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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 September 30, 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
October 31, 2001 was 97,142,977.
TABLE OF CONTENTS
PART I. Financial Information
Description Page
----------- ----
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited)
Three and Nine Months Ended September 30, 2001 and 2000 3
Condensed Consolidated Balance Sheets (Unaudited)
September 30, 2001 and December 31, 2000 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 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 18
PART II. Other Information
Description Page
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Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
Part I. Financial Information
Item 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
In millions, except per share amounts
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------- -----------------------------
2001 2000 2001 2000
----------- ------------ ------------ ------------
Revenue
Products $ 734 $ 778 $ 2,198 $ 2,178
Services 708 686 2,119 1,989
----------- ------------ ------------ ------------
Total Revenue 1,442 1,464 4,317 4,167
Operating Expenses
Cost of products 487 486 1,424 1,369
Cost of services 547 515 1,612 1,507
Selling, general and administrative expenses 305 319 985 953
Research and development expenses 68 77 221 246
----------- ------------ ------------ ------------
Total Operating Expenses 1,407 1,397 4,242 4,075
----------- ------------ ------------ ------------
Income from Operations 35 67 75 92
Interest expense (6) (4) (16) (9)
Other (expense)/income, net (39) 22 (42) 61
----------- ------------ ------------ ------------
(Loss)/Income Before Income Taxes and Cumulative Effect of
Accounting Change (10) 85 17 144
Income tax (benefit)/expense (4) 31 (133) 56
----------- ------------ ------------ ------------
(Loss)/income before cumulative effect of accounting change (6) 54 150 88
Cumulative effect of accounting change, net of tax - - (4) -
----------- ------------ ------------ ------------
Net (Loss)/Income $ (6) $ 54 $ 146 $ 88
=========== ============ ============ ============
Net (Loss)/Income per Common Share
Basic before cumulative effect of accounting change $ (0.07) $ 0.57 $ 1.55 $ 0.93
Cumulative effect of accounting change - - (0.04) -
----------- ------------ ------------ ------------
Basic $ (0.07) $ 0.57 $ 1.51 $ 0.93
=========== ============ ============ ============
Diluted before cumulative effect of accounting change $ (0.07) $ 0.55 $ 1.50 $ 0.90
Cumulative effect of accounting change - - (0.04) -
----------- ------------ ------------ ------------
Diluted $ (0.07) $ 0.55 $ 1.46 $ 0.90
=========== ============ ============ ============
Weighted Average Common Shares Outstanding
Basic 97.2 96.1 96.6 95.1
Diluted 97.2 99.1 99.8 98.1
See Notes to Condensed Consolidated Financial Statements.
3
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
In millions, except per share amounts
September 30 December 31
2001 2000
-------------- ---------------
Assets
Current Assets
Cash, cash equivalents and short-term investments $ 284 $ 357
Accounts receivable, net 1,064 1,338
Inventories 312 288
Other current assets 251 251
-------------- ---------------
Total Current Assets 1,911 2,234
Reworkable service parts and rental equipment, net 239 218
Property, plant and equipment, net 688 742
Other assets 2,000 1,912
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Total Assets $ 4,838 $ 5,106
============== ===============
Liabilities and Stockholders' Equity
Current Liabilities
Short-term borrowings $ 135 $ 96
Accounts payable 414 521
Payroll and benefits liabilities 233 260
Customer deposits and deferred service revenue 340 344
Other current liabilities 407 615
-------------- ---------------
Total Current Liabilities 1,529 1,836
Long-term debt 11 11
Pension and indemnity liabilities 333 332
Postretirement and postemployment benefits liabilities 391 466
Other liabilities 593 676
Minority interests 23 27
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Total Liabilities 2,880 3,348
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Put Options 15 -
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Commitments and Contingencies (Note 4)
Stockholders' Equity
Preferred stock: par value $0.01 per share, 100.0 shares
authorized, no shares issued and outstanding at September 30,
2001 and December 31, 2000, respectively - -
Common stock: par value $0.01 per share, 500.0 shares
authorized, 97.3 and 95.2 shares issued and outstanding at
September 30, 2001 and December 31, 2000, respectively 1 1
Paid-in capital 1,184 1,156
Retained earnings 790 644
Accumulated other comprehensive loss (32) (43)
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Total Stockholders' Equity 1,943 1,758
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Total Liabilities and Stockholders' Equity $ 4,838 $ 5,106
============== ===============
See Notes to Condensed Consolidated Financial Statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
In millions
Nine Months Ended
September 30
--------------------------------
2001 2000
-------------- ---------------
Operating Activities
Net income $ 146 $ 88
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 317 272
Deferred income taxes (141) 23
Net gain on sales of assets - (37)
Purchased research and development from acquisitions - 25
Changes in assets and liabilities:
Receivables 291 61
Inventories (23) (11)
Current payables (161) (19)
Customer deposits and deferred service revenue (4) (7)
Employee severance and pension including timing of disbursements (212) (217)
Other assets and liabilities (142) (114)
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Net Cash Provided by Operating Activities 71 64
Investing Activities
Short-term investments, net (9) 52
Net expenditures and proceeds for service parts (102) (76)
Expenditures for property, plant and equipment (113) (163)
Proceeds from sales of property, plant and equipment 26 172
Business acquisitions and investments (3) (71)
Other investing activities, net (45) (73)
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Net Cash Used in Investing Activities (246) (159)
Financing Activities
Purchases of company common stock (50) (37)
Short-term borrowings, net 39 8
Long-term borrowings, net - (3)
Other financing activities, net 84 55
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Net Cash Provided by Financing Activities 73 23
Effect of exchange rate changes on cash and cash equivalents 20 (17)
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Decrease in Cash and Cash Equivalents (82) (89)
Cash and Cash Equivalents at Beginning of Period 347 571
-------------- ---------------
Cash and Cash Equivalents at End of Period $ 265 $ 482
============== ===============
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 and Form 10-Q for the quarters ended March 31, 2001
and June 30, 2001.
Certain prior year amounts have been reclassified to conform to the 2001
presentation.
