash equivalents $ 305 $ 347
Short-term investments 20 10
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Total cash, cash equivalents and short-term
investments $ 325 $ 357
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Inventories
Finished goods $ 250 $ 219
Work in process and raw materials 79 69
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Total inventories $ 329 $ 288
========= =======
4. SEGMENT INFORMATION
NCR categorizes its operations into six reportable operating segments: Data
Warehousing, Financial Self Service, Retail Store Automation, Systemedia,
Payment and Imaging, and Other. Each of these segments includes hardware,
software, professional consulting, customer support and maintenance services,
and third party applications and technologies. Customer support services include
staging and implementation services, networking, multi-vendor integration
services, consulting services, solution-specific support services and
outsourcing solutions.
The following tables present data for revenue and operating income/(loss) by
operating segment for the quarters ended March 31 (in millions):
Three Months Ended
March 31
--------------------------
2001 2000
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Revenue
Data Warehousing $ 282 $ 239
Financial Self Service 336 311
Retail Store Automation 286 266
Systemedia 116 114
Payment and Imaging 73 71
Other 283 254
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Consolidated revenue $ 1,376 $ 1,255
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Three Months Ended
March 31
--------------------------
2001 2000
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Operating Income/(Loss)
Data Warehousing $ (10) $ (19)
Financial Self Service 35 19
Retail Store Automation (13) (27)
Systemedia (1) 4
Payment and Imaging 12 7
Other (1) 12
Special items (1) (41) (14)
---------- ----------
Consolidated operating (loss) $ (19) $ (18)
========== ==========
(1) 2001 - Significant special items represent charges related to the write down
of loans and receivables with Credit Card Center ($39 million) and
integration charges related to the acquisition of 4Front
Technologies, Inc. ($2 million).
2000 - Significant special items represent restructuring and other related
charges ($14 million) in connection with the 1999 restructuring plan.
7
5. 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.
NCR believes the amounts provided in its consolidated financial statements, as
prescribed by generally accepted accounting principles, are adequate in light of
the probable and estimable liabilities. However, there can be no assurances that
the actual amounts required to discharge alleged liabilities from various
lawsuits, claims, legal proceedings and other matters, including the Fox River
matter discussed below, 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 results of
operations, financial condition and cash flows. Any amounts of costs that may be
incurred in excess of those amounts provided as of March 31, 2001 cannot
currently be determined.
Environmental Matters
NCR's facilities and operations are subject to a wide range of environmental
protection laws, and NCR has investigatory and remedial activities underway at a
number of facilities that it currently owns or operates, or formerly owned or
operated, to comply, or to determine compliance, with such laws. Also, 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 various state and federal laws, 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.
Various federal agencies, Native American tribes and the State of Wisconsin
(Claimants) consider NCR to be a PRP under the FWPCA and CERCLA for alleged
natural resource damages (NRD) and remediation liability with respect 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 in
part from NCR's former carbonless paper manufacturing in Wisconsin. Claimants
have also notified a number of other paper manufacturing companies of their
status as PRPs resulting from their ongoing or former paper manufacturing
operations in the Fox River Valley, and Claimants have entered into a Memorandum
of Agreement among themselves to coordinate their actions, including the
assertion of claims against the PRPs. Additionally, the federal NRD Claimants
have notified NCR and the other PRPs of their intent to commence a NRD lawsuit,
but have not as yet instituted litigation. In addition, one of the Claimants,
the United States Environmental Protection Agency (USEPA), has formally proposed
the Fox River for inclusion on the CERCLA National Priorities List. In February
1999, the State of Wisconsin made available for public review a draft remedial
investigation and feasibility study (RI/FS), which outlines a variety of
alternatives for addressing the Fox River sediments. While the draft RI/FS did
not advocate any specific alternative or combination of alternatives, the
estimated total costs provided in the draft RI/FS ranged from $0 for no action
(which appears to be an unlikely choice) to between $143 million and $721
million depending on the alternative selected. The USEPA has indicated that the
final RI/FS will likely be issued in the second or third quarter of 2001 and
that a decision on the anticipated remedial action will be made in the third or
fourth quarter of 2001. During the fourth quarter of 2000, the federal Claimants
released a proposed Restoration and Compensation Determination Plan (RCDP). The
range of damages in the proposed RCDP is from $176 million to $333 million. NCR,
