UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-Q
________________________
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| |
þ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 20182019
Commission File Number 001-00395
________________________
NCR CORPORATIONCORPORATION
(Exact name of registrant as specified in its charter)
________________________
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| | |
| Maryland | | 31-0387920 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
864 Spring Street NW
Atlanta, GA30308
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (937) (937) 445-5000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ☑ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ☑ No o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| | | | | |
| Large accelerated filer | þ | | | Accelerated filer | o |
| Non-accelerated filer | o | (Do not check if a smaller reporting company) | | Smaller reporting company | o☐ |
| | | | | Emerging Growth Company | o☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transaction period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No þ☑
Securities registered pursuant to Section 12(b) of the Act:
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| | |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, par value $0.01 per share | NCR | New York Stock Exchange |
As of July 19, 2018,2019, there were approximately 117.9120.4 million shares of the registrant's common stock issued and outstanding.
TABLE OF CONTENTS
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| PART I. Financial Information | |
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| | Description | Page |
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| Item 1. | | |
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| Item 2. | | |
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| Item 3. | | |
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| Item 4. | | |
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| PART II. Other Information | |
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| | Description | Page |
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| Item 1. | | |
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| Item 1A. | | |
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| Item 2. | | |
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| Item 6. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 6. | | |
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Part I. Financial Information
| |
| Item 1. | FINANCIAL STATEMENTS |
NCR Corporation
Condensed Consolidated Statements of Operations (Unaudited)
|
| | | | | | | | | | | | | | | |
| In millions, except per share amounts | Three months ended June 30 | | Six months ended June 30 |
| 2018 | | 2017 | | 2018 | | 2017 |
| Product revenue | $ | 525 |
| | $ | 618 |
| | $ | 1,051 |
| | $ | 1,172 |
|
| Service revenue | 1,012 |
| | 975 |
| | 2,003 |
| | 1,899 |
|
| Total revenue | 1,537 |
| | 1,593 |
| | 3,054 |
| | 3,071 |
|
| Cost of products | 451 |
| | 478 |
| | 871 |
| | 902 |
|
| Cost of services | 683 |
| | 654 |
| | 1,360 |
| | 1,296 |
|
| Selling, general and administrative expenses | 261 |
| | 228 |
| | 506 |
| | 458 |
|
| Research and development expenses | 65 |
| | 58 |
| | 131 |
| | 125 |
|
| Asset impairment charges | 183 |
| | — |
| | 183 |
| | — |
|
| Total operating expenses | 1,643 |
| | 1,418 |
| | 3,051 |
| | 2,781 |
|
| (Loss) income from operations | (106 | ) | | 175 |
| | 3 |
| | 290 |
|
| Interest expense | (41 | ) | | (41 | ) | | (82 | ) | | (80 | ) |
| Other (expense), net | (9 | ) | | (4 | ) | | (14 | ) | | (9 | ) |
| (Loss) income from continuing operations before income taxes | (156 | ) | | 130 |
| | (93 | ) | | 201 |
|
| Income tax (benefit) expense | (12 | ) | | 33 |