2. SUPPLEMENTAL FINANCIAL INFORMATION (in millions)
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------- ---------------------------------
Comprehensive (Loss)/Income 2001 2000 2001 2000
--------------- --------------- --------------- ---------------
Net (loss)/income $ (6) $ 54 $ 146 $ 88
Other comprehensive (loss)/income, net of tax:
Unrealized loss on securities (8) (3) (1) (35)
Unrealized loss on derivatives (14) - - -
Additional minimum pension liability - - (6) 6
Currency translation adjustments 26 (22) 18 (36)
--------------- --------------- --------------- ---------------
Total Comprehensive (Loss)/Income $ (2) $ 29 $ 157 $ 23
=============== =============== =============== ===============
September 30 December 31
2001 2000
--------------- ---------------
Cash, Cash Equivalents and Short-Term Investments
Cash and cash equivalents $ 265 $ 347
Short-term investments 19 10
--------------- ---------------
Total Cash, Cash Equivalents and Short-Term Investments $ 284 $ 357
=============== ===============
Inventories
Work in process and raw materials $ 83 $ 69
Finished goods 229 219
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Total Inventories $ 312 $ 288
=============== ===============
3. SEGMENT INFORMATION
NCR categorizes its operations into six reportable 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.
6
The following tables present data for revenue and operating income by operating
segment for the periods ended September 30 (in millions):
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------- ---------------------------------
Revenue 2001 2000 2001 2000
--------------- --------------- --------------- ---------------
Data Warehousing $ 250 $ 272 $ 832 $ 803
Financial Self Service 423 365 1,147 1,035
Retail Store Automation 318 358 934 944
Systemedia 124 123 365 365
Payment and Imaging 74 73 223 220
Other 253 273 816 800
--------------- --------------- --------------- ---------------
Total Revenue $ 1,442 $ 1,464 $ 4,317 $ 4,167
=============== =============== =============== ===============
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------- ---------------------------------
Operating Income/(Loss) 2001 2000 2001 2000
--------------- --------------- --------------- ---------------
Data Warehousing $ (32) $ (12) $ (50) $ (27)
Financial Self Service 73 49 169 120
Retail Store Automation 10 6 (6) (34)
Systemedia 6 3 8 11
Payment and Imaging 6 11 29 30
Other (25) 15 (29) 39
Special items /1/ (3) (5) (46) (47)
--------------- --------------- --------------- ---------------
Total Operating Income $ 35 $ 67 $ 75 $ 92
=============== =============== =============== ===============
/1/ 2001 QTD - Significant special items represent integration charges related
to acquisitions ($3 million).
2000 QTD - Significant special items represent restructuring and other
related charges in connection with the 1999 restructuring plan
($4 million) and in-process research and development charges
related to acquisitions ($1 million).
2001 YTD - Significant special items represent charges related to the first
quarter 2001 write-down of loans and receivables with Credit Card
Center ($39 million), and integration charges related to
acquisitions ($7 million).
2000 YTD - Significant special items represent restructuring and other
related charges in connection with the 1999 restructuring plan
($22 million), and in-process research and development charges
relating to acquisitions ($25 million).
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
environmental 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
September 30, 2001 cannot currently be reasonably 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.
7
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 Green Bay (Fox River site) due to, among other things, sediment
contamination 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 site for inclusion on the CERCLA National
Priorities List, but no action has yet been taken on this proposal. 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.
On October 2, 2001, the Wisconsin Department of Natural Resources (WDNR) and
USEPA Region 5 made available for public review a Proposed Remedial Action Plan
for the Fox River site (PRAP), along with a revised draft remedial investigation
and feasibility study (RI/FS) and related documents. The PRAP segregates the Fox
River into four segments and includes a fifth segment for Green Bay, describes
the various remedial alternatives that were considered for the cleanup of each
segment and then selects a proposed alternative. The proposed alternative in the
PRAP is to dredge a total of approximately 7,250,500 cubic yards of sediment
from three segments of the Fox River site, dispose of the dredged sediment in
local landfills after treatment, and utilize monitored natural recovery for the
other Fox River segment and for the Green Bay segment, at a total estimated cost
of approximately $370 million, including a 20% contingency. (The range of
estimated costs for other Fox River alternatives considered and rejected was
between approximately $18 million and $1,096 million and the range of estimated
costs for other Green Bay alternatives considered and rejected was between
approximately $18 million and $2,454 million, all exclusive of contingencies;
the latter number consists mainly of the cost of dredging the Green Bay, an
action that has been characterized by WDNR as infeasible). While NCR plans to
continue to review the PRAP, RI/FS and related documents, including the cost
estimates, and file comments with the agencies (presently due on January 21,
2002), NCR recorded a $40 million environmental provision during the third
quarter of 2001 based on the PRAP.
NCR, in conjunction with the other PRPs, has developed a substantial body of
evidence that may demonstrate that eventual selection of alternatives involving
river-wide restoration/remediation, particularly massive dredging, would be
inappropriate and unnecessary. There is ongoing debate within the scientific,
regulatory, legal, public policy and legislative communities over how to
properly manage large areas of contaminated sediments, and NCR believes there is
a high degree of uncertainty about the appropriate scope of alternatives that
may ultimately be required by Claimants. NCR's ultimate share of restoration/
remediation and damages liability cannot be determined at this time, except by
reference to a range of potential outcomes, 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 are presently able to pay their respective 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, Appleton
Papers Inc. (API), have reached an interim settlement agreement under which the
parties are sharing both defense and liability costs.
NCR and API recently entered into an Interim Settlement with the Claimants,
which is subject to approval by the federal court in Wisconsin. If approved, the
key terms of the Interim Settlement would be as follows: (a) API/NCR would
provide funds to the Claimants totaling $10.375 million per year over a
four-year period for remediation or natural resource restoration activities at
the Fox River site; (b) the Claimants would not initiate an enforcement action
(including natural resource damage actions or administrative orders) against API
or NCR during the four-year period; and (c) before the term of the Interim
Settlement expires, the Claimants and API/NCR would engage in settlement
discussions regarding all claims against API/NCR at the Fox River site.