in conjunction with the other PRPs, has developed a substantial body of evidence
that it believes should demonstrate that selection of alternatives involving
river-wide restoration/remediation, particularly massive dredging, would be
inappropriate and unnecessary. However, because there is ongoing debate within
the scientific, regulatory, legal, public policy and legislative communities
over how to properly manage large areas of contaminated sediments, NCR believes
there is a high degree of uncertainty about the appropriate scope of
alternatives that may ultimately be required by the Claimants. An accurate
estimate of NCR's ultimate share of restoration/remediation and damages
liability cannot be made at this time due to uncertainties with respect to: the
scope and cost of the potential alternatives; the outcome of further federal and
state NRD assessments; the amount of NCR's share of such restoration/remediation
expenses; the timing of any restoration/remediation; the evolving nature of
restoration/remediation technologies and governmental policies; the
contributions from other parties; and the recoveries from insurance carriers and
other indemnitors. NCR believes the other currently named PRPs would be required
and able to pay substantial shares toward restoration and remediation, and that
there are additional parties, some of which have substantial resources, that may
also be liable. Further, in 1978 NCR sold the business to which the claims
apply, and NCR and the buyer have reached an interim settlement agreement under
which the parties are sharing both defense and liability costs.
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 or range of the
liability is
8
reasonably estimable. Provisions for estimated losses from environmental
restoration and 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. Management expects that
the amounts accrued from time to time will be paid out over the period of
investigation, negotiation, remediation and restoration for the applicable
sites, which, as to the Fox River site, may be 10 to 20 years or more. The
amounts provided for environmental matters in NCR's consolidated financial
statements are the estimated gross undiscounted amounts of such liabilities,
without deductions for insurance or third-party indemnity claims. Except for the
sharing arrangement described above with respect to the Fox River, 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.
6. STOCK REPURCHASE PROGRAM
During the first quarter of 2001, NCR repurchased approximately 450,000 shares
of its stock for approximately $20 million as part of the systematic repurchase
program authorized in December of 2000. These shares were repurchased on the
open market and through privately negotiated transactions at an average price of
$44.47 per share. In addition to this plan, there is approximately $181 million
remaining under a separate authorization received from NCR's Board of Directors
in October 1999.
7. EARNINGS PER SHARE
Basic earnings per share are calculated by dividing net income by the weighted
average number of shares outstanding during the reported period. The calculation
of diluted earnings per share is similar to basic, except that the weighted
average number of shares outstanding include the additional dilution from
potential common stock such as stock options and restricted stock awards, when
appropriate.
8. OTHER DEVELOPMENTS
In March 2001, NCR announced concerns about the ability of Credit Card Center
(CCC), a distributor of ATM equipment into the U.S. small retailer marketplace,
to repay an outstanding loan and accounts receivable to NCR. The Company has
worked with CCC to develop stronger customer leasing support, but CCC's revenue
growth has outpaced its capital and management resources, resulting in cash flow
deficiencies that could impact its ability to repay its obligations to NCR.
Although NCR will continue to work closely with CCC to successfully resolve
these issues, the Company established a reserve in the first quarter of 2001
related to prior business with CCC of approximately $40 million before tax or
$27 million after tax.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
- ---------------------
We categorize our operations into six reportable operating segments: Data
Warehousing, Financial Self Service, Retail Store Automation, Systemedia,
Payment and Imaging, and Other. Each of these segments includes hardware,
software, professional consulting, customer support and maintenance services,
and third party applications and technologies. Customer support services include
staging and implementation services, networking, multi-vendor integration
services, consulting services, solution-specific support services and
outsourcing solutions.
For the quarters ended March 31, the effects of significant special items have
been excluded from the gross margin, operating expenses and operating income
amounts presented and discussed below.
In millions 2001 2000
- -------------------------------------------------------------------------
Consolidated revenue $ 1,376 $ 1,255
Consolidated gross margin (1) 411 371
Consolidated operating expenses:
Selling, general and administrative expenses (2) 313 305
Research and development expenses 76 70
Consolidated income/(loss) from operations $ 22 $ (4)
(1) 2001 - Significant special items represent integration charges related to
the acquisition of 4Front Technologies, Inc. ($1 million).
