EXHIBIT 13
2002 ANNUAL REPORT TO STOCKHOLDERS OF NCR CORPORATION
Management's Discussion and Analysis of Financial Condition and Results of
Operations
OVERVIEW
We provide the technology and services that help businesses interact, connect
and relate with their customers. Our market-leading Data Warehousing solutions
transform information into knowledge, permitting businesses to respond with
programs designed to improve customer acquisition, retention and profitability.
Through our presence at customer interaction points, such as automated-teller
machines (ATMs), retail point-of-sale (POS) workstations, self-checkout systems,
electronic shelf labels (ESLs), and web-enabled kiosks, our Financial Self
Service and Retail Store Automation solutions enable companies to capture and
process transaction-based information. Services are an essential component of
each of our complete offerings, and our Customer Services division is a global
leader in information technology (IT) and services delivery.
We provide specific solutions for the retail and financial industries, and
through our Data Warehousing and Customer Services businesses, we provide
solutions for industries including telecommunications, transportation,
insurance, utilities and electronic commerce, as well as consumer goods
manufacturers and government entities. Our solutions are built on a foundation
of long-established industry knowledge and consulting expertise, hardware
technology, value-adding software, global customer support services, and a
complete line of business consumables and specialty media products.
Our key solutions are categorized as Data Warehousing, Financial Self Service,
Retail Store Automation and Customer Services, each of which is a reportable
operating segment. In addition, our Systemedia and Payment and Imaging solutions
are reportable segments. A seventh segment, Other, primarily relates to
third-party computer hardware and related professional and installation services
in our high availability and networking services businesses and to a business in
Japan that is not aligned with our other segments. Our segments are comprised of
hardware, software, professional and installation-related services and customer
support services.
We deliver our solutions to customers on a global basis, and categorize our
results in four regions: the Americas, Europe/Middle East/Africa (EMEA), Japan
and Asia/Pacific excluding Japan (Asia/Pacific).
RESULTS FROM OPERATIONS
In millions 2002/1/ 2001/2/ 2000/3/
------- ------- -------
Consolidated revenue $5,585 $5,917 $5,959
Consolidated gross margin 1,587 1,794 1,867
Consolidated operating expenses:
Selling, general and administrative expenses 1,166 1,315 1,329
Research and development expenses 232 293 333
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Total consolidated income from operations $ 189 $ 186 $ 205
====== ====== ======
/1/ Income from operations for 2002 includes real estate consolidation and
restructuring charges of $16 million and asset impairment charges of $5
million.
/2/ Income from operations for 2001 includes a $39 million provision for
uncollectible loans and receivables related to Credit Card Center (CCC),
$9 million of integration costs related to acquisitions and $67 million
of goodwill amortization.
/3/ Income from operations for 2000 includes $38 million for restructuring
and other related charges, $25 million for in-process R&D charges related
to acquisitions, $2 million for integration costs related to acquisitions
and $33 million of goodwill amortization.
Total revenue decreased 6% in 2002 versus the prior year. When adjusted for the
impact of foreign currency fluctuations, revenue declined 7%. The revenue
decline in 2002 was primarily attributed to lower revenue from exited businesses
and the impact of depressed IT capital spending. This adverse capital spending
environment impacted our Customer Services and Retail Store Automation
businesses while weakness in the European economy and lower upgrade activity
following the Euro conversion on January 1, 2002, specifically affected our
Financial Self Service solutions. These declines were partially offset by
improved performance from Data Warehousing in the Americas and EMEA regions, as
well as the continued success of Financial Self Service in the Asia/Pacific
region. Total revenue
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declines in 2002 of 8% in the Americas region, 7% in the EMEA region and 4% in
Japan were partially offset by growth in the Asia/Pacific region of 6%. Adjusted
for the impact of foreign currency fluctuations, 2002 revenues declined 11% in
the EMEA region and 2% in Japan, contrasted to a 4% increase in the Asia/Pacific
region.
Total operating income was $189 million in 2002 versus operating income of $186
million and $205 million in 2001 and 2000, respectively. In 2002, total
operating income included $5 million of asset impairment charges and $16 million
of real estate consolidation and restructuring charges. Excluding the impact of
prior year goodwill amortization of $67 million, total operating income
decreased $64 million. This decline was mainly due to lower revenue relating to
exited businesses, margin erosion due to competitive pressure, lower product
revenue and the impact of pension and postemployment changes.
In 2001, total revenue decreased 1% compared to 2000, but increased 2% when
adjusted for the impact of foreign currency fluctuations. Revenues reflected
declines from exited businesses and the impact of the slow United States (U.S.)
economy on capital spending, offset by the strength of our Financial Self
Service solutions in the expanding Asia/Pacific marketplace and the EMEA region,
specifically due to higher sales and upgrades relating to the conversion to the
Euro currency. Total revenue declines in 2001 of 4% in the Americas region and
12% in Japan were partially offset by growth in the EMEA and Asia/Pacific
regions of 6% and 9%, respectively. Adjusted for the impact of foreign currency
fluctuations, 2001 revenues increased 9% in the EMEA region and 16% in the
Asia/Pacific region, contrasted to a 1% decline in Japan.
In 2001, total operating income included a $39 million provision for
uncollectible loans and receivables related to Credit Card Center (CCC), $9
million of acquisition-related integration charges and $67 million of goodwill
amortization. In addition to these expenses, the decline in total operating
income in 2001 reflected a lower mix of higher-margin product revenues versus
services revenue and lower customer services margin as a percentage of revenue,
partially offset by a reduction in operating expenses.
Revenue And Operating Margin By Segment
For purposes of discussing our operating results by segment, we exclude the
impact of certain items from operating income, consistent with the manner by
which we manage each segment and report our operating segment results under
Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures
about Segments of an Enterprise and Related Information." Although such
exclusions result in financial information that differs from generally accepted
accounting principles (GAAP) in the United States, it is useful to investors
because it includes the same information that is used by our management to
assess our overall financial performance and the financial performance of our
operating segments. Moreover, this non-GAAP information excludes items that
reflect management decisions made for the long-term benefit of our company
overall, but which may have a disproportional impact, either positively or
negatively, within the reporting period, or exclude events that occur
infrequently and therefore do not reflect ongoing operational performance within
the period. The effects of pension income, goodwill amortization, and other
special items as described in Note 12 of Notes to Consolidated Financial
Statements have been excluded from the operating income for each reporting
segment presented and discussed below. Our segment results are reconciled to
total company GAAP results in Note 12 of Notes to Consolidated Financial
Statements.
Data Warehousing provides the market-leading Teradata data warehousing database
software, hardware platform and related services that enable companies to gain a
competitive advantage by more quickly and efficiently analyzing customer
behavior and other business information and then delivering that business
intelligence to the company's decision-makers. Combining computer hardware,
software, professional consulting services, customer support services and
third-party software from leading technology firms, our Data Warehousing
solutions are designed to enable businesses, across multiple industries, to
quickly leverage detailed data into actionable opportunities.
The following table presents Data Warehousing (including hardware and software
maintenance) revenue and total operating income (loss) for the years ended
December 31:
2002 2001 2000
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In millions
Data Warehousing revenue $1,226 $1,149 $1,134
Data Warehousing operating income (loss) $ 112 $ (53) $ (60)
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Data Warehousing revenue increased 7% in 2002 compared to 2001, outpacing the
industry despite the challenging economic environment. During 2002, Data
Warehousing increased product revenues as a result of existing customers
upgrading their data warehouses and the addition of approximately 100 new
customers. Data Warehousing generated significant year-over-year growth in the
insurance, communications, government and retail sectors. In addition, hardware
and software maintenance revenue increased as a result of growth in our
installed customer base. Data Warehousing solutions experienced revenue growth
in the Americas and EMEA regions, partially offset by declines in the
Asia/Pacific region and Japan. Operating income improved to $112 million in
2002, compared to an operating loss
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of $53 million in 2001, primarily attributed to reductions in costs and expenses
not aligned to demand-creation activities, as well as higher product and
maintenance revenues.
In 2001, revenue increased 1% despite a challenging economic environment
compared to 2000. This increase was primarily attributable to an increase in
hardware and software maintenance revenue as a result of growth in our installed
customer base. The 2001 operating loss improved by $7 million from 2000 due to a
lower expense structure which was partially offset by a lower mix of
higher-margin hardware and software products, versus lower-margin professional
services.
We expect continued revenue growth in 2003 driven by the ability of our Teradata
business to grow market share despite the depressed IT capital spending
environment. We anticipate that our maintenance revenue will continue to grow as
a result of growth in our installed customer base. This expected growth, when
combined with our continued focus on cost and expense management, should result
in improved operating profitability for Teradata Data Warehousing in 2003.
Financial Self Service provides ATMs and related software, including our APTRA
operating system software, to banks, credit unions and retailers. Our
market-leading value proposition is based on our high-quality ATM product family
which provides a broad array of functionality, our leadership position in
multi-vendor software, and our best-in-class project management services, all
delivered at an attractive cost of ownership. Our Financial Self Service
solutions are designed to quickly and reliably process high volumes of consumer
transactions and incorporate advanced features such as web enablement, automated
check cashing/deposit, automated cash deposit, bill payment and the dispensing
of non-cash items. Financial Self Service solutions enable businesses to reduce
costs and generate new revenue streams, as well as enhance customer loyalty.
The following table presents Financial Self Service revenue and total operating
income for the years ended December 31:
2002 2001 2000
- ---------------------------------------------------------------------
In millions
Financial Self Service revenue $1,095 $1,114 $1,077
Financial Self Service operating income $ 115 $ 168 $ 143
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Financial Self Service revenue decreased 2% in 2002 compared to 2001. The
revenue decrease in 2002 was driven by a decline in the EMEA region, partially
offset by increases in the Asia/Pacific and Americas regions. The revenue
decline in the EMEA region was attributed to economic weakness and competitive
pressure in Europe. Additionally, there were fewer upgrades and purchases of
equipment in 2002 versus higher levels of upgrades in 2001 as financial
institutions prepared for the January 1, 2002 conversion to the Euro currency.
Growth in the Americas region was related to upgrades and purchases by top tier
banks and 7-Eleven's purchase of our advanced function ATMs. Growth experienced
in the Asia/Pacific region was primarily driven by strong markets in China and
India as an increasing number of financial institutions in these countries are
installing ATMs for the first time. The operating income decline in 2002 versus
the prior year was mainly due to lower product revenue and competitive pressure
in Europe.
In 2001, revenues increased 3% compared to 2000. This increase was due largely
to the growth in the Asia/Pacific region, particularly in the emerging markets
of India and China, and growth in Europe as banks and financial institutions
prepared for the January 1, 2002 conversion to the Euro currency. The operating
income increase in 2001 versus 2000 was due primarily to higher volume and lower
expenses.
We will leverage our worldwide sales, service and manufacturing presence while
we continue to focus on expense management in our Financial Self Service segment
in 2003. We will also drive expansion in our business in the Asia/Pacific region
as we increase production at our Beijing and India manufacturing facilities. We
expect flat revenue in 2003 as continued softness in the European market is
expected to offset growth in other regions.
Retail Store Automation provides retail-oriented technologies such as POS
terminals, bar-code scanners and software as well as innovative self-checkout
systems and electronic shelf labels to retailers. Our retail solutions are
industry-tested and have proven their business value in the most extreme of
retail environments including high-volume food stores, general merchandisers and
fast-food restaurants. Combining our retail industry expertise, software and
hardware technologies, and implementation and consulting services, our Retail
Store Automation solutions are designed to improve selling productivity and
checkout processes, and increase customer satisfaction for our retail customers.
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The following table presents Retail Store Automation revenue and total operating
(loss) income for the years ended December 31:
2002 2001 2000
- -----------------------------------------------------------------------
In millions
Retail Store Automation revenue $714 $834 $894
Retail Store Automation operating (loss) income $(57) $ 10 $ 4
- -----------------------------------------------------------------------
Retail Store Automation revenue decreased 14% in 2002 compared to 2001. The
revenue decline was primarily the result of decreased revenues in the Americas
and Japan regions as retailers continue to delay capital spending. The operating
income decline in 2002 was predominately the result of lower revenue,
competitive pressures and transition costs relating to our supply chain.
In 2001, revenue decreased 7% compared to 2000 due largely to post Y2K and the
continued constrained capital spending of retailers. The improvement in
operating income in 2001 was primarily the result of lower cost and expense.
We expect to see revenue growth in 2003 driven by 2002 order activity which is
likely to be partially offset by continued weakness in the retail marketplace.
We should also begin to harvest our research and development investments as our
product mix shifts to newer products and the industry prepares for a
long-overdue upgrade cycle. Streamlining and lowering the cost in our supply
chain, as well as ongoing expense management, will better position Retail Store
Automation to improve profitability in 2003.
Systemedia provides business consumables and products including paper rolls for
ATMs and POS workstations inkjet and laser printer supplies, thermal transfer
ribbons, labels, ink ribbons, laser documents, business forms and retail office
products. Systemedia products are designed to reduce paper-related failures in
our ATMs and POS terminals and enable businesses to improve transaction accuracy
while reducing overall costs.
The following table presents Systemedia revenue and total operating income for
the years ended December 31:
2002 2001 2000
- ---------------------------------------------------------------
In millions
Systemedia revenue $518 $503 $502
Systemedia operating income $ 6 $ 1 $ 8
- ---------------------------------------------------------------
Systemedia revenues increased 3% in 2002 compared to 2001. In 2002, revenue
increased in all regions except the Asia/Pacific region. Operating income
improved in 2002 versus the prior year predominately due to cost reductions in
manufacturing and supply-line management.
In 2001, revenue remained relatively flat compared to 2000. The growth
experienced in the Americas region was offset by declines in Japan and the EMEA
and Asia/Pacific regions. Operating income declined in 2001 primarily due to
continued competitive pricing pressures impacting gross margin, offset partially
by lower operating expenses.
We expect revenue for Systemedia to be flat in 2003 compared to 2002. Growth
driven by sales of retail office products and increasing the capture rate of our
ATM and POS customers is expected to be offset by declines in sales of
traditional paper products.
Payment and Imaging provides end-to-end solutions for both traditional
paper-based and image-based item processing. Our imaging solutions utilize
advanced image recognition and workflow technologies to automate item
processing, helping financial industry businesses increase efficiency and reduce
operating costs. Consisting of hardware, software, and consulting and support
services, our comprehensive Payment and Imaging solutions enable check and
item-based transactions to be digitally captured, processed and retained within
a flexible, scalable environment.
The following table presents Payment and Imaging revenue and total operating
income for the years ended December 31:
2002 2001 2000
- ---------------------------------------------------------------
In millions
Payment and Imaging revenue $152 $186 $185
Payment and Imaging operating income $ 19 $ 17 $ 18
- ---------------------------------------------------------------
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Payment and Imaging revenue declined 18% in 2002 compared to 2001. This decline
was largely attributed to the sale of our item-processing outsourcing business
that contributed $30 million of revenue in 2001 (see Note 4 of Notes to
Consolidated Financial Statements). Operating income increased in 2002 compared
to 2001 primarily related to lower operating expenses.
In 2001, revenue remained relatively flat compared to 2000. Operating income
slightly declined during 2001 compared to 2000 due to product margin erosion.
We expect 2003 revenue to be consistent with the revenue generated in 2002.
Payment and Imaging is shifting its focus from traditional item-processing to
imaging solutions as check volume and traditional item-processing decline and
financial institutions move to digital images to process, and potentially clear,
checks electronically.
Customer Services are an essential component of our complete solution offerings.
NCR's Customer Services division is a global leader in IT services delivery. In
addition to providing maintenance and support for our base of NCR solution
customers, our Customer Services segment provides services from consulting to
site design, to staging and implementation and maintenance for third parties, to
complete systems management.
As a result of supporting our solutions around the world, Customer Services has
established an unmatched service delivery capability, and has leveraged this
global presence and experience to develop and deliver a comprehensive portfolio
of IT infrastructure services to businesses in other industries. These high
availability services focus on the vital systems, networks, software and
security that comprise the IT infrastructure of today's businesses, and include
operations management, consulting, deployment and maintenance. Customer Services
provides these services directly to global businesses as well as through
partnerships with leading technology, network and systems suppliers including
Cisco Systems, Dell Computer Corporation, Sun Microsystems and others.
The following table presents Customer Services revenue and total operating
income for the years ended December 31:
2002 2001 2000
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In millions
Customer Services revenue $1,791 $1,968 $1,945
Customer Services operating income $ 37 $ 170 $ 215
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Customer Services revenue declined 9% in 2002 compared to 2001. This decline was
largely due to lower maintenance revenue relating to exited businesses, lower
professional services and installation-related services due to lower overall
company revenues and softness in the third-party contracts market. Our exited
businesses relate to bank branch automation, home banking, account processing
and low-end server businesses we exited in the 1990s. Customer Services
maintenance revenue related to exited businesses declined more than $100 million
in 2002. The operating income decline in 2002 was primarily due to lower
maintenance revenue from our exited businesses and margin erosion.
In 2001, revenue slightly increased versus 2000 largely due to higher customer
services maintenance revenue for our Financial Self Service solution. The
operating income decline in 2001 compared to 2000 was principally related to
margin erosion from pricing pressures and the impact of exited businesses.
Customer Services revenue is expected to be down in 2003 as the continued
decline in maintenance revenues related to exited businesses will offset the
expected growth in maintenance revenues for Financial Self Service and Retail
Store Automation. The declining revenue from our exited businesses will continue
through 2004. Additionally, Customer Services will continue to focus on
increasing its managed services business in 2003.
Restructuring and re-engineering
In the third quarter of 2002, we announced re-engineering plans to drive
operational efficiency throughout our company. We targeted process improvements
to drive simplification, standardization, globalization and consistency across
the organization. Key business processes and supporting functions are being
evaluated to improve efficiency and effectiveness of operations. To support our
growth initiatives, we will focus on our sales process and sales management.
Initiatives in this area include capitalizing on our value propositions,
improving sales training, territory management and sales metrics and simplifying
the sales process. To reduce our cost of delivering products and services, we
will focus on improvements to our supply chain that will yield lower inventory
levels as well as reductions in inventory handling, freight and warehousing
costs. In addition, we will reduce product costs through design and procurement
initiatives. In services, we will focus on completion of a global model for
service delivery. To reduce our expense structure, we are standardizing our
global IT applications, continuing to reduce our real estate costs and
implementing new global processes within the finance and administration areas to
streamline these processes to begin to reach benchmark standards.
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During the fourth quarter of 2002, in connection with these efforts, management
approved a real-estate consolidation and restructuring plan designed to
accelerate our re-engineering and consolidation strategies. Since 1997, we have
reduced the number of facilities utilized by NCR and have reduced the total
space used by more than four million square feet. We will continue to reduce
excess square footage through better utilization of current space, increasing
the use of virtual offices and the sale of underutilized facilities.
As part of our re-engineering, real estate consolidation and restructuring
plans, during the fourth quarter of 2002, we incurred a real estate
consolidation and restructuring charge of $25 million, of which $8 million was
for restructuring charges related to contractual lease termination costs, $9
million related to asset impairment charges and $8 million for lease buy-outs
and other real estate consolidation costs.
Gross margin
Gross margin as a percentage of revenue decreased 1.9 percentage points to 28.4%
in 2002 from 30.3% in 2001. Product gross margin declined 1.4 percentage points
to 34.7% and services gross margin decreased 2.5 percentage points to 21.7%. In
2002, product gross margin included $4 million of asset impairment charges and
services gross margin included $8 million for real estate restructuring charges.
Product gross margin, including the asset impairment charge, declined primarily
due to rate declines relating to competitive pressure in Retail Store Automation
and Financial Self Service combined with lower volume in Retail Store
Automation, partially offset by improved margin performance in Data Warehousing.
The decline in services gross margin was largely due to the lower revenue from
exited businesses, margin erosion relating to competitive pricing pressure and
the impact of the restructuring charge.
The 2001 gross margin decreased 1.0 percentage point compared to 2000. Product
gross margin declined 1.0 percentage point to 36.1% and services gross margin
decreased 0.6 percentage points to 24.2%. In 2001, product gross margin included
$1 million of acquisition-related integration charges and services gross margin
included $5 million of acquisition-related integration charges. Product gross
margin declined largely due to lower hardware margins for Data Warehousing and
Retail Store Automation. The decline in service gross margin was primarily due
to exited businesses and the underutilization of our customer services
infrastructure resulting from the slower economy and its effect on the retail
and telecommunication industries. In 2000, gross margin as a percentage of
revenue was 31.3% and included $37 million of restructuring charges and $1
million of acquisition-related integration charges.