| | (5 | ) | | 47 |
|
| (Loss) income from continuing operations | (144 | ) | | 97 |
| | (88 | ) | | 154 |
|
| (Loss) income from discontinued operations, net of tax | (2 | ) | | 5 |
| | (37 | ) | | 5 |
|
| Net (loss) income | (146 | ) | | 102 |
| | (125 | ) | | 159 |
|
| Net (loss) income attributable to noncontrolling interests | (1 | ) | | — |
| | — |
| | — |
|
| Net (loss) income attributable to NCR | $ | (145 | ) | | $ | 102 |
| | $ | (125 | ) | | $ | 159 |
|
| Amounts attributable to NCR common stockholders: | | | | | | | |
| (Loss) income from continuing operations | $ | (143 | ) | | $ | 97 |
| | $ | (88 | ) | | $ | 154 |
|
| Series A convertible preferred stock dividends | (12 | ) | | (12) |
| | (24 | ) | | (24 | ) |
| Deemed dividend on modification of Series A convertible preferred stock | — |
| | — |
| | — |
| | (4 | ) |
| Deemed dividend on Series A convertible preferred stock related to redemption | — |
| | — |
| | — |
| | (58 | ) |
| (Loss) income from continuing operations attributable to NCR common stockholders | (155 | ) | | 85 |
| | (112 | ) | | 68 |
|
| (Loss) income from discontinued operations, net of tax | (2 | ) | | 5 |
| | (37 | ) | | 5 |
|
| Net (loss) income attributable to NCR common stockholders | $ | (157 | ) | | $ | 90 |
| | $ | (149 | ) | | $ | 73 |
|
| (Loss) income per share attributable to NCR common stockholders: | | | | | | | |
| (Loss) income per common share from continuing operations | | | | | | | |
| Basic | $ | (1.31 | ) | | $ | 0.70 |
| | $ | (0.94 | ) | | $ | 0.56 |
|
| Diluted | $ | (1.31 | ) | | $ | 0.64 |
| | $ | (0.94 | ) | | $ | 0.53 |
|
| Net (loss) income per common share | | | | | | | |
| Basic | $ | (1.33 | ) | | $ | 0.74 |
| | $ | (1.26 | ) | | $ | 0.60 |
|
| Diluted | $ | (1.33 | ) | | $ | 0.67 |
| | $ | (1.26 | ) | | $ | 0.57 |
|
| Weighted average common shares outstanding | | | | | | | |
| Basic | 117.9 |
| | 121.4 |
| | 118.6 |
| | 122.1 |
|
| Diluted | 117.9 |
| | 152.7 |
| | 118.6 |
| | 127.2 |
|
|
| | | | | | | | | | | | | | | |
| In millions, except per share amounts | Three months ended June 30 | | Six months ended June 30 |
| 2019 |
| 2018 | | 2019 | | 2018 |
| Product revenue | $ | 664 |
| | $ | 525 |
| | $ | 1,203 |
| | $ | 1,051 |
|
| Service revenue | 1,046 |
| | 1,012 |
| | 2,043 |
| | 2,003 |
|
| Total revenue | 1,710 |
| | 1,537 |
| | 3,246 |
| | 3,054 |
|
| Cost of products | 539 |
| | 451 |
| | 992 |
| | 871 |
|
| Cost of services | 700 |
| | 683 |
| | 1,372 |
| | 1,360 |
|
| Selling, general and administrative expenses | 252 |
| | 261 |
| | 504 |
| | 506 |
|
| Research and development expenses | 62 |
| | 65 |
| | 121 |
| | 131 |
|
| Asset impairment charges | — |
| | 183 |
| | — |
| | 183 |
|
| Total operating expenses | 1,553 |
| | 1,643 |
| | 2,989 |
| | 3,051 |
|
| Income (loss) from operations | 157 |
| | (106) |
| | 257 |
| | 3 |
|
| Interest expense | (45 | ) | | (41 | ) | | (90 | ) | | (82 | ) |
| Other expense, net | (9 | ) | | (9 | ) | | (17 | ) | | (14 | ) |
| Income (loss) from continuing operations before income taxes | 103 |
| | (156) |
| | 150 |
| | (93 | ) |
| Income tax expense (benefit) | 15 |
| | (12) |
| | 24 |
| | (5 | ) |
| Income (loss) from continuing operations | 88 |
| | (144 | ) | | 126 |
| | (88 | ) |
| Loss from discontinued operations, net of tax | — |
| | (2 | ) | | — |
| | (37 | ) |
| Net income (loss) | 88 |
| | (146) |
| | 126 |
| | (125 | ) |
| Net income (loss) attributable to noncontrolling interests | — |
| | (1 | ) | | 1 |
| | — |
|
| Net income (loss) attributable to NCR | $ | 88 |
| | $ | (145 | ) | | $ | 125 |
| | $ | (125 | ) |
| Amounts attributable to NCR common stockholders: | | | | | | | |
| Income (loss) from continuing operations | $ | 88 |
| | $ | (143 | ) | | $ | 125 |
| | $ | (88 | ) |
| Dividends on convertible preferred stock | (12 | ) | | (12) |
| | (25 | ) | | (24 | ) |
| Income (loss) from continuing operations attributable to NCR common stockholders | 76 |
| | (155 | ) | | 100 |
| | (112 | ) |
| Loss from discontinued operations, net of tax | — |
| | (2 | ) | | — |
| | (37 | ) |
| Net income (loss) attributable to NCR common stockholders | $ | 76 |
| | $ | (157 | ) | | $ | 100 |
| | $ | (149 | ) |
| Income (loss) per share attributable to NCR common stockholders: | | | | | | | |
| Income (loss) per common share from continuing operations | | | | | | | |
| Basic | $ | 0.63 |
| | $ | (1.31 | ) | | $0.83 | | $ | (0.94 | ) |
| Diluted | $ | 0.58 |
| | $ | (1.31 | ) | | $0.81 | | $ | (0.94 | ) |
| Net income (loss) per common share | | | | | | | |
| Basic | $ | 0.63 |
| | $ | (1.33 | ) | | $0.83 | | $ | (1.26 | ) |
| Diluted | $ | 0.58 |
| | $ | (1.33 | ) | | $0.81 | | $ | (1.26 | ) |
| Weighted average common shares outstanding | | | | | | | |
| Basic | 120.2 |
| | 117.9 |
| | 119.8 | | 118.6 |
|
| Diluted | 152.7 |
| | 117.9 |
| | 123.0 | | 118.6 |
|
NCR Corporation
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
| | | In millions | Three months ended June 30 | | Six months ended June 30 | Three months ended June 30 | | Six months ended June 30 |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 |
| 2018 | | 2019 | | 2018 |
| Net (loss) income | $ | (146 | ) | | $ | 102 |
| | $ | (125 | ) | | $ | 159 |
| |
| Net income (loss) | | $ | 88 |
| | $ | (146 | ) | | $ | 126 |
| | $ | (125 | ) |
| Other comprehensive (loss) income: | | | | | | | | | | | | | | |
| Currency translation adjustments | | | | | | | | | | | | | | |
| Currency translation (losses) gains | (49 | ) | | 5 |
| | (30 | ) | | 29 |
| |
| Currency translation gains (losses) | | (8 | ) | | (49 | ) | | 11 |
| | (30 | ) |
| Derivatives | | | | | | | | | | | | | | |
| Unrealized gains (losses) on derivatives | 9 |
| | (6 | ) | | 4 |
| | (10 | ) | |
| Unrealized gains on derivatives | | — |
| | 9 |
| | 1 |
| | 4 |
|
| Gains on derivatives recognized during the period | (1 | ) | | (1 | ) | | — |
| | (3 | ) | (2 | ) | | (1 | ) | | (3 | ) | | — |
|
| Less income tax benefit | — |
| | 1 |
| | — |
| | 3 |
| |
| Less income tax provision | | 1 |
| | — |
| | 1 |
| | — |
|
| Employee benefit plans | | | | | | | | | | | | | | |
| Amortization of prior service benefit | (3 | ) | | (3 | ) | | (5 | ) | | (5 | ) | (2 | ) | | (3 | ) | | (4 | ) | | (5 | ) |
| Amortization of actuarial loss (benefit) | 1 |
| | — |
| | 1 |
| | (1 | ) | |
| Amortization of actuarial (losses) gains | | — |
| | 1 |
| | (1 | ) | | 1 |
|
| Less income tax benefit | — |
| | 1 |
| | 1 |
| | 2 |
| — |
| | — |
| | — |
| | 1 |
|
| Other comprehensive (loss) income | (43 | ) | | (3 | ) | | (29 | ) | | 15 |
| |
| Total comprehensive (loss) income | (189 | ) | | 99 |
| | (154 | ) | | 174 |
| |
| Less comprehensive loss attributable to noncontrolling interests: | | | | | | | | |
| Net loss | (1 | ) | | — |
| | — |
| | — |
| |
| Other comprehensive income (loss) | | (11 | ) | | (43 | ) | | 5 |
| | (29 | ) |
| Total comprehensive income (loss) | | 77 |
| | (189 | ) | | 131 |
| | (154 | ) |
| Less comprehensive income attributable to noncontrolling interests: | | | | | | | | |
| Net income (loss) | | — |
| | (1 | ) | | 1 |
| | — |
|
| Currency translation losses | (3 | ) | | — |
| | (3 | ) | | — |
| — |
| | (3 | ) | | — |
| | (3 | ) |
| Amounts attributable to noncontrolling interests | (4 | ) | | — |
| | (3 | ) | | — |
| — |
| | (4 | ) | | 1 |
| | (3 | ) |
| Comprehensive (loss) income attributable to NCR | $ | (185 | ) | | $ | 99 |
| | $ | (151 | ) | | 174 |
| |
| Comprehensive income (loss) attributable to NCR | | $ | 77 |
| | $ | (185 | ) | | $ | 130 |
| | (151 | ) |
See Notes to Condensed Consolidated Financial Statements.
NCR Corporation
Condensed Consolidated Balance Sheets (Unaudited)
| | | In millions, except per share amounts | June 30, 2018 | | December 31, 2017 | June 30, 2019 | | December 31, 2018 |
| Assets | | | | | | |
| Current assets | | | | | | |
| Cash and cash equivalents | $ | 343 |
| | $ | 537 |
| $ | 335 |
| | $ | 464 |
|
| Accounts receivable, net | 1,272 |
| | 1,270 |
| 1,430 |
| | 1,356 |
|
| Inventories | 842 |
| | 780 |
| 868 |
| | 806 |
|
| Other current assets | 282 |
| | 243 |
| 402 |
| | 397 |
|
| Total current assets | 2,739 |
| | 2,830 |
| 3,035 |
| | 3,023 |
|
| Property, plant and equipment, net | 326 |
| | 341 |
| 372 |
| | 359 |
|
| Goodwill | 2,590 |
| | 2,741 |
| 2,707 |
| | 2,692 |
|
| Intangibles, net | 517 |
| | 578 |
| 553 |
| | 595 |
|
| Operating lease assets | | 414 |
| | — |
|
| Prepaid pension cost | 127 |
| | 118 |
| 151 |
| | 140 |
|
| Deferred income taxes | 472 |
| | 460 |
| 468 |
| | 448 |
|
| Other assets | 593 |
| | 586 |
| 522 |
| | 504 |
|
| Total assets | $ | 7,364 |
| | $ | 7,654 |
| $ | 8,222 |
| | $ | 7,761 |
|
| Liabilities and stockholders’ equity | | | | | | |
| Current liabilities | | | | | | |
| Short-term borrowings | $ | 160 |
| | $ | 52 |
| $ | 198 |
| | $ | 185 |
|
| Accounts payable | 711 |
| | 762 |
| 769 |
| | 897 |
|
| Payroll and benefits liabilities | 229 |
| | 219 |
| 235 |
| | 238 |
|
| Contract liabilities | 469 |
| | 458 |
| 546 |
| | 461 |
|
| Other current liabilities | 310 |
| | 398 |
| 555 |
| | 501 |
|
| Total current liabilities | 1,879 |
| | 1,889 |
| 2,303 |
| | 2,282 |
|
| Long-term debt | 2,952 |
| | 2,939 |
| 2,918 |
| | 2,980 |
|
| Pension and indemnity plan liabilities | 796 |
| | 798 |
| 767 |
| | 759 |
|
| Postretirement and postemployment benefits liabilities | 132 |
| | 133 |
| 120 |
| | 118 |
|
| Income tax accruals | 127 |
| | 148 |
| 94 |
| | 91 |
|
| Operating lease liabilities | | 389 |
| | — |
|
| Other liabilities | 258 |
| | 200 |
| 186 |
| | 259 |
|
| Total liabilities | 6,144 |
| | 6,107 |
| 6,777 |
| | 6,489 |
|
| Commitments and Contingencies (Note 9) |
| |
|
| |
|
| Redeemable noncontrolling interest | 12 |
| | 15 |
| 14 |
| | 14 |
|
| Series A convertible preferred stock: par value $0.01 per share, 3.0 shares authorized, 0.8 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively; redemption amount and liquidation preference of $847 and $825 as of June 30, 2018 and December 31, 2017, respectively | 834 |
| | 810 | |
| Series A convertible preferred stock: par value $0.01 per share, 3.0 shares authorized, 0.9 and 0.9 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively; redemption amount and liquidation preference of $895 and $871 as of June 30, 2019 and December 31, 2018, respectively | | 884 |
| | 859 |
|
| Stockholders’ equity | | | | | | |
| NCR stockholders’ equity | | | | | | |
| Preferred stock: par value $0.01 per share, 100.0 shares authorized, no shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively | — |
| | — |
| |
| Common stock: par value $0.01 per share, 500.0 shares authorized, 117.7 and 122.0 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively | 1 |
| | 1 |
| |
| Preferred stock: par value $0.01 per share, 100.0 shares authorized, no shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively | | — |
| | — |
|
| Common stock: par value $0.01 per share, 500.0 shares authorized, 120.3 and 118.7 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively | | 1 |
| | 1 |
|
| Paid-in capital | — |
| | 60 |
| 76 |
| | 34 |
|
| Retained earnings | 594 |
| | 857 |
| 706 |
| | 606 |
|
| Accumulated other comprehensive loss | (224 | ) | | (199) |
| (241 | ) | | (246 | ) |
| Total NCR stockholders’ equity | 371 |
| | 719 |
| 542 |
| | 395 |
|
| Noncontrolling interests in subsidiaries | 3 |
| | 3 |
| 5 |
| | 4 |
|
| Total stockholders’ equity | 374 |
| | 722 |
| 547 |
| | 399 |
|
| Total liabilities and stockholders’ equity | $ | 7,364 |
| | $ | 7,654 |
| $ | 8,222 |
| | $ | 7,761 |
|
See Notes to Condensed Consolidated Financial Statements.
NCR Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
| | | In millions | Six months ended June 30 | Six months ended June 30 |
| 2018 | | 2017 | 2019 | | 2018 |
| Operating activities | | | | | | |
| Net (loss) income | $ | (125 | ) | | $ | 159 |
| |
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | |
| Loss (income) from discontinued operations | 37 |
| | (5 | ) | |
| Net income | | $ | 126 |
| | $ | (125 | ) |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
| Loss from discontinued operations | | — |
| | 37 |
|
| Depreciation and amortization | 171 |
| | 172 |
| 160 |
| | 171 |
|
| Stock-based compensation expense | 40 |
| | 41 |
| 48 |
| | 40 |
|
| Deferred income taxes | 1 |
| | 4 |
| (17 | ) | | 1 |
|
| Impairment of goodwill and long-lived assets | | — |
| | 193 |
|
| Gain on sale of property, plant and equipment | — |
| | (1 | ) | (6 | ) | | — |
|
| Impairment of goodwill and long-lived assets | 193 |
| | — |
| |
| Changes in assets and liabilities: | | | | | | |
| Receivables | (41 | ) | | (28 | ) | (71 | ) | | (41 | ) |
| Inventories | (88 | ) | | (126 | ) | (64 | ) | | (88 | ) |
| Current payables and accrued expenses | (57 | ) | | (93 | ) | (144 | ) | | (57 | ) |
| Contract liabilities | — |
| | 50 |
| 76 |
| | — |
|
| Employee benefit plans | (8 | ) | | (6 | ) | (9 | ) | | (8 | ) |
| Other assets and liabilities | (28 | ) | | (33 | ) | (28 | ) | | (28 | ) |
| Net cash provided by operating activities | 95 |
| | 134 |
| 71 |
| | 95 |
|
| Investing activities | | | | | | |
| Expenditures for property, plant and equipment | (70 | ) | | (43 | ) | (35 | ) | | (70 | ) |
| Proceeds from sale of property, plant and equipment | | 11 |
| | — |
|
| Additions to capitalized software | (86 | ) | | (84 | ) | (103 | ) | | (86 | ) |
| Business acquisitions, net | | (12 | ) | | — |
|
| Other investing activities, net | (3 | ) | | — |
| 5 |
| | (3 | ) |
| Net cash used in investing activities | (159 | ) | | (127 | ) | (134 | ) | | (159 | ) |
| Financing activities | | | | | | |
| Short term borrowings, net | 2 |
| | 13 |
| 4 |
| | 2 |
|
| Payments on term credit facilities | (34 | ) | | (25 | ) | (39 | ) | | (34 | ) |
| Payments on revolving credit facilities | (1,013 | ) | | (615 | ) | (914 | ) | | (1,013 | ) |
| Borrowings on revolving credit facilities | 1,163 |
| | 855 |
| 897 |
| | 1,163 |
|
| Repurchases of Company common stock | (210 | ) | | (350 | ) | — |
| | (210 | ) |
| Proceeds from employee stock plans | 11 |
| | 8 |
| 10 |
| | 11 |
|
| Tax withholding payments on behalf of employees | (29 | ) | | (24 | ) | (16 | ) | | (29 | ) |
| Other financing activities | — |
| | (1 | ) | |
| Net cash used in financing activities | (110 | ) | | (139 | ) | (58 | ) | | (110 | ) |
| Cash flows from discontinued operations | | | | | | |
| Net cash used in operating activities | (11 | ) | | (5 | ) | (11 | ) | | (11 | ) |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (8 | ) | | 12 |
| 1 |
| | (8 | ) |
| Decrease in cash, cash equivalents, and restricted cash | (193 | ) | | (125 | ) | (131 | ) | | (193 | ) |
| Cash, cash equivalents and restricted cash at beginning of period | 543 |
| | 507 |
| 476 |
| | 543 |
|
| Cash, cash equivalents and restricted cash at end of period | $ | 350 |
| | $ | 382 |
| $ | 345 |
| | $ | 350 |
|
| | | in millions | June 30 | |
| 2018 | | 2017 | |
| In millions | | June 30 |
| 2019 | | 2018 |
| Reconciliation of cash, cash equivalents and restricted cash as shown in the Condensed Consolidated Statements of Cash Flows | | | | | | |
| Cash and cash equivalents | $ | 343 |
| | $ | 377 |
| $ | 335 |
| | $ | 343 |
|
| Restricted cash included in Other assets | 7 |
| | 5 |
| |
| Restricted cash included in other assets | | 10 |
| | 7 |
|
| Total cash, cash equivalents and restricted cash | $ | 350 |
| | $ | 382 |
| $ | 345 |
| | $ | 350 |
|
See Notes to Condensed Consolidated Financial Statements.
NCR Corporation
Condensed Consolidated Statements of Changes in Stockholder's Equity (Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | NCR Stockholders | | | | |
| | | Common Stock | | | | | | Accumulated Other Comprehensive (Loss) Income | | Non-Redeemable Noncontrolling Interests in Subsidiaries | | |
| In millions | | Shares | | Amount | | Paid-in Capital | | Retained Earnings | | | | Total |
| December 31, 2018 | | 119 |
| | $ | 1 |
| | $ | 34 |
| | $ | 606 |
| | $ | (246 | ) | | $ | 4 |
| | $ | 399 |
|
| Comprehensive income: | | | | | | | | | | | | | | |
| Net income | | — |
| | — |
| | — |
| | 37 |
| | — |
| | 1 |
| | 38 |
|
| Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | 16 |
| | — |
| | 16 |
|
| Total comprehensive income | | — |
| | — |
| | — |
| | 37 |
| | 16 |
| | 1 |
| | 54 |
|
| Employee stock purchase and stock compensation plans | | 1 |
| | — |
| | 14 |
| | — |
| | — |
| | — |
| | 14 |
|
| Series A convertible preferred stock dividends | | — |
| | — |
| | — |
| | (13 | ) | | — |
| | — |
| | (13 | ) |
| March 31, 2019 | | 120 |
| | 1 |
| | 48 |
| | 630 |
| | (230 | ) | | 5 |
| | 454 |
|
| Comprehensive income: | | | | | | | | | | | | | | |
| Net income | | — |
| | — |
| | — |
| | 88 |
| | — |
| | — |
| | 88 |
|
| Other comprehensive income | | — |
| | — |
| | — |
| |
|
| | (11 | ) | | — |
| | (11 | ) |
| Total comprehensive income | | — |
| | — |
| | — |
| | 88 |
| | (11 | ) | | — |
| | 77 |
|
| Employee stock purchase and stock compensation plans | | — |
| | — |
| | 28 |
| | — |
| | — |
| | — |
| | 28 |
|
| Series A convertible preferred stock dividends | | — |
| | — |
| | — |
| | (12 | ) | | — |
| | — |
| | (12 | ) |
| June 30, 2019 | | 120 |
| | $ | 1 |
| | $ | 76 |
| | $ | 706 |
| | $ | (241 | ) | | $ | 5 |
| | $ | 547 |
|
See Notes to Condensed Consolidated Financial Statements.
NCR Corporation
Condensed Consolidated Statements of Changes in Stockholder's Equity (Unaudited) - (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | NCR Stockholders | | | | |
| | | Common Stock | | | | | | Accumulated Other Comprehensive (Loss) Income | | Non-Redeemable Noncontrolling Interests in Subsidiaries | | |
| In millions | | Shares | | Amount | | Paid-in Capital | | Retained Earnings | | | | Total |
| December 31, 2017 | | 122 |
| | $ | 1 |
| | $ | 60 |
| | $ | 857 |
| | $ | (199 | ) | | $ | 3 |
| | $ | 722 |
|
| Comprehensive income: | | | | | | | | | | | | | | |
| Net income | | — |
| | — |
| | — |
| | 20 |
| | — |
| | — |
| | 20 |
|
| Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | 14 |
| | — |
| | 14 |
|
| Total comprehensive income | | — |
| | — |
| | — |
| | 20 |
| | 14 |
| | — |
| | 34 |
|
Effects of adoption of new accounting standards
| | — |
| | — |
| | — |
| | 14 |
| | 1 |
| | — |
| | 15 |
|
| Employee stock purchase and stock compensation plans | | 1 |
| | — |
| | 8 |
| | — |
| | — |
| | — |
| | 8 |
|
| Repurchase of Company common stock | | (5 | ) | | — |
| | (68 | ) | | (97 | ) | | — |
| | — |
| | (165 | ) |
| Series A convertible preferred stock dividends | | — |
| | — |
| | — |
| | (12 | ) | | — |
| | — |
| | (12 | ) |
| March 31, 2018 | | 118 |
| | 1 |
| | — |
| | 782 |
| | (184 | ) | | 3 |
| | 602 |
|
| Comprehensive income: | | | | | | | | | | | | | | |
| Net income | | — |
| | — |
| | — |
| | (145 | ) | | — |
| | — |
| | (145 | ) |
| Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | (40 | ) | | — |
| | (40 | ) |
| Total comprehensive income | | — |
| | — |
| | — |
| | (145 | ) | | (40 | ) | | — |
| | (185 | ) |
| Employee stock purchase and stock compensation plans | | 1 |
| | — |
| | 14 |
| | — |
| | — |
| | — |
| | 14 |
|
| Repurchase of Company common stock | | (1 | ) | | — |
| | (14 | ) | | (31 | ) | | — |
| | — |
| | (45 | ) |
| Series A convertible preferred stock dividends | | — |
| | — |
| | — |
| | (12 | ) | | — |
| | — |
| | (12 | ) |
| June 30, 2018 | | 118 |
| | $ | 1 |
| | $ | — |
| | $ | 594 |
| | $ | (224 | ) | | $ | 3 |
| | $ | 374 |
|
See Notes to Condensed Consolidated Financial Statements.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Index to Financial Statements and Supplemental Data
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying Condensed Consolidated Financial Statements have been prepared by NCR Corporation (NCR, the Company, we or us) without audit pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC) and, in the opinion of management, include all adjustments (consisting of normal, recurring adjustments, unless otherwise disclosed) necessary for a fair statement of the consolidated results of operations, financial position, and cash flows for each period presented. The consolidated results for the interim periods are not necessarily indicative of results to be expected for the full year. The 20172018 year-end Condensed Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States (GAAP). These financial statements should be read in conjunction with NCR’s Form 10-K for the year ended December 31, 2017.2018.
Effective January 1, 2019, NCR changed the management of its business to an industry basis from the previous model of management on a solution basis, which resulted in a corresponding change to NCR's reportable segments. We have reclassified prior period segment disclosures to conform to the current period presentation. See Note 3. Segment Information and Concentrations for additional information.
Use of Estimates The preparation of financial statements in accordance with 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 revenue and expenses during the period reported. Actual results could differ from those estimates.
Evaluation of Subsequent Events The Company evaluated subsequent events through the date that our Condensed Consolidated Financial Statements were issued. NoExcept as described below, no matters were identified that required adjustment of the Condensed Consolidated Financial Statements or additional disclosure.
Acquisition of D3 Technology, Incorporated On July 2, 2019, the Company announced the acquisition of D3 Technology ("D3"), a provider of online and mobile banking for the Large Financial Institution (LFI) market, for approximately $80 million, which was paid in cash. The acquisition is expected to further expand our Digital Banking strategy.
Reclassifications Certain prior-period amounts have been reclassified in the accompanying Condensed Consolidated Financial Statements and Notes thereto in order to conform to the current period presentation. Reclassifications had no effect on prior year net income or shareholders’ equity.
Redeemable Noncontrolling Interests and Related Party Transactions In 2011, we sold a 49% voting equity interest in NCR Brasil - Indústria de Equipamentos para Automação S.A., a subsidiary of the Company (NCR Manaus), to Scopus Tecnologia Ltda. (Scopus). Under our investment agreements with Scopus, Scopus may elect to sell its shares in NCR Manaus at the then-current fair value to a third party that is not a competitor of NCR. If Scopus is unable to locate a buyer, Scopus may require NCR to purchase its noncontrolling interest for its then-current fair value.
We recognized revenue related to Banco Bradesco SA (Bradesco), the parent of Scopus, totaling $3 million and $7 million during the three and six months ended June 30, 2018, respectively, as compared to $5 million and $6 million during the three and six months ended June 30, 2017. As of June 30, 2018 and December 31, 2017, we had $2 million and $18 million, respectively, in receivables outstanding from Bradesco.
Recent Accounting Pronouncements
Issued
In February 2016, the Financial Accounting Standards Board (FASB) issued a new leasing standard that will supersede current guidance related to accounting for leases. The guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The standard will be effective for the first interim period within annual periods beginning after December 15, 2018, with early adoption permitted. The standard is required to be adopted using the modified retrospective approach. As part of the adoption of the standard, we have selected and are in the process of implementing new lease accounting software. We are also in the process of identifying and designing appropriate changes to our business processes, systems and controls to support the new standard, and we are continuing to evaluate the impact of the standard on our consolidated financial statements and related disclosures. At this time the Company cannot estimate the quantitative impact of adopting the new standard, but it is expected to have a material effect to the total assets and total liabilities reported on the consolidated balance sheet, and is not expected to have a material effect to the consolidated statement of operations or the consolidated statement of cash flows.
Adopted
In May 2014, the FASB issued a new revenue recognition standard that superseded existing revenue recognition guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard was effective for the first interim period within annual periods beginning after December 15, 2017, with
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
early adoption permitted for annual periods beginning after December 15, 2016, and can be adopted either retrospectively to each prior reporting period presented (“full retrospective method”) or as a cumulative effect adjustment as of the date of adoption (“modified retrospective method”). Effective January 1, 2018, we adopted the standard using the modified retrospective method applied to contracts that were not complete as of the date of adoption and recorded a cumulative adjustment to increase retained earnings by $2 million. Adoption of the new standard resulted in changes to our accounting policies for revenue recognition and deferred commissions. Refer to Note 2. Accounting Policies related to Revenue with Contracts with Customers, for the updated policy disclosures, and Note 3. Revenue Recognized under Previous Guidance, for presentation of what revenue would have been in the current periods had the Company continued to recognize revenue under the previous accounting guidance.
In August 2016, the FASB issued an accounting standards update which provides guidance regarding the classification of certain cash receipts and cash payments on the statement of cash flows, where specific guidance is provided for issues not previously addressed. This guidance is effective for annual reporting periods, including interim reporting within those periods, beginning after December 15, 2017, with early adoption permitted, and is required to be adopted using a retrospective approach. The adoption of this accounting standards update did not have a material effect on the Company's statement of cash flows.
In October 2016, the FASB issued an accounting standards update which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. This standard is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. Effective January 1, 2018, we adopted the standard using the modified retrospective method and recorded a cumulative adjustment to increase retained earnings by $13 million.
In November 2016, the FASB issued an accounting standards update which clarifies how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. The guidance requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The accounting standards update is required to be adopted for annual periods beginning after December 15, 2017, including interim periods within that annual period. The amendment is to be applied retrospectively with early adoption permitted. The adoption of this accounting standards update did not have a material effect on the Company's statement of cash flows.
In January 2017, the FASB issued an accounting standards update which clarifies the definition of a business which is used across several areas of accounting. The area expected to see the most change is the evaluation of whether a transaction should be accounted for as an acquisition (or disposal) of assets, or as a business combination. The new guidance clarifies that to be a business there must also be at least one substantive process, and narrows the definition of outputs by more closely aligning it with how outputs are described in the new revenue recognition standard. The accounting standards update is required to be adopted for annual periods beginning after December 15, 2017, including interim periods within that annual period. The amendment is to be applied prospectively with early adoption permitted. The adoption of this standard did not have a material effect on our financial condition, results of operations or disclosures, as the standard applies only to businesses acquired after the adoption date.
In January 2017, the FASB issued an accounting standards update with new guidance intended to simplify the subsequent measurement of goodwill. The standards update eliminates the requirement for an entity to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, an entity will perform its annual, or interim, goodwill impairment testing by comparing the fair value of a reporting unit with its carrying amount and recording an impairment charge for the amount by which the carrying amount exceeds the fair value. The standards update is effective prospectively for annual and interim goodwill impairment testing performed in fiscal years beginning after December 15, 2019. Refer to Note 4. Goodwill and Long-Lived Assets for further discussion.
In March 2017, the FASB issued an accounting standards update with new guidance on an employer's presentation of defined benefit retirement costs in the income statement. Employers will present the service cost component of net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period. Only the service cost component will be eligible for capitalization in assets. Employers will present the other components of the net periodic benefit cost separately from the line item(s) that includes the service cost and outside of any subtotal of operating income, if one is presented. These components will not be eligible for capitalization in assets. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods therein, with early adoption permitted. The adoption of this accounting standards update did not have a material effect on the Company's net income, cash flows or financial condition.
In May 2017, the FASB issued an accounting standards update which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. This update requires modification only if the fair value, vesting conditions or the classification of the award changes as a result of the change in terms or conditions. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods therein, with early adoption permitted. The adoption of this accounting standards update did not have a material effect on the Company's net income, cash flows or financial condition.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
In August 2017, the FASB issued an accounting standards update which simplifies certain aspects of hedge accounting and improves disclosures of hedging arrangements through the elimination of the requirement to separately measure and report hedge ineffectiveness. This update generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item in order to align financial reporting of hedge relationships with economic results. Entities must apply the amendments to cash flow and net investment hedge relationships that exist on the date of adoption using a modified retrospective approach. The presentation and disclosure requirements must be applied prospectively. This guidance is effective for fiscal years beginning after December 15, 2018, and interim periods therein, with early adoption permitted. The adoption of this accounting standards update did not have a material effect on the Company's net income, cash flows or financial condition.
In February 2018, the FASB issued an accounting standards update which permits entities to reclassify tax effects stranded in accumulated other comprehensive income as a result of the enactment of the Tax Cuts and Jobs Act (U.S. Tax Reform) to retained earnings. Entities can elect to apply the guidance retrospectively or in the period of adoption. This guidance is effective for fiscal years beginning after December 15, 2018, and interim periods therein, with early adoption permitted. The adoption of this accounting standards update did not have a material effect on the Company's net income, cash flows or financial condition.
In March 2018, the FASB issued an accounting standards update which allowed SEC registrants to record provisional amounts in earnings for the year ended December 31, 2017 due to the complexities involved in accounting for the enactment of U.S. Tax Reform. The standard was effective upon issuance. The Company recognized the estimated income tax effects of U.S. Tax Reform in its 2017 Consolidated Financial Statements in accordance with SEC Staff Accounting Bulletin No. 118 (SAB No. 118). Refer to Note 6. Income Taxes, for further information regarding the provisional amounts recorded by the Company as of December 31, 2017.
2. ACCOUNTING POLICIES RELATED TO REVENUE WITH CONTRACTS WITH CUSTOMERS
The Company records revenue, net of sales tax, when the following five steps have been completed:
Identification of the contract(s) with a customer
Identification of the performance obligation(s) in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, we satisfy performance obligations
The Company records revenue when, or as, performance obligations are satisfied by transferring control of a promised good or service to the customer. The Company evaluates the transfer of control primarily from the customer’s perspective where the customer has the ability to direct the use of and obtain substantially all of the remaining benefits from that good or service.
Our product revenue includes hardware and software which is generally recognized at a point in time, once all conditions for revenue recognition have been met. For hardware products, control is generally transferred when the customer has the ability to direct the use of and obtain substantially all of the remaining benefits of the products, which generally coincides with when the customer has assumed risk