It is difficult to estimate the future financial impact of environmental laws,
including potential liabilities. NCR records 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 (except for the Fox
River site where the estimated costs are taken directly from the above-described
PRAP), 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
8
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. The amounts provided for environmental matters in NCR's consolidated
financial statements are the estimated gross undiscounted amounts of such
liabilities (except for the Fox River site where the PRAP estimates certain long
term costs at net present worth), 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
collectability of such amounts is probable, the amounts would be reflected as
receivables in the consolidated financial statements.
5. STOCK REPURCHASE PROGRAM
During the first nine months of 2001, NCR committed to purchase 1,050,000 shares
of its stock for approximately $41 million as part of the systematic repurchase
program authorized in December 2000. 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.
As part of the stock repurchase program, NCR sold 400,000 put options in July
2001, that entitled the holder of each option to sell to the company, by
physical delivery, shares of common stock at a specified price. The options sold
in July will expire in December 2001. NCR has a potential repurchase obligation
of $15 million.
6. 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.
7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (SFAS 143). SFAS 143, which amends Statement of Financial
Accounting Standards No. 19, "Financial Accounting and Reporting by Oil and Gas
Producing Companies", establishes accounting standards for the recognition and
measurement of an asset retirement obligation and its associated asset
retirement cost. The objective of SFAS 143 is to provide guidance for legal
obligations associated with the retirement of tangible long-lived assets. The
retirement obligations included within the scope of this project are those that
an entity cannot avoid as a result of either acquisition, construction or normal
operation of a long-lived asset. This statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002. At this time,
NCR does not expect this standard to have any material impact on the Company's
consolidated financial position, results of operations or cash flows.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
144). SFAS 144 supersedes Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" (SFAS 121) and amends Accounting Principles Bulletin Opinion No.
30, "Reporting Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business" (APB 30). This statement develops one accounting model
(based on the model in SFAS 121) for long-lived assets that are disposed of by
sale, as well as addresses the principal implementation issues. It eliminates
the APB 30 requirement that discontinued operations be measured at net
realizable value or that entities include under "discontinued operations" in the
financial statements amounts for operating losses that have not yet occurred.
Additionally, SFAS 144 expands the scope of discontinued operations to include
all components of an entity with operations that (1) can be distinguished from
the rest of the entity and (2) will be eliminated from the ongoing operations of
the entity in a disposal transaction. This statement is effective for fiscal
years beginning after December 15, 2001. At this time, NCR does not expect this
standard to have any material impact on the Company's consolidated financial
position, results of operations or cash flows.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
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We categorize our operations into six reportable 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.
Three Months Ended September 30, 2001 Compared to Three Months Ended September
- ------------------------------------------------------------------------------
30, 2000
- --------
For the three months ended September 30, 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 $ 1,442 $ 1,464
Consolidated gross margin /1/ 410 467
Consolidated operating expenses:
Selling, general and administrative expenses /2/ 304 319
Research and development expenses /3/ 68 76
- --------------------------------------------------------------------------------
Consolidated income from operations $ 38 $ 72
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/1/ 2001 - Excludes integration charges related to acquisitions ($2 million).
2000 - Excludes restructuring and other related charges in connection with
the 1999 restructuring plan ($4 million).
/2/ 2001 - Excludes integration charges related to acquisitions ($1 million).
/3/ 2000 - Excludes in-process research and development charges relating to
acquisitions ($1 million).
Revenue: Revenue for the three months ended September 30, 2001 was $1,442
million, a decrease of 2% from the third quarter of 2000. When adjusted for the
impact of changes in currency exchange rates, revenue was flat.
By key solution, Financial Self Service experienced revenue growth of 17%,
offset by revenue declines in Data Warehousing and Retail Store Automation of
13% and 14%, respectively. The improvement in Financial Self Service was
primarily due to double-digit growth in the Europe/Middle East/Africa and Asia
Pacific regions, excluding Japan. Revenue growth in the Europe/Middle
East/Africa region was aided by revenue from Euro conversion kits that allow
banks to dispense the new Euro currency. The revenue decline in Data Warehousing
was due primarily to the economic impact on the telecommunications industry and
upgrade deferrals by customers. Retail Store Automation experienced strong
growth from new products (primarily self-checkout terminals and web-enabled
kiosks) with their attractive return on investments, but saw a decrease in
revenues attributable to traditional retail products as retailers deferred
capital spending during the current economic slowdown.
Revenue in the third quarter of 2001 as compared with the third quarter of 2000
increased 11% in the Europe/Middle East/Africa region and 17% in the Asia
Pacific region, excluding Japan. These increases were offset by declines of 8%
in the Americas region and 13% in Japan. When adjusted for the impact of changes
in foreign currency exchange rates, revenue increased 12% in the Europe/Middle
East/Africa region and 24% in the Asia Pacific region, excluding Japan, offset
by declines of 7% in the Americas region and 2% in Japan. The revenue decline in
the Americas region was primarily driven by the slowing U.S. economy, while the
revenue decline in Japan was primarily driven by the businesses NCR has chosen
to exit. The strong revenue growth in the Europe/Middle East/Africa and
Asia-Pacific region, excluding Japan, was primarily driven by growth in sales of
our Financial Self Service solution. The Americas region comprised 51% of our
total revenue in the third quarter of 2001, Europe/Middle East/Africa region
comprised 30%, Asia Pacific, excluding Japan, comprised 11% and Japan comprised
8%.
Gross Margin and Operating Expenses: Gross margin as a percentage of revenue
decreased 3.5 percentage points to 28.4% in the third quarter of 2001 from 31.9%
in the third quarter of 2000. Products gross margin decreased 3.7 percentage
points to 33.8% in the third quarter of 2001 due largely to a lower mix of Data
Warehousing revenues versus Retail Store
10
Automation and Financial Self Service revenues. Services gross margin decreased
2.6 percentage points to 22.9% in the third quarter of 2001 as lower than
expected revenues in our services business affected our ability to leverage our
semi-fixed cost infrastructure.
Selling, general and administrative expenses decreased $15 million in the third
quarter of 2001 from the third quarter of 2000. As a percentage of revenue,
selling, general and administrative expenses were 21.1% in the third quarter of
2001 and 21.8% in the third quarter of 2000. The decrease versus prior year is
the result of lower headcount and revaluation of our management and associate
performance rewards programs. Research and development expenses decreased $8
million to $68 million in the third quarter of 2001. As a percentage of revenue,
research and development expenses were 4.7% in the third quarter of 2001
compared to 5.2% in the third quarter of 2000. The decrease in research and
development expenses is largely a result of our continued move toward industry
standard hardware components across our core solutions.
The net impact on operating results from our combined pension, postretirement
and postemployment plans was $12 million less favorable in the third quarter of
2001 as compared to the third quarter of 2000. Goodwill unfavorably impacted
operating results with an additional $9 million of amortization expense in the
third quarter of 2001 versus the comparable prior-year period.
Income Before Income Taxes and Cumulative Effect of Accounting Change: Operating
income was $38 million in the third quarter of 2001 compared to $72 million in
the third quarter of 2000.
Other expense, net, was $45 million in the third quarter of 2001 compared to $18
million other income, net, in the third quarter of 2000. Excluding a $40 million
provision for environmental matters related to a business that was sold in 1978,
other expense, net, was $5 million in the third quarter of 2001. The change
versus the prior-year period was primarily driven by decreased gains from asset
dispositions and net interest expense.
Loss before income taxes and cumulative effect of accounting change was $10
million in the third quarter of 2001 compared to income of $85 million in the
third 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 third quarter income tax provision was $11 million compared to a $32 million
provision in the third quarter of 2000. The tax effect of special items in the
third quarter of 2001 was a $15 million benefit comprised of a $14 million
benefit related to the long-term environmental liability and a $1 million
benefit related to acquisition integration charges, compared to a $1 million
benefit in the prior-year period resulting from restructuring and other related
charges. Including special items, the income tax provision was a $4 million
benefit in the third quarter of 2001 compared to a $31 million income tax
provision in the third quarter of 2000.
Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30,
- --------------------------------------------------------------------------------
2000
- ----
For the nine months ended September 30, 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 2000 2001
- --------------------------------------------------------------------------------
Consolidated revenue $ 4,317 $ 4,167
Consolidated gross margin /1/ 1,286 1,312
Consolidated operating expenses:
Selling, general and administrative expenses /2/ 944 952
Research and development expenses /3/ 221 221
- --------------------------------------------------------------------------------
Consolidated income from operations $ 121 $ 139
================================================================================
/1/ 2001 - Excludes integration charges related to the acquisitions ($5
million).
2000 - Excludes restructuring and other related charges in connection with
the 1999 restructuring plan ($21 million).
/2/ 2001 - Excludes charges related to the first quarter 2001 write-down of
loans and receivables with Credit Card Center ($39 million) and
integration charges related to acquisitions ($2 million).
2000 - Excludes restructuring and other related charges in connection with
the 1999 restructuring plan ($1 million).
/3/ 2000 - Excludes in-process research and development charges relating to
acquisitions ($25 million).
11
Revenue: Revenue for the nine months ended September 30, 2001 was $4,317
million, an increase of 4% from the first nine months of 2000. When adjusted for
the impact of changes in currency exchange rates, revenue increased 7%.
The revenue improvement in the first nine months of 2001 compared to the prior
year reflects broad-based revenue growth in our key solutions. By key solution,
Financial Self Service revenue increased 11%, Data Warehousing revenue increased
3%, and Retail Store Automation revenue increased 2% compared to the comparable
prior-year period. Financial Self Service experienced revenue growth in all
regions, except Japan, with double-digit growth in the Asia Pacific region,
excluding Japan. Revenue growth in Data Warehousing was due primarily to
increased sales of consulting services. 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.
Revenue in the first nine months of 2001 compared with the first nine months of
2000 increased 13% in the Europe/Middle East/Africa region, 11% in the Asia
Pacific region, excluding Japan, while remaining flat in the Americas region.
These increases were partially offset by a decrease in Japan of 6%. When
adjusted for the impact of changes in foreign currency exchange rates, revenue
increased 20% in the Asia Pacific region, excluding Japan, 17% in the
Europe/Middle East/Africa region, and 5% in Japan. The strong revenue growth in
the Asia Pacific region, excluding Japan, reflects growth in sales of our
Financial Self Service and Data Warehousing solutions. Revenue growth in the
Europe/Middle East/Africa region reflects growth in sales of our Data
Warehousing, Financial Self Service and Payment and Imaging solutions partially
offset by a decline in our Retail Store Automation solution. The Americas region
comprised 51% of our total revenue in the first nine months of 2001, the
Europe/Middle East/Africa region comprised 30%, the Asia Pacific region,
excluding Japan, comprised 10% and Japan comprised 9%.
Gross Margin and Operating Expenses: Gross margin as a percentage of revenue
decreased 1.7 percentage points to 29.8% in the first nine months of 2001 from
31.5% in the same period of 2000. Products gross margin decreased 2.0 percentage
points to 35.3% in the first nine months of 2001. Services gross margin
decreased 1.0 percentage points to 24.1% in the first nine months of 2001.
Overall, a larger mix of services versus hardware and software negatively
impacted gross margin as a percentage of revenue.
Selling, general and administrative expenses decreased $8 million in the first
nine months of 2001 from the first nine months of 2000. As a percentage of
revenue, selling, general and administrative expenses were 21.9% in the first
nine months of 2001 and 22.8% in the first nine months of 2000. Research and
development expenses remained flat in the first nine months of 2001 compared to
the first nine months of 2000. As a percentage of revenue, research and
development expenses were 5.1% in the first nine months of 2001 compared to 5.3%
in the same period of 2000.
The net impact on operating results from our combined pension, postretirement
and postemployment plans is $15 million less favorable in the first nine months
of 2001 as compared to the same period of 2000. Goodwill unfavorably impacted
operating results with an additional $30 million of amortization expense in the
first nine months of 2001 versus the comparable prior-year period.
Income Before Income Taxes and Cumulative Effect of Accounting Change: Operating
income was $121 million in the first nine months of 2001 compared to $139
million in the first nine months of 2000.
Other expense, net, was $58 million in the first nine months of 2001 compared to
other income, net, of $52 million in 2000. Excluding a $40 million provision for
environmental matters related to a business that was sold in 1978, and a $1
million charge for interest receivables, other expense, net, was $17 million in
the first nine months of 2001 compared to other income, net, of $52 million in
the first nine months of 2000. The change versus the prior period was due
primarily to decreased gains from asset dispositions, a write-down of marketable
securities of a technology company investment and decreased interest income
resulting from lower cash, cash equivalents and short-term investment balances
due to acquisitions.
Income before income taxes and cumulative effect of accounting change was $17
million in the first nine months of 2001 compared to $144 million in the same
period 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 income tax provision for the first nine months was $34 million compared to a
$67 million provision in the first nine months of 2000. The tax effect of
special items was a $167 million benefit in the first nine months of 2001
comprised of a $138 million benefit resulting from the favorable resolution of
an examination of prior year international activities, and a total $29 million
of benefit related to other special items. This compares to an $11 million
benefit in the prior-year period resulting from
12
restructuring and other related charges. Including special items, the income tax
benefit was $133 million for the first nine months of 2001 compared to a $56
million income tax provision for the first nine months of 2000.
Financial Condition, Liquidity, and Capital Resources
- -----------------------------------------------------
Our cash, cash equivalents, and short-term investments totaled $284 million at
September 30, 2001 compared to $357 million at December 31, 2000.
Operating Activities: We generated cash flows from operations of $71 million in
the first nine months of 2001 compared to $64 million generated in the first
nine months of 2000. The cash generated in operations in the first nine months
of 2001 was driven primarily by continued improvements in asset management.
Receivable balances decreased $291 million in the first nine months of 2001
versus a $61 million decrease in the same period in 2000. The decrease in
receivable balances in the first nine months of 2001 is driven primarily by the
increased focus on collections and the factoring of approximately $136 million
of receivables at September 30, 2001. Inventory balances increased $23 million
in the first nine months of 2001 compared to an increase of $11 million in the
same period of 2000. The increase in inventory is due to lower than expected
product sales in the third quarter of 2001, and an increase in the work in
process and finished equipment to support our seasonal fourth quarter expected
billings. Current payables decreased $161 million in the first nine months of
2001 compared to a decrease of $19 million in the same period of 2000. The
decrease in 2001 was primarily due to reductions in accounts payable versus a
year-end 2000 measure that reflects seasonal spending patterns. The decrease in
the prior-year period was not as pronounced as year 2000 concerns impacted the
timing of year-end 1999 spending. Customer deposits and deferred service revenue
increased $212 million in the first nine months of 2001 compared to an increase
of $217 million in the prior-year period.
Investing Activities: Net cash flows used in investing activities was $246
million in the first nine months of 2001 and $159 million in the same period of
2000. During the first nine months of 2001, we purchased short-term investments
of $9 million compared to $52 million in sales for the same period of 2000 as we
converted securities into cash to complete the October 2000 acquisition of
4Front Technologies, Inc. Net expenditures and proceeds for reworkable service
parts utilized $102 million of cash in the first nine months of 2001 compared to
a use of $76 million in the same period of 2000. Capital expenditures were $113
million for the first nine months of 2001 and $163 million for the comparable
period in 2000. This reduction is in line with our capital expenditure reduction
initiatives implemented during 2001. Proceeds from sales of property, plant and
equipment generated cash of $26 million compared to $172 million in the prior-
year period. The prior-year period included sales related to our strategy to
reduce our real estate assets. Business acquisitions and investments used $3
million in the first nine months of 2001 compared to $71 million in the first
nine months of 2000.
Financing Activities: Net cash provided by financing activities was $73 million
in the first nine months of 2001 and $23 million in the same period of 2000. In
the first nine months of 2001, we utilized $50 million of cash in the repurchase
of Company common stock pursuant to the systematic stock repurchase program
compared to a $37 million use for stock repurchases in the same period in 2000.
Short-term borrowings generated cash of $39 million in the first nine months of
2001, compared to a $8 million source of cash in the prior-year period. In the
first nine months of 2001, other financing activities provided $84 million
compared to $55 million in the prior-year period. Other financing activities
primarily relate to share activity under our stock option and employee stock
purchase plans.
In 1996, NCR entered into a $600 million five-year, unsecured revolving credit
facility with a syndicate of financial institutions which was scheduled to
expire in November 2001. In October 2001, NCR terminated the $600 million credit
facility and entered into a $200 million 364-day unsecured revolving credit
facility with a one year term-out option and a $400 million five-year unsecured
revolving credit facility, both with a syndicate of financial institutions. The
credit facilities contain certain representations and warranties, conditions,
affirmative, negative and financial covenants, and events of default customary
for such facilities. Interest rates charged on borrowings outstanding under the
credit facilities are based on prevailing market rates. As of September 30,
2001, no amounts were outstanding under the 1996 credit facility.
We believe that cash flows from operations, the credit facility, and other
short-term and long-term financing, if any, will be sufficient to satisfy our
future working capital, research and development, capital expenditure, and other
financing requirements for the foreseeable future.
13
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 Corporation (IBM), Oracle
Corporation, Unisys Corporation and Wincor Nixdorf Gmbh & Co., some of which
have widespread penetration of their platforms and service offerings. 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
maintain 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.
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 retail self-checkout terminals,
electronic shelf label solutions and financial self-service full function ATMs
and outsourcing, 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 remedy errors that we believe
would be considered critical by our customers prior to shipment, we may not be
able to detect or remedy 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
14
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 that have
complementary products, services and skills. Many different relationships are
formed by these alliances such as outsourcing arrangements with Solectron
Corporation and others to manufacture hardware and subcontract agreements with
third parties to perform services and provide products to NCR's customers in
connection with NCR's solutions. 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 or contractual arrangements 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 (including goodwill acquired prior
to July 1, 2001, which will be amortized normally though December 31, 2001).
It is our policy not to discuss or comment upon negotiations regarding such
business combinations or divestitures until a definitive agreement is signed or
circumstances indicate a high degree of probability that a material transaction
will be consummated, unless the law requires otherwise.
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 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.
Cost/Expense Reductions. We are actively working to manage the Company's costs
and expenses to continue to improve operating profitability. Our success in
achieving targeted cost and expense reductions depends on a number of factors,
including our ability to achieve infrastructure rationalizations, implement six
sigma practices, improve accounts receivable collections, and reduce inventory
overhead, among other things. If we do not successfully complete our cost
reduction initiatives, our results of operation or financial condition could be
adversely affected.
Multi-National Operations
Continuing to generate substantial revenues from our multi-national operations
helps to balance our risks and meet our strategic goals.
15
Currently, approximately 56% 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: the impact of recent terrorist activity on the
economy or markets in general, or on the ability of NCR and its suppliers to
meet their commitments, or on the timing of purchases by NCR's customers;
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 and global telecommunications industries;
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
4 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 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
- -----------------------------------------
In August 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (SFAS 143). SFAS 143, which amends Statement of Financial
Accounting Standards No. 19, "Financial Accounting and Reporting by Oil and Gas
Producing Companies", establishes accounting standards for the recognition and
measurement of an asset retirement obligation and its associated asset
retirement cost. The objective of
16
SFAS 143 is to provide guidance for legal obligations associated with the
retirement of tangible long-lived assets. The retirement obligations included
within the scope of this project are those that an entity cannot avoid as a
result of either acquisition, construction or normal operation of a long-lived
asset. This statement is effective for financial statements issued for fiscal
years beginning after June 15, 2002. At this time, we do not expect this
standard to have any material impact on our consolidated financial position,
results of operations or cash flows.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
144). SFAS 144 supersedes Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" (SFAS 121) and amends Accounting Principles Bulletin Opinion No.
30, "Reporting Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business" (APB 30). This statement develops one accounting model
(based on the model in SFAS 121) for long-lived assets that are disposed of by
sale, as well as addresses the principal implementation issues. It eliminates
the APB 30 requirement that discontinued operations be measured at net
realizable value or that entities include under "discontinued operations" in the
financial statements amounts for operating losses that have not yet occurred.
Additionally, SFAS 144 expands the scope of discontinued operations to include
all components of an entity with operations that (1) can be distinguished from
the rest of the entity and (2) will be eliminated from the ongoing operations of
the entity in a disposal transaction. This statement is effective for fiscal
years beginning after December 15, 2001. At this time, we do not expect this
standard to have any material impact on our consolidated financial position,
results of operations or cash flows.
17
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 related to anticipated transactions. 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
September 30, 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
$48 million increase or a $8 million 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
$5 million decrease or a $5 million increase in the fair value of the hedge
portfolio as of September 30, 2001 and 2000, respectively.
The interest rate risk associated with our borrowing and investing activities at
September 30, 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 September 30, 2001 and 2000, we did not have any major
concentration of credit risk related to financial instruments.
18
Part II. Other Information
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 June 25, 2001 (incorporated by reference to Exhibit 3.2
from the NCR Corporation Form 10-Q for the quarter ended June
30, 2001).
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).
4.3 NCR Corporation hereby agrees to furnish the Securities and
Exchange Commission, upon its request, a copy of any
instrument which defines the rights of holders of long-term
debt of NCR Corporation and all of its subsidiaries for which
consolidated or unconsolidated financial statements are
required to be filed, and which does not exceed 10% of the
total assets of NCR Corporation and its subsidiaries on a
consolidated basis.
10.1 Second Amendment to the Retirement Plan for Officers of NCR
Corporation effective January 1, 2001.
10.2 Letter Agreement effective August 20, 2001.
(b) Reports on Form 8-K
No reports filed on Form 8-K for the quarter ended September
30, 2001.
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.
Teradata is either a registered trademark or trademark of NCR International,
Inc. in the United States and/or other countries.
19
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: November 13, 2001 By: /s/ Earl Shanks
----------------------------------
Earl Shanks, Senior Vice President
and Chief Financial Officer
20
EXHIBIT 10.1
SECOND AMENDMENT TO
THE RETIREMENT PLAN FOR OFFICERS OF NCR
AMENDMENT TO THE RETIREMENT PLAN FOR OFFICERS OF NCR (the "Plan") as
restated and in effect January 1, 1997 by NCR Corporation ("NCR").
WHEREAS, the Plan was amended and restated effective January 1, 1997;
and
WHEREAS, NCR desires to change the vesting schedule of the Plan;
NOW, THEREFORE, NCR does hereby amend the Plan, effective January 1,
2001, as follows:
Paragraph 3 of ARTICLE VII is hereby amended to read as follows:
3. A Participant shall be entitled to benefits under the Plan only if he
or she is vested in the Plan benefit at the time his or her employment with the
Company terminates, or his or her participation in the Plan terminates due to
change in employment status. A Participant shall become vested in his or her
Plan benefit upon (1) completion of five years of service with the Company, or
(2) the Participant's death while employed by the Company.
Paragraph 4 of ARTICLE VII is hereby amended to read as follows:
4. If a Participant's participation in the Plan terminates due to a change
in such Participant's employment status with the Company, the amount of his or
her benefits shall be computed in accordance with Section l or 2 of this ARTICLE
VII; provided, however, that for purposes of determining the Pension Plan
Benefit, the portion of any pension paid to such former Participant under the
Pension Plan attributable to the period after the termination of participation
in the Plan shall be disregarded.
IN WITNESS WHEREOF, NCR has caused this amendment to the Plan to be executed
this 24th day of October, 2001.
FOR NCR CORPORATION
By: /s/ Wilbert Buiter
Wilbert Buiter
Senior Vice President, Human Resources
21
EXHIBIT 10.2
[NCR Logo]
- --------------------------------------------------------------------------------
Wilbert J. M. Buiter 1700 South Patterson Boulevard
Senior Vice President, Human Resources Dayton, Ohio 45479
PERSONAL & CONFIDENTIAL
-----------------------
David Bearman
5350 Reserve Drive
Dublin, OH 43017
Re: Retirement Information
Dear David:
On behalf of Lars and myself, I want to thank you for your outstanding service
to NCR. You have made significant contributions to the company. The purpose of
this letter is to provide you with information regarding your compensation and
benefits as they will be impacted by your upcoming retirement. As we have
discussed, your retirement compensation and benefits will be those provided
under NCR's normal plans, except for your Mid-Career Hire Pension Plan vesting,
which is addressed in detail in numbered paragraph 4 of this letter.
This letter agreement is effective as of August 20, 2001. Your effective
retirement date will be January 15, 2002. By signing this letter, you resign
your position as Senior Vice President and Chief Financial Officer effective as
of the date of the appointment of your successor. You will continue to be
classified as a Band I position and will be on a paid leave of absence through
your retirement date with the understanding you are available for consultation
as needed. This agreement is subject to approval by the Compensation Committee
of the NCR Board of Directors.
1. Compensation. During the period September 1, 2001 through your effective
retirement date (January 15, 2002), you will continue to be paid your
current weekly salary of $8,783.65. Payment will continue on a bi-weekly
basis and is subject to all applicable withholdings. Additionally, your
employee benefits, as selected by you during the Personal Choice enrollment
period, will continue until your retirement date.
2. Vacation Pay. You may use any unused vacation prior to September 15, 2001.
Any accrued and unused vacation as of that date will be paid out in a lump-
sum payment. You will not accrue any vacation for the year 2002.
3. Management Incentive Plan for Executive Officers (MIP). You will be
eligible for the full year 2001 BPP award based on your retirement date of
January 15, 2002. Any actual award will be determined in accordance with
the Plan by the Chairman and CEO, and the Compensation Committee of the
Board of Directors, and paid in Q1 2002. You will not be eligible for a BPP
award for 2002.
4. Nonqualified Executive Pension Plans. You are vested in your non-qualified
pension under The Retirement Plan for Officers of NCR (SERP II), because
you attained age 55 while covered by the plan. You may commence your SERP
II pension at any time between your retirement date and your reaching age
62. A 6% early retirement reduction factor applies to the benefit for each
year prior to age 62 that the benefit commences. Regardless of when you
commence your SERP benefit, you will be considered to have retired from
NCR, because you are leaving the company after age 55.
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Although you have not met the service requirement to vest under the NCR
Mid-Career Hire Pension Plan, subject to approval by the Compensation
Committee of the NCR Board of Directors, you will be paid a benefit based
on the formula as prescribed in that plan.
Contact Alisa Cheatham (937.445.9686) at least 30 days prior to the date
you wish to commence your non-qualified pension benefit.
5. Qualified Plan Pension. You are not vested for benefits from the NCR
Pension Plan, including the PensionPlus benefit, since you will not have
five years of service as of your retirement date. As a result, your
non-qualified pension benefits (SERP and Mid-Career) will not be reduced by
benefits from this plan.
6. Savings Plan. You will be 60% vested in the Company contributions to your
Savings Plan accounts. You may take a distribution from the Savings Plan at
any time after your retirement date. To initiate a distribution or to
attain information, contact the NCR Benefits Center at 1-800-245-9035. You
may also access your Savings Plan account online by visiting Fidelity's
NetBenefits at http://netbenefits.fidelity.com.
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7. Equity Based Incentives. All unvested grants awarded under the Management
Stock Option Plan will vest in full effective on your retirement date and
are exercisable for the full ten year term. You will not be eligible for a
management stock option grant in 2002.
Your restricted stock, as described in your offer letter of August 5, 1998,
will also immediately vest on your retirement date, and will be taxable
income to you at that time. The restrictions on the restricted stock will
be lifted as soon as the tax withholding obligation is satisfied. Please
contact Alisa Cheatham at least 30 days before your retirement date if you
would like to satisfy the tax obligation by providing a check to NCR.
Otherwise, the tax obligation will be satisfied by selling sufficient
shares to cover the statutory withholding amounts.
After your successor is appointed, it will no longer be necessary for you
to clear option exercises with the NCR Law Department. Provided you do not
purchase or sell NCR shares on the open market during the time remaining
until that date, you also will not need to clear open market purchases and
sales. However, you will continue to be subject to insider trading
black-out periods, because you will continue to be an NCR employee who is
in the D Band or above. Please note that while the black-out periods are
not in effect, if you have actual material inside information concerning
the company, you should not exercise options or otherwise purchase or sell
NCR securities until the information becomes public.
8. Health Care Coverage. Coverage for you and your spouse under the NCR Health
Care Plan will terminate on your retirement date. However, you can extend
your coverages through COBRA for eighteen months. You will receive a COBRA
notice shortly after your retirement date, giving the opportunity to elect
COBRA coverage. The election form must be returned within 60 days. If you
incur health care costs before you return your COBRA election, the claims
may be rejected, but they will be reprocessed after your COBRA election is
received. As an active employee through January 15, you will have the
opportunity to change your 2002 benefit elections during open enrollment
this Fall.
9. Life Insurance. When you retire, your company-provided life insurance will
cease. During a thirty-day window immediately following your retirement
date, you may convert your life insurance coverage in effect prior to your
termination date to an individual policy. Call the Benefits Center at
1-800-245-9035 to request a conversion form. Your company-provided
accidental death and business and travel accident coverage cannot be
converted.
10. Financial Counseling. You will continue to participate in the Financial
Counseling Program through 2001.
Terms and Conditions
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11. Company Property. In accordance with your existing and continuing
obligations to NCR, you agree to return to NCR, on or before your
retirement date, all NCR property or copies thereof, including, but not
limited to, mobile or portable phones, files, records, computer and related
hardware and software, computer access codes, computer programs, keys, card
key passes, instruction manuals, documents, business plans and other
property which you received or prepared or
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helped to prepare in connection with your employment with NCR, and to
assign to NCR all right, title and interest in such property, and any other
inventions, discoveries or works of authorship created by you during the
course of your employment.
12. Proprietary Company Information. You affirm your obligation to keep all
"Proprietary Company Information" confidential and not to disclose it to
any third party in the future, subject to any obligation to comply with
legal process. As used in this letter agreement, the term "Proprietary
Company Information" includes, but is not necessarily limited to,
confidential, technical, marketing, business, financial or other
information not publicly available.
13. Confidentiality. You agree to keep this letter agreement confidential and
not to disclose its contents to anyone except your lawyer, your immediate
family, your executive outplacement counselor or your financial consultant,
provided that such persons agree in advance to keep said information
confidential and not disclose it to others.
Release and Indemnification
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14. Material Breach. You understand and agree that a violation of the
paragraphs relating to Company Property or Proprietary Company Information,
unless you have a right to use such Property or Proprietary Company
Information pursuant to a separate agreement with NCR, will be considered a
material breach of this letter agreement, for which you will forfeit any
moneys not already paid under this letter agreement. The provisions of this
paragraph in no way limit NCR's right to also commence an action for
damages and/or pursue other legal or equitable remedies in the event you
breach any provision of this letter agreement. In the event NCR takes such
action, all of your other obligations under this letter agreement shall
remain in full force and effect.
Release and Indemnification
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15. Waiver of Rights. You acknowledge that there are various state, local and
federal laws that prohibit employment discrimination on a number of bases
including, but not limited to, age, sex, race, color, national origin,
religion, disability, sexual orientation or veteran status and that these
laws are enforced through the Equal Employment Opportunity Commission,
Department of Labor and State or Local Human Rights agencies. Such laws
include, without limitation, Title VII of the Civil Rights Act of 1964 as
amended, 42 U.S.C. Sec. 2000 et. seq.; the Age Discrimination in Employment
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Act, 29 U.S.C. Sec. 621 et. seq.; the Americans with Disabilities Act, 42
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U.S.C. Sec. 12101; the Employee Retirement Income Security Act, as amended
29 U.S.C. Sec. 1001 et. seq.; and 42 U.S.C. Sec. 1981, and other state and
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local human or civil rights laws as well as other statutes which regulate
employment; and the common law of contracts and torts. In consideration of
this letter agreement, you hereby waive and release any rights you may have
as of the date of your execution of this letter agreement under these or
any other laws with respect to your employment and termination of
employment with NCR and acknowledge that based on your knowledge as of the
date of your execution of this letter agreement, NCR has not (a)
discriminated against you, (b) breached any contract with you, (c)
committed any civil wrong (tort) against you, or (d) otherwise acted
unlawfully towards you. You also waive any right to become, and promise not
to consent to become, a member of any class in a case in which claims are
asserted against any Releasee (as defined below) that is related in any way
to your employment or the termination of your employment with NCR, and that
involve events which have occurred as of the date of this letter agreement
(defined to mean the date on which you sign this letter agreement) or your
retirement date. If you, without your knowledge or consent are made a
member of a class in any proceeding, you shall opt out of the class at the
first opportunity afforded to you after learning of your inclusion. In this
regard you agree that you will execute, without objection or delay, an
"opt-out" form presented to you either by the court in which such
proceeding is pending or by counsel for a Releasee who is made a defendant
in any such proceeding.
16. Release of Claims. You, on behalf of yourself, your heirs, executors,
administrators, successors and assigns, release and discharge NCR and its
successors, assigns, subsidiaries, affiliates, directors, officers,
representatives, agents and employees ("Releasees") from any and all claims
(including claims for attorneys' fees and costs), charges, actions and
causes of action with respect to, or arising out of, your employment or
termination of employment with NCR, as well as from all claims for personal
injury, actual or potential, to the date of your retirement. This includes,
but is not limited to, claims arising under federal, state or local laws
prohibiting age, sex, race or any other forms of discrimination or claims
growing out of any legal restrictions on NCR's right to terminate its
employees. You represent that you have not filed any charge or lawsuit
against NCR or any Releasee with any governmental agency or court and that
you will not institute
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any actions against NCR or any Releasee for any reason, except that you may
file a charge with the Equal Employment Opportunity Commission concerning
claims of discrimination and you may participate in any manner in an
investigation, hearing or proceeding. However, you waive your right to
recover any damages or other relief in any claim or suit brought by you or
the EEOC or any other federal, state or local agency on your behalf, under
Title VII of the Civil Rights Act of 1964, the Age Discrimination in
Employment Act (ADEA), the Americans with Disabilities Act (ADA), the Equal
Pay Act, or any other federal, state or municipal discrimination law. With
respect to any administrative charges that have been or may be filed
concerning events or actions relating to your employment or the termination
of your employment that occurred on or before the date of your execution of
this letter agreement, you waive and release any right you may have as of
the date of your execution of this letter agreement to recover in any
lawsuit or proceeding brought by you or by an administrative agency on your
behalf. If you breach this paragraph, you understand that you will be
liable for all expenses, including your costs and reasonable attorneys'
fees. This paragraph is not intended to limit you from instituting legal
action for the sole purpose of enforcing this letter agreement.
17. Acknowledgment. By signing this letter agreement, you state that:
(a) You have read it and have had sufficient time to consider its
terms;
(b) You understand it and know that you are giving up important
rights;
(c) You agree with everything in it;
(d) You have been advised of and are aware of your right to consult
an attorney before signing it.
(e) You have signed it knowingly and voluntarily.
Please also note that both SERP II and your option agreements contain
non-competition clauses. If you are considering opportunities for employment
during the three years following your retirement from NCR, I recommend that you
consult with Lars or me to determine if the non-competition clauses might be
violated.
David, your contributions to NCR are very much appreciated, and I hope your
retirement is healthy and rewarding.
Sincerely,
/s/ Wilbert Buiter
Wilbert Buiter
Senior Vice President
Human Resources
Accepted:
By: /s/ David Bearman
Name: David Bearman
Dated: November 9, 2001
cc: Lars Nyberg
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