Operating expenses
Selling, general and administrative (SG&A) expenses decreased $149 million, or
11%, in 2002 compared to 2001. Excluding the impact of prior year goodwill
amortization of $67 million, SG&A expenses decreased $82 million, or 7%, of
which $39 million of this decline related to the prior year CCC charge. In 2002,
SG&A expenses included $9 million of real estate consolidation and asset
impairment charges. The decrease in 2002 was primarily due to continued
infrastructure cost improvements and the curtailment of discretionary spending.
This strategy will continue in 2003 as we target process improvements to drive
simplification, standardization and globalization and consistency across the
organization. SG&A expenses decreased $14 million, or 1%, in 2001 compared to
2000. In 2001, SG&A expenses included a $39 million provision for uncollectible
loans and receivables related to CCC and $3 million of acquisition-related
integration charges. The decrease in 2001 SG&A expenses was mainly due to
infrastructure improvements and curtailment of discretionary spending. As a
percentage of revenue, SG&A expenses were 20.9%, 22.2% and 22.3%, in 2002, 2001
and 2000, respectively.
Research and development (R&D) expenses decreased $61 million, or 21%, in 2002
compared to the prior year. The decline in 2002 is a result of utilizing more
industry-standard components and the benefit from consolidating our R&D
facilities. R&D expenses decreased $40 million, or 12%, in 2001 compared to
2000. The decline in 2001 related to the rationalization of our spending and the
elimination of duplicative R&D expenses associated with our customer
relationship management software, as we completed the integration of Ceres
Integrated Solutions, LLC, which we acquired in 2000. In 2000, R&D expenses
included $25 million of in-process R&D charges relating to acquisitions. As a
percentage of revenue, R&D expenses were 4.2%, 5.0% and 5.6% in 2002, 2001 and
2000, respectively.
Cost of revenue and total expenses for the years ended December 31, were
impacted by certain employee benefit plans as shown below:
2002 2001 2000
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In millions
Pension (income) Expense $(74) $(124) $(124)
Postemployment Expense 75 37 21
Postretirement Expense 16 13 13
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Net Expense (income) $ 17 $ (74) $ (90)
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During the 12 months ended December 31, 2002, we realized a $74 million benefit
from pension income versus a $124 million benefit in 2001. The decline was due
primarily to the impact of the investment performance of our pension fund
portfolio in the difficult market environments during 2000 and 2001.
Predominately due to the poor performance of the equity markets over the past
few years and changes to actuarial assumptions, we expect pension expense of
approximately $95 million in 2003.
Postemployment expense (severance, disability and medical) increased to $75
million for the 12 months ended December 31, 2002, versus $37 million in 2001.
This increase in expense was primarily attributable to a $33 million increase
resulting from a change in the assumed demographic mix of our involuntary
employee turnover. The change was made based on actual recent experience
factors. Expense increased by $16 million for the 12 months ended December 31,
2001 versus the comparable period in 2000. This increase was primarily
attributable to a one-time reduction in our long-term disability medical
liability of $12 million in 2000 due to assumption changes relating to long-term
disability recovery rates and mortality rates for people on long-term
disability. We expect our postemployment expense to be approximately $84 million
in 2003.
Postretirement plan expense (medical and life insurance) for the 12 months ended
December 31, 2002 was $16 million, which increased over the prior year,
primarily due to completing the amortization of the benefits of our 1998 plan
design changes during the year.
Income before income tax
Operating income was $189 million in 2002, versus operating income of $186
million and $205 million in 2001 and 2000, respectively. In 2002, operating
income included $5 million of asset-impairment charges and $16 million of real
estate consolidation and restructuring charges. Excluding the impact of
prior-year goodwill amortization of $67 million, operating income decreased $64
million. This decline is primarily due to lower revenue from exited businesses,
margin erosion from competitive pressure and lower product revenue and the
impact of pension and postemployment changes. In 2001, operating income included
a $39 million provision for uncollectible loans and receivables related to CCC,
$9 million of acquisition-related integration charges and $67 million of
goodwill amortization. The decline in operating income in 2001 reflected a lower
mix of higher-margin product revenues versus services revenue and lower customer
services margins, partially offset by a reduction in operating expenses. In
2000, operating income included $38 million of restructuring and related
charges, $25 million of in-process R&D charges relating to an acquisition and $2
million of acquisition-related integration charges.
Interest expense was $19 million in 2002, $18 million in 2001 and $13 million in
2000. Other expense, net, was $39 million in 2002, and consisted primarily of a
$14 million investment basis write-down of marketable securities in Japan for
losses that were considered to be other than temporary, a $9 million charge
relating to an indemnification claim made by Lucent Technologies, Inc. (see Note
11 of Notes to Consolidated Financial Statements), $8 million of real estate
consolidation impairment charges and $6 million of costs relating to the
disposition of a small non-strategic business. Other expense, net, was $44
million in 2001, and consisted predominately of a $40 million charge related to
the Fox River environmental matter (see Note 11 of Notes to Consolidated
Financial Statements), $7 million of goodwill amortization expense and $16
million of investment basis write-downs for losses that were considered to be
other than temporary. These expenses were partially offset by $10 million of
interest income and $20 million of other income representing both a gain from
the sale of our account and item-processing outsourcing businesses and a gain
related to the demutualization of one of our health insurance providers. Other
income, net, was $83 million in 2000, which consisted primarily of $48 million
in gains from facility sales and $31 million of interest income, partially
offset by $6 million in goodwill amortization expense.
Income tax
Income tax expense was $3 million in 2002 compared to income tax benefit of $97
million in 2001 and income tax expense of $97 million in 2000. The income tax
expense in 2002 was reduced by a $15 million benefit relating to the resolution
of outstanding issues on refund claims from the U.S. and French governments. The
income tax benefit in 2001 included a $138 million benefit resulting from the
favorable settlement of audit issues in our 1993 and 1994 tax years related to a
number of international dividend transactions. These issues had been the subject
of dispute between the Internal Revenue Service (IRS) and NCR, therefore, a
reserve for these items had been established in prior periods. Upon favorable
settlement of the dispute during 2001, the reserve was released.
Our effective tax rate was approximately 14% for 2002 excluding the tax impacts
relating to the adoption of Statement of Financial Accounting Standard No. 142
(SFAS 142), "Goodwill and Other Intangible Assets," and the benefit from the
resolution of outstanding issues on refund claims. Each year our effective tax
rate includes a certain amount of benefit related to the use of foreign tax
credits. For 2002, the amount of such benefit as compared to the amount of
income before tax was larger than previous years. Our effective tax rate was
approximately 33% for 2001 excluding the impact of the provision for
uncollectible loans and receivables related to CCC, acquisition-related
integration costs, a charge related to the Fox River environmental matter, the
cumulative effect of adopting Statement of Financial Accounting Standards No.
133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities,"
and the
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benefit from the favorable resolution of international income tax issues
described above. Our effective tax rate was approximately 33% for 2000,
excluding restructuring and other related charges, acquisition-related
integration and in-process R&D charges. We anticipate our tax rate will be
approximately 28% in 2003.
Cumulative effect of accounting change
The cumulative effect of accounting change in 2002 was a non-cash, net-of-tax
goodwill impairment charge of $348 million which relates to the adoption of SFAS
142. The cumulative effect of accounting change in 2001 of $4 million relates to
the adoption of SFAS 133.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents and short-term investments totaled $526 million at
December 31, 2002 compared to $336 million and $357 million at December 31, 2001
and 2000, respectively.
We generated cash flow from operations of $247 million, $146 million and $171
million in 2002, 2001 and 2000, respectively. The cash generated from operations
in 2002 was driven by operating profitability and was partially offset by
negative net working capital and disbursements for employee severance and
pension. Net working capital was impacted by a $90 million increase in
receivables largely relating to the discontinuation of receivables factoring in
2002. The cash generated in 2001 was driven by operating profitability and
improved asset management, specifically accounts receivable, partially offset by
disbursements for employee severance and pension. Receivable balances decreased
$212 million in 2001 compared to an $80 million increase in 2000. The decrease
in receivables in 2001 versus 2000 was primarily attributable to lower
fourth-quarter revenues, incremental factoring of receivables of approximately
$18 million and a continued focus on collections. The cash generated from
operations in 2000 was driven primarily by operating results, partially offset
by disbursements for employee severance and pension.
Net cash flows used in investing activities was $220 million, $233 million and
$367 million in 2002, 2001 and 2000, respectively. The net use of cash in
investing activities in 2002, 2001 and 2000 primarily represented net capital
expenditures for property, plant and equipment, reworkable service parts and
additions to capitalized software. Capital expenditures were $259 million, $325
million and $391 million for the years ended 2002, 2001 and 2000, respectively.
Proceeds from sales of property, plant and equipment are primarily driven by our
continued focus to reduce our excess real estate. We have progressively reduced
our capital spending due to the challenging economic climate and we will
continue to manage our capital expenditures below our depreciation and
amortization expense. In 2000, we reduced our net short-term investment position
by $182 million to fund acquisition activities.
Net cash provided by financing activities was $151 million and $87 million in
2002 and 2001, respectively, compared to a $7 million use in 2000. The net cash
provided in 2002 was primarily driven by the net proceeds received from our
private issuance of long-term debt, offset in part by the repurchase of Company
common stock and repayment of short-term debt. The proceeds from the issuance of
the June 2002 long-term debt were $296 million after discount and expenses.
Proceeds from short-term borrowings were $101 million, $213 million and $10
million for 2002, 2001 and 2000, respectively. During 2002, $234 million of cash
was utilized to repay short-term borrowings, compared to repayments of $171
million and $21 million for 2001 and 2000, respectively. We used $66 million,
$60 million and $110 million in 2002, 2001 and 2000, respectively, for the
purchase of Company common stock pursuant to the systematic stock repurchase
program. We expect this program to continue in 2003. Other financing activities
primarily relate to share activity under our stock option and employee stock
purchase plans. Proceeds from our employee stock plans were $51 million, $101
million and $122 million for 2002, 2001 and 2000, respectively.
In 2002, global capital market developments resulted in negative returns on
NCR's pension funds and a decline in the discount rate used to estimate the
pension liability. As a result, the accumulated benefit obligation exceeded the
fair value of plan assets and NCR was required to adjust the minimum pension
liability recorded in the consolidated balance sheet. This $841 million charge
decreased prepaid pension costs by $523 million, increased pension liabilities
by $325 million, increased intangible assets by $7 million, increased deferred
taxes by $290 million and increased other comprehensive loss by $551 million.
This non-cash charge did not affect our 2002 earnings, cash flow or debt
covenants, nor did it otherwise impact our business operations.
Contractual and Commercial Commitments In the normal course of business, we
enter into various contractual and other commercial commitments that impact, or
could impact, the liquidity of our operations. The following table outlines our
commitments at December 31, 2002:
14
Total Less than 1-3 4-5 Over 5
Amounts 1 Year Years Years Years
- -----------------------------------------------------------------------------------------
In millions
Long-term debt $ 306 $ -- $ 1 $ -- $305
Operating leases (non-cancelable) 342 64 85 56 137
Short-term borrowings 5 5 -- -- --
- -----------------------------------------------------------------------------------------
Total Contractual $ 653 $ 69 $86 $ 56 $442
=========================================================================================
Unused lines of credit/1/ $ 762 $362 $-- $400 $ --
Standby letters of credit and surety bonds 226 54 77 -- 95
Other corporate guarantees 19 2 4 -- 13
Other commitments 14 -- 10 -- 4
- -----------------------------------------------------------------------------------------
Total Commerical $1,021 $418 $91 $400 $112
=========================================================================================
/1/ Includes unused bank overdraft facilities and other uncommitted funds of
$162 million.
We had debt with scheduled maturities of less than one year of $5 million and
$138 million at December 31, 2002 and 2001, respectively. We used a portion of
the proceeds from the $300 million senior unsecured notes (as described below),
issued in June 2002, to repay short-term debt. The weighted average interest
rate for such debt was 5.5% at December 31, 2002 and 3.5% at December 31, 2001.
The increase in the weighted average interest rate reflects a reduced borrowing
in Japan (which has lower rates) in 2002 versus the prior year. We had long-term
debt and notes totaling $306 million and $10 million at December 31, 2002 and
2001, respectively. Material obligations had U.S. dollar-equivalent interest
rates ranging from 7.1% to 9.5% with scheduled maturity dates from 2009 to 2020.
The scheduled maturities of the outstanding long-term debt and notes during the
next five years are $1 million in 2004, with the remainder after 2008.
In October 2002, we renewed a $200 million 364-day unsecured credit facility
with a one-year term-out option with a syndicate of financial institutions. The
364-day facility coincides with a $400 million, five-year unsecured revolving
credit facility which we entered into in October 2001. 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. No amounts were outstanding
under the facilities at December 31, 2002 and 2001.
In June 2002, we issued $300 million of senior unsecured notes due in 2009. The
notes were sold privately pursuant to Rule 144A and Regulation S of the
Securities Act. The net proceeds from the notes were used to repay a portion of
our short-term debt with the remainder available for general corporate purposes.
The notes bear interest at an annual rate of 7.125%, which increased 0.25% as of
November 4, 2002, and will continue to accrue interest until certain
registration requirements are met. This interest is payable semi-annually in
arrears on each June 15 and December 15, beginning December 15, 2002, and
contain certain covenants typical of this type of debt instrument.
Our cash flows from operations, the credit facilities (existing or future
arrangements), the 7.125% senior notes, and other short- and long-term debt
financing, will be sufficient to satisfy our future working capital, R&D,
capital expenditures and other financing requirements for the foreseeable
future. Our ability to generate positive cash flows from operations is dependent
on general economic conditions, competitive pressures, and other business and
risk factors described below in "Factors That May Affect Future Results." If we
are unable to generate sufficient cash flows from operations, or otherwise
comply with the terms of our credit facilities and the 7.125% senior notes, we
may be required to refinance all or a portion of our existing debt or seek
additional financing alternatives.
Our current focus on improving free cash flow, which we define as cash flow from
operating activities less capital expenditures for property, plant and
equipment, reworkable service parts, and additions to capitalized software, and
a continued focus on balance sheet management has increased our ability to
generate cash. During 2002, we generated a $167 million free cash flow
improvement over 2001, which was primarily driven by improvement in operating
activities and a reduction in capital expenditures.
2002 2001 2000
- ---------------------------------------------------------------------------
In millions
Net cash provided by operating activities $ 247 $ 146 $ 171
Less:
Net expenditures and proceeds for service parts (113) (117) (108)
Expenditures for property, plant and equipment (81) (141) (216)
Additions to capitalized software (65) (67) (67)
- ---------------------------------------------------------------------------
Free cash flow $ (12) $(179) $(220)
- ---------------------------------------------------------------------------
15
FACTORS THAT AFFECT FUTURE RESULTS
This annual report, including the Shareholder's Letter, and other documents that
we file with the Securities and Exchange Commission (SEC), 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, but not limited to, 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.
Economic Pressures Our business is affected by the global economies in which we
operate. The recent economic downturn and the subsequent decline in capital
spending by many industries, particularly retail and telecommunications, could
impact our ability to meet our commitments to customers, the ability of our
suppliers to meet their commitments to us, the timing of purchases by our
current and potential customers, or the ability of our customers to fulfill
their obligations to us on a timely basis. The extent of this impact, if any, is
dependent on a number of factors, including the duration and intensity of the
downturn, its effect on the markets in general and other general economic and
business conditions.
Competition Our ability to compete effectively within the technology industry is
critical to our future success. We operate 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. Our competitors
include other large, successful companies in the technology industry such as:
International Business Machines Corporation (IBM), Oracle Corporation, Diebold,
Inc., Dell Computer Corporation, Wincor Nixdorf GmbH & Co., Getronics NV and
Unisys Corporation, some of which have widespread penetration of their platforms
and service offerings. In addition, we compete with companies in specific
markets such as self-check out, electronic shelf labels, entry-level ATMs,
payment and imaging, and business consumables and media products.
We offer a broad suite of consulting and support services across our Data
Warehousing, Financial Self Service, Retail Store Automation and Payment and
Imaging segments. We compete with companies in consulting and support services,
and we partner with companies such as Cisco Systems, Dell Computer Corporation
and Sun Microsystems to deliver IT infrastructure services solutions and also
offer consulting and support services.
Our future competitive performance and market position depend on a number of
factors, including our ability to: react to competitive product and pricing
pressures; penetrate developing and emerging markets such as India and China in
the ATM business; 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; react on a timely
basis to shifts in market demands; reduce costs without creating operating
inefficiencies; maintain competitive operating margins; improve product and
service delivery quality; and market and sell all of our diverse solutions
effectively. Our business and operating performance could be impacted by
external competitive pressures, such as increasing price erosion, particularly
in the industries targeted by our more mature solution offerings such as Retail
Store Automation and Financial Self Service Solutions. In addition, our Payment
and Imaging segment is shifting from traditional item processing as check volume
and the traditional item processing markets are declining and financial
institutions are migrating to a digital process with the potential to clear
checks electronically.
Our customers finance many of our product sales through third-party financing
companies. In case of customer default, these financing companies may be forced
to resell this equipment at discounted prices impacting our ability to sell
incremental units. The impact of these competitive product and pricing pressures
could include lower customer satisfaction, decreased demand for our solutions,
loss of market share and reduction of operating profits.
Operating Result Fluctuations Future operating results could 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 and
cash flow requirements to vary from quarter to quarter depending on the
variability in the volume, timing and mix of product and services sales. In
addition, revenue in the third month of each quarter is typically higher than in
the first and second months. These factors, among others, make forecasting more
difficult and may adversely affect our ability to predict financial results
accurately.
Cost/Expense Reductions We are actively working to manage our costs and expenses
to continue improving operating profitability without jeopardizing the quality
of our products or the efficiencies of our operations. We are also striving
16
to become the leading, low-cost provider of certain Financial Self Service and
Retail Store Automation solutions. Our success in achieving targeted cost and
expense reductions depends on a number of factors, including our ability to
achieve infrastructure rationalizations, drive lower component costs, improve
supply chain efficiencies, improve accounts receivable collections, and reduce
inventory overhead, among other things. If we do not successfully complete our
cost reduction initiatives, our results of operations or financial condition
could be adversely affected.
Contractual Obligations of Consulting Services We maintain a professional
services consulting workforce to fulfill contracts that we enter into with our
customers that may extend to multiple periods. Our profitability may be impacted
if we are not able to control costs and maintain utilization rates. Our
profitability is largely a function of performing to customer contractual
arrangements within the estimated costs to perform these obligations. If we
exceed these estimated costs, our profitability under these contracts may be
negatively impacted. In addition, if we are not able to maintain appropriate
utilization rates for our professionals, we may not be able to sustain our
profitability.
Acquisitions and Divestitures As part of our solutions strategy, we intend to
continue to selectively acquire and divest technologies, products and
businesses. As these activities take place and we begin to include, or exclude
as the case may be, the financial results related to these investments could
cause our operating results to fluctuate.
Pension Funds Consistent with local competitive practice and regulations, we
sponsor pension plans in many of the countries where we do business. A number of
these pension plans are supported by pension fund investments which are subject
to financial market risk. The liabilities and assets of these plans are reported
in our financial statements in accordance with Statement of Financial Accounting
Standards SFAS No. 87 (SFAS 87), "Employer's Accounting for Pensions." In
conforming to the requirements of SFAS 87, we are required to make a number of
actuarial assumptions for each plan, including expected long-term return on plan
assets and discount rate. Our future financial results could be materially
impacted by changes in these actuarial assumptions, including those described
below in our "Critical Accounting Policies and Estimates." Consistent with the
requirements of paragraphs 44-45 of SFAS 87, we estimate our discount rate and
long-term expected rate of return on assets assumptions on a country-by-country
basis after consultation with independent actuarial consultants. We examine
interest rate trends within each country, particularly yields on high-quality
long-term corporate bonds, to determine our discount rate assumptions. Our
long-term expected rate of return on asset assumptions are developed by
considering the asset allocation and implementation strategies employed by each
pension fund relative to capital market expectations.
Real Estate Our strategy over the past four years with respect to real estate
has been to reduce our holdings of excess real estate and to improve liquidity.
In line with this strategy, we anticipate the sale of facilities, which may
impact net income. We will intensify our actions to reduce the size of our real
estate portfolio during the upcoming year.
Multinational Operations Generating substantial revenues from our multinational
operations helps to balance our risks and meet our strategic goals. Currently,
approximately 57% of our revenues come from outside the United States. 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, deteriorating economic environments or business
disruptions due to economic or political uncertainties, and cultural business
practices that may be different from U.S. business practices). However, our
ability to sell our solutions domestically in the United States and
internationally is subject to the following risks, among others: general
economic and political conditions in each country which could adversely affect
demand for our solutions in these markets; currency exchange rate fluctuations
which could result in lower demand for our products as well as generate currency
translation losses; 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; and the impact
of civil unrest relating to war and terrorist activity on the economy or markets
in general, or on our ability, or that of our suppliers, to meet commitments.