2000 - Significant special items represent restructuring and other related
charges ($13 million) in connection with the 1999 restructuring plan.
(2) 2001 - Significant special items represent charges related to the write down
of loans and receivables with Credit Card Center ($39 million) and
integration charges related to the acquisition of 4Front
Technologies, Inc.($1 million).
2000 - Significant special items represent restructuring and other related
charges ($1 million) in connection with the 1999 restructuring plan.
Revenue: Revenue for the three months ended March 31, 2001 was $1,376 million,
an increase of 10% from the first quarter of 2000. When adjusted for the impact
of changes in currency exchange rates, revenue increased 13%.
The revenue improvement in the first quarter of 2001 compared to the prior year
reflects broad-based revenue growth in our key solutions. By key solution,
revenue in the first quarter of 2001 reflects increased sales in Data
Warehousing of 18%, Retail Store Automation of 8% and Financial Self Service of
8%. Revenue growth in Data Warehousing was due primarily to increased sales of
software and consulting services, and was further supported by more than a 20%
increase in new customers versus the year ago period. The revenue growth in
Retail Store Automation was driven primarily by increases in new product sales,
such as self-checkout terminals and web-enabled kiosks. Financial Self Service
revenues grew in the Americas and Asia Pacific regions, but were also enhanced
by increased sales of our expanded functionality ATMs in the Europe/Middle
East/Africa region.
Revenue in the first quarter of 2001 compared with the first quarter of 2000
increased 26% in the Asia Pacific region, excluding Japan, 14% in the
Europe/Middle East/Africa region and 8% in the Americas region, offset by a
decrease in Japan of 8%. The strong revenue growth in the Asia Pacific region,
excluding Japan, reflects strong growth in sales of our Financial Self Service,
Data Warehousing and Payment and Imaging solutions partially offset by declines
in Retail Store Automation and our non-core solutions. When adjusted for the
impact of changes in foreign currency exchange rates, revenue increased 36% in
the Asia Pacific region, excluding Japan, 20% in the Europe/Middle East/Africa
region and 2% in Japan. The Americas region comprised 53% of our total revenue
in the first quarter of 2001, Europe/Middle East/Africa region comprised 29%,
Asia Pacific comprised 10% and Japan comprised 8%.
Gross Margin and Operating Expenses: Gross margin as a percentage of revenue
increased 0.3 percentage points to 29.9% in the first quarter of 2001 from 29.6%
in the first quarter of 2000. Products gross margin increased 0.8 percentage
points to 35.9% in the first quarter of 2001. Services gross margin decreased
0.2 percentage points to 23.8% in the first quarter of 2001.
Selling, general and administrative expenses increased $8 million, or 3%, in the
first quarter of 2001 from the first quarter of 2000. As a percentage of
revenue, selling, general and administrative expenses were 22.7% in the first
quarter of 2001 and 24.3% in the first quarter of 2000. Goodwill amortization
included in selling, general and administrative expenses increased
10
$13 million in the first quarter of 2001 compared to the prior year period.
Research and development expenses increased $6 million to $76 million in the
first quarter of 2001. As a percentage of revenue, research and development
expenses were 5.5% in the first quarter of 2001 compared to 5.6% in the first
quarter of 2000. The increase in research and development expenses reflects
continuing investments in our strategic operating segments.
The net impact on operating results from our combined pension, post-retirement
and post-employment plans is $1 million additional expense in the first quarter
of 2001 as compared to the first quarter of 2000.
Income Before Income Taxes and Cumulative Effect of Accounting Change: Operating
income was $22 million in the first quarter of 2001 compared to an operating
loss of $4 million in the first quarter of 2000.
Other expense, net, was $7 million in the first quarter of 2001. Excluding a $1
million charge for interest receivables related to Credit Card Center (CCC),
other expense, net, was $6 million in the first quarter of 2001 compared to
other income, net, of $13 million in the first quarter of 2000. The change
versus the prior period was due primarily to lower interest income resulting
from decreased cash and short-term investment balances. Cash and short-term
investments decreased year-over-year as we have continued our acquisition and
share repurchase initiatives.
Loss before income taxes and cumulative effect of accounting change was $26
million in the first quarter of 2001 compared to a loss before income taxes of
$5 million in the first quarter of 2000.
Provision for Income Taxes: Income tax provisions for interim periods are based
on estimated annual income tax rates calculated without the effect of
significant special items. At an estimated effective tax rate of 33% for 2001,
the first quarter income tax provision was $5 million compared to a $3 million
provision in the first quarter of 2000.
The tax effect of special items was a $152 million benefit in the first quarter
of 2001 comprised of a $138 million benefit resulting from the favorable
resolution of an examination of prior year international activities and a $14
million benefit resulting from 4Front Technologies integration and CCC-related
charges. This compares to a $3 million benefit in the prior year period
resulting from restructuring and other related charges.
Including significant special items, the income tax benefit was $147 million in
the first quarter of 2001 compared to no income tax provision in the first
quarter of 2000.
Financial Condition, Liquidity, and Capital Resources
- -----------------------------------------------------
Our cash, cash equivalents, and short-term investments totaled $325 million at
March 31, 2001 compared to $357 million at December 31, 2000.
Operating Activities: We generated cash flows from operations of $23 million in
the first three months of 2001 compared to $24 million in the first quarter of
2000. Receivable balances decreased $248 million in the first quarter of 2001
versus a $74 million decrease in the same period in 2000. Revenues in December
of 2000 were $176 million higher than in December of 1999 resulting in a
commensurate increase in year-end receivables. Subsequent collection of these
receivables, together with factoring of approximately $80 million of
international receivables, resulted in the year-over-year decrease. Inventory
balances increased $40 million in the first quarter of 2001 compared to a
decrease of $12 million in the first quarter of 2000. The increase in inventory
in the first quarter of 2001 reflects higher backlogs, and is consistent with
the historical trend. Customer deposits and deferred service revenue increased
$88 million in the first quarter of 2001 compared to an increase of $134 million
in the prior year period. The decline in 2001 versus the prior year quarter was
due primarily to a change in the amount of advance deposits related to
international orders, particularly in Japan.
Investing Activities: Net cash flows used in investing activities were $96
million in the first quarter of 2001 and $144 million in the first quarter of
2000. In 2001, we increased short-term investments by $10 million compared to a
$20 million increase in 2000. Net expenditures and proceeds for service parts
utilized $25 million of cash in the first three months of 2001 compared to a use
of $31 million in the same period of 2000. Capital expenditures were $53 million
for the first quarter of 2001 and $64 million for the comparable period in 2000.
Proceeds from sales of property, plant and equipment generated cash of $2
million compared to $23 million in the prior year period. The prior year period
included $4 million of sales related to our strategy to reduce our owned, excess
real estate. Business acquisitions and investments used $3 million in the first
quarter of 2001 compared to $25 million in the first quarter of 2000.
11
Financing Activities: Net cash provided by financing activities was $26 million
in the first quarter of 2001 and $22 million in the first quarter of 2000. In
the first quarter of 2001, we utilized $34 million of cash in the repurchase of
Company common stock pursuant to the stock repurchase program compared to a $2
million use in the same period in 2000. Short-term borrowings generated cash of
$27 million in the first three months of 2001, compared to generating $2 million
in the same prior year period. In the first quarter of 2001, other financing
activities provided $34 compared to $24 million in the first quarter of 2000.
Other financing activities primarily relates to share activity under our stock
option and employee stock purchase plans.
We believe that cash flows from operations, the credit facility, and other
short- and long-term financings, if any, will be sufficient to satisfy our
future working capital, research and development, capital expenditure, and other
financing requirements for the foreseeable future.
In March 2001, we announced concerns about the ability of Credit Card Center
(CCC), a distributor of ATM equipment into the U.S. small retailer marketplace,
to repay an outstanding loan and accounts receivable to NCR. We have worked with
CCC to develop stronger customer leasing support, but CCC's revenue growth has
outpaced its capital and management resources, resulting in cash flow
deficiencies that could impact its ability to repay its obligations to NCR.
Although we will continue to work closely with CCC to successfully resolve these
issues, we established a reserve in the first quarter of 2001 related to prior
business with CCC of approximately $40 million before tax or $27 million after
tax.
Factors That May Affect Future Results
- --------------------------------------
This quarterly report and other documents that we file with the Securities and
Exchange Commission, as well as other oral or written statements we may make
from time to time, contain information based on management's beliefs and include
forward-looking statements (within the meaning of the Private Securities
Litigation Reform Act of 1995) that involve a number of known and unknown risks,
uncertainties and assumptions. These forward-looking statements are not
guarantees of future performance, and there are a number of factors, including
those listed below, which could cause actual outcomes and results to differ
materially from the results contemplated by such forward-looking statements. We
do not undertake any obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Competition
Our ability to compete effectively within the technology industry is critical to
our future success.
We compete in the intensely competitive information technology industry. This
industry is characterized by rapidly changing technology, evolving industry
standards, frequent new product introductions, price and cost reductions, and
increasingly greater commoditization of products, making differentiation
difficult. In addition, this intense competition increases pressure on gross
margins that could impact our business and operating results. Our competitors
include other large, successful companies in the technology industry such as:
Diebold, Inc., International Business Machines (IBM), Oracle Corporation, Unisys
Corporation and Wincor Nixdorf Gmbh & Co., some of which have widespread
penetration of their platforms. If we are unable to compete successfully, the
demand for our solutions, including products and services, would decrease. Any
reduction in demand could lead to fewer customer orders, a decrease in the
prices of our products and services, reduced revenues, reduced margins,
operating inefficiencies, reduced levels of profitability and loss of market
share. These competitive pressures could impact our business and operating
results.
Our future competitive performance depends on a number of factors, including our
ability to: rapidly and continually design, develop and market, or otherwise
obtain and introduce solutions and related products and services for our
customers that are competitive in the marketplace; offer a wide range of
solutions from web-enabled kiosks to enterprise data warehouses; offer solutions
to customers that operate effectively within a computing environment, which
include the integration of hardware and software from multiple vendors; offer
products that are reliable and that ensure the security of data and information;
offer high quality, high availability services; market and sell all of our
solutions effectively and produce and deliver solutions at competitive operating
margins.
Introduction of New Solutions
The solutions we sell are very complex, and we need to rapidly and successfully
develop and introduce new solutions.
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We operate in a very competitive, rapidly changing environment, and our future
success depends on our ability to develop and introduce new solutions that our
customers choose to buy. If we are unable to develop new solutions, our business
and operating results would be impacted. This includes our efforts to rapidly
develop and introduce data warehousing software applications. The development
process for our complex solutions, including our software application
development programs, requires high levels of innovation from both our
developers and our suppliers of the components embedded in our solutions. In
addition, the development process can be lengthy and costly. It requires us to
commit a significant amount of resources to bring our business solutions to
market. If we are unable to anticipate our customers' needs and technological
trends accurately, or are otherwise unable to complete development efficiently,
we would be unable to introduce new solutions into the market on a timely basis,
if at all, and our business and operating results would be impacted. In
addition, if we are unable to successfully market and sell both existing and
newly developed solutions, such as our self-checkout and electronic shelf label
solutions, our operating results would be impacted.
Our solutions, which contain both hardware and software products, may contain
known as well as undetected errors which may be found after the products'
introduction and shipment. While we attempt to fix errors that we believe would
be considered critical by our customers prior to shipment, we may not be able to
detect or fix all such errors, and this could result in lost revenues, delays in
customer acceptance and incremental costs, which would all impact our operating
results.
Reliance on Third Parties
Third party suppliers provide important elements to our solutions.
We rely on many suppliers for necessary parts and components to complete our
solutions. In most cases, there are a number of vendors producing the parts and
components that we utilize. However, there are some components that are
purchased from single sources due to price, quality, technology or other
reasons. For example, we depend on chips and microprocessors from Intel
Corporation and operating systems from UNIX(R) and Microsoft Windows NT(R).
Certain parts and components used in the manufacture of our ATMs and the
delivery of some of our Store Automation solutions are also supplied by single
sources. If we were unable to purchase the necessary parts and components from a
particular vendor and we had to find an alternative supplier for such parts and
components, our new and existing product shipments and solutions deliveries
could be delayed, impacting our business and operating results.
We have, from time to time, formed alliances with third parties (such as the
outsourcing arrangements with Solectron Corporation and others to manufacture
hardware) that have complementary products, services and skills. These alliances
introduce risks that we cannot control such as non-performance by third parties
and difficulties with or delays in integrating elements provided by third
parties into our solutions. The failure of third parties to provide high quality
products or services that conform to the required specifications could impair
the delivery of our solutions on a timely basis and impact our business and
operating results.
Acquisitions and Alliances
Our ability to successfully integrate acquisitions or effectively manage
alliance activities will help drive future growth.
As part of our overall solutions strategy, we intend to continue to make
investments in companies, products, services and technologies, either through
acquisitions, joint ventures or strategic alliances. Acquisitions and alliance
activities inherently involve risks. The risks we may encounter include those
associated with assimilating and integrating different business operations,
corporate cultures, personnel, infrastructures and technologies or products
acquired or licensed, retaining key employees and the potential for unknown
liabilities within the acquired or combined business. The investment or alliance
may also disrupt our ongoing business, or we may not be able to successfully
incorporate acquired products, services or technologies into our solutions and
maintain quality. Business acquisitions typically result in intangible assets
being recorded and amortized in future years. Future operating results could be
impacted if our acquisitions do not generate profitable results in excess of the
related amortization expense.
Operating Result Fluctuations
We expect our revenues and operating results to fluctuate for a number of
reasons.
Future operating results will continue to be subject to fluctuations based on a
variety of factors, including:
Seasonality. Our sales are historically seasonal, with revenue higher in the
fourth quarter of each year. During the three quarters ending in March, June and
September, we have historically experienced less favorable results than in the
quarter ending in December. Such seasonality also causes our working capital
cash flow requirements to vary from quarter to
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quarter depending on the variability in the volume, timing and mix of product
sales. In addition, revenue in the third month of each quarter is typically
higher than in the first and second months. These factors, among other things,
make forecasting more difficult and may adversely affect our ability to predict
financial results accurately.
Acquisitions and Alliances. As part of our solutions strategy, we intend to
continue to acquire technologies, products and businesses as well as form
strategic alliances and joint ventures. As these activities take place and we
begin to include the financial results related to these investments, our
operating results will fluctuate. For example, the acquisition of 4Front has and
will continue to result in incremental customer services revenue, margin and
operating expenses.
Multi-National Operations
Continuing to generate substantial revenues from our multi-national operations
helps to balance our risks and meet our strategic goals.
Currently, approximately 59% of our revenues come from our international
operations. We believe that our geographic diversity may help to mitigate some
risks associated with geographic concentrations of operations (e.g., adverse
changes in foreign currency exchange rates or business disruptions due to
economic or political uncertainties). However, our ability to sell our solutions
domestically in the United States and internationally is subject to the
following risks, among others: general economic and political conditions in each
country which could adversely affect demand for our solutions in these markets,
as evidenced by the recent economic slowing in the U.S. retail industry;
currency exchange rate fluctuations which could result in lower demand for our
products as well as generate currency translation losses; currency changes such
as the euro introduction which could affect cross border competition and pricing
and require modifications to our offerings to accommodate the changeover; and
changes to and compliance with a variety of local laws and regulations which may
increase our cost of doing business in these markets or otherwise prevent us
from effectively competing in these markets.
Employees
Hiring and retaining highly qualified employees helps us to achieve our business
objectives.
Our employees are vital to our success, and our ability to attract and retain
highly skilled technical, sales, consulting and other key personnel is critical
as these key employees are difficult to replace. The expansion of high
technology companies has increased demand and competition for qualified
personnel. If we are not able to attract or retain highly qualified employees in
the future, our business and operating results could be impacted.
Intellectual Property
As a technology company, our intellectual property portfolio is key to our
future success.
Our intellectual property portfolio is a key component of our ability to be a
leading technology and services solutions provider. To that end, we aggressively
protect and work to enhance our proprietary rights in our intellectual property
through patent, copyright, trademark and trade secret laws, and if our efforts
fail, our business could be impacted. In addition, many of our offerings rely on
technologies developed by others, and if we were not able to continue to obtain
licenses for such technologies, our business would be impacted. Moreover, from
time to time, we receive notices from third parties regarding patent and other
intellectual property claims. Whether such claims are with or without merit,
they may require significant resources to defend and, if an infringement claim
is successful, in the event we are unable to license the infringed technology or
to substitute similar non-infringing technology, our business could be adversely
affected.
Environmental
Our historical and ongoing manufacturing activities subject us to environmental
exposures.
We have been identified as a potentially responsible party in connection with
the Fox River matter as further described in "Environmental Matters" under Note
6 of the Notes to Condensed Consolidated Financial Statements and we incorporate
such discussion in this Management's Discussion and Analysis of Financial
Condition and Results of Operations by reference and make it a part of this risk
factor.
Contingencies
Like other technology companies, we face uncertainties with regard to
regulations, lawsuits and other related matters.
We are subject to regulations, proceedings, lawsuits, claims and other matters,
including those that relate to the environment, health and safety, and
intellectual property. Such matters are subject to the resolution of many
uncertainties; thus, outcomes
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are not predictable with assurance. While we believe that amounts provided in
our 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.
Recently Issued Accounting Pronouncements
- -----------------------------------------
We adopted Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133), as amended by
Statement of Financial Accounting Standards No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an Amendment of FASB
Statement No. 133" (SFAS 138) on January 1, 2001. SFAS 133 and SFAS 138 require
that all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. For fair value hedge transactions in which we are hedging
changes in the fair value of an asset, liability or firm commitment, changes in
the fair value of the derivative instrument will be offset in the income
statement by changes in the hedged item's fair value. For cash flow hedge
transactions in which we are hedging the variability of cash flows related to a
variable rate asset, liability or a forecasted transaction, changes in the fair
value of the derivative instrument will generally be reported in other
comprehensive income. The gains and losses on the derivative instrument that are
reported in other comprehensive income will be reclassified to earnings in the
periods in which earnings are impacted by the variability of the cash flows of
the hedged item. To the extent that a qualifying hedge is terminated or ceases
to be effective as a hedge, any deferred gains and losses recorded in other
comprehensive income to that point continue to be deferred and are included in
the basis of the underlying transaction. To the extent anticipated transactions
are no longer likely to occur, the related hedges are closed with gains or
losses recognized in earnings in the current period.
On January 1, 2001, we recorded net-of-tax, cumulative-effect-type losses of $6
million and $4 million, in accumulated other comprehensive income and net
income, respectively, to recognize at fair value all derivative instruments that
will be designated as hedging instruments.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
- -----------
We are exposed to market risk, including changes in foreign currency exchange
rates and interest rates. We use a variety of measures to monitor and manage
these risks, including derivative financial instruments. Since a substantial
portion of our operations and revenue occur outside the United States, and in
currencies other than the U.S. dollar, our results can be significantly impacted
by changes in foreign currency exchange rates. To manage our exposures to
changes in currency exchange rates, we enter into various derivative financial
instruments such as forward contracts and options. These instruments generally
mature within 12 months. At inception, select derivative instruments are
designated as hedges of inventory purchases and sales, and of certain financing
transactions that are firmly committed or forecasted. Generally, gains and
losses on qualifying hedged transactions are recorded in other comprehensive
income and recognized in the determination of income when the underlying
transactions are realized, canceled or otherwise terminated. When hedging
certain foreign currency transactions of a long-term investment nature, gains
and losses are recorded in the currency translation adjustment component of
stockholders' equity. Gains and losses on other foreign exchange contracts are
recognized in other income or expense as exchange rates change.
For purposes of potential risk analysis, we use sensitivity analysis to quantify
potential impacts that market rate changes may have on the fair values of our
hedge portfolio. The sensitivity analysis represents the hypothetical changes in
value of the hedge position and does not reflect the related gain or loss on the
forecasted underlying transaction. As of March 31, 2001 and 2000, a 10%
appreciation in the value of the U.S. dollar against foreign currencies from the
prevailing market rates would result in a $40 million increase or a $9 million
dollar increase in the fair value of the hedge portfolio, respectively.
Conversely, a 10% depreciation of the U.S. dollar against foreign currencies
from the prevailing market rates would result in an $6 million decrease or a $20
million increase in the fair value of the hedge portfolio as of March 31, 2001
and 2000, respectively.
The interest rate risk associated with our borrowing and investing activities at
March 31, 2001 was not material in relation to our consolidated financial
position, results of operations and cash flows. We generally do not use
derivative financial instruments to alter the interest rate characteristics of
our investment holdings or debt instruments.
We are potentially subject to concentrations of credit risk on accounts
receivable and financial instruments such as hedging instruments, short-term
investments and cash and cash equivalents. Credit risk includes the risk of
nonperformance by counterparties. The maximum potential loss may exceed the
amount recognized on the balance sheet. Exposure to credit risk is managed
through credit approvals, credit limits, selecting major international financial
institutions (as counterparties to hedging transactions) and monitoring
procedures. Our business often involves large transactions with customers, and
if one or more of those customers were to default in its obligations under
applicable contractual arrangements, we could be exposed to potential
significant losses. However, we believe that the reserves for potential losses
are adequate. At March 31, 2001 and 2000, we did not have any major
concentration of credit risk related to financial instruments.
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Part II. Other Information
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the first
quarter of 2001. NCR's Annual Meeting of Stockholders was held on April 18,
2001. At the Annual Meeting, stockholders voted on two matters: a proposal to
elect Linda Fayne Levinson and James R. Long as Class B directors, and a
proposal to approve the appointment of PricewaterhouseCoopers LLP as the
Company's independent accountants for 2001. The numbers of shares voted with
respect to each matter required to be reported herein are as follows:
1. Election of Class B Directors:
Linda Fayne Levinson For: 82,398,502 Withheld: 663,137
James R. Long For: 82,412,933 Withheld: 648,706
2. Approve appointment of PricewaterhouseCoopers LLP as independent
accountants for 2001.
For: 82,120,811
Against: 598,495
Abstain: 342,333
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Amendment and Restatement of NCR Corporation as
amended May 14, 1999 (incorporated by reference to Exhibit 3.1
from the NCR Corporation Form 10-Q for the period ended June
30, 1999) and Articles Supplementary of NCR Corporation
(incorporated by reference to Exhibit 3.1 from the NCR
Corporation Annual Report on Form 10-K for the year ended
December 31, 1996 (the "1996 NCR Annual Report")).
3.2 Bylaws of NCR Corporation, as amended and restated on February
3, 2000 (incorporated by reference to Exhibit 3.2 from the NCR
Corporation Annual Report on Form 10-K for the year ended
December 31, 1999).
4.1 Common Stock Certificate of NCR Corporation (incorporated by
reference to Exhibit 4.1 from the NCR Corporation Annual
Report on Form 10-K for the year ended December 31, 1999).
4.2 Preferred Share Purchase Rights Plan of NCR Corporation, dated
as of December 31, 1996, by and between NCR Corporation and
The First National Bank of Boston (incorporated by reference
to Exhibit 4.2 from the 1996 NCR Annual Report).
10.1(a) Agreement and Plan of Merger by and among NCR Corporation, NCR
Merger Sub Inc. and 4Front Technologies, Inc. dated August 2,
2000 (incorporated by reference to Annex A from the 4Front
Technologies, Inc. Notice of Annual Meeting of Stockholders
and Proxy Statement dated September 25, 2000)
10.1(b) Amendment to Agreement and Plan of Merger by and among NCR
Corporation, NCR Merger Sub Parent, Inc., NCR Merger Sub Inc.,
and 4Front Technologies, Inc. dated October 6, 2000
(incorporated by reference to Exhibit 10.1(b) from the NCR
Corporation Report on Form 10-Q for the quarter ended
September 30, 2000).
(b) Reports on Form 8-K
No reports filed on Form 8-K for the quarter ended March 31,
2001.
UNIX is a registered trademark of The Open Group
Windows NT is a registered trademark of Microsoft Corporation.
Teradata is a trademark or registered trademark of NCR International, Inc. in
the United States and other countries.
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SIGNATURES
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: May 13, 2001 By: /s/ David Bearman
------------------------------------
David Bearman, Senior Vice President
and Chief Financial Officer
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