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 June 30, 1999
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___
---
Number of shares of common stock, $.01 par value per share, outstanding as of
July 31, 1999 was 98,216,391.
TABLE OF CONTENTS
PART I. Financial Information
Description Page
----------- ----
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited)
Three and Six Months Ended June 30, 1999 and 1998 3
Condensed Consolidated Balance Sheets
June 30, 1999 (Unaudited) and December 31, 1998 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. Other Information
Description Page
----------- ----
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
Part I. Financial Information
Item 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
In millions, except per share amounts
Three Months Ended Six Months Ended
June 30 June 30
-------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenue
Products $ 852 $ 868 $ 1,517 $ 1,543
Services 720 706 1,388 1,340
------- ------- ------- -------
Total Revenue 1,572 1,574 2,905 2,883
------- ------- ------- -------
Operating Expenses
Cost of products 531 568 972 1,032
Cost of services 544 534 1,053 1,025
Selling, general and administrative expenses 352 358 663 665
Research and development expenses 84 91 164 172
------- ------- ------- -------
Total Operating Expenses 1,511 1,551 2,852 2,894
------- ------- ------- -------
Income (Loss) from Operations 61 23 53 (11)
Interest (expense) (2) (4) (5) (7)
Other income, net 15 73 31 110
Income Before Income Taxes 74 92 79 92
Income tax expense 28 44 30 44
------- ------- ------- -------
Net Income $ 46 $ 48 $ 49 $ 48
======= ======= ======= =======
Net Income per Common Share
Basic $ .47 $ .47 $ .50 $ .47
Diluted $ .45 $ .46 $ .48 $ .46
Weighted Average Common Shares Outstanding
Basic 98.3 102.6 98.7 102.9
Diluted 102.1 104.1 102.5 104.0
See accompanying notes.
3
CONDENSED CONSOLIDATED BALANCE SHEETS
In millions, except per share amounts
June 30 December 31
1999 1998
---------- -----------
(Unaudited)
Assets
Current assets
Cash and short-term investments $ 576 $ 514
Accounts receivable, net 1,354 1,556
Inventories 394 384
Other current assets 145 178
---------- -----------
Total Current Assets 2,469 2,632
Reworkable service parts, net 221 232
Property, plant and equipment, net 844 872
Other assets 1,186 1,156
---------- -----------
Total Assets $ 4,720 $ 4,892
========== ===========
Liabilities and Stockholders' Equity
Current liabilities
Short-term borrowings $ 78 $ 50
Accounts payable 327 376
Payroll and benefits liabilities 260 303
Customers' deposits and deferred service revenue 401 352
Other current liabilities 587 619
---------- -----------
Total Current Liabilities 1,653 1,700
Long-term debt 32 33
Pension and indemnity liabilities 400 420
Postretirement and postemployment benefits liabilities 607 655
Other long-term liabilities 583 593
Minority interests 43 44
---------- -----------
Total Liabilities 3,318 3,445
---------- -----------
Commitments and contingencies
Stockholders' Equity
Preferred stock: par value $.01 per share, 100.0 shares
authorized, no shares issued or outstanding - -
Common stock: par value $.01 per share, 500.0 shares
authorized; 104.8 and 105.0 shares issued at June 30, 1999
and December 31, 1998, respectively; 97.4 and 98.7 shares
outstanding at June 30, 1999 and December 31, 1998, respectively 1 1
Retained earnings and paid-in capital 1,420 1,429
Other (19) 17
---------- -----------
Total Stockholders' Equity 1,402 1,447
---------- -----------
Total Liabilities and Stockholders' Equity $ 4,720 $ 4,892
========== ===========
See accompanying notes.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
In millions
Six Months Ended June 30
------------------------
1999 1998
----- -----
Operating Activities
Net income $ 49 $ 48
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 185 184
Net gain on sales of assets (8) (55)
Changes in operating assets and liabilities:
Receivables 202 7
Inventories (11) (49)
Current payables (80) (71)
Deferred revenue and customer deposits 49 97
Timing of disbursements for employee severance and
pension (101) (57)
Other assets and liabilities (70) (185)
----- -----
Net Cash Provided by (Used in) Operating Activities 215 (81)
----- -----
Investing Activities
Short-term investments, net (109) 66
Expenditures for service parts and property, plant
and equipment (170) (160)
Acquisition of minority interest in subsidiary - (271)
Proceeds from sales of facilities and other assets 40 230
Other investing activities (24) (33)
----- -----
Net Cash Used in Investing Activities (263) (168)
----- -----
Financing Activities
Purchase of Company common stock (62) (78)
Short-term borrowings, net 28 10
Long-term debt - (2)
Other financing activities 50 39
----- -----
Net Cash Provided by (Used in) Financing Activities 16 (31)
----- -----
Effect of exchange rate changes on cash and cash equivalents (15) (13)
----- -----
Decrease in Cash and Cash Equivalents (47) (293)
Cash and Cash Equivalents at Beginning of Period 488 886
----- -----
Cash and Cash Equivalents at End of Period $ 441 $ 593
===== =====
See accompanying notes.
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 1998 Annual Report to Stockholders, Form 10-K for the
year ended December 31, 1998 and Form 10-Q for the quarter ended March 31, 1999.
Certain prior years amounts have been reclassified to conform to the 1999
presentation.
2. SUPPLEMENTAL FINANCIAL INFORMATION (in millions)
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
Comprehensive Income 1999 1998 1999 1998
---------- ---------- ---------- ----------
Net income $ 46 $ 48 $ 49 $ 48
Other comprehensive (loss) income, net of tax:
Additional minimum pension liability and other (1) 16 8 15
Currency translation adjustments (26) (33) (45) (40)
---------- ---------- ---------- ----------
Total comprehensive income $ 19 $ 31 $ 12 $ 23
========== ========== ========== ==========
June 30 December 31
1999 1998
---------- -----------
Cash and Short-Term Investments
Cash and cash equivalents $ 441 $ 488
Short-term investments 135 26
---------- -----------
Total cash and short-term investments $ 576 $ 514
========== ===========
Inventories
Finished goods $ 334 $ 324
Work in process and raw materials 60 60
---------- -----------
Total inventories $ 394 $ 384
========== ===========
3. SEGMENT INFORMATION
NCR assesses performance and allocates resources based principally on the
customers served and the industries in which such customers operate.
Accordingly, NCR categorizes its operations into four strategic segments:
Retail, Financial, National Accounts and Systemedia.
The following tables present data for revenue and operating income by industry
operating segments (in millions):
Three Months Six Months
Ended June 30 Ended June 30
------------------------- ------------------------
1999 1998 1999 1998
---------- ---------- --------- ---------
Revenue
Retail $ 408 $ 354 $ 731 $ 622
Financial 647 696 1,205 1,256
National Accounts 381 365 681 673
Systemedia 119 128 232 238
All other segments 17 31 56 94
---------- ---------- ------------ ---------
Consolidated revenue $ 1,572 $ 1,574 $ 2,905 $ 2,883
========== ========== ============ =========
6
Three Months Six Months
Ended June 30 Ended June 30
-------------------------- ----------------------------
1999 1998 1999 1998
---------- ---------- ----------- -----------
Operating Income
Retail $ 45 $ 10 $ 55 $ (3)
Financial 72 58 110 93
National Accounts 38 21 44 10
Systemedia 8 10 17 19
Unallocated corporate
expenses and other segments (102) (76) (173) (130)
---------- ---------- ----------- -----------
Consolidated operating income $ 61 $ 23 $ 53 $ (11)
========== ========== =========== ===========
4. 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 or cash flows. Any amounts of costs that may be
incurred in excess of those amounts provided as of June 30, 1999 cannot
currently be determined.
Environmental Matters
NCR's facilities and operations are subject to a wide range of environmental
protection laws and 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. 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 and $721 million
depending on the alternative selected. NCR, in conjunction with the other PRPs,
has developed a substantial body of evidence which 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 manage
properly 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 the 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.
7
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 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 may as to the Fox River site be 10 to 20 years or
more. 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.
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.
Legal Proceedings
NCR was named as one of the defendants in a purported class-action suit filed in
November 1996 in Florida alleging liability based on state antitrust and common-
law claims of unlawful restraints of trade, monopolization, and unfair business
practices related to a purported agreement between Siemens-Nixdorf and NCR. In
January 1999, NCR agreed to settle this suit with plaintiffs for an undisclosed
and non-material amount. This settlement is expected to be approved by the court
in the near future.
5. STOCK REPURCHASE PROGRAM
As of June 30, 1999, the Company has committed $106 million of $250 million
authorized for share repurchases. As a result of the reverse/forward stock split
initiative, approximately 2.4 million shares were repurchased at a cost of
$42.30 per share. An additional 120,000 shares were repurchased on the open
market, at a cost of $38.88 per share. Both of these stock repurchase programs
are pursuant to the share repurchase program authorized by the Board of
Directors on April 15, 1999.
6. EARNINGS PER SHARE
Basic earnings per share is 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.
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
- -----------------------------------------------------------------------------
Results of Operations
Revenue: Revenue for the three months ended June 30, 1999 was $1,572 million,
essentially flat from the second quarter of 1998. Foreign currency exchange
rates had no material impact on revenue compared with the second quarter of
1998.
Product revenue decreased 2% to $852 million in the second quarter of 1999
compared to the second quarter of 1998. Revenue gains in the quarter occurred
in Retail products at 29% and Enterprise Servers at 26% offset in part by
anticipated revenue declines in Other Computer products at 29%. The downward
pressure on revenue is expected to continue within Other Computer products. The
Other Computer product group includes many products that NCR once sold in
volume, but now sells largely as a solution component. In addition, Financial
products and Systemedia revenues were down slightly in the quarter. Services
revenue increased 2% to $720 million in the second quarter of 1999 compared to
the second quarter of 1998, due to revenue gains in both Customer Support
Services and Professional Services.
Revenue in the second quarter of 1999 compared with the second quarter of 1998
increased 4% in the Americas and 22% in the Asia Pacific region, excluding
Japan, with a decrease of 17% in Japan and 3% in Europe/Middle East/Africa. The
revenue declines experienced in Japan reflect market challenges in that area as
well as NCR's decision to exit the Super ATM business in Japan. NCR continues to
take steps to strengthen its operations in Japan including changes in
management, and expects improvements in future operating results. When adjusted
for the impact of changes in foreign currency exchange rates, revenue on a local
currency basis increased 1% in Europe/Middle East/Africa, 19% in the Asia
Pacific region, excluding Japan, and decreased 26% in Japan. The Americas
region comprised 54% of NCR's total revenue in the second quarter of 1999,
Europe/Middle East/Africa region comprised 30%, Japan comprised 9% and the Asia
Pacific region, excluding Japan, comprised 7%.
Gross Margin and Operating Expenses: Gross margin as a percentage of revenue
increased 1.6 percentage points to 31.6% in the second quarter of 1999 from
30.0% in the second quarter of 1998. Products gross margin increased 3.1
percentage points to 37.7% in the second quarter of 1999. This increase is
attributable to improved product mix and margin rate improvement in most product
lines. Services gross margin remained unchanged at 24.4% in the second quarter
of 1999.
Selling, general and administrative expenses decreased $6 million, or 2%, in the
second quarter of 1999 from the second quarter of 1998. As a percentage of
revenue, selling, general and administrative expenses were 22.4% in the second
quarter of 1999 and 22.7% in the second quarter of 1998. Research and
development expenses decreased $7 million to $84 million in the second quarter
of 1999. As a percentage of revenue, research and development expenses were
5.3% in the second quarter of 1999 versus 5.8% in the second quarter of 1998.
The second quarter research and development expenses continue to reflect the
changing revenue base, and the investment continues to move toward software and
solutions development efforts, with less emphasis on hardware, operating systems
and middleware. While total R&D spending declined in the quarter, continued
year over year declines are not expected.
Income Before Income Taxes: NCR reported operating income of $61 million in the
second quarter of 1999 compared to operating income of $23 million in the second
quarter of 1998. Other income, net of expenses, was $13 million in the second
quarter of 1999 compared to $69 million in the second quarter of 1998. Other
income in 1998 includes a non-recurring gain of $55 million on the sale of NCR's
TOPEND(R) ("TOPEND") middleware technology and product family to BEA Systems,
Inc. ("BEA"). Income before income taxes was $74 million in the second quarter
of 1999 compared to $92 million in the second quarter of 1998.
Provision for Income Taxes: Income tax provisions for interim periods are based
on estimated annual income tax rates. The provision for income taxes was $28
million in the second quarter of 1999 compared to $44 million in the second
quarter of 1998. The second quarter 1999 tax provision compared to the 1998
periods reflects a return to more normalized tax rate levels. The normalization
of tax rates is primarily due to improved profitability in certain tax
jurisdictions, mainly the United States.
9
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
- -------------------------------------------------------------------------
Results of Operations
Revenue: Revenue for the six months ended June 30, 1999 was $2,905 million, an
increase of 1% from the first six months of 1998. When adjusted for the impact
of changes in currency exchange rates, revenue was flat compared with the first
six months of 1998.
Product revenue decreased 2% to $1,517 million in the first six months of 1999
compared to the same period of 1998. Revenue gains in the first six months of
1999 in Retail products of 36% were partly offset by anticipated revenue
declines in Other Computer products of 22%. The Other Computer product group
includes many products that NCR once sold in volume, but now sells largely as a
solution component. In addition, Enterprise Servers, Customer Services and
Professional Services recorded revenue growth in the first six months of 1999
between 2% and 9%. Financial products were flat in the first six months of 1999
while Systemedia decreased slightly compared to the first six months of 1998.
Services revenue increased 4% to $1,388 million in the first six months of 1999
compared to the same period of 1998, due to revenue gains in both Customer
Support Services and Professional Services.
Revenue in the first six months of 1999 compared with the first six months of
1998 increased 4% in the Americas, 1% in Europe/Middle East/Africa and 13% in
the Asia Pacific region, excluding Japan, with a decrease of 16% in Japan. The
revenue declines experienced in Japan reflect market challenges in that area as
well as NCR's decision to exit the Super ATM business in Japan. When adjusted
for the impact of changes in foreign currency exchange rates, revenue on a local
currency basis increased 2% in Europe/Middle East/Africa, 11% in the Asia
Pacific region, excluding Japan, and decreased 24% in Japan. The Americas
region comprised 53% of NCR's total revenue in the first six months of 1999,
Europe/Middle East/Africa region comprised 31%, Japan comprised 9% and the Asia
Pacific region, excluding Japan, comprised 7%.
Gross Margin and Operating Expenses: Gross margin as a percentage of revenue
increased 1.6 percentage points to 30.3% in the first six months of 1999 from
28.7% in the same period of 1998. Products gross margin increased 2.8 points to
35.9% in the first six months of 1999. This increase is attributable to
improved product mix and margin rate improvement in most product lines.
Services gross margin increased 0.6 points to 24.1% in the first six months of
1999 due primarily to improvements in customer support and professional services
margins.
Selling, general and administrative expenses decreased $2 million in the first
six months of 1999 from the first six months of 1998. As a percentage of
revenue, selling, general and administrative expenses were 22.8% in the first
six months of 1999 and 23.1% in the first six months of 1998. Research and
development expenses decreased $8 million to $164 million in the first six
months of 1999. As a percentage of revenue, research and development expenses
were 5.6% in the first six months of 1999 versus 6.0% in the first six months of
1998. The trend in research and development expenses continues to reflect the
changing revenue base.
Income Before Income Taxes: NCR reported operating income of $53 million in the
first six months of 1999 compared to an operating loss of $11 million in the
same period of 1998. Other income, net of expenses, was $26 million in the first
six months of 1999 compared to $103 million in the first six months of 1998.
Other income in 1998 includes a non-recurring gain of $55 million on the sale of
TOPEND to BEA. Other declines year over year are due to reductions in interest
income, attributable to lower average short term investment balances, and 1998
foreign exchange contract gains that did not recur in 1999. Income before income
taxes was $79 million in the first six months of 1999 compared to $92 million in
the same period of 1998.
Provision for Income Taxes: Income tax provisions for interim periods are based
on estimated annual income tax rates. The provision for income taxes was $30
million in the first six months of 1999 compared to $44 million in the first six
months of 1998. The first six months 1999 tax provision compared to the 1998
periods primarily reflects a return to more normalized tax rate levels. The
normalization of tax rates is primarily due to improved profitability in certain
tax jurisdictions, mainly the United States.
Financial Condition, Liquidity, and Capital Resources
NCR's cash, cash equivalents, and short-term investments totaled $576 million at
June 30, 1999, compared to $514 million at December 31, 1998.
Operating Activities: NCR generated cash flows from operations of $215 million
in the first six months of 1999 while net cash flows used in operations were $81
million in the first six months of 1998. The cash generated in operations in
the first six months of 1999 was driven primarily by improved asset management.
Receivable balances decreased $202 million in the first six months of 1999
compared to a decrease of $7 million in the same period in 1998. The
improvement in 1999 reflects a strong focus on collections. Inventory balances
increased $11 million in the first six months of 1999 compared to an increase of
$49 million in the first six months of 1998. 1998 operating activities included
a $55 million gain in the sale of TOPEND to BEA.
10
Investing Activities: Net cash flows used in investing activities were $263
million in the first six months of 1999 and $168 million in the same period of
1998. In 1999, NCR purchased short-term investments of $109 million compared
with an investment reduction of $66 million in 1998. The increase in 1999
reflects the improvement in operating results. Capital expenditures were $170
million for the first six months of 1999 and $160 million for the comparable
period in 1998. Capital expenditures generally relate to Expenditures for
reworkable parts used to service customer equipment, expenditures for equipment
and facilities used in manufacturing and research and development, and
expenditures for facilities to support sales and marketing activities. 1998
proceeds from the sale of facilities and other assets includes the sale of NCR's
TOP END middleware technology to BEA and the sale of NCR's retail and computer
systems manufacturing operations to Solectron Corp. ("Solectron").
Financing Activities: Net cash provided by financing activities was $16 million
in the first six months of 1999 and net cash used for financing was $31 million
in the first six months of 1998. As of June 30, 1999, $62 million of cash was
used in the repurchase of Company stock pursuant to the stock repurchase program
included in Note 5 of the Notes to Consolidated Financial Statements; $78
million of cash was used in the same period of 1998 to repurchase Company stock.
In the first six months of 1999, NCR reported cash flows of $50 million from
other financing activities compared to $39 million in the same period of 1998.
Other financing cash flows primarily relate to share activity under NCR's
employee stock purchase plan.
NCR believes that cash flows from operations, the credit facility, and other
short- and long-term financings, if any, will be sufficient to satisfy its
future working capital, research and development, capital expenditure, and other
financing requirements for the foreseeable future.
Factors That May Affect Future Results
Year 2000
- ---------
Please note that the following is a Year 2000 Readiness Disclosure, as that term
is defined in the Year 2000 Information and Readiness Disclosure Act (105
P.L.271).
Year 2000 issues concern the inability of certain computerized information
systems to properly process date-sensitive information as the year 2000
approaches. Systems that do not process such information may require
modification or replacement prior to the year 2000. NCR accords a significant
priority to Year 2000 issues, and in early 1996 established a task force to
coordinate its global efforts to develop and implement its plans to address such
issues.
NCR's Year 2000 plans include, without limitation: (1) replacing or upgrading
NCR's affected internal information technology (IT) systems and non-IT systems
(those which include embedded microprocessors such as security systems or
factory production equipment), (2) developing Year 2000 Qualified products as
part of its offerings to customers, (3) designating products that will not be
rendered Year 2000 Qualified, (4) making Year 2000 upgrades available for
certain products and (5) identifying options for customers to migrate from non-
Qualified products to Year 2000 Qualified products. ''Year 2000 Qualification''
means that a particular NCR product has been reviewed to confirm that it stores,
processes (including sorting and performing mathematical operations), inputs and
outputs data containing date information correctly, regardless of whether the
data contains dates before, on, or after January 1, 2000. NCR products that do
not perform date manipulation, and that do not alter any date information that
flows through them, are also considered Year 2000 Qualified.
State of Readiness: In assessing the Year 2000 readiness of its products, IT
systems and non-IT systems, the Company employs a process consisting of five
phases: (1) inventory; (2) assessment; (3) remediation; (4) testing; and (5)
deployment (including making Year 2000 Qualified products available to customers
and, for the Company's internal systems, replacing or modifying designated IT
and non-IT systems).
The Company has completed inventory, assessment, remediation and testing of all
of the products it presently develops and provides to customers. Installation
of Year 2000 Qualified products at customer sites is largely dependent upon,
among other things, the customers' schedules, the availability of personnel for
installations and the presence or absence of Year 2000 plans on the customers'
part. NCR expects that installation of Year 2000 Qualified products or upgrades
will continue to take place at customer sites throughout 1999. Many such
installations occurred in 1998. NCR is encouraging its customers to plan such
installations promptly, because if a large number of customers delay their plans
until late in the year, the demand for installation and related services may
exceed their availability. NCR has designated the Year 2000 Qualification
status of several thousand of its current and former products, and has made that
directly available to past and present customers through links on its Year 2000
website. Through that website, direct contacts to customers with formal account
teams assigned to them, its "800" call center, mailings to customers, and other
means, NCR has sought to convey information on the status of its products, to
advise on the availability or discontinuation of maintenance services for older
products, and to provide information on upgrades or migration paths. There can
be no assurance, however, that all owners of NCR products, particularly if they
are not current maintenance customers, or otherwise have no current NCR
relationship, can be identified or contacted.
11
The Company previously offered highly specialized products specifically targeted
for niche markets, often unique to a single country (''local products''). The
Company has completed its assessment of these local products, typically sold
prior to 1995 under the Company's previous business model, and has determined
that the majority of them are not Year 2000 Qualified. Where practical, NCR is
communicating with purchasers of these products and is offering to assist them
in identifying replacement NCR products, if available.
The Company has completed its inventory, assessment, remediation and testing of
the Year 2000 issues associated with its critical global IT systems (e.g.,
manufacturing, financial management, incident management, payroll and statutory,
and order processing systems). At the end of the second quarter of 1999,
deployment (including retirement of legacy systems) was complete for
approximately 89% of these critical IT systems, which are supported by the
Company's Information Technology Services group, with the balance of those
systems expected to be completed in the third quarter of 1999. The Company has
also completed its inventory, assessment, remediation and testing of Year 2000
issues associated with its non-critical global internal information systems
supported by the Information Technology Services group, and deployment
(including retirement of legacy systems) was complete for approximately 92% of
such systems as of the end of the second quarter of 1999. Other, typically
localized IT systems, applications or tools are directly supported by various
business units of the Company around the world; most of these are characterized
as non-critical to the locations and business units that utilize them, and none
are categorized as critical to the Company and its subsidiaries taken as a
whole. The Company's Year 2000 analysis and related deployment for these
systems, applications and tools was substantially complete at the end of the
second quarter of 1999, with the remainder of such activities expected to be
completed in the third and fourth quarters of 1999. In addition, the Company
has completed its inventory and assessment of the Year 2000 issues associated
with its non-IT systems, including telecommunication equipment, security systems
and embedded microprocessors, at its manufacturing, distribution and office
facilities around the world. The Company did not identify any significant
business impact as a result of Year 2000 issues in connection with such systems.
NCR has requested information from substantially all of its key suppliers
concerning their Year 2000 readiness to assess the suppliers' ability to
continue to deliver products and services to NCR, as well as the Year 2000
readiness of those products and services themselves. Suppliers are categorized
as critical (meaning their failure to deliver products or services could have a
critical impact on some phase or phases of NCR's business) or non-critical
(typically designating a supplier that is NCR's primary source of a significant
product or service, but for which one or more alternate sources also exist). At
this time, approximately 240 and 550 suppliers are identified in those
respective categories (other suppliers, such as those utilized on a spot basis,
in very low volume, or for generic commodity purchases not critical to the
Company's business, are excluded). NCR has conducted reviews and completed its
initial assessment of its critical suppliers in accordance with its Year 2000
Qualification guidelines. All of the critical suppliers that the Company has
assessed either have completed their Year 2000 internal compliance activities or
have presented plans or statements that, at present, meet NCR's expectations.
NCR will continue to monitor these suppliers and expects to be prepared to
implement prepared contingency plans should the Company determine that any of
its critical suppliers will not complete their plans on schedule. In addition,
NCR continues to assess its non-critical suppliers. As of the end of the second
quarter of 1999, NCR had assessed approximately 95% of its non-critical
suppliers. The Company expects that its assessment of the remaining non-
critical suppliers will be completed during the third quarter of 1999. New
suppliers are also evaluated for Year 2000 readiness.
NCR's assessment of its suppliers is dependent upon its ability to obtain
accurate and complete information from them, and on their willingness to provide
such information. Moreover, there can be no assurances that all of NCR's
suppliers, including its critical suppliers, will be able to effectively achieve
Year 2000 readiness. NCR has developed contingency plans to address such
situations with respect to both its critical and non-critical suppliers. The
Company relies on Solectron to provide essential hardware components of NCR's
product offerings. Any major Year 2000 failures by Solectron or any other
critical suppliers could materially and adversely impact the Company. Because
of Solectron's particular significance to the Company's manufacturing
operations, NCR has conducted multiple on-site reviews of Solectron's facilities
to ascertain the status of those facilities' Year 2000 readiness. No material
Year 2000 issues have been identified in those reviews. Solectron facilities,
including all those utilized by NCR, were also subject to an external audit for
Year 2000 readiness arranged for by Solectron.
NCR believes that no single customer represents so significant a portion of the
Company's revenues that failure on the part of such a customer to plan
effectively for Year 2000 would materially impact NCR's consolidated results of
operations, financial condition or cash flows. In addition, NCR believes that
the diversity of its customer base should minimize the potential financial
impact of such an event. Some commentators have predicted that information
technology buying trends could be reduced due to Year 2000 issues. While some
NCR customers have postponed or have indicated that they may postpone purchasing
decisions in order to stabilize their information technology systems to
facilitate Year 2000 testing and readiness, others have indicated that Year 2000
readiness should not affect the timing of their purchases, and some have made
new purchases to enhance their Year 2000 readiness. The impact of such buying
patterns on NCR's financial results is difficult to quantify and may affect the
Company's revenue, consolidated results of operations, financial condition or
cash flows in upcoming quarters.
12
Costs to Address Year 2000 Issues: Due to a number of factors, it is difficult
to calculate the total cost of addressing the Company's Year 2000 issues with
precision. These factors include, without limitation, the large number of NCR
employees and contractors devoting a portion of their time and efforts to Year
2000 issues, and the inability to separately identify Year 2000 costs due to the
concurrent remediation of both Year 2000 and non-Year 2000 issues associated
with NCR's products, IT systems and non-IT systems. The Company estimates the
total cost to address its Year 2000 issues, including costs already incurred in
1997 and 1998, to be approximately $205 million. These costs include (1) in
connection with the products offered by the Company, personnel expenses, product
upgrades, and other modifications, including the replacement of legacy systems,
and (2) in connection with the
Company's infrastructure, the internal IT and non-IT systems being addressed in
the Company's Year 2000 plans as discussed above. Approximately $85 million of
such total costs were incurred in fiscal 1998; the Company estimates it incurred
approximately $20 million of such costs in 1997. NCR intends to capitalize or
expense its Year 2000 costs as required by generally accepted accounting
principles. In addition, the Company expects to fund these costs through
operating cash flows. Because these Year 2000 costs will be funded through a
reallocation of NCR's overall research and development, information technology
and administrative spending, Year 2000 costs are not expected to result in
significant increases in such expenditures. These cost estimates do not include
potential increased service, customer satisfaction, warranty or litigation costs
that may arise from Year 2000 issues affecting the Company's products or from
unanticipated failures of the Company's IT and non-IT systems, nor do they
include any increased costs, such as those associated with execution of
contingency plans, that may result from supplier or customer disruptions related
to a lack of readiness for Year 2000 issues. Although NCR believes its cost
estimates are reasonable, there can be no assurance, for the reasons stated
below, that the costs of implementing the Company's Year 2000 plans will not
differ materially from its estimates.
Risks of Year 2000 Issues: Year 2000 problems can be difficult to identify or
predict for a number of reasons. These include, among others, the complexity of
testing (whether by NCR or by a customer) inter-connected products, operating
environments, networks and applications, including those developed and/or sold
by third parties; the difficulty of simulating and testing for all possible
variables and outcomes associated with critical dates in 1999 and 2000; and the
reliability of test results obtained in a laboratory environment against actual
occurrences in a live production environment. As a result of such difficulties
and the risks described below, there can be no assurances that Year 2000 issues
will not materially adversely impact NCR's consolidated results of operations,
financial condition or cash flows.
Despite the Company's substantive Year 2000 plans and efforts, the Company could
face significant risks associated with its business-critical operations,
including, without limitation, the possible malfunction of NCR's IT and non-IT
systems due to unidentified components or applications, undetected errors or
defects, and the potential impacts of Year 2000 difficulties experienced by
third parties (e.g., suppliers, customers, utilities, governmental units and
financial institutions). In particular, risks associated with non-U.S. third
parties may be greater than those located domestically, as it is widely reported
that many non-U.S. businesses and governments are not addressing their Year 2000
issues on a timely basis.
In addition, despite the Company's Year 2000 Qualification and testing
processes, NCR could face significant Year 2000 risks as a vendor of technology
products and services. Such risks include, but are not limited to, the
following uncertainties: NCR's products may contain undetected errors or defects
associated with Year 2000 issues; NCR may be unable to identify and notify
affected customers of local or other products that are not Year 2000 Qualified;
installation schedules of Year 2000 Qualified products may be delayed; and
demand for installation services may exceed the ability of NCR and other service
providers to meet that demand. In addition, NCR has provided a range of
services, including software code development, as contracted and specified by
its customers. Typically, such services and products have been accepted by the
customers and warranties for them have expired; however, there is some risk that
customers will claim that NCR bears responsibility for Year 2000 issues
involving their systems. The Company also has provided Year 2000 code
remediation services to a small number of its customers. Some commentators have
noted that the complexity of identifying and testing Year 2000 issues in
connection with such services raises prospects of liability. NCR's contractual
arrangements typically contain limited warranties and limitations on liability,
but there can be no assurance that these limitations will be upheld in all
instances. Any of these or other unforeseen Year 2000 risks could increase
service, customer satisfaction, warranty and litigation costs. While no
litigation has been initiated against NCR in connection with Year 2000 issues,
suits have been brought against other technology vendors and such claims may be
advanced against NCR in the future.
The anticipated costs and risks described above are based on management's best
estimates using information currently available and numerous assumptions of
future events. There can be no assurances that these estimates will not change
or that there will not be delays in implementing the Company's Year 2000 plans.
In addition, the continued availability of personnel to address Year 2000 issues
cannot be assured, which could result in increased costs or delays in
implementing NCR's Year 2000 plans.
Contingency Plans: NCR believes it has developed effective Year 2000 plans for
the critical areas of its business. However, the Company recognizes that it is
not possible to identify and test all potential variables and outcomes relative
to Year 2000 issues. Accordingly, the Company has developed over 400 business
continuity and contingency plans (BCCPs) for its critical processes. NCR's
BCCPs address, among other things, the potential for Year 2000 failures of third
parties, including suppliers. BCCPs have
13
also been developed for such areas as customer support services, services
delivery, order management, help desks, incident-based services, manufacturing
systems, accounting and payroll, networks and processing centers. These plans
were completed in the second quarter of 1999. The Company is also, developing or
updating, as the case may be complementary disaster recovery plans for
approximately 86 a process expects to complete in the third quarter of 1999.
Disaster recovery plans are not limited to Year 2000 concerns, and address
potential failures of utilities or building services, as well as occurrences
such as floods and fires. Both the BCCPs and the disaster recovery plans are
expected to be adjusted and coordinated in the third and fourth quarters of 1999
as information and circumstances change.
Environmental
- -------------
The Company has been identified as a potentially responsible party in connection
with the Fox River matter as further described in "Environmental Matters" under
Note 4 of the Notes to Consolidated Financial Statements on page 7 of this
quarterly report and such discussion is incorporated in this Item 2 by reference
and made a part hereof.
Forward Looking Statements
- --------------------------
This Management's Discussion and Analysis of Financial Condition and Results of
Operations, and other sections of this Form 10-Q contain forward-looking
statements that are based on current expectations, estimates and projections
about the industry in which the Company operates, management's beliefs and
assumptions made by management. Any Form 10-K, Annual Report to Shareholders,
Form 10-Q or Form 8-K of the Company may include forward-looking statements. In
addition, other written or oral statements, which constitute forward-looking
statements, may be made by or on behalf of the Company. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions
("Factors"), which are difficult to predict. Therefore, actual outcomes and
results may differ materially from what is expressed or forecasted in such
forward-looking statements. The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise. Factors include price and product/services
competition by foreign and domestic competitors, including new entrants; the
Company's ability to identify, complete and successfully integrate other
businesses through mergers, acquisitions, joint ventures and other business
combinations; the ability to identify and expand into new and emerging markets;
the ability to continue to introduce competitive new products, services and
solutions on a timely, cost effective basis; the ability to achieve and improve
profitable gross margins through, among other things, a competitive mix of
products/services; the achievement of lower costs and expenses; the pace of
market growth for the Company's offerings, such as data warehousing; the
Company's ability to execute its strategies for its offerings in various
markets; management changes in Japan; protection and validity of patent and
other intellectual property rights; reliance on third party and single source or
exclusive suppliers, such as Solectron; reliance on alliances with companies
that provide products and services that are integrated into NCR's solution
offerings; the seasonal nature of the Company's business; risks of operating
abroad; and the outcome of pending and future litigation and governmental
proceedings, including those related to the environment, health and safety.
These foregoing are representative, but do not constitute a complete list, of
the Factors that could affect the outcome of the forward-looking statements. In
addition, such statements could be affected by general industry and market
conditions and growth rates, NCR's performance in these markets, retention of
personnel, general domestic and international political or economic conditions,
including interest rate and currency exchange rate fluctuations, Euro changeover
and other Factors.
For a further description of Factors that could cause actual results to differ
materially from such forward-looking statements, see Footnote 4 of the Notes to
Consolidated Financial Statements in Item 1 hereof, Item 3. Quantitative and
Qualitative Disclosure About Market Risk, the discussion above captioned Year
2000 and also see the discussion of such Factors in Form 10-Q for the quarter
ended March 31, 1999, the Company's Form 10-K for the Fiscal Year ended December
31, 1998 and in the Company's other securities filings.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NCR is exposed to market risk, including changes in foreign currency exchange
rates and interest rates. NCR uses a variety of measures to monitor and manage
these risks, including derivative financial instruments. Because a substantial
portion of NCR's operations and revenue occur outside the United States, NCR's
results can be significantly impacted by changes in foreign currency exchange
rates. To manage the exposures to changes in currency exchange rates, NCR
enters into various derivative financial instruments such as forward contracts,
swaps and options. These instruments generally mature within twelve months. At
inception, the derivative instruments are designated as hedges of inventory
purchases and sales and certain financing transactions that are firmly committed
or forecasted. Gains and losses on qualifying hedged transactions are deferred
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 generally
recognized currently in other income or expense as exchange rates change. NCR
does not hold or enter into derivative financial instruments for trading
purposes.
For purposes of specific risk analysis, NCR uses sensitivity analysis to
determine the impacts that market risk exposures may have on the fair values of
the Company's hedge portfolio. The foreign currency exchange risk is computed
based on the market value of future cash flows as impacted by the changes in the
rates attributable to the market risk being measured. The sensitivity analysis
represents the hypothetical changes in value of the hedge position and does not
reflect the opposite gain or loss on the underlying transaction. A 10%
strengthening of the U.S. Dollar from levels present at June 30, 1999 results in
an increase of 1 million U.S. Dollars to the current fair value of derivatives
protecting anticipated exposures. A 10% weakening in U.S. Dollar exchange rates
would increase the same fair value of derivatives by 16 million U.S. Dollars.
The interest rate risk associated with NCR's borrowing and investing activities
at June 30, 1999 is not material in relation to NCR's consolidated financial
position, results of operations or cash flows. NCR does not generally use
derivative financial instruments to alter the interest rate characteristics of
its investment holdings or debt instruments.
15
Part II. Other Information
ITEM 1. LEGAL PROCEEDINGS
The information required by this item is included in the material under Note 4
of the Notes to Consolidated Financial Statements on page 8 of this quarterly
report and is incorporated in this Item 1 as by reference and made a part
hereof.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Amendment and Restatement and Articles Supplementary
of NCR Corporation, as amended May 14, 1999.
3.2 Bylaws of NCR Corporation, as amended and restated on February 19,
1998 (incorporated by reference to Exhibit 3.2 to the NCR
Corporation Annual Report on Form 10-K for the year ended December
31, 1997).
4.1 Common Stock Certificate of NCR Corporation (incorporated by
reference to Exhibit 4.1 to the NCR Corporation Annual Report on
Form 10-K for the year ended December 31, 1996).
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
to the NCR Corporation Annual Report on Form 10-K for the year
ended December 31, 1996).
10.1 Termination Agreement dated May 26, 1999.
27 Financial Data Schedule.
(b) Reports on Form 8-K
NCR filed a Current Report on Form 8-K dated May 17, 1999, reporting under Item
5 of such form the news release addressing NCR's cash out of record stockholders
with small holdings.
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.
16
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: August 12, 1999 By: /s/ David Bearman
-------------------------------------
David Bearman, Senior Vice-President
and Chief Financial Officer
17