Introduction of New Solutions The solutions we sell are complex, and we need to
rapidly and successfully develop and introduce new solutions. We operate in a
competitive, rapidly changing environment, and our future business and operating
results depend in part on our ability to develop and introduce new solutions
that our customers choose to buy. This includes our efforts to rapidly develop
and introduce next generation software applications especially for our Data
Warehousing business. 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, and 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 could be impacted. Likewise, we
sometimes make commitments to customers regarding new technologies, and our
results could be impacted if we are unable to deliver such technologies as
planned. In addition, if we are unable to successfully market and sell both
existing and newly developed solutions, such as our advanced-function ATMs,
self-checkout technologies and electronic shelf labels, and transition our
17
Payment and Imaging solutions from traditional item processing to imaging, our
business and operating results could 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 business and operating results.
Reliance on Third Parties Third party suppliers provide important elements to
our solutions. We rely on many suppliers for necessary parts and components to
complete our solutions. In most cases, there are a number of vendors producing
the parts and components that we utilize. However, there are some components
that are purchased from single sources due to price, quality, technology or
other reasons. For example, we depend on chips and microprocessors from Intel
Corporation and operating systems from UNIX(R) and Microsoft Windows NT(R).
Certain parts and components used in the manufacture of our ATMs and the
delivery of many of our Retail 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, software, services and skills. Many different
relationships are formed by these alliances such as outsourcing arrangements to
manufacture hardware and subcontract agreements with third parties to perform
services and provide products and software to our customers in connection with
our solutions. For example, we rely on third parties for cash replenishment
services for our ATM products. 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.
Lack of information technology infrastructure, manual processes and data
integrity issues of smaller suppliers can also create product time delays,
inventory and invoicing problems and staging delays, as well as other operating
issues. The failure of third parties to provide high-quality products or
services that conform to required specifications or contractual arrangements
could impair the delivery of our solutions on a timely basis, create exposure
for non-compliance with our contractual commitments to our customers and impact
our business and operating results.
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 remain 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 are not able to continue to obtain licenses for such
technologies, our business could be impacted. There has been a recent increase
in the issuance of software and business method patents and more companies are
aggressively enforcing their intellectual property rights. This trend could
impact NCR because from time to time we receive notices from third parties
regarding patent and other intellectual property claims such as those made by LG
Electronics (LGE) as described in Note 11 of Notes to Consolidated Financial
Statements. Whether such claims are with or without merit, they may require
significant resources to defend. 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.
Work Environment
Restructuring As we discussed above, we are implementing a re-engineering plan
to drive operational efficiency throughout our company. In order to drive cost
and expense out of our businesses, we are rationalizing our infrastructure
through real estate and support cost reductions; simplifying our front- and
back-office processes by, for example, standardizing global IT applications and
finance and administration processes; reducing our product costs through design
and procurement initiatives; and working to lower our cost of services through
completion of a global model for such services. In addition to reducing costs
and expenses, our plan includes initiatives to grow revenue such as improving
sales training, addressing sales territory requirements and focusing on our
strong value propositions. If we are not successful in managing the required
changes to implement this plan, in particular those related to changing our
internal processes, our business and operating results could be impacted.
Employees Our employees are vital to our success. 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 and our current
re-engineering efforts may adversely impact our workforce. If we are not able to
attract or retain highly qualified employees by offering competitive
compensation, secure work environments and leadership opportunities now and in
the future, our business and operating results could be impacted.
Internal Controls / Accounting Policies and Practices Our internal controls,
accounting policies and practices, and internal information systems enable us to
capture and process transactions in a timely and accurate manner in
18
compliance with GAAP, laws and regulations, taxation requirements and federal
securities laws and regulations. While we believe these controls, policies,
practices and systems are adequate to ensure data integrity, unanticipated and
unauthorized actions of employees (both domestic and international) or temporary
lapses in internal controls due to resource constraints could lead to
improprieties that could impact our financial condition or results of
operations.
Information Systems It is periodically necessary to replace, upgrade or modify
our internal information systems. If we are unable to replace, upgrade or modify
such systems in a timely and cost effective manner, especially in light of
strains on our information technology resources, our ability to capture and
process financial transactions and therefore our financial condition or results
of operation may be impacted.
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 making 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 and control
procedures, 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. Further, we may not achieve the projected
synergies once we have integrated the business into our operations.
It is our policy not to discuss or comment upon negotiations regarding such
business combinations or divestitures unless they are material and 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.
Environmental Our historical and ongoing manufacturing activities subject us to
environmental exposures. Our facilities and operations are subject to a wide
range of environmental protection laws, and we have investigatory and remedial
activities underway at a number of facilities that we currently own or operate,
or formerly owned or operated, to comply, or to determine compliance, with such
laws. Given the uncertainties inherent in such activities, there can be no
assurances that the costs required to comply with applicable environmental laws
will not impact future operating results.
We have also been identified as a potentially responsible party in connection
with certain environmental matters, including the Fox River matter, as further
described in "Environmental Matters" under Note 11 of Notes to Consolidated
Financial Statements and in the "Critical Accounting Policies and Estimates"
section of this Management's Discussion and Analysis of Financial Condition and
Results of Operations, and we incorporate such disclosures by reference and make
them a part of this risk factor. As described in more detail in such
disclosures, we maintain an accrual for our potential liability on the Fox River
matter which represents certain critical estimates and judgments made by us
regarding our potential liability; however, both the ultimate costs associated
with the Fox River site and our share of those costs are subject to a wide range
of potential outcomes.
Contingencies Like other technology companies, we face uncertainties with regard
to regulations, lawsuits and other related matters. In the normal course of
business, we are subject to proceedings, lawsuits, claims and other matters,
including those that relate to the environment, health and safety, employee
benefits, export compliance, intellectual property and other regulatory
compliance and general matters. Because such matters are subject to many
uncertainties, their outcomes are not predictable. While we believe that amounts
provided in our consolidated financial statements are currently adequate in
light of the probable and estimable liabilities, there can be no assurances that
the amounts required to satisfy alleged liabilities from such matters will not
impact future operating results. Additionally, we are subject to diverse and
complex laws and regulations, including those relating to corporate governance,
public disclosure and reporting, which are rapidly changing and subject to many
possible changes in the future. Although we do not believe that recent
regulatory and legal initiatives will result in significant changes to our
internal practices or our operations, rapid changes in accounting standards,
taxation requirements (including tax rate changes, new tax laws and revised tax
interpretations), and federal securities laws and regulations, among others, may
substantially increase costs to our organization and could impact our future
operating results.
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 and
mitigate the impact of currency fluctuations on the operations of our foreign
subsidiaries, we hedge our main transactional exposures through the use of
foreign exchange forward contracts and options. This is primarily done through
the hedging of foreign-currency-denominated inter-company inventory purchases by
the marketing units and of
19
foreign-currency-denominated inventory sales by the manufacturing units, and of
certain financing transactions that are firmly committed or forecasted. These
foreign exchange contracts are designated as cash flow hedges, and the gains or
losses are deferred in other comprehensive income and recognized in the
determination of income when the underlying hedged transaction impacts earnings.
As we hedge inventory purchases, the ultimate gain or loss from the derivative
contract is recorded in cost of sales when the inventory is sold to an unrelated
third party.
Our strategy is to hedge, on behalf of each subsidiary, our non-functional
currency denominated cash flows for a period of up to 12 months. In this way,
much of the impact of currency fluctuations on non-functional currency
denominated transactions (and hence on subsidiary operating income as stated in
the functional currency) is mitigated in the near term. In the longer-term
(longer than the hedging period of up to 12 months) the subsidiaries are still
subject to the impacts of foreign currency fluctuations. In addition, the
subsidiary results are still subject to any impact of translating the functional
currency results to U.S. dollars. When hedging certain foreign currency
transactions of a long-term investment nature (net investments in foreign
operations), 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 firmly committed or forecasted 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. A 10% appreciation in the value of the U.S. dollar
against foreign currencies from the prevailing market rates would result in a $7
million increase or a $41 million increase in the fair value of the hedge
portfolio as of December 31, 2002 and 2001, respectively. Conversely, a 10%
depreciation of the U.S. dollar against foreign currencies from the prevailing
market rates would result in a $7 million decrease or a $9 million decrease in
the fair value of the hedge portfolio as of December 31, 2002 and 2001,
respectively.
The interest rate risk associated with our borrowing and investing activities at
December 31, 2002, was not material in relation to our consolidated financial
position, results of operations or cash flows. Historically, we have not used
derivative financial instruments to alter the interest rate characteristics of
our investment holdings or debt instruments but could do so in the future.
We utilize non-exchange traded financial instruments such as foreign exchange
forward contracts and options that we purchase exclusively from highly-rated
financial institutions. Additionally, we utilize put option contracts that are
not exchange traded as described in Note 8 of Notes to Consolidated Financial
Statements. With respect to foreign exchange contracts, we record these on our
balance sheet at fair market value based upon market-price quotations from the
financial institutions. We do not enter into non-exchange traded contracts that
require the use of fair value estimation techniques, but if we did, they could
have a material impact on our financial results. Also, we do not enter into
hedges for speculative purposes.
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 for
which we do not require collateral, and if one or more of those customers were
to default on its obligations under applicable contractual arrangements, we
could be exposed to potentially significant losses. Moreover, the continued
downturn in the global economy could have an adverse impact on the ability of
our customers to pay their obligations on a timely basis. However, we believe
that the reserves for potential losses are adequate. At December 31, 2002 and
2001, we did not have any major concentration of credit risk related to
financial instruments.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements are prepared in accordance with GAAP. In
connection with the preparation of these financial statements, we are required
to make assumptions, estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, expenses and the related disclosure of contingent
liabilities. These assumptions, estimates and judgments are based on historical
experience and assumptions that are believed to be reasonable at the time.
However, because future events and their effects cannot be determined with
certainty, the determination of estimates requires the exercise of judgment. Our
critical accounting policies are those which require assumptions to be made
about matters that are highly uncertain. Different estimates could have a
material impact on our financial results. Judgments and uncertainties affecting
the application of these policies and estimates may result in materially
different amounts being reported under different conditions or circumstances.
Our management continually reviews these estimates and assumptions to ensure
that our financial statements are presented fairly and are materially correct.
20
In many cases, the accounting treatment of a particular transaction is
specifically dictated by GAAP and does not require significant management
judgment in its application. There are also areas in which management's judgment
in selecting among available alternatives would not produce a materially
different result. The significant accounting policies and estimates that we
believe are the most critical to aid in fully understanding and evaluating our
reported financial results are discussed in the paragraphs below. Our senior
management has reviewed these critical accounting policies and related
disclosures with our independent auditors and the Audit Committee of our Board
of Directors (see Note 1 of Notes to Consolidated Financial Statements, which
contains additional information regarding our accounting policies and other
disclosures required by GAAP).
Revenue Recognition We are a solutions company which provides our customers with
computer hardware, software, professional consulting services and customer
support services. Consistent with other companies that provide similar solution
offerings, revenue recognition is often complex and subject to multiple
accounting pronouncements including Staff Accounting Bulletin No. 101 (SAB 101),
"Revenue Recognition in Financial Statements," Statement of Position No. 97-2
(SOP 97-2), "Software Revenue Recognition," and related interpretations.
In general, we consider revenue realized, or realizable, and earned when
persuasive evidence of an arrangement exists, the products or services have been
provided to the customer, the sales price is fixed or determinable and
collectibility is reasonably assured. This policy is consistently applied to all
of our operating segments.
Hardware and software revenue is recognized upon shipment, delivery,
installation or customer acceptance of the product, as defined in the customer
contract. Generally, we do not sell our software products without the related
hardware as our software products are embedded in the hardware we sell. Our
typical solution requires no significant production, modification or
customization of the software or hardware that is essential to the functionality
of the products other than installation for our more complex solutions. For
these complex solutions, revenue is deferred until all customer contractual
obligations have been met.
Our sales arrangements often include support services in addition to hardware
and software. These services could include hardware and software maintenance,
upgrade rights, customer support and professional consulting services. For sales
arrangements that include bundled hardware, software and services, we account
for any undelivered service offering as a separate element of a multiple-element
arrangement. These services are typically not required to operate the hardware
and software. Revenue deferred for services is determined based upon
vendor-specific objective evidence of the fair value of the elements as
prescribed in SOP 97-2. For these services, revenue is typically recognized
ratably over the period benefited or when the services are complete. If the
services are essential to the functionality of the hardware and software,
revenue from the hardware and software components is deferred until the
essential services are complete.
Revenue recognition for complex contractual arrangements require a greater
degree of judgment, including a review of specific contracts, past experience,
credit-worthiness of customers, international laws and other factors. Changes in
judgments about these factors could impact the timing and amount of revenue
recognized between periods.
Allowance for Doubtful Accounts We evaluate the collectibility of our accounts
receivable based on a number of factors. We establish provisions for doubtful
accounts using percentages of our accounts receivable balances as an overall
proxy to reflect historical average credit losses and provision for known
issues. These percentages are applied to aged accounts receivable balances. Aged
accounts are determined based on the number of days the receivable is
outstanding, measured from the date of the invoice, or from the date on which
payment is due. As the age of the receivable increases, the provision percentage
also increases. This policy is applied to all of our operating segments.
Based on the factors below, we periodically review customer account activity in
order to assess the adequacy of the allowances provided for potential losses.
Factors considered include economic conditions and each customer's payment
history and credit worthiness. Judgment is used to assess the collectibility of
account balances, and the credit worthiness of a customer.
The Allowance for Doubtful Accounts for the periods ended December 31 was $25
million in 2002, $54 million in 2001 and $24 million in 2000. These allowances
represent 2.0%, 4.6% and 1.8% of gross receivables for 2002, 2001 and 2000,
respectively. The increase in the allowance for doubtful accounts between 2001
and 2000 represents a $39 million provision for uncollectible loans and
receivables related to CCC. Although no near-term changes are expected,
unforeseen changes to future allowance percentages could materially impact
overall financial results.
Given our experience, we believe that the reserves for potential losses are
adequate, but if one or more of our larger customers were to default on its
obligations, we could be exposed to potentially significant losses in excess of
the provisions established. If economic conditions worsen, impacting our
customers' ability to pay, we may increase our reserves for doubtful accounts.
21
Inventory Valuation Inventories are stated at lower of cost or market. Each
quarter, our business segments reassess raw materials, work-in-process, parts
and finished equipment inventory average costs for purchase or usage variances
from standards and valuation adjustments are made. Additionally, to properly
provide for potential exposure due to slow moving, excess, obsolete or unusable
inventory, a reserve against inventory is established. This reserve is
established based on forecasted usage, orders, technological obsolescence and
inventory aging. These factors are impacted by market conditions, technology
changes, and changes in strategic direction, and require estimates and
management judgment that may include elements that are uncertain. On a quarterly
basis, we review the current market value of inventory and require each business
segment to ensure that inventory balances are adjusted for any inventory
exposure due to age or excess of cost over market value.
We have inventory in more than 40 countries around the world. We transfer
inventory from our plants to our distribution and sales organizations. This
inventory is transferred at cost plus mark-up. This mark-up is referred to as
inter-company profit. Each quarter we review our inventory levels and analyze
our inter-company profit for each of our segments to determine the amount of
inter-company profit to eliminate. Key assumptions are made to estimate product
gross margins, the product mix of existing inventory balances and current period
shipments. Over time, we refine these estimates as facts and circumstances
allow. If our estimates require refinement our results could be impacted.
Our inventory reserve balances of $66 million, $54 million and $54 million as of
December 31, 2002, 2001 and 2000 represent 20.2%, 16.2% and 15.8% of our gross
inventory balances for each period. Although we strive to achieve a balance
between market demands and risk of inventory excess or obsolescence caused by
these factors, it is possible that, should conditions change, additional
reserves may be needed. Any changes in reserves will impact operating income
during a given period. This policy is consistently applied to all of our
operating segments and we do not anticipate any changes to our policy in the
near term.
Warranty Reserves One of our key strategies is to provide superior quality
products and services. To that end, we provide a standard manufacturer's
warranty extending up to 12 months such that, should products under warranty
require repair, no additional cost of that repair will be charged to our
customers. A corresponding estimated liability for potential warranty costs is
also recorded at the time of the sale. We sometimes offer extended warranties to
our customers for purchase. We defer the fair value of these revenues and
recognize revenue over the life of the warranty. This impacts all segments of
our business except for the "Other" segment where minimal warranty, if any, is
offered.
Future warranty obligation costs are based upon historic factors such as labor
rates, average repair time, travel time, number of service calls per machine and
cost of replacement parts. Each segment consummating a sale recognizes the total
customer revenue and records the associated warranty liability based upon the
pre-established warranty percentages for that product class.
Total warranty costs for the period ended December 31, 2002 were $16 million,
$18 million in 2001 and $24 million in 2000, representing 0.6%, 0.6% and 0.8% of
total product revenues in the respective periods. Historically the principal
factor used to estimate our warranty costs has been service calls per machine.
Significant changes in this factor could result in actual warranty costs
differing from accrued estimates. Although no near-term changes in our estimated
warranty reserves are currently anticipated, in the unlikely event of a
significant increase in warranty claims by one or more of our larger customers,
costs to fulfill warranty obligations would be higher than provisioned, thereby
impacting results.
Pension, Postretirement and Postemployment Benefits We account for defined
benefit pension plans in accordance with SFAS 87 which requires that amounts
recognized in financial statements be determined on an actuarial basis. Our
postretirement plans are accounted for in accordance with Statement of Financial
Accounting Standards No. 106 (SFAS 106), "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and our postemployment plans are
accounted for in accordance with Statement of Financial Accounting Standards No.
112 (SFAS 112), "Employers' Accounting for Postemployment Benefits." We have
significant pension, postretirement and postemployment benefit costs and
credits, which are developed from actuarial valuations. Actuarial assumptions
attempt to anticipate future events and are used in calculating the expense and
liability relating to these plans. These factors include assumptions we make
about interest rates, expected investment return on plan assets, rate of
increase in health care costs, total and involuntary turnover rates, and rates
of future compensation increases. In addition, our actuarial consultants also
use subjective factors such as withdrawal rates and mortality rates to develop
our valuations. We generally review and update these assumptions on an annual
basis at the beginning of each fiscal year. We are required to consider current
market conditions, including changes in interest rates, in making these
assumptions. The actuarial assumptions that we use may differ materially from
actual results due to changing market and economic conditions, higher or lower
withdrawal rates or longer or shorter life spans of participants. These
differences may result in a significant impact to the amount of pension,
postretirement or postemployment benefits expense we have recorded or may
record. Postretirement and postemployment expenses impact all of our segments,
while pension income is reported at the corporate level.
22
The key assumptions used in developing our 2002 pension and postretirement plan
expense were the discount rate of 7.25% and expected return on assets assumption
of 10% for our U.S. plans which represents 69% and 100% of pension and
postretirement plan obligations, respectively. Holding all other assumptions
constant, a 0.25% change in the discount rate used for the U.S. plan would have
increased or decreased pre-tax 2002 income by approximately $2 million.
Likewise, a 0.25% change in the expected rate of return on plan assets
assumption would have increased or decreased pre-tax 2002 income by
approximately $7 million. Our expected return on plan assets has historically
been and will likely continue to be material to operating and net income. While
it is required that we review our actuarial assumptions each year at the
measurement date, we generally do not change them between measurement dates. We
use a measurement date of December 31, for all of our plans. In determining 2003
pension and postretirement expense for the U.S. plans, we intend to use a
discount rate of 6.75% and an expected rate of return on assets assumption of
8.5%. The most significant assumption used in developing our 2002 postemployment
plan expense was the assumed rate of involuntary turnover of 4%. The involuntary
turnover rate is based on historical trends and projections of involuntary
turnover in the future. Our historical assumption has been 3.5%; however, due to
reengineering activities that increased our recent involuntary turnover rate and
our projection of involuntary turnover, we raised our rate to 4%. A 0.25% change
in the rate of involuntary turnover would have increased or decreased pre-tax
2002 expense by approximately $4 million.
Environmental and Legal Contingencies Each quarter, we review the status of each
claim and legal proceeding and assess our potential financial exposure. If the
potential loss from any claim or legal proceeding is considered probable and the
amount can be reasonably estimated, we accrue a liability for the estimated
loss, in accordance with Statement of Financial Accounting Standards No. 5 (SFAS
5), "Accounting for Contingencies." To the extent the amount of a probable loss
is estimable only by reference to a range of equally probable outcomes, and no
amount within the range appears to be a better estimate than any other amount,
we accrue for the low end of the range. Because of uncertainties related to
these matters, the use of estimates, assumptions, judgments and external factors
beyond our control, accruals are based on the best information available at the
time. As additional information becomes available, we reassess the potential
liability related to our pending claims and litigation and may revise our
estimates. Such revisions in the estimates of the potential liabilities could
have a material impact on our results of operations and financial position. When
insurance carriers or third-parties have agreed to pay any amounts related to
costs, and we believe that it is probable that we can collect such amounts,
those amounts would be reflected as receivables in our consolidated financial
statements.
The most significant legal contingency impacting our company relates to the Fox
River matter, which is further described in detail in Note 11 of Notes to
Consolidated Financial Statements. This matter impacts our company overall and
does not affect the financial results of any one of its segments. As described
in Note 11, NCR was identified as a potentially responsible party (PRP) at the
Fox River site in Wisconsin, because of polychlorinated biphenyl (PCB)
discharges from two carbonless paper manufacturing facilities previously owned
by NCR located along the Fox River. Some parties contend that NCR is also
responsible for PCB discharges from paper mills owned by other companies because
carbonless paper manufactured by NCR was purchased by those mills as a raw
material for their paper making processes. NCR sold the facilities in 1978 to
the present owner, Appleton Papers Inc. (API), which has also been identified as
a PRP. The other Fox River PRPs include P.H. Glatfelter Company, Georgia Pacific
(formerly Fort James), WTM1 Co. (formerly Wisconsin Tissue, now owned by
Chesapeake Corporation), Riverside Paper Corporation, and U.S. Paper Mills Corp.
(owned by Sonoco Products Company).
As of the end of 2002, our reserve for the Fox River matter was approximately
$56 million. In 2001, we increased our reserve to account for the government's
proposed clean-up plan, which included certain estimates regarding the total
clean-up costs associated with the Fox River, among other things. We regularly
re-evaluate the assumptions we use in determining the appropriate reserve for
the Fox River matter as additional information becomes available and, when
warranted, make appropriate adjustments.
The extent of our potential liability has been highly uncertain and continues to
be so at this time. Our eventual liability - which we expect will be paid out
over the next 20-40 or more years - will depend on a number of factors. In
general, these factors include: (1) the total clean-up costs for the site; (2)
the total natural resource damages for the site; (3) the share NCR and API will
jointly bear of the total clean-up costs and natural resource damages; as former
and current owners of paper manufacturing facilities along the Fox River (4) the
share NCR will bear of the joint NCR/API payments for clean-up costs and natural
resource damages; and (5) our transaction costs to defend our company in this
matter. In setting our reserve, we have attempted to estimate a range of
reasonably possible outcomes for each of these factors, although each range is
itself highly uncertain. We use our best estimate within the range if that is
possible. Where there is a range of equally probable outcomes, and there is no
amount within that range that appears to be a better estimate than any other
amount, we use the low-end of the range. Each of these factors is discussed
below:
.. For the first factor described above, total clean-up costs for the site, we
determined that there is a range of equally probable outcomes, and that no
estimate within that range was better than the other estimates.
Accordingly, we used the low-end of that range, which was the government's
estimate of the clean-up costs as set forth in the
23
proposed clean-up plan. This amount was $370 million; however there can be
no assurances that this amount will not be significantly higher. For
example, one consultant has expressed an opinion that total clean-up costs
for the site could be approximately $1.1 billion. In relying on the
government estimates for clean-up costs, we assumed that neither the amount
of dredging undertaken nor the cost per cubic yard of the dredging will
vary significantly from the amounts contained in the proposed plan. The
goverment's final clean-up plan for the first two areas of the Fox River
that was released in January 2003 is generally consistent with the
estimates for the corresponding portions of its proposed plan.
.. Second, for total natural resource damages, we also determined that there
is a range of equally probable outcomes, and that no estimate within that
range was better than the other estimates. Accordingly, we used the low-end
of that range, which was the lowest estimate in a 2000 government report on
natural resource damages. This amount was $176 million.
.. Third, for the NCR/API share of clean-up costs and natural resource
damages, we examined figures developed by several independent,
nationally-recognized engineering and paper-industry experts, along with
those set forth in draft government reports. Again, we determined that
there is a range of equally probable outcomes, and that no estimate within
that range was better than the other estimates. Accordingly, we used the
low-end of that range, which was primarily an estimate of the joint NCR/API
percentage of direct discharges of PCBs to the river.
.. Fourth, for our share of the joint NCR/API payments, we estimated we would
pay approximately half of the total costs jointly attributable to NCR/API.
This is based on a sharing agreement between us and API, the terms of which
are confidential. This factor assumes that API is able to pay its share of
the NCR/API joint share.
.. Finally, for our transaction costs to defend this matter, we estimated the
costs we are likely to incur over the four-year period covered by the
NCR/API interim settlement with the government (which is described below).
This estimate is based on our costs since this matter first arose in 1995
and estimates of what our defense costs will be in the future.
We do not expect there to be any significant near-term changes to any of the
above-described assumptions that are likely to have a material effect on the
amount of our accrual. However, there are other estimates for each of these
factors which are significantly higher than the estimates described above. We
believe there is such uncertainty surrounding these estimates that we cannot
quantify the high-end of the range of such estimates. In any event, assuming,
for example, that the above described assumptions are each doubled, our payments
for the potential liabilities for the Fox River matter would be approximately
$255 million (to be paid out over the next 20-40 or more years). AT&T Corp. and
Lucent Technologies, Inc. are jointly responsible for indemnifying us for a
portion of amounts incurred by our company over a certain threshold, and the
$255 million estimate assumes they will make such payments. If we were in fact
required to pay an amount such as $255 million for NCR's share of the Fox River
liabilities, it would have a minimal impact on our liquidity and capital
resources, assuming that such amount was required to be paid over the time frame
currently contemplated. However, if such an amount were required to be paid in a
shorter time period, it could have a material impact on our liquidity or capital
resources.
We have discussed above our overall, long-term exposure to the Fox River
liability. However, as described in Note 11 of Notes to Consolidated Financial
Statements, we also have limited short-term liability for this matter. In
December 2001, NCR and API entered into an interim settlement with the
governmental agencies that limits NCR/API's joint cash payouts to $10.375
million per year over a four-year period beginning at the time of such interim
settlement. Any portion of an annual $10.375 million installment not paid out in
a given year will be rolled over and made available for payment during
subsequent years up until December 10, 2005. These payments are being shared by
us and API under the terms of the confidential settlement agreement discussed
above and will be credited against our long-term exposure for this matter.
Investment in Marketable Securities We typically classify our marketable
securities as available-for-sale and account for them at fair value with net
unrealized gains or losses reported, net-of-tax, within stockholders' equity. If
a decline in the fair value of a marketable security is deemed by us to be other
than temporary, the cost basis of the investment is written down to estimated
fair value, and the amount of the write-down is included in the determination of
income. The determination of whether a decline in the fair market value is to be
other than temporary requires a significant amount of judgment and is based on
historical experience and upon information available to us at the time. However,
because future events relating to marketable securities cannot be determined
with absolute certainty, our decision to recognize a loss may be premature or we
may fail to a make a timely adjustment, impacting future earnings. During the
fourth quarter of 2002, we recognized a pre-tax loss of $14 million for
investments in marketable securities in Japan. Currently, we do not anticipate
any near-term changes in the fair market value of our marketable securities and
any changes in the fair market value would be immaterial.
24
Income Taxes We account for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes," which recognizes deferred tax assets and liabilities based on the
differences between the financial statement carrying amounts and the tax basis
of assets and liabilities. The deferred tax assets and liabilities are
determined based on the enacted tax rates expected to apply in the periods in
which the deferred tax assets or liabilities are expected to be settled or
realized.
We regularly review our deferred tax assets for recoverability and establish a
valuation allowance if it is more likely than not that some portion or all of a
deferred tax asset will not be realized. The determination as to whether a
deferred tax asset will be realized is made on a jurisdictional basis and is
based on the evaluation of positive and negative evidence. This evidence
includes historical taxable income, projected future taxable income, the
expected timing of the reversal of existing temporary differences and the
implementation of tax planning strategies. Projected future taxable income is
based on our expected results and assumptions as to which jurisdiction the
income will be earned. The expected timing of the reversals of existing
temporary differences is based on current tax law and our tax methods of
accounting. We also review our liabilities under SFAS No. 5 which requires an
accrual for estimated losses when it is probable that a liability has been
incurred and the amount can be reasonably estimated. These projections and
estimates may change in the future as actual results become known.
If we are unable to generate sufficient future taxable income, or if there is a
material change in the actual effective tax rates or the time period within
which the underlying temporary differences become taxable or deductible, or if
the tax laws change unfavorably, then we could be required to increase our
valuation allowance against our deferred tax assets, resulting in an increase in
our effective tax rate. The impact to our effective tax rate would be an
increase of one percentage point for each increase of $1 million to the
valuation allowance as of December 31, 2002.
We have a valuation allowance of $357 million as of December 31, 2002 related to
certain deferred income tax assets, primarily tax loss carryforwards, in
jurisdictions where there is uncertainty as to ultimate realization of a benefit
from those tax assets. As of December 31, 2001, the valuation allowance was $281
million.
Impairment of Long-Lived Assets In accordance with Statement of Financial
Accounting Standards No. 144 (SFAS 144), "Accounting for the Impairment or
Disposal of Long-Lived Assets," long-lived assets to be held and used are
reviewed for impairment whenever events or circumstances indicate that the
carrying amount may not be recoverable. When required, impairment losses on
assets to be held and used are recognized based on the fair value of the asset.
We determine the fair value of these assets based upon estimates of future cash
flows, market value of similar assets, if available, or independent appraisals,
if required. In analyzing the fair value and recoverability using future cash
flows, we make projections based on a number of assumptions and estimates of
growth rates, future economic conditions, assignment of discount rates and
estimates of terminal values. An impairment loss is recognized if the carrying
amount of the long-lived asset is not recoverable from its undiscounted cash
flows. The measurement of impairment loss is the difference between the carrying
amount and fair value of the asset. This policy is applied to all of our
segments. Long-lived assets to be disposed of and/or held for sale are reported
at the lower of carrying amount or fair value less cost to sell. We determine
the fair value of these assets in the same manner as described for assets held
and used.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 141 (SFAS 141), "Business Combinations" and SFAS 142 in
June 2001. SFAS 141 specifies criteria that intangible assets acquired in a
purchase method business combination must be recognized and reported apart from
goodwill. SFAS 142 requires that goodwill no longer be amortized, but instead be
tested for impairment at least annually. SFAS 142 also requires intangible
assets with definite useful lives to continue to be amortized over their
respective useful lives and be tested for impairment whenever events and
circumstances indicate that the carrying amount may not be recoverable.
Indefinite life intangible assets must be tested annually to determine whether
events or circumstances continue to support the indefinite useful life. If the
intangible asset is subsequently determined to have a finite useful life, the
asset shall be tested for impairment in accordance with SFAS 144. Similar to
goodwill, the assessment of impairment for intangible assets requires estimates
of future cash flows. To the extent the carrying value of the assets exceed
their fair value, an impairment loss would be recorded. See Note 5 of Notes to
Consolidated Financial Statements for our disclosure regarding intangible assets
and goodwill.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
A discussion of recently issued accounting pronouncements is described in Note 1
of Notes to 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 hereof.
25
Report of Management
We are responsible for the preparation, integrity and objectivity of our
consolidated financial statements and other financial information presented in
our Annual Report. The accompanying consolidated financial statements were
prepared in accordance with accounting principles generally accepted in the
United States of America and include certain amounts based on currently
available information and our judgment of current conditions and circumstances.
We maintain an internal control structure designed to provide reasonable
assurance, at reasonable cost, that our assets are safeguarded, and that
transactions are properly authorized, executed, recorded and reported. This
structure is supported by the selection and training of qualified personnel, by
the proper delegation of authority and division of responsibility, and through
dissemination of written policies and procedures. An ongoing program of internal
audits and operational reviews assists us in monitoring the effectiveness of
these controls, policies and procedures. The accounting systems and related
other controls are modified and improved in response to changes in business
conditions and operations, and recommendations made by our independent
accountants and internal auditors.
PricewaterhouseCoopers LLP, independent accountants, are engaged to perform
audits of our consolidated financial statements. These audits are performed in
accordance with auditing standards generally accepted in the United States of
America, which include the consideration of our internal control structure.
The Audit Committee of the Board of Directors, consisting entirely of
independent directors who are not employees of NCR, monitors our accounting,
reporting and internal control structure. Our independent accountants, internal
auditors and management have complete and free access to the Audit Committee,
which periodically meets directly with each group to ensure that their
respective duties are being properly discharged.
/s/ Lars Nyberg /s/ Earl Shanks
Lars Nyberg Earl Shanks
Chairman of the Board Senior Vice President and
Chief Financial Officer
Report of Independent Accountants
To the Board of Directors and Stockholders of NCR Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
NCR Corporation and its subsidiaries at December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of NCR Corporation's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 of the Notes to Consolidated Financial Statements, on
January 1, 2002, NCR Corporation adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangibles." The transitional goodwill
impairment write-down was reflected as a cumulative effect of change in
accounting for the year ended December 31, 2002. On January 1, 2001, NCR
Corporation adopted Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended by
Statement of Financial Accounting Standards No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an Amendment of FASB
Statement No. 133," the effect of which is reflected as a cumulative effect of
change in accounting for the year ended December 31, 2001.
/s/ PricewaterhouseCoopers LLP
Dayton, Ohio
January 20, 2003
26
Consolidated Statements of Operations
For the year ended December 31 2002 2001 2000
- -----------------------------------------------------------------------------------
In millions, except per share amounts
Revenue
Product revenue $2,885 $3,048 $3,178
Service revenue 2,700 2,869 2,781
- -----------------------------------------------------------------------------------
Total revenue 5,585 5,917 5,959
- -----------------------------------------------------------------------------------
Operating expenses
Cost of products 1,883 1,947 2,000
Cost of services 2,115 2,176 2,092
Selling, general and administrative expenses 1,166 1,315 1,329
Research and development expenses 232 293 333
- -----------------------------------------------------------------------------------
Total operating expenses 5,396 5,731 5,754
- -----------------------------------------------------------------------------------
Income from operations 189 186 205
Interest expense 19 18 13
Other expense (income), net 39 44 (83)
- -----------------------------------------------------------------------------------
Income before income taxes and cumulative effect of
accounting change 131 124 275
Income tax expense (benefit) 3 (97) 97
- -----------------------------------------------------------------------------------
Income before cumulative effect of accounting change 128 221 178
Cumulative effect of accounting change, net-of-tax (348) (4) --
- -----------------------------------------------------------------------------------
Net (loss) income $ (220) $ 217 $ 178
- -----------------------------------------------------------------------------------
Net (loss) income per common share
Basic before cumulative effect of accounting change $ 1.30 $ 2.29 $ 1.87
Cumulative effect of accounting change (3.55) (0.04) --
- -----------------------------------------------------------------------------------
Basic $(2.25) $ 2.25 $ 1.87
- -----------------------------------------------------------------------------------
Diluted before cumulative effect of accounting change $ 1.27 $ 2.22 $ 1.82
Cumulative effect of accounting change (3.48) (0.04) --
- -----------------------------------------------------------------------------------
Diluted $(2.21) $ 2.18 $ 1.82
- -----------------------------------------------------------------------------------
Weighted average common shares outstanding
Basic 97.9 96.7 95.1
Diluted 99.9 99.6 98.0
- ------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
27
Consolidated Balance Sheets
At December 31 2002 2001
- -------------------------------------------------------------------------------
In millions, except per share amounts
Assets
Current assets
Cash, cash equivalents and short-term investments $ 526 $ 336
Accounts receivable, net 1,204 1,126
Inventories, net 263 280
Other current assets 193 221
- -------------------------------------------------------------------------------
Total current assets 2,186 1,963
- -------------------------------------------------------------------------------
Reworkable service parts and rental equipment, net 234 224
Property, plant and equipment, net 558 629
Goodwill 102 450
Other assets 1,592 1,589
- -------------------------------------------------------------------------------
Total assets $4,672 $4,855
- -------------------------------------------------------------------------------
Liabilities and stockholders' equity
Current liabilities
Short-term borrowings $ 5 $ 138
Accounts payable 364 362
Payroll and benefits liabilities 227 217
Customer deposits and deferred service revenue 339 319
Other current liabilities 482 482
- -------------------------------------------------------------------------------
Total current liabilities 1,417 1,518
- -------------------------------------------------------------------------------
Long-term debt 306 10
Pension and indemnity liabilities 696 319
Postretirement and postemployment benefits liabilities 312 359
Other liabilities 596 600
Minority interests 20 22
- -------------------------------------------------------------------------------
Total liabilities 3,347 2,828
- -------------------------------------------------------------------------------
Commitments and contingencies (Note 11)
Stockholders' equity
Preferred stock: par value $0.01 per share, 100.0 shares
authorized, no shares issued and outstanding at
December 31, 2002 and 2001, respectively -- --
Common stock: par value $0.01 per share, 500.0 shares
authorized, 97.0 and 97.4 shares issued and
outstanding at December 31, 2002 and 2001, respectively 1 1
Paid-in capital 1,217 1,235
Retained earnings 641 861
Accumulated other comprehensive loss (534) (70)
- -------------------------------------------------------------------------------
Total stockholders' equity 1,325 2,027
- -------------------------------------------------------------------------------
Total liabilities and stockholders' equity $4,672 $4,855
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
28
Consolidated Statements of Cash Flows
For the year ended December 31
2002 2001 2000
- ------------------------------------------------------------------------------
In millions
Operating Activities
Net (loss) income $(220) $ 217 $ 178
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 328 423 361
Deferred income taxes (27) 11 32
Income tax adjustment -- (138) --
Goodwill impairment 348 -- --
Other gain on assets, net 50 (23) (8)
Changes in assets and liabilities:
Receivables (90) 212 (80)
Inventories 18 8 28
Current payables (12) (146) 80
Customer deposits and deferred service revenue 21 (25) (42)
Disbursements for employee severance and pension (155) (263) (248)
Other assets and liabilities (14) (130) (130)
- ------------------------------------------------------------------------------
Net cash provided by operating activities 247 146 171
- ------------------------------------------------------------------------------
Investing Activities
Purchases of short-term investments -- (23) (26)
Proceeds from sales and maturities of short-term
investments 1 32 208
Net expenditures and proceeds for reworkable service
parts (113) (117) (108)
Expenditures for property, plant and equipment (81) (141) (216)
Proceeds from sales of property, plant and equipment 23 40 173
Business acquisitions and investments -- (6) (319)
Proceeds from sale of business -- 44 --
Additions to capitalized software (65) (67) (67)
Other investing activities, net 15 5 (12)
- ------------------------------------------------------------------------------
Net cash used in investing activities (220) (233) (367)
- ------------------------------------------------------------------------------
Financing Activities
Purchases of Company common stock (66) (60) (110)
Short-term borrowings, additions 101 213 10
Short-term borrowings, repayments (234) (171) (21)
Long-term debt, additions 299 1 --
Long-term debt, repayments (3) (2) (3)
Proceeds from employee stock plans 51 101 122
Other financing activities, net 3 5 (5)
- ------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 151 87 (7)
- ------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash
equivalents 13 (12) (21)
Increase (decrease) in cash and cash equivalents 191 (12) (224)
Cash and cash equivalents at beginning of year 335 347 571
- ------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 526 $ 335 $ 347
- ------------------------------------------------------------------------------
Supplemental data
Cash paid (received) during the year for:
Income taxes $ 29 $ (8) $ 68
Interest 19 18 14
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
29
Consolidated Statements of Changes in Stockholders' Equity
Accumulated
Common Stock Other
--------------- Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income (Loss) Total
- --------------------------------------------------------------------------------------------------------------
In millions
December 31, 1999 94 $ 1 $1,081 $ 466 $ 48 $1,596
Employee stock purchase
and stock compensation plans 3 -- 117 -- -- 117
Purchase acquisitions 1 -- 64 -- -- 64
Proceeds from sale of put options -- -- 5 -- -- 5
Expiration of put option obligation -- -- 13 -- -- 13
Purchase of Company common stock (3) -- (124) -- -- (124)
- --------------------------------------------------------------------------------------------------------------
Subtotal 95 1 1,156 466 48 1,671
- --------------------------------------------------------------------------------------------------------------
Net income -- -- -- 178 -- 178
Other comprehensive income (loss), net-of-tax:
Currency translation adjustments -- -- -- -- (42) (42)
Unrealized (losses) gains on securities:
Unrealized holding (losses) arising
during the period -- -- -- -- (35) (35)
Less: reclassification adjustment for
gains included in net income -- -- -- -- (3) (3)
Additional minimum pension liability -- -- -- -- (11) (11)
- --------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) -- -- -- 178 (91) 87
- --------------------------------------------------------------------------------------------------------------
December 31, 2000 95 1 1,156 644 (43) 1,758
Employee stock purchase
and stock compensation plans 3 -- 124 -- -- 124
Proceeds from sale of put options -- -- 1 -- -- 1
Purchase of Company common stock (1) -- (46) -- -- (46)
- --------------------------------------------------------------------------------------------------------------
Subtotal 97 1 1,235 644 (43) 1,837
- --------------------------------------------------------------------------------------------------------------
Net income -- -- -- 217 -- 217
Other comprehensive income (loss), net-of-tax:
Currency translation adjustments -- -- -- -- (42) (42)
Unrealized (losses) on securities:
Unrealized holding (losses) arising
during the period -- -- -- -- (3) (3)
Less: reclassification adjustment for
losses included in net income -- -- -- -- 5 5
Additional minimum pension liability -- -- -- -- 6 6
Unrealized gains on derivatives -- -- -- -- 7 7
- --------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) -- -- -- 217 (27) 190
- --------------------------------------------------------------------------------------------------------------
December 31, 2001 97 1 1,235 861 (70) 2,027
Employee stock purchase
and stock compensation plans 2 -- 47 -- -- 47
Proceeds from sale of put options -- -- 1 -- -- 1
Purchase of Company common stock (2) -- (66) -- -- (66)
- --------------------------------------------------------------------------------------------------------------
Subtotal 97 1 1,217 861 (70) 2,009
- --------------------------------------------------------------------------------------------------------------
Net loss -- -- -- (220) -- (220)
Other comprehensive loss, net-of-tax:
Currency translation adjustments -- -- -- -- 101 101
Unrealized (losses) on securities:
Unrealized holding (losses) arising
during the period -- -- -- -- (7) (7)
Less: reclassification adjustment for
losses included in net income -- -- -- -- 6 6
Additional minimum pension liability -- -- -- -- (551) (551)
Unrealized (losses) on derivatives -- -- -- -- (13) (13)
- --------------------------------------------------------------------------------------------------------------
Comprehensive loss -- -- -- (220) (464) (684)
- --------------------------------------------------------------------------------------------------------------
December 31, 2002 97 $ 1 $1,217 $ 641 $(534) $1,325
- --------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Description of Business and Significant Accounting Policies
Description of Business NCR Corporation (NCR or the Company) and its
subsidiaries provide solutions worldwide that are designed specifically to
enable NCR's customers to build, expand and enhance their relationships with
their customers by facilitating transactions and transforming data from
transactions into useful business information.
NCR offers specific solutions for the retail and financial industries, and
through its Data Warehousing and Customer Services segments, NCR provides
solutions for industries including telecommunications, transportation,
insurance, utilities and electronic commerce, as well as consumer goods
manufacturers and government entities. These solutions are built on a foundation
of long-established industry knowledge and consulting expertise, a range of
hardware technology, value-adding software, global customer support services,
and a complete line of business consumables.
Basis of Consolidation The consolidated financial statements include the
accounts of NCR and its majority-owned subsidiaries. Long-term investments in
affiliated companies in which NCR owns between 20% and 50%, and therefore
exercises significant influence, but which it does not control, are accounted
for using the equity method. Investments in which NCR does not exercise
significant influence (generally, when NCR has an investment of less than 20%
and no representation on the Company's Board of Directors) are accounted for
using the cost method. All significant inter-company transactions and accounts
have been eliminated. The Company does not have any special purpose entities
whose financial results are not included in the consolidated financial
statements.
Use of Estimates The preparation of financial statements in conformity with U.S.
generally accepted accounting principles (GAAP) requires management to make
estimates and judgments that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and revenues and expenses during the period reported.
Actual results could differ from those estimates.
Revenue Recognition NCR's revenue recognition policy is consistent with the
requirements of Staff Accounting Bulletin No. 101 (SAB 101), "Revenue
Recognition in Financial Statements," Statement of Position No. 97-2 (SoP 97-2),
"Software Revenue Recognition," and other applicable revenue recognition
guidance and interpretations. In general, the Company records revenue when it is
realized, or realizable, and earned. The Company considers these requirements
met when persuasive evidence of an arrangement exists, the products or services
have been provided to the customer, the sales price is fixed or determinable and
collectibility is reasonably assured.
For the Company's solutions, computer hardware and software revenue is
recognized upon shipment, delivery, installation or customer acceptance of the
product, as defined in the customer contract. Typically, NCR does not sell its
software products without the related hardware as the software products are
embedded in the hardware. The Company's typical solution requires no significant
production, modification or customization of the software or hardware that is
essential to the functionality of the products other than installation for its
more complex solutions. For these complex solutions, revenue is deferred until
the installation is complete.
As a solutions provider, the Company's sales arrangements often include services
in addition to hardware and software. These services could include hardware
maintenance, upgrade rights, customer support and professional consulting
services. For sales arrangements that include bundled hardware, software and
services, NCR accounts for any undelivered service offering as a separate
element of a multiple-element arrangement. These services are typically not
essential to the functionality of the hardware and software. Amounts deferred
for services are determined based upon vendor-specific objective evidence of the
fair value of the elements as prescribed in SoP 97-2. For these services,
revenue is typically recognized ratably over the period benefited or when the
services are complete. If the services are essential to the functionality of the
hardware and software, revenue from the hardware and software components is
deferred until the essential services are complete.
NCR's customers may request that certain transactions be on a bill and hold
basis. For these transactions, the Company recognizes revenue in accordance with
SAB 101 and the criteria established by the Securities and Exchange Commission.
Cash, Cash Equivalents and Short-Term Investments All short-term, highly liquid
investments having original maturities of three months or less are considered to
be cash equivalents. Short-term investments include certificates of deposit,
commercial paper and other investments having maturities less than one year.
Such investments are stated at cost, which approximates fair value at December
31, 2002 and 2001.
Transfer of Financial Assets NCR offers its customers the option to acquire its
products and services through payment plans, financing or leasing contracts.
From time to time, the Company has factored certain receivables, or transfers
future payments under these contracts, to financing institutions on a
non-recourse basis. NCR may act as
31
servicing agent for the purchaser and retain collection and administrative
responsibilities. These transfers are recorded as sales of the related accounts
receivable when NCR is considered to have surrendered control of such
receivables. The Company had factored receivables of less than $1 million at
December 31, 2002 and approximately $76 million and $58 million at December 31,
2001 and 2000, respectively. The related cost of the factoring was immaterial to
the Company's consolidated financial results.
Allowance for Doubtful Accounts NCR establishes provisions for doubtful accounts
using both percentages of accounts receivable balance to reflect historical
average credit losses and specific provisions for known issues. Given this
experience, NCR believes that the reserves for potential losses are adequate,
but if one or more of the Company's larger customers were to default on its
obligations under applicable contractual arrangements, NCR could be exposed to
potentially significant losses in excess of the provisions established.
Inventories Inventories are stated at the lower of average cost or market value.
Excess and obsolete reserves are established based on forecasted usage, orders,
technological obsolescence and inventory aging.
Investments in Marketable Securities Typically, marketable securities, which are
included in other assets, are deemed by management to be available-for-sale and
are reported at fair value with net unrealized gains or losses reported,
net-of-tax, within stockholders' equity. If a decline in the fair value of a
marketable security is deemed by management to be other than temporary, the cost
basis of the investment is written down to fair value, and the amount of the
write-down is included in the determination of income. Realized gains and losses
are recorded based on the specific identification method and average cost
method, as appropriate, based upon the investment type.
Long-Lived Assets
Capitalized Software Certain direct development costs associated with
internal-use software are capitalized within other assets and are amortized over
the estimated useful lives of the resulting software. NCR typically amortizes
capitalized internal-use software over three years beginning when the asset is
substantially ready for use.
R&D costs incurred for the development of computer software that will be sold,
leased or otherwise marketed are capitalized when technological feasibility has
been established. These costs are included within other assets and are amortized
over the estimated useful lives of the resulting software. The Company typically
amortizes capitalized software over three years beginning when the product is
available for general release. Costs capitalized include direct labor and
related overhead costs. Costs incurred prior to technological feasibility and
after general release are expensed as incurred.
Additions to capitalized software development costs were $65 million in 2002,
$67 million in 2001 and $67 million in 2000. Amortization of capitalized
software development costs was $70 million in 2002, $70 million in 2001 and $68
million in 2000. Gross capitalized software development costs were $317 million
and $252 million at December 31, 2002 and 2001, respectively, and accumulated
amortization for capitalized software development costs was $214 million and
$144 million at December 31, 2002 and 2001, respectively.
Goodwill NCR adopted SFAS 142 on January 1, 2002, and accordingly, NCR
discontinued the amortization of goodwill assets upon adoption. NCR recorded a
non-cash, net-of-tax goodwill impairment charge of $348 million as a cumulative
effect of accounting change for the year ended December 31, 2002. An additional
annual test was performed during the fourth quarter 2002 and no further
impairment was realized.
In 2001 and 2000, goodwill amortization was computed on a straight-line basis
over estimated useful lives ranging from three to 20 years. Goodwill
amortization expense recorded in operating expense was $67 million and $33
million in 2001 and 2000, respectively. Goodwill amortization expense recorded
in other expense was $7 million and $6 million in 2001 and 2000, respectively.
Accumulated amortization was $127 million and $58 million at December 31, 2001
and 2000, respectively.
Property, Plant and Equipment Property, plant and equipment, reworkable service
parts and rental equipment are stated at cost less accumulated depreciation.
Depreciation is computed over the estimated useful lives of the related assets
primarily on a straight-line basis. Buildings are depreciated over 25 to 45
years, machinery and other equipment over three to ten years and reworkable
service parts over three to six years. Reworkable service parts are those parts
that can be reconditioned and used in installation and ongoing maintenance
services and integrated service solutions for NCR's customers.
Property, Plant and Equipment Held for Sale Long-lived assets to be sold are
classified as held for sale in the period for which they meet the criteria
outlined in SFAS 144. Assets classified as held for sale are carried at the
lower of their carrying amount or fair value and are not depreciated while
classified as held for sale.
32
Valuation of Long-Lived Assets Long-lived assets such as property, plant and
equipment, software and investments are reviewed for impairment when events or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable. An impairment loss would be recognized when estimated future
undiscounted cash flows expected to result from the use of the asset and its
eventual disposition are less than its carrying amount.
Warranty, Post Sales Support and Sales Returns Provisions for product
warranties, post sales support and sales returns and allowances are recorded in
the period in which the related revenue is recognized. The Company accrues
warranty reserves and sales return and allowances using percentages of revenue
to reflect the Company's historical average warranty and sales return claims.
In addition to the standard product warranty, the Company offers extended
warranties to its customers. NCR considers extended warranties to be no
different than a normal service contract and therefore accounts for the extended
warranty by deferring revenue equal to the fair value of the warranty and
recognizes the deferred revenue over the extended warranty term.
Pension, Postretirement and Postemployment Benefits NCR has significant pension,
postretirement and postemployment benefit costs and credits, which are developed
from actuarial valuations. Actuarial assumptions attempt to anticipate future
events and are used in calculating the expense and liability relating to these
plans. These factors include assumptions the Company makes about interest rates,
expected investment return on plan assets, rate of increase in health care
costs, total and involuntary turnover rates, and rates of future compensation
increases. In addition, NCR's actuarial consultants also use subjective factors
such as withdrawal rates and mortality rates to develop the Company's
valuations. NCR generally reviews and updates these assumptions on an annual
basis at the beginning of each fiscal year. NCR is required to consider current
market conditions, including changes in interest rates, in making these
assumptions. The actuarial assumptions that NCR uses may differ materially from
actual results due to changing market and economic conditions, higher or lower
withdrawal rates or longer or shorter life spans of participants. These
differences may result in a significant impact to the amount of pension,
postretirement or postemployment benefits expense the Company has recorded or
may record.
Foreign Currency For many NCR international operations, the local currency is
designated as the functional currency. Accordingly, assets and liabilities are
translated into U.S. dollars at year-end exchange rates, and revenues and
expenses are translated at average exchange rates prevailing during the year.
Currency translation adjustments resulting from fluctuations in exchange rates
are recorded in other comprehensive income.
In the normal course of business, NCR enters into various financial instruments,
including derivative financial instruments. NCR uses foreign exchange forward
contracts and options to reduce the Company's exposure to changes in currency
exchange rates, primarily as it relates to inventory purchases by marketing
units and inventory sales by manufacturing units. Derivatives used as a part of
NCR's risk management strategy, which are designated at inception as cash-flow
hedges, are measured for effectiveness both at inception and on an ongoing
basis. For foreign exchange contracts designated as cash-flow hedges, the gains
or losses are deferred in other comprehensive income and recognized in the
determination of income as adjustments of carrying amounts when the underlying
hedged transaction is realized, canceled or otherwise terminated. For the year
ended December 31, 2002, NCR reclassified net losses of $1 million to other
income as a result of discontinuance of cash-flow hedges. The net impact related
to the ineffectiveness of all cash-flow hedges was not material during 2002. At
December 31, 2002, before-tax deferred net losses recorded in other
comprehensive income related to cash-flow hedges were $9 million, and are
expected to be reclassified to earnings during the next 12 months.
When hedging certain foreign currency transactions of a long-term investment
nature (net investments in foreign operations), gains and losses are recorded in
the currency translation adjustment component of stockholders' equity. Gains and
losses on foreign exchange contracts that are not used to hedge currency
transactions of a long-term investment nature, or that are not designated as
cash-flow hedges, are recognized in other income or expense as exchange rates
change. The impact of these hedging activities were not material to the
Company's consolidated financial position, results of operations or cash flows.
Settlement payments are primarily based on net gains and losses related to
foreign exchange derivatives and are included in cash flows from operating
activities in the consolidated statements of cash flows.
Income Taxes Income tax expense is provided based on income before income taxes.
Deferred income taxes reflect the impact of temporary differences between assets
and liabilities recognized for financial reporting purposes and such amounts
recognized for tax purposes. These deferred taxes are determined based on the
enacted tax rates expected to apply in the periods in which the deferred assets
or liabilities are expected to be settled or realized. NCR records valuation
allowances related to its deferred income tax assets when it is more likely than
not that some portion or all of the deferred income tax assets will not be
realized.
33
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 includes the additional
dilution from potential common stock, such as stock options and restricted stock
awards.
Environmental and Legal 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 GAAP are adequate in light
of the probable and estimable liabilities. However, there can be no assurances
that the actual amounts required to satisfy alleged liabilities from various
lawsuits, claims, legal proceedings and other matters, including the Fox River
environmental matter discussed below in Note 11 of Notes to Consolidated
Financial Statements, 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 costs that may be incurred in
excess of those amounts provided as of December 31, 2002, cannot currently be
reasonably determined.
Stock Compensation NCR accounts for its stock-based compensation plans using the
intrinsic value-based method in accordance with Accounting Principles Board
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees," which
requires compensation expense for options to be recognized when the market price
of the underlying stock exceeds the exercise price on the date of grant.
Compensation cost charged against income for NCR's stock-based plans was not
material in 2002, 2001 and 2000. If NCR recognized stock-based compensation
expense based on the fair value of granted options at the grant date, net (loss)
income and net (loss) income per diluted share for the years ended December 31
would have been as follows:
2002 2001 2000
- --------------------------------------------------------------
In millions, except per share amounts
Net (loss) income
As reported $ (220) $ 217 $ 178
Pro forma $ (265) $ 177 $ 140
Net (loss) income per diluted share
As reported $(2.21) $2.18 $1.82
Pro forma $(2.65) $1.78 $1.43
- --------------------------------------------------------------
The pro forma amounts calculated are not necessarily indicative of the effects
on net income and net income per diluted share in future years. The pro forma
net (loss) income and net (loss) income per diluted share for all periods
presented were computed using the fair value of options as calculated using the
Black-Scholes option-pricing method.
Reclassifications Certain prior year amounts have been reclassified to conform
to the 2002 presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 143 In August 2001, the
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 143 (SFAS 143), "Accounting for Asset Retirement
Obligations." 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 a material impact on the Company's consolidated financial
position, results of operations or cash flows.
Statement of Financial Accounting Standards No. 145 In April 2002, the FASB
issued Statement of Financial Accounting Standards No. 145 (SFAS 145),
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections as of April 2002." SFAS 145 rescinds Statement of
Financial Accounting Standards No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," and an amendment of that Statement, Statement of
Financial Accounting Standards No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements." SFAS 145 also rescinds Statement of Financial
Accounting Standards No. 44, "Accounting for Intangible Assets of Motor
Carriers." SFAS 145 amends Statement of Financial Accounting Standards No. 13,
"Accounting for Leases," to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback
34
transactions. SFAS 145 also amends other existing authoritative pronouncements
to make various technical corrections, clarify meanings or describe their
applicability under changed conditions. The provisions of SFAS 145 shall be
applied in fiscal years beginning after May 15, 2002. NCR does not expect this
standard to have any material impact on the Company's consolidated financial
position, results of operations or cash flows.
Statement of Financial Accounting Standards No. 146 In July 2002, the FASB
issued Statement of Financial Accounting Standards No. 146 (SFAS 146),
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146
replaces Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring)." This Statement
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. Examples of costs covered by the standard include lease
termination costs and certain employee severance costs that are associated with
a restructuring, discontinued operation, plant closing, or other exit or
disposal activity. SFAS 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. NCR is evaluating the impact of
this standard on the Company's consolidated financial position, results of
operations or cash flows.
Statement of Financial Accounting Standards No. 148 In December 2002, the FASB
issued Statement of Financial Accounting Standards No. 148 (SFAS 148)
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB Statement No. 123." This Statement amends Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation" to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
SFAS 123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. NCR is evaluating the
impact of this standard for the Company's consolidated financial position,
results of operations or cash flows.
FASB Interpretation No. 45 In November 2002, the FASB issued Interpretation No.
45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others," which expands
previously issued accounting guidance and disclosure requirements for certain
guarantees. FIN 45 requires NCR to recognize an initial liability for the fair
value of an obligation assumed by issuing a guarantee. The provision for initial
recognition and measurement of the liability will be applied on a prospective
basis to guarantees issued or modified after December 31, 2002. NCR has adopted
the disclosure provisions of FIN 45 and is evaluating the impact that it will
have on the consolidated financial position, results of operations or cash
flows.
FASB Interpretation No. 46 In January 2003, the FASB issued Interpretation No.
46 (FIN 46), "Consolidation of Variable Interest Entities" expanding the
guidance in Accounting Research Bulletin No. 51, "Consolidated Financial
Statements" relating to transactions involving variable interest entities. NCR
is evaluating the impact of this Interpretation on the Company's consolidated
financial position, results of operations or cash flows.
35
Note 2 Supplemental Financial Information
For the year ended December 31 2002 2001 2000
- --------------------------------------------------------------------------------
In millions
Other expense (income)
Interest income $ (10) $ (10) $(31)
Other gain on assets, net 50 (23) (33)
Fox River provision (see Note 11) -- 40 2
Other, net (1) 37 (21)
- --------------------------------------------------------------------------------
Other expense (income), net $ 39 $ 44 $(83)
- --------------------------------------------------------------------------------
At December 31 2002 2001
- --------------------------------------------------------------------------------
Cash, cash equivalents and short-term investments
Cash and cash equivalents $ 526 $ 335
Short-term investments -- 1
- --------------------------------------------------------------------------------
Total cash, cash equivalents and short-term
investments $ 526 $ 336
- --------------------------------------------------------------------------------
Accounts receivable
Trade $1,177 $1,093
Other 52 87
- --------------------------------------------------------------------------------
Accounts receivable, gross 1,229 1,180
Less: allowance for doubtful accounts 25 54
- --------------------------------------------------------------------------------
Total accounts receivable, net $1,204 $1,126
- --------------------------------------------------------------------------------
Inventories
Finished goods, net $ 197 $ 198
Work in process and raw materials, net 66 82
- --------------------------------------------------------------------------------
Total inventories, net $ 263 $ 280
- --------------------------------------------------------------------------------
36
Note 2 Supplemental Financial Information (continued)
At December 31 2002 2001
- --------------------------------------------------------------------------------
In millions
Other current assets
Current deferred tax assets $ 108 $ 113
Other 85 108
- --------------------------------------------------------------------------------
Total other current assets $ 193 $ 221
- --------------------------------------------------------------------------------
Reworkable service parts and rental equipment
Reworkable service parts and rental equipment, gross $ 501 $ 462
Less: accumulated depreciation 267 238
- --------------------------------------------------------------------------------
Total reworkable service parts and rental equipment, net $ 234 $ 224
- --------------------------------------------------------------------------------
Property, plant and equipment
Land and improvements $ 90 $ 88
Buildings and improvements 534 556
Machinery and other equipment 1,066 1,058
- --------------------------------------------------------------------------------
Property, plant and equipment, gross 1,690 1,702
Less: accumulated depreciation 1,132 1,073
- --------------------------------------------------------------------------------
Total property, plant and equipment, net $ 558 $ 629
- --------------------------------------------------------------------------------
Other assets
Prepaid pension cost/1/ $ 794 $1,104
Deferred income taxes/1/ 596 253
Other 202 232
- --------------------------------------------------------------------------------
Total other assets $1,592 $1,589
- --------------------------------------------------------------------------------
Other liabilities
Income taxes $ 458 $ 440
Other 138 160
- --------------------------------------------------------------------------------
Total other liabilities $ 596 $ 600
- --------------------------------------------------------------------------------
Accumulated other comprehensive loss
Currency translation adjustments $ 50 $ (54)
Unrealized gain on securities 2 3
Unrealized (loss) gain on derivatives (9) 7
Additional minimum pension liability and other/1/ (577) (26)
- --------------------------------------------------------------------------------
Total accumulated other comprehensive loss $ (534) $ (70)
- --------------------------------------------------------------------------------
/1/ At December 31, 2002, NCR recorded a $841 million pre-tax charge to
shareholders' equity, increasing additional minimum liabilities for our
pension plans. To account for this charge, prepaid pension cost decreased
$523 million, other intangible assets increased $7 million, non-current
deferred taxes increased $290 million, pension and indemnity liabilities
increased $325 million and the net-of-tax impact to other comprehensive
loss was $551 million.
37
Note 3 Business Restructuring
In the third quarter of 2002, NCR announced re-engineering plans to drive
operational efficiency throughout the Company. The Company is targeting process
improvements to drive simplification, standardization, globalization and
consistency across the organization. Key business processes and supporting
functions are being re-engineered to improve efficiency and lower costs and
expenses. Management is taking action to shorten the Company's product and
service offer development cycles and to improve its sales and order management
processes. To improve accounts receivables collections and cash flow, management
has implemented plans to drive efficiencies for the Company's invoicing and
collection activities.
During the fourth quarter of 2002, in connection with these efforts, NCR's
management approved a real estate consolidation and restructuring plan designed
to accelerate the Company's re-engineering strategies. A pre-tax restructuring
charge of $8 million was recorded in the fourth quarter of 2002 to provide for
contractual lease termination costs. This charge primarily impacted the
following segments, Data Warehousing ($2 million), Financial Self Service ($3
million), and Customer Services ($3 million).
As of December 31, 2002, NCR had not utilized any of the $8 million liability,
and as such it is reflected as a current liability on NCR's consolidated balance
sheet. The Company anticipates the entire $8 million charge to be utilized for
cash outlays. The Company expects to complete the restructuring plan via exiting
all identified facilities by the end of 2003.
Note 4 Business Combinations, Divestitures and Equity Investments
During 2002, NCR had no significant acquisition or divestiture activity that
materially impacted the consolidated statement of income, balance sheet or cash
flows. In 2001 and 2000, NCR completed a number of acquisitions accounted for as
purchase business combinations. The earnings from the acquired entities were
included in NCR's consolidated financial results from the dates of acquisition.
Purchase price and related acquisition costs were allocated to the acquired
tangible and intangible assets and liabilities based on fair market values, with
residual amounts recorded as goodwill. Also, in 2002, 2001 and 2000, NCR
completed other investments and sold assets related to portions of its
businesses to third parties, all of which were insignificant.
During 2001, NCR acquired two companies that were not individually, or in
aggregate, significant to its financial position, results of operations or cash
flows. In 2001, the Company recorded approximately $9 million of integration
costs related to acquisitions, which were expensed as incurred ($6 million in
cost of revenue and $3 million in SG&A expenses). Also during 2001, NCR sold its
account and item processing outsourcing businesses for approximately $44
million. Unaudited pro forma financial information has not been presented
because the effects of the acquisitions and divestitures were not material on
either an individual or aggregate basis.
During 2000, NCR completed several acquisitions including 4Front Technologies,
Inc. (4Front). These acquisitions resulted in total goodwill of $431 million
that was being amortized over various periods of five to ten years, and
in-process R&D charges of $25 million. The total amount of stock issued as part
of the acquisitions was $64 million. NCR recorded approximately $2 million of
integration costs related to acquisitions in 2000, which were expensed as
incurred ($1 million in cost of revenue and $1 million in SG&A expenses). All
purchase accounting adjustments for acquisitions completed in 2000 were
finalized and included in the 2001 results.
Assuming the acquisition of 4Front had occurred at the beginning of 2000, the
unaudited pro forma revenue, net income and net income per common share for the
period ended December 31, 2000 would have been:
2000
--------------------
Pro Forma Reported
- --------------------------------------------------------------------------------
In millions, except per share amounts
Revenue $6,138 $5,959
Net income $ 147 $ 178
Net income per common share (Basic) $ 1.55 $ 1.87
Net income per common share (Diluted) $ 1.50 $ 1.82
Unaudited pro forma financial information for other acquisitions and
divestitures completed in 2000 has not been presented because the effects of the
acquisitions and divestitures were not material on either an individual or
aggregated basis.
38
Note 5 Long-lived Assets
Property, Plant and Equipment Held for Sale Included in property, plant and
equipment classified as held for sale at December 31, 2002 were Land and
improvements of $6 million, Buildings and improvements of $26 million and
Machinery and equipment of $6 million with related accumulated amortization of
$23 million. Impairment charges of $8 million were recorded to reduce the assets
to their net realizable value.
Goodwill NCR adopted SFAS 142 on January 1, 2002 and, in accordance with SFAS
142, NCR discontinued the amortization of goodwill assets upon adoption. NCR
recorded a non-cash, net-of-tax goodwill impairment charge of $348 million as a
cumulative effect of accounting change as of January 1, 2002.
Assuming goodwill amortization had been discontinued at January 1, 2000, the
comparable net income and earnings per share (basic and diluted) for the
prior-year periods would have been:
For the years ended December 31 2001 2000
- ------------------------------------------------------------
In millions (except per share amounts)
Reported net income $ 217 $ 178
Impact of Goodwill amortization (net of tax) 66 32
- ------------------------------------------------------------
Adjusted Net Income $ 283 $ 210
- ------------------------------------------------------------
Basic earnings per share:
Reported net income $2.25 $1.87
Impact of Goodwill amortization (net of tax) 0.68 0.34
- ------------------------------------------------------------
Adjusted basic earnings per share $2.93 $2.21
- ------------------------------------------------------------
Fully diluted earnings per share:
Reported net income $2.18 $1.82
Impact of Goodwill amortization (net of tax) 0.66 0.33
- ------------------------------------------------------------
Adjusted fully diluted earnings per share: $2.84 $2.15
- ------------------------------------------------------------
The changes in the carrying amount of goodwill by operating segment for the year
ended December 31, 2002 were as follows:
Beginning Balance Transitional Other For the year ended
January 1, 2002 Impairment Adjustments/1/ December 31, 2002
- ---------------------------------------------------------------------------------------------------
In millions
Goodwill
Data Warehousing $ 75 $ -- $ 2 $ 77
Financial Self Service 16 -- (1) 15
Retail Store Automation 28 (28) -- --
Systemedia 8 (8) -- --
Payment and Imaging 2 -- -- 2
Customer Services 7 -- 1 8
Other 314 (314) -- --
- ---------------------------------------------------------------------------------------------------
Total goodwill $450 $(350) $ 2 $102
- ---------------------------------------------------------------------------------------------------
/1/ Changes to ending balances primarily relate to the impact of currency
fluctuations and a purchase accounting adjustment in Financial Self
Service.
Effective January 1, 2002, NCR performed testing for transitional goodwill
impairment and at that time identified operating segments as its reporting
units: (1) Data Warehousing, (2) Financial Self Service, (3) Retail Store
Automation, (4) Systemedia, (5) Payment and Imaging and (6) Other. At the time
of this analysis, the Other segment accumulated individual and dissimilar
businesses, such as networking hardware and services, managed services and
exited businesses, which are not attributable to the formally identified
reportable segments. Other businesses included in the Other segment include data
management services, data archiving services, network hardware and management,
e-business, integration and migration services, system security consultation and
help desk services. Exited businesses included in the Other segment relate to
bank branch automation, home banking, account processing and low-end servers.
The majority of goodwill is related to acquisitions directly attributed to
specific reporting units. Goodwill
39
associated with the Japan subsidiary (the result of acquiring minority shares in
1998) was allocated based on the proportional contribution of Japan to the
reporting unit results measured at the approximate point of acquisition. The
goodwill that was aligned to Other was primarily the result of the acquisition
of 4Front in 2000. 4Front provided a variety of services including maintenance,
help desk and network management, among others.
NCR used discounted cash flow models on a reporting unit basis to calculate the
fair value of each segment. The annual and strategic long-range plans were used
as the basis for calculating the operating income for each segment. Assumptions
were modified based on updated information, management input, and industry and
economic trends that existed at January 1, 2002. Appropriate adjustments were
made to the projected net income to arrive at a cash flow for each reporting
unit.
Based on this transitional analysis, NCR identified three reporting units for
which a total pre-tax impairment loss of $350 million was realized: Retail Store
Automation ($28 million), Systemedia ($8 million) and Other ($314 million). The
impairment losses realized for Retail Store Automation and Systemedia were
primarily related to reduced customer spending resulting from the economic
slowdown within the U.S. economy. The impairment loss realized in Other was
predominately due to intense regional competition driving down operating margins
and the global economic slowdown within the networking and infrastructure
sector.
In the fourth quarter of 2002, NCR's executive management team made a number of
strategic changes in how the Company manages its businesses. As part of this
strategic change, NCR expanded its operating segments to include Customer
Services. Prior to this change, goodwill associated with Customer Services was
allocated to each of the other segments, as such a proportional share of the
Customer Services goodwill was included in the $350 million pre-tax impairment
charge. The remaining goodwill aligned to Customer Services is related to
previous acquisitions and the proportional allocation of Japan goodwill.
In the fourth quarter of 2002, NCR performed its annual impairment test using
the same methodology used in the transitional test described above and no
further goodwill impairment losses were realized.
Other Intangible Assets Other intangible assets were specifically identified
when acquired, and mainly consist of patents. NCR has not reclassified any other
intangibles to goodwill, nor has it recognized any other intangible assets that
were previously included in goodwill. NCR's other intangible assets are deemed
to have finite lives and are being amortized over original periods ranging from
three to ten years. The gross carrying amount and accumulated amortization for
NCR's other intangible assets were $25 million and $15 million for the year
ended December 31, 2002 and $23 million and $11 million for the year ended
December 31, 2001.
The aggregate amortization expense was $4 million and $3 million for the years
ended December 31, 2002 and 2001, respectively. The estimated annual
amortization expense for the years ending December 31, 2003, 2004, 2005 and 2006
is $4 million, $4 million, $2 million and zero, respectively.
Note 6 Debt Obligations
In June 2002, the Company issued $300 million of senior unsecured notes due in
2009. The notes were offered to institutional buyers in accordance with Rule
144A and outside the United States in accordance with Regulation S under the
Securities Act of 1933, as amended (Securities Act). The notes have not been
registered under the Securities Act and were not offered or sold in the United
States without appropriate registration pursuant to an applicable exemption from
the Securities Act registration requirements. The notes accrue interest from
June 6, 2002, at the rate of 7.125% per annum, payable semi-annually in arrears
on each June 15 and December 15, beginning December 15, 2002, and contain
certain covenants typical of this type of debt instrument. As of November 4,
2002, the interest due on the notes increased 0.25% because certain registration
requirements were not yet met. Such additional interest will be due and owing
until the Company completes an exchange offer for the notes with new notes that
are registered under the Securities Act. The proceeds from the issuance totaled
$296 million, after discount and expenses, and were used to repay short-term
debt with the remainder available for general corporate purposes.
40
Note 7 Income taxes
For the years ended December 31, income before income taxes consisted of the
following:
In millions 2002 2001 2000
- -------------------------------------------------------------------------------
Income (loss) before income taxes and
cumulative effect of accounting change
United States $ 284 $ 289 $319
Foreign (153) (165) (44)
- -------------------------------------------------------------------------------
Total income before income taxes and
cumulative effect of accounting change $ 131 $ 124 $275
- -------------------------------------------------------------------------------
For the years ended December 31, income tax expense (benefit) consisted of the
following:
In millions 2002 2001 2000
- -------------------------------------------------------------------------------
Income tax expense (benefit)
Current
Federal $ (2) $ 9 $32
State and local 4 2 2
Foreign 28 (119) 31
Deferred
Federal (13) 7 35
State and local (1) (4) 3
Foreign (13) 8 (6)
- -------------------------------------------------------------------------------
Total income tax expense (benefit) $ 3 $ (97) $97
- -------------------------------------------------------------------------------
The following table presents the principal components of the difference between
the effective tax rate and the U.S. federal statutory income tax rate for the
years ended December 31:
In millions 2002 2001 2000
- -------------------------------------------------------------------------------
Income tax expense at the U.S. federal tax rate of 35% $ 46 $ 43 $ 96
Foreign income tax differential (30) (147) (8)
U.S. permanent book/tax differences (principally
goodwill) 1 9 6
Tax benefits on refund claims (15) -- --
Other, net 1 (2) 3
- -------------------------------------------------------------------------------
Total income tax expense (benefit) $ 3 $ (97) $ 97
- -------------------------------------------------------------------------------
NCR's tax provisions include a provision for income taxes in those tax
jurisdictions where its subsidiaries are profitable, but reflect only a portion
of the tax benefits related to certain foreign subsidiaries' tax losses due to
the uncertainty of the ultimate realization of future benefits from these
losses. In 2001, the foreign income tax differential included a $138 million
income tax benefit resulting from the favorable settlement of audit issues from
the 1993 and 1994 tax years related to a number of international dividend
transactions. These issues had been the subject of dispute between the IRS and
NCR, therefore, a reserve for these items had been established in prior periods.
Upon favorable settlement of the dispute during 2001, the reserve was released.
Deferred income tax assets and liabilities included in the balance sheets at
December 31 were as follows:
In millions 2002 2001
- -------------------------------------------------------------------------------
Deferred income tax assets
Employee pensions and other benefits $ 322 $ 37
Other balance sheet reserves and allowances 131 150
Tax loss and credit carryforwards 471 343
Capitalized research and development 199 120
Property, plant and equipment 30 46
Other 76 94
- -------------------------------------------------------------------------------
Total deferred income tax assets 1,229 790
Valuation allowance (357) (281)
- -------------------------------------------------------------------------------
Net deferred income tax assets 872 509
- -------------------------------------------------------------------------------
Deferred income tax liabilities
Property, plant and equipment 18 32
Employee pensions and other benefits 277 245
Other 65 41
- -------------------------------------------------------------------------------
Total deferred income tax liabilities 360 318
- -------------------------------------------------------------------------------
Total net deferred income tax assets $ 512 $ 191
- -------------------------------------------------------------------------------
41
NCR recorded valuation allowances related to certain deferred income tax assets
due to the uncertainty of the ultimate realization of future benefits from those
assets. The valuation allowance covers deferred tax assets, primarily tax loss
carryforwards, in tax jurisdictions where there is uncertainty as to the
ultimate realization of a benefit from those tax losses. As of December 31,
2002, NCR had U.S. federal and foreign tax loss carryforwards of approximately
$647 million. The tax loss carryforwards subject to expiration expire in the
years 2003 through 2021.
NCR did not provide for U.S. federal income taxes or foreign withholding taxes
on approximately $466 million and $565 million of undistributed earnings of its
foreign subsidiaries as of December 31, 2002 and 2001, respectively, because
such earnings are intended to be reinvested indefinitely.
The income tax benefit related to other comprehensive income for 2002, 2001 and
2000 was $247 million, $15 million and $48 million, respectively.
Note 8 Stock Compensation Plans, Purchases of Company Common Stock and Put
Options Stock Compensation Plans The NCR Management Stock Plan provides for the
grant of several different forms of stock-based benefits, including stock
options, stock appreciation rights, restricted stock awards, performance awards,
other stock unit awards and other rights, interests or options relating to
shares of NCR common stock to employees and non-employee directors. Stock
options are generally granted at the fair market value of the common stock at
the date of grant, generally have a ten-year term and vest within three years of
the grant date. Grants that were issued before 1998 generally had a four-year
vesting period. Options to purchase common stock may be granted under the
authority of the Board of Directors. Option terms as determined by the
Compensation Committee of the Board of Directors will not exceed ten years, as
consistent with the Internal Revenue Code. The plan was adopted by the Board of
Directors, with stockholder approval, effective January 1, 1997. The plan
contains an evergreen provision that initially authorized and made available for
grant 5.6% of the outstanding shares as of January 1, 1997, as well as
sufficient shares to replace all outstanding awards held by active NCR employees
for shares of AT&T Corp. stock. Thereafter, the number of shares authorized
under the plan increases each calendar year by 4% of the outstanding shares on
the first day of the year for the ten-year term of the plan without the need for
additional Board approval. The number of shares of common stock authorized and
available for grant under this plan were approximately 25 million and 9 million,
respectively, at December 31, 2002.
The NCR WorldShares Plan provides for the grant of stock options relating to
shares of NCR common stock to employees. The plan was adopted by the Board of
Directors, with stockholder approval, effective January 1, 1997. Options to
purchase common stock may be granted by the Board of Directors. On January 1,
1997, the Board granted options with a five-year term to substantially all NCR
employees. Those options expired January 1, 2002. The plan terminates January 1,
2007, and currently no option grants are outstanding under the plan. The plan
authorizes and makes available for grant 6.6% of the outstanding shares as of
January 1, 1997. The number of shares of common stock authorized and available
for grant under this plan were approximately 7 million and 5 million,
respectively, at December 31, 2002.
A summary of stock option activity under the NCR Management Stock Plan follows:
2002 2001 2000
----------------- ----------------- -----------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Under Exercise Under Exercise Under Exercise
Option Price Option Price Option Price
- --------------------------------------------------------------------------------------------
shares in thousands
Outstanding at beginning of year 15,519 $38.87 15,915 $36.52 14,577 $35.22
Granted 2,421 33.16 3,598 43.89 4,491 38.50
Exercised (522) 33.25 (2,481) 32.73 (2,327) 32.07
Canceled (656) 40.01 (864) 38.41 (593) 37.44
Forfeited (386) 37.42 (649) 34.10 (233) 34.26
- --------------------------------------------------------------------------------------------
Outstanding at end of year 16,376 $38.21 15,519 $38.87 15,915 $36.52
- --------------------------------------------------------------------------------------------
42
The following table summarizes information about stock options outstanding at
December 31, 2002:
Stock Options Outstanding Stock Options Exercisable
------------------------------- -------------------------
Weighted
shares in thousands Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life Price Shares Price
- ---------------------------------------------------------------------------------
$15.28 to $29.72 1,364 9.17 years $25.60 152 $26.23
$30.26 to $51.63 15,012 6.21 years 39.36 10,914 38.37
- ---------------------------------------------------------------------------------
Total 16,376 $38.21 11,066 $38.20
- ---------------------------------------------------------------------------------
There were approximately 8.3 million stock options with a weighted average
exercise price of $36.64 exercisable at December 31, 2001. At December 31, 2000,
there were approximately 8.4 million stock options exercisable with a weighted
average exercise price of $34.67.
NCR accounts for its stock-based compensation plans using the intrinsic
value-based method, which requires compensation expense for options to be
recognized when the market price of the underlying stock exceeds the exercise
price on the date of grant. Compensation cost charged against income for NCR's
stock-based plans was not material in 2002, 2001 and 2000. If NCR recognized
stock-based compensation expense based on the fair value of granted options at
the grant date, net (loss) income and net (loss) income per diluted share for
the years ended December 31 would have been as follows:
2002 2001 2000
- --------------------------------------------------------------
In millions, except per share amounts
Net (loss) income
As reported $ (220) $ 217 $ 178
Pro forma $ (265) $ 177 $ 140
Net (loss) income per diluted share
As reported $(2.21) $2.18 $1.82
Pro forma $(2.65) $1.78 $1.43
- --------------------------------------------------------------
The pro forma amounts calculated are not necessarily indicative of the effects
on net income and net income per diluted share in future years. The pro forma
net (loss) income and net (loss) income per diluted share for all periods
presented were computed using the fair value of options as calculated using the
Black-Scholes option-pricing method. The following weighted average assumptions
were used for the years ended December 31:
2002 2001 2000
- -------------------------------------------------------------
Dividend yield -- -- --
Risk-free interest rate 3.92% 4.86% 6.41%
Expected volatility 45.00% 40.00% 40.00%
Expected holding period (years) 5.0 4.9 5.0
- -------------------------------------------------------------
The weighted average fair value of NCR stock options calculated using the
Black-Scholes option-pricing model for options granted during the years ended
December 31, 2002, 2001 and 2000 was $14.84, $18.53 and $17.42 per share,
respectively.
The NCR Employee Stock Purchase Plan enables eligible employees to purchase
NCR's common stock at 85% of the average market price at the end of the last
trading day of each month. Employees may authorize payroll deductions of up to
10% of eligible compensation for common stock purchases. During 2002, 2001 and
2000, employees purchased approximately 0.8 million, 0.7 million and 0.8 million
shares, respectively, of NCR common stock for approximately $22 million, $25
million and $27 million, respectively. As of December 31, 2002, the number of
shares authorized and the number of shares available for grant under this plan
were approximately 8 million and 3 million, respectively.
43
Purchase of Company Common Stock On November 21, 2000, NCR's Board of Directors
approved a share repurchase program authorizing the systematic repurchase of
shares of Company common stock to offset the dilutive effect of the employee
stock plans. The systematic repurchase program is funded by the proceeds from
the purchase of shares under the Company's Employee Stock Purchase Plan and the
exercise of options. Stock will be repurchased periodically on an ongoing basis
in the open market or through privately negotiated transactions at management's
discretion. The repurchased shares are added to NCR's authorized, but unissued
shares. In 2002, NCR committed approximately $66 million to the repurchase of
approximately 2.2 million shares under this program at an average price per
share of $29.16. This program is expected to continue in 2003.
Under a separate share repurchase program, the Board of Directors on April 15,
1999, and October 21, 1999, authorized $500 million for share repurchases. As of
December 31, 2002, the Company had purchased approximately $319 million of the
total $500 million authorized. No shares were repurchased under this program in
2002.
Put Options At times, the Company sells put options that entitle the holder of
each option to sell to the Company, by physical delivery, shares of common stock
at a specified price. These options are recorded as equity as physical
settlement is prescribed, although NCR may elect another means of settlement.
However, amounts relating to the Company's repurchase obligations at the balance
sheet date are reclassified to temporary equity until such time as the option is
settled. In the third quarter of 2002, the Company sold put options for 0.4
million shares of common stock. These were exercised during the fourth quarter
of 2002 at an average price of $25.24 per share. There were no put options
outstanding at December 31, 2002. These put options were designated as part of
the repurchase program approved by NCR's Board of Directors on November 21,
2000. NCR received net premiums related to Company put options of approximately
$1 million in 2002. The put option activity is summarized as follows:
Put Options Outstanding
-----------------------
Number of Potential
Options Obligations
- -----------------------------------------------------------
In millions
December 31, 2000 -- $ --
- -----------------------------------------------------------
Sales 0.4 14.8
Exercises / Retirements (0.4) (14.8)
- -----------------------------------------------------------
December 31, 2001 -- --
- -----------------------------------------------------------
Sales 0.4 10.1
Exercises / Retirements (0.4) (10.1)
- -----------------------------------------------------------
December 31, 2002 -- $ --
- -----------------------------------------------------------
Note 9 Employee Benefit Plans
Pension and Postretirement Plans NCR sponsors defined benefit plans for
substantially all U.S. employees and the majority of international employees.
For salaried employees, the defined benefit plans are based primarily upon
compensation and years of service. For certain hourly employees in the United
States, the benefits are based on a fixed dollar amount per year of service.
NCR's funding policy is to contribute annually not less than the minimum
required by applicable laws and regulations. Assets of NCR's defined benefit
plans are primarily invested in publicly traded common stocks, corporate and
government debt securities, real estate investments and cash or cash
equivalents.
Prior to September 1998, substantially all U.S. employees who reached retirement
age while working for NCR were eligible to participate in a postretirement
benefit plan. The plan provides medical care and life insurance benefits to
retirees and their eligible dependents. In September 1998, the plan was amended
whereby U.S. participants who had not reached a certain age and years of service
with NCR were no longer eligible for such benefits. Non-U.S. employees are
typically covered under government sponsored programs, and NCR generally does
not provide postretirement benefits other than pensions to non-U.S. retirees.
NCR generally funds these benefits on a pay-as-you-go basis.
44
Reconciliation of the beginning and ending balances of the benefit obligations
for NCR's pension and postretirement benefit plans were:
U.S Pension Benefits International Pension Benefits Postretirement Benefits
-------------------- ------------------------------ -----------------------
2002 2001 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------
In millions
Change in benefit obligation
Benefit Obligation at January 1 $2,494 $2,408 $1,127 $1,185 $347 $332
Gross service cost 43 43 34 35 -- 1
Interest Cost 175 171 68 63 24 25
Amendments -- -- (1) 3 (16) --
Actuarial Loss 148 24 76 (12) 35 31
Benefits paid (160) (152) (71) (88) (43) (42)
Currency translation adjustments -- -- 147 (57) -- --
Other -- -- -- (2) -- --
- -------------------------------------------------------------------------------------------------------------------
Benefit Obligation at December 31 $2,700 $2,494 $1,380 $1,127 $347 $347
- -------------------------------------------------------------------------------------------------------------------
A reconciliation of the beginning and ending balances of the fair value of the
plan assets of NCR's pension plans follows:
U.S Pension Benefits International Pension Benefits
-------------------- ------------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------
In millions
Change in plan assets
Fair value of plan assets at January 1 $2,686 $3,026 $1,089 $1,514
Actual return on plan assets (327) (196) (56) (332)
Company contributions 9 8 46 51
Benefits paid (160) (152) (71) (88)
Currency translation adjustments -- -- 128 (51)
Other -- -- 2 (5)
- ------------------------------------------------------------------------------------------------
Fair value of plan assets at December 31 $2,208 $2,686 $1,138 $1,089
- ------------------------------------------------------------------------------------------------
In 2002, global capital market developments resulted in negative returns on
NCR's pension funds and a decline in the discount rate used to estimate the
pension liability. As a result, the accumulated benefit obligation exceeded the
fair value of plan assets and NCR was required to adjust the minimum pension
liability recorded in the consolidated balance sheet. This $841 million charge
decreased prepaid pension costs by $523 million, increased pension liabilities
by $325 million, increased intangible assets by $7 million, increased deferred
taxes by $290 million and increased other comprehensive loss by $551 million.
This non-cash charge did not affect our 2002 earnings, cash flow or debt
covenants, nor did it otherwise impact the business operations of the Company.
Accrued pension and postretirement benefit assets (liabilities) included in
NCR's consolidated balance sheets at December 31 were:
U.S Pension Benefits International Pension Benefits Postretirement Benefits
-------------------- ------------------------------ -----------------------
2002 2001 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
In millions
Reconcilliation to balance sheet
Funded status $(492) $192 $(242) $(38) $(347) $(347)
Unrecognized net loss 951 190 731 410 74 40
Unrecognized prior service cost (benefit) 5 14 25 31 (33) (26)
Unrecognized transition asset (4) (6) 1 1 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 460 $390 $ 515 $404 $(306) $(333)
- ---------------------------------------------------------------------------------------------------------------------------
Total recognized amounts consist of:
Prepaid benefit cost $ -- $471 $ 769 $633 $ -- $ --
Accrued benefit liability (366) (89) (310) (254) (306) (333)
Intangible asset 8 -- 3 3 -- --
Accumulated other comprehensive income 818 8 53 22 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 460 $390 $ 515 $404 $(306) $(333)
- ---------------------------------------------------------------------------------------------------------------------------
45
The weighted average rates and assumption utilized in accounting for these plans
for the years ended December 31 were:
U.S Pension Benefits International Pension Benefits Postretirement Benefits
-------------------- ------------------------------ -----------------------
2002 2001 2000 2002 2001 2000 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Discount rate 6.8% 7.3% 7.5% 5.6% 6.0% 5.9% 6.8% 7.3% 7.5%
Expected return on plan assets 10.0% 10.0% 10.0% 8.9% 9.5% 10.1% -- -- --
Rate of compensation increase 4.4% 4.4% 4.4% 3.7% 3.6% 3.6% 4.3% 4.3% 4.3%
- ----------------------------------------------------------------------------------------------------------------
For postretirement benefit measurement purposes, NCR assumed growth in the per
capita cost of covered health care benefits (the health care cost trend rate)
would gradually decline from 10% and 6.0%, pre-65 and post-65, respectively, in
2002 to 5.0% by the year 2009. In addition, a one percentage point change in
assumed health care cost trend rates would have the following effect on the
postretirement benefit costs and obligation:
1% Increase 1% Decrease
- ----------------------------------------------------------------------------------
In millions
2002 service cost and interest cost $ 2 $ (1)
Postretirement benefit obligation at December 31, 2002 24 (23)
- ----------------------------------------------------------------------------------
The net periodic benefit (income) cost of the plans for the years ended December
31 are as follows:
U.S Pension Benefits International Pension Benefits Postretirement Benefits
--------------------- ------------------------------ -----------------------
2002 2001 2000 2002 2001 2000 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------
In millions
Net service cost $ 43 $ 43 $ 45 $ 33 $ 34 $ 33 $-- $ 1 $ 1
Interest cost 175 171 168 68 63 66 24 25 24
Expected return on plan assets (288) (308) (286) (128) (123) (128) -- -- --
Settlement charge (credit) -- -- -- 1 15 (8) -- -- --
Curtailment charge (credit) -- -- 1 3 -- (1) -- -- --
Amortization of:
Transition asset (2) (12) (12) -- (8) (9) -- -- --
Prior service cost 10 11 12 7 11 11 (9) (13) (12)
Actuarial loss (gain) 1 (26) (21) 3 5 5 1 -- --
- -----------------------------------------------------------------------------------------------------------------
Net benefit (income) cost $ (61) $(121) $ (93) $ (13) $ (3) $ (31) $16 $ 13 $ 13
- -----------------------------------------------------------------------------------------------------------------
For pension plans with accumulated benefit obligations in excess of plan assets,
the projected benefit obligation, accumulated benefit obligation and fair value
were $3,105 million, $2,924 million and $2,265 million, respectively, at
December 31, 2002, and $439 million, $378 million and $39 million, respectively,
at December 31, 2001.
Savings Plans All U.S. employees and many international employees participate in
defined contribution savings plans. These plans generally provide either a
specified percent of pay or a matching contribution on participating employees'
voluntary elections. NCR's matching contributions typically are subject to a
maximum percentage or level of compensation. Employee contributions can be made
pre-tax, after-tax or a combination thereof. The expense under the U.S. plan was
approximately $24 million in 2002 and $28 million in each of 2001 and 2000. The
expense under international and subsidiary savings plans was $10 million, $9
million and $7 million in 2002, 2001 and 2000.
Other Postemployment Benefits NCR offers various postemployment benefits to
involuntarily terminated and certain inactive employees after employment but
before retirement. These benefits are paid in accordance with NCR's established
postemployment benefit practices and policies. Postemployment benefits may
include disability benefits, supplemental unemployment benefits, severance,
workers' compensation benefits, and continuation of health care benefits and
life insurance coverage. NCR provides appropriate accruals for these
postemployment benefits. These postemployment benefits are funded on a
pay-as-you-go basis. The expense under these plans was approximately $75
million, $37 million and $21 million for 2002, 2001 and 2000, respectively. The
accrued postemployment liability at December 31, 2002 and 2001 was $99 million
and $115 million, respectively.
46
Note 10 Financial Instruments
In the normal course of business, NCR enters into various financial instruments,
including derivative financial instruments. These instruments primarily consist
of foreign exchange forward contracts and options that are used to reduce the
Company's exposure to changes in currency exchange rates. Derivatives used as a
part of NCR's risk management strategy, which are designated at inception as
highly effective cash-flow hedges, are measured for effectiveness both at
inception and on an ongoing basis, with gains or losses deferred in other
comprehensive income until the underlying hedged transaction is realized,
canceled or otherwise terminated. The forward contracts and options generally
mature within 12 months. The majority of NCR's foreign exchange forward
contracts were to exchange pounds, euro and yen.
NCR has hedged certain foreign currency transactions of a long-term investment
nature (net investments in foreign operations) with the resulting gains and
losses recorded in the currency translation adjustment component of
stockholders' equity. Foreign exchange contracts that are not used to hedge
currency transactions of a long-term investment nature, or that are not
designated as cash flow hedges, are recognized in the determination of income as
exchange rates change.
Letters of Credit Letters of credit are purchased guarantees that ensure NCR's
performance or payment to third parties in accordance with specified terms and
conditions. Letters of credit may expire without being drawn upon. Therefore,
the total notional or contract amounts do not necessarily represent future cash
flows.
Fair Value of Financial Instruments The fair values of debt and foreign exchange
contracts are based on market quotes of similar instruments. The fair values of
letters of credit are based on fees charged for similar agreements. The table
below presents the fair value, carrying value and notional amount of foreign
exchange contracts, debt and letters of credit at December 31, 2002 and 2001.
The notional amounts represent agreed-upon amounts on which calculations of
dollars to be exchanged are based, and are an indication of the extent of NCR's
involvement in such instruments. These notional amounts do not represent amounts
exchanged by the parties and, therefore, are not a measure of the instruments.
Contract Carrying Amount FairValue
Notional ----------------- -----------------
In millions Amount Asset Liability Asset Liability
- -------------------------------------------------------------------------------------
2002
Foreign exchange forward contracts $ 90 $ 5 $ 14 $ 5 $ 14
Debt -- -- 306 -- 327
Letters of credit 43 -- -- -- --
- -------------------------------------------------------------------------------------
2001
Foreign exchange forward contracts $881 $15 $ 3 $15 $ 3
Foreign currency options 132 -- 1 -- 1
Debt -- -- 148 -- 149
Letters of credit 50 -- -- -- --
- -------------------------------------------------------------------------------------
Fair values of financial instruments represent estimates of possible value that
may not be realized in the future.
Concentration of Credit Risk NCR is 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. NCR's 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, the Company could be
exposed to potentially significant losses. Moreover, the continued downturn in
the U.S. economy could have an adverse impact on the ability of our customers to
pay their obligations on a timely basis. However, management believes that the
reserves for potential losses are adequate. At December 31, 2002 and 2001, NCR
did not have any major concentration of credit risk related to financial
instruments.
Investment in Marketable Securities During the fourth quarter of 2002, NCR
recognized a loss of $14 million for certain marketable securities in Japan that
were considered other than temporarily impaired. The fair value of the Company's
investments in marketable securities in aggregate was $38 million and $73
million at December 31, 2002 and 2001, respectively. The cost basis of the
Company's investments in marketable securities was $43 million and $69 million
at December 31, 2002 and 2001, respectively.
47
Note 11 Commitments and Contingencies
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 GAAP, are adequate in light of the probable and
estimable liabilities. However, there can be no assurances that the actual
amounts required to satisfy 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 or cash flows. Any costs that may be incurred in
excess of those amounts provided as of December 31, 2002 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 clean-up 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 (CERCLA), as amended, and comparable
state statutes.
NCR is one of seven entities that have been formally notified by governmental
and other entities (such as local Native American tribes) that they are PRPs for
environmental claims under CERCLA and other statutes arising out of the presence
of polychlorinated biphenyls (PCBs) in sediments in the lower Fox River and in
the Bay of Green Bay, in Wisconsin. NCR was identified as a PRP because of
alleged PCB discharges from two carbonless copy paper manufacturing facilities
it previously owned, which are located along the Fox River. Some parties contend
that NCR is also responsible for PCB discharges from paper mills owned by other
companies because carbonless paper manufactured by NCR was purchased by those
mills as a raw material for their paper making processes. NCR sold the
facilities in 1978 to the present owner, Appleton Papers Inc. (API), which has
also been identified as a PRP. The other Fox River PRPs include P.H. Glatfelter
Company, Georgia Pacific (formerly Fort James), WTM1 Co. (formerly Wisconsin
Tissue, now owned by Chesapeake Corporation), Riverside Paper Corporation, and
U.S. Paper Mills Corp. (owned by Sonoco Products Company).
The governmental and other entities making such claims against NCR and the other
PRPs have agreed to coordinate their actions, including the assertion of claims
against the PRPs. Additionally, certain claimants have notified NCR and the
other PRPs of their intent to commence a natural resource damage (NRD) lawsuit,
but have not as yet instituted litigation; and one of the claimants, the U.S.
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.
As of the end of 2002, NCR's reserve for the Fox River matter was approximately
$56 million. In 2001, NCR adjusted its reserve to account for the government's
proposed clean-up plan, which included certain estimates regarding the total
clean-up costs associated with the Fox River, among other things. The Company
regularly re-evaluates the assumptions used in determining the appropriate
reserve for the Fox River matter as additional information becomes available
and, when warranted, make appropriate adjustments.
NCR's potential liability has been highly uncertain and continues to be so at
this time. NCR's eventual liability - which is expected to be paid out over the
next 20-40 or more years - will depend on a number of factors. In general, these
factors include: (1) the total clean-up costs for the site; (2) the total
natural resource damages for the site; (3) the share NCR and API will jointly
bear of the total clean-up costs and natural resource damages as former and
current owners of paper manufacturing facilities located along the Fox River;
(4) the share NCR will bear of the joint NCR/API payments for clean-up costs and
natural resource damages; and (5) NCR's transaction costs to defend itself in
this matter. In setting the reserve, NCR has attempted to estimate a range of
reasonably possible outcomes for each of these factors, although each range is
itself highly uncertain. NCR used its best estimate within the range if that is
possible. Where there is a range of equally probable outcomes, and there is no
amount within that range that appears to be a better estimate than any other
amount, NCR used the low-end of the range. Each of these factors is discussed
below:
.. For the first factor described above, total clean-up costs for the site,
NCR determined that there is a range of equally probable outcomes, and that
no estimate within that range was better than the other estimates.
Accordingly, NCR used the low-end of that range, which was the government's
estimate of the clean-up costs as set forth in the proposed clean-up plan.
This amount was $370 million; however there can be no assurances that this
amount will not be significantly higher. For example, one consultant has
expressed an opinion that total clean-up costs for the site could be
approximately $1.1 billion. In relying on the government estimates for
clean-up
48
costs, we assumed that neither the amount of dredging undertaken nor the
cost per cubic yard of the dredging will vary significantly from the
amounts contained in the proposed plan. The goverment's final clean-up plan
for the first two areas of the Fox River that was released in January 2003,
is generally consistent with the estimates for the corresponding portions
of the proposed plan.
.. Second, for total natural resource damages, NCR also determined that there
is a range of equally probable outcomes, and that no estimate within that
range was better than the other estimates. Accordingly, NCR used the
low-end of that range, which was the lowest estimate in a 2000 government
report on natural resource damages. This amount was $176 million.
.. Third, for the NCR/API share of clean-up costs and natural resource
damages, NCR examined figures developed by several independent,
nationally-recognized engineering and paper-industry experts, along with
those set forth in draft government reports. Again, the Company determined
that there is a range of equally probable outcomes, and that no estimate
within that range was better than the other estimates. Accordingly, NCR
used the low-end of that range, which was primarily an estimate of the
joint NCR/API percentage of direct discharges of PCBs to the river.
.. Fourth, for the NCR share of the joint NCR/API payments, the Company
estimated to pay approximately half of the total costs jointly attributable
to NCR/API. This is based on a sharing agreement between NCR and API, the
terms of which are confidential. This factor assumes that API is able to
pay its share of the NCR/API joint share.
.. Finally, for NCR's transaction costs to defend this matter, the Company
estimated the costs that are likely to be incurred over the four-year
period covered by the NCR/API interim settlement with the government (which
is described below). This estimate is based on NCR's costs since this
matter first arose in 1995 and estimates of what the Company's defense
costs will be in the future.
NCR does not expect that there are any significant near-term changes to any of
the above-described estimates that are likely to have a material effect on the
amount of our accrual. However, there are other estimates for each of these
factors which are significantly higher than the estimates described above. NCR
believes there is such uncertainty surrounding these estimates that it cannot
quantify the high-end of the range of such estimates.
NCR has discussed above the Company's overall, long-term exposure to the Fox
River liability. However, NCR also has limited short-term liability for this
matter. In December 2001, NCR and API entered into an interim settlement with
the governmental agencies that limits NCR/API's joint cash payouts to $10.375
million per year over a four-year period beginning at the time of such interim
settlement. Any portion of an annual $10.375 million installment not paid out in
a given year will be rolled over and made available for payment during
subsequent years up until December 10, 2005. In exchange for these payments, the
governmental agencies have agreed not to take any enforcement actions against
NCR and API during the term of the settlement. These payments are being shared
by NCR and API under the terms of the confidential settlement agreement
discussed above and will be credited against NCR's long-term exposure for this
matter.
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 clean-up costs are taken directly from the
governmental agencies' proposed clean-up plan and 2003 final clean-up plan for
the first two parts of the Fox River), 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. 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 governmental agencies'
proposed clean-up plan 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 site, 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 would be reflected as receivables in the consolidated financial
statements.
Legal Matters
Legal Proceedings In response to patent infringement assertions by LG
Electronics (LGE), NCR filed suit against LGE in federal court in Ohio in June
2002 for a declaratory judgment that NCR's products do not infringe a number of
LGE patents, primarily related to Intel chip technology. NCR also asserted
claims that LGE products infringe several NCR e-commerce related patents. LGE
filed counterclaims seeking damages and injunctive relief for alleged patent
49
infringement by NCR. In addition, in August 2002, LGE filed suit against NCR
Corporation, NCR Financial Solutions Ltd. and a third party in patent court in
the United Kingdom alleging that NCR products infringe British counterparts of
two of the patents at issue in the Ohio case. The Ohio case has been stayed at
the request of both parties, and the British court has scheduled a hearing on
potentially decisive preliminary issues for June 2003. Based upon the
information presently available, no loss is probable in either case and we have
not taken a reserve. If LGE were to prevail on its patent infringement claims,
however, NCR could be subject to remedies that could have a material impact on
the Company's operations.
In January 2001, NCR was joined to defend counterclaims in a case filed in
Georgia state court in 1991 by Compris Technologies, Inc. (Compris), a software
development company acquired by NCR through a stock purchase in 1997. Compris
brought this suit against Techwerks, Inc. and related parties for breach of
various provisions of a 1989 Asset Purchase and General Release Agreement
pursuant to which Compris acquired rights to the Compris software. The
defendants filed counterclaims seeking actual and punitive damages, in addition
to the return of the Compris software and all derivative works, for alleged
breaches of contract and conversion. In October 2002, the court granted NCR's
motion for summary judgment and dismissed it from the case, finding no successor
liability as to NCR Corporation. However, the court denied in part Compris'
motion for summary judgment, permitting certain contract claims against Compris
to go forward. NCR believes the claims against Compris are without merit. If
Techwerks were to prevail, however, Compris could be subject to remedies that
could have a material impact on the Company's operations.
Other Matters Pursuant to NCR's divestiture from AT&T Corp. in 1996, NCR is a
party to mutual indemnification provisions that obligate NCR, AT&T and Lucent
Technologies, Inc. to partially indemnify each other for certain liabilities
accrued prior to the divestiture exceeding a threshold amount. NCR's share over
the threshold amount for AT&T and Lucent liabilities is 3%. On August 9, 2002,
Lucent notified NCR that it had entered into an out-of-court settlement of
multiple class action lawsuits against Lucent and participants, and that Lucent
intends to make a claim for contribution against NCR in accordance with the
divestiture agreement. These lawsuits claimed damages for allegedly excessive
charges in connection with leased residential telephone business operated by
AT&T from 1984 until 1996, and thereafter by Lucent. Pursuant to the proposed
settlement and the terms of the divestiture agreement, NCR established a $9
million pre-tax reserve for its estimated share of the proposed
settlement-related costs. The actual cost of the settlement to NCR may be
different depending on the number of claims submitted and accepted. NCR has not
been advised of any other claims from AT&T or Lucent that presently appear
likely to exceed the indemnity threshold in the divestiture agreement.
Guarantees and Product Warranties Guarantees associated with NCR's business
activities are reviewed for appropriateness and impact to the Company's
financial statements. During 2002, NCR's customers entered into various leasing
arrangements coordinated by NCR with a leasing partner. These leases ranged in
term from 31 months to 45 months. In some instances, NCR guarantees the leasing
partner a minimum value at the end of the lease term on the leased equipment. In
2002, the maximum future payment obligation of this guaranteed value was $7
million; an associated liability of $6 million was also recorded.
NCR has equity investments in certain affiliates who have issued debt guarantees
ranging from three to five years in length. Upon default, NCR's maximum amount
of future payment obligation on these guarantees was $3 million in 2002, and no
associated liability was recorded.
In support of NCR's global operations' use of suppliers and government
obligations, the Company provides, through various local banks, payment
guarantees and standby letters of credit. If the local organization is not able
to make payment, the supplier or government agency may draw on the pertinent
bank. In 2002, maximum future payment obligations relative to these various
guarantees were $19 million of which NCR maintains a $1 million recorded
liability.
NCR provides its customers a standard manufacturer's warranty and records, at
the time of the sale, a corresponding estimated liability for potential warranty
costs. Estimated future obligations due to warranty claims are based upon
historic factors such as labor rates, average repair time, travel time, number
of service calls per machine, and cost of replacement parts. Each business unit
consummating a sale recognizes the total customer revenue and records the
associated warranty liability using pre-established warranty percentages for
that product class. Any additional warranty coverage requested by NCR's
customers is accounted for as a maintenance contract and revenue is recognized
over the contract life. The following table identifies the activity relating to
the warranty reserve for 2002:
50
In millions
Warranty reserve liability
Beginning balance at January 1, 2002 $18
Accruals for warranties issued during 2002 39
Accruals relating to pre-existing warranties (including
changes in accounting estimates) --
Settlements (in cash or in kind) during 2002 (41)
- -------------------------------------------------------------
Ending balance at December 31, 2002 $16
=============================================================
NCR also offers extended warranties to its customers. As described in Note 1 of
Notes to Consolidated Financial Statements, NCR accounts for these extended
warranties by deferring revenue equal to the fair value of the warranty and
recognizes the deferred revenue over the extended warranty term. Amounts
associated with these extended warranties are not included in the table above.
NCR provides its customers with indemnifications. In general, these
indemnifications provide that NCR will indemnify the customer if a third party
asserts patent or other infringement on the part of the customer for its use of
the Company's products. The fair value of these indemnifications is not readily
determinable.
Leases NCR conducts certain of its sales and manufacturing operations using
leased facilities, the initial lease terms of which vary in length. Many of the
leases contain renewal options and escalation clauses. Future minimum lease
payments under non-cancelable leases as of December 31, 2002 for fiscal years
2003, 2004, 2005, 2006, 2007 and thereafter were $64 million, $49 million, $36
million, $30 million, $26 million and $137 million, respectively. In addition to
the future minimum lease payments, NCR entered into an assigned lease guarantee
in the United Kingdom that expires in 2010. The maximum future obligation of
this assigned lease is $4 million. Total rental expense for operating leases was
$71 million, $81 million and $83 million in 2002, 2001 and 2000, respectively.
Note 12 Segment Information and Concentrations
Operating Segment Information As part of NCR's re-engineering plan, the
Company's executive management team made a number of strategic changes in how
the Company manages its businesses. NCR is now managed through the following
business units which are also the Company's operating segments: (1) Data
Warehousing, (2) Financial Self Service, (3) Retail Store Automation, (4)
Payment and Imaging, (5) Systemedia, (6) Customer Services and (7) Other, which
primarily relates to third party hardware and related installation services in
our high availability and networking services businesses and to a business that
is not aligned to NCR's other segments.
NCR's Data Warehousing solutions serve a multitude of industries including
retail, financial, telecommunications, transportation, insurance, utilities and
electronic commerce, as well as consumer manufacturing and government entities.
The Company's Financial Self Service solutions offer a complete line of ATM
hardware and software, and related services, enabling businesses to reduce
costs, generate new revenue streams and build customer loyalty. Financial Self
Service solutions primarily serve the financial services industry, with
particular focus on retail banking. NCR's Retail Store Automation solutions are
designed to improve selling productivity and checkout processes, and increase
service levels. Primarily serving the retail industry, Retail Store Automation
solutions deliver traditional point-of-sale, web-enabled kiosk, self-checkout
and electronic shelf label solutions. Systemedia develops, produces and markets
a complete line of business consumables and products. The Company's Payment and
Imaging solutions are designed to digitally capture, process and retain
item-based transactions, thereby helping businesses reduce operating costs and
increase efficiency. Payment and Imaging solutions mainly serve the financial
services industry. Services are an essential component of each of our complete
solution offerings, and the Customer Services division is a global leader in IT
services delivery.
In recognition of the volatility of the effects of pension on operating income
and to maintain operating focus on and analysis of business performance
improvement, pension income or expense is excluded from segment operating income
when evaluating business unit performance and is separately delineated to
reconcile back to total Company reported operating income.
Installation-related services constitutes implementation and installation
services within each segment and is an integral part of NCR's Customer Services
segment. Operating management teams in Data Warehousing, Financial Self Service,
Retail Store Automation, Payment and Imaging and Other, are accountable for the
installation-related services revenue and operating income related to their
respective businesses. Customer Services has shared responsibilities for
installation-related services revenue and operating income for each segment,
except Data Warehousing. As such, this revenue and operating income is also
included in the results of the Customer Services segment. To reconcile back to
total Company reported revenue and operating income, the installation-related
services included in both the business segments and the Customer Services
segment is adjusted.
51
The following table presents revenue by segment for the years ended December 31:
2002 2001 2000
- ------------------------------------------------------------------------------------------------
In millions
Revenue by segment
Data Warehousing
Products $ 668 $ 623 $ 670
Professional and Installation-related services 334 334 291
- ------------------------------------------------------------------------------------------------
Data Warehousing solution revenue 1,002 957 961
Data Warehousing Customer Service maintenance revenue 224 192 173
- ------------------------------------------------------------------------------------------------
Total Data Warehousing revenue 1,226 1,149 1,134
- ------------------------------------------------------------------------------------------------
Financial Self Service
Products 912 939 937
Professional and Installation-related services 183 175 140
- ------------------------------------------------------------------------------------------------
Total Financial Self Service revenue 1,095 1,114 1,077
- ------------------------------------------------------------------------------------------------
Retail Store Automation
Products 504 622 665
Professional and Installation-related services 210 212 229
- ------------------------------------------------------------------------------------------------
Total Retail Store Automation revenue 714 834 894
- ------------------------------------------------------------------------------------------------
Systemedia 518 503 502
Payment and Imaging
Products 115 121 116
Professional and Installation-related services 37 65 69
- ------------------------------------------------------------------------------------------------
Total Payment and Imaging revenue 152 186 185
- ------------------------------------------------------------------------------------------------
Customer Services
Products 2 2 14
Professional and Installation-related services 218 318 353
Customer Service Maintenance:
Financial Self Service 516 501 434
Retail Store Automation 462 438 465
Payment and Imaging 107 115 119
Other 486 594 560
- ------------------------------------------------------------------------------------------------
Total Customer Services revenue 1,791 1,968 1,945
- ------------------------------------------------------------------------------------------------
Other
Products 166 238 274
Professional and Installation related services 121 166 225
- ------------------------------------------------------------------------------------------------
Total Other revenue 287 404 499
- ------------------------------------------------------------------------------------------------
Elimination of installation-related services revenue included in both
the Customer Services segment and the other segments (198) (241) (277)
Total revenue $5,585 $5,917 $5,959
- ------------------------------------------------------------------------------------------------
Reconciliation to consolidated product and services revenues:
Total product revenue $2,885 $3,048 $3,178
Total services revenue 2,700 2,869 2,781
Total revenue $5,585 $5,917 $5,959
- ------------------------------------------------------------------------------------------------
52
The following table presents operating income (loss) by segment for the years
ended December 31:
2002 2001 2000
- ----------------------------------------------------------------------------------
Operating Income by segment
Data Warehousing $112 $(53) $ (60)
Financial Self Service 115 168 143
Retail Store Automation (57) 10 4
Systemedia 6 1 8
Payment and Imaging 19 17 18
Customer Services 37 170 215
Other (46) (58) (21)
Pension income 74 124 124
Elimination of installation-related services operating
income included in both the Customer Services segment
and the other segments (50) (78) (128)
- ----------------------------------------------------------------------------------
Income from operations excluding goodwill
amortization and reconciling items $210 $301 $ 303
Goodwill amortization included in income from operations -- (67) (33)
Adjustments to reconcile operating income (loss) to GAAP /1/ (21) (48) (65)
- ----------------------------------------------------------------------------------
Consolidated operating income $189 $186 $ 205
- ----------------------------------------------------------------------------------
/1/ Income from operations by segment for 2002 excludes real estate
consolidation and restructuring charges of $16 million and asset
impairment charges of $5 million. Income from operations by segment for
2001 excludes a $39 million provision for loans and receivables related
to CCC and $9 million of integration costs related to acquisitions.
Income from operations by segment for 2000 excludes $38 million for
restructuring and other related charges, $2 million for integration costs
related to acquisitions and $25 million for in-process R&D charges.
The assets attributable to NCR's segments consist primarily of accounts
receivable, inventories, manufacturing assets, capitalized software and goodwill
dedicated to a specific solution. Assets not attributable to segments consist
primarily of fixed assets not dedicated to a specific segment, deferred tax
assets, prepaid pension costs, cash, cash equivalents and short-term
investments. Segment assets at December 31 were:
2002 2001 2000
- ---------------------------------------------------------------------------------------
In millions
SEGMENT ASSETS
Data Warehousing $ 531 $ 549 $ 541
Financial Self Service 431 408 445
Retail Store Automation 299 278 324
Systemedia 184 196 207
Payment and Imaging 50 55 58
Customer Services 464 476 519
Other 62 404 488
- ---------------------------------------------------------------------------------------
Segment assets 2,021 2,366 2,582
Assets not attributable to segments 2,651 2,489 2,524
- ---------------------------------------------------------------------------------------
Consolidated assets $4,672 $4,855 $5,106
- ---------------------------------------------------------------------------------------
Revenues are attributed to geographic areas/countries based principally upon the
geographic area/country to which the product is delivered or in which the
service is provided. The following table presents revenue by geographic area for
NCR for the years ended December 31:
53
2002 % 2001 % 2000 %
- ------------------------------------------------------------------------------
In millions
REVENUE BY GEOGRAPHIC AREA
United States $2,396 43% $2,550 43% $2,707 45%
Americas (excluding
United States) 383 7% 459 8% 432 7%
Europe/Middle East/Africa 1,671 30% 1,788 30% 1,681 28%
Japan 483 9% 504 9% 576 10%
Asia/Pacific (excluding Japan) 652 11% 616 10% 563 10%
- ------------------------------------------------------------------------------
Consolidated revenue $5,585 100% $5,917 100% $5,959 100%
- ------------------------------------------------------------------------------
The following table presents certain long-lived assets, primarily composed of
property, plant and equipment, prepaid pension, capitalized software and
goodwill by country at December 31:
2002 2001 2000
- -------------------------------------------------------------------------------
In millions
LONG-LIVED ASSETS
United States $ 610 $1,251 $1,279
Japan 154 201 228
All other countries 1,082 1,074 1,105
- -------------------------------------------------------------------------------
Consolidated long-lived assets $1,846 $2,526 $2,612
- -------------------------------------------------------------------------------
Concentrations No single customer accounts for more than 10% of NCR's
consolidated revenue. As of December 31, 2002, NCR is not aware of any
significant concentration of business transacted with a particular customer that
could, if suddenly eliminated, have a material adverse impact on NCR's
operations. NCR also does not have a concentration of available sources of
labor, services, licenses or other rights that could, if suddenly eliminated,
have a material adverse impact on its operations.
A number of NCR's products, systems and solutions rely primarily on specific
suppliers for microprocessors and other component products, manufactured
assemblies, operating systems, commercial databases and other central
components. There can be no assurances that any sudden impact to the
availability or cost of these technologies would not have a material adverse
impact on NCR's operations.
Note 13 Quarterly Information (unaudited)
First/1/ Second Third Fourth Total
- -------------------------------------------------------------------------------
In millions, except per
share amounts
2002
Total revenues $1,247 $1,380 $1,377 $1,581 $5,585
Gross margin 350 401 396 440 1,587
Operating income (loss) 9 51 53 76 189
Net (loss) income (344) 26 41 57 (220)
Net (loss) income per share:
Basic $(3.51) $ 0.26 $ 0.42 $ 0.58 $(2.25)
Diluted (3.41) 0.25 0.42 0.57 (2.21)
- -------------------------------------------------------------------------------
2001
Total revenues $1,376 $1,499 $1,442 $1,600 $5,917
Gross margin 410 463 408 513 1,794
Operating income (loss) (19) 59 35 111 186
Net income (loss) 117 35 (6) 71 217
Net income (loss) per share:
Basic $ 1.22 $ 0.36 $(0.07) $ 0.73 $ 2.25
Diluted 1.18 0.35 (0.07) 0.72 2.18
- -------------------------------------------------------------------------------
/1/ The net loss, net loss per basic share and the net loss per diluted
share, includes the impact of the cumulative effect of accounting change
of $348 million (net-of-tax) related to the goodwill transitional
write-down. The transitional analysis was completed after the filing of
the first quarter Form 10-Q and the effect of this write-down was
retroactively recorded as of January 1, 2002. The Form 10-Q filed as of
March 31, 2002, did not contain the impact of this transitional
write-down.
54
NCR Corporation
Selected Financial Data
For the year ended
December 31 2002/1/ 2001/2/ 2000/3/ 1999/4/ 1998/5/
- -------------------------------------------------------------------------------
In millions, except per
share amounts
Revenue $ 5,585 $ 5,917 $ 5,959 $ 6,196 $ 6,505
Income from operations 189 186 205 78 102
Other expense (income), net 58 62 (70) (157) (110)
Income tax expense (benefit) 3 (97) 97 (102) 90
Net (loss) income (220) 217 178 337 122
Net (loss) income per common
share
Basic $ (2.25) $ 2.25 $ 1.87 $ 3.45 $ 1.21
Diluted (2.21) 2.18 1.82 3.35 1.20
At December 31
- -------------------------------------------------------------------------------
Total assets $ 4,672 $ 4,855 $ 5,106 $ 4,895 $ 4,892
Debt 311 148 107 77 83
Stockholders' equity 1,325 2,027 1,758 1,596 1,447
Cash dividends -- -- -- -- --
Number of employees and
contractors 30,100 31,400 32,900 32,800 33,100
- -------------------------------------------------------------------------------
/1/ Income from operations for 2002 includes real estate consolidation and
restructuring charges of $16 million and asset impairment charges of $5
million. Net income includes a $348 million cumulative effect of
accounting change charge for goodwill impairment relating to the adoption
of Statement of Financial Accounting Standards No. 142, real estate
consolidation impairment charges of $8 million, marketable securities
write-down to fair value in Japan of $14 million, a charge of $9 million
for a Lucent indemnification claim, and an income tax benefit of $35
million relating to tax refunds, tax planning and use of foreign tax
credits.
/2/ Income from operations for 2001 includes a $39 million provision for
loans and receivables related to CCC, $9 million of integration costs
related to acquisitions and $67 million of goodwill amortization. Net
income for 2001 includes the after-tax impacts of a $39 million provision
for loans and receivables with CCC, $9 million of integration costs
related to acquisitions, $40 million for a charge associated with the Fox
River environmental matter, a $1 million provision for interest
receivables related to CCC, a $138 million tax benefit from the
resolution of international income tax issues, $4 million cumulative
effect of adopting Statement of Financial Accounting Standards No. 133
and $74 million of goodwill amortization.
/3/ Income from operations for 2000 includes $38 million for restructuring
and other related charges, $25 million for in-process R&D charges related
to acquisitions, $2 million for integration costs related to acquisitions
and $33 million of goodwill amortization. Net income for 2000 includes
the after-tax impact of goodwill amortization of $39 million.
/4/ Income from operations for 1999 includes $125 million for restructuring
and other related charges and $20 million of goodwill amortization. Net
income for 1999 includes the after-tax impacts of $125 million for
restructuring and other related charges, $98 million of gains from
significant asset dispositions, $232 million of favorable impact from a
tax valuation allowance release and $23 million of goodwill amortization.
/5/ Income from operations for 1998 includes a $50 million non-recurring
pension charge. Net income for 1998 includes the after-tax impacts of $50
million for a non-recurring pension charge and a $55 million significant
gain from an asset disposition.
Teradata is either a registered trademark or trademark of NCR
International, Inc. in the United States and/or other countries. APTRA,
NCR FastLane, NCR RealPOS, and NCR RealPrice are either registered
trademarks or trademarks of NCR Corporation in the United States and/or
other countries. UNIX is either a registered trademark or trademark of
The Open Group in the United States and/or other countries. Windows NT is
either a registered trademark or trademark of Microsoft Corporation in
the United States and/or other countries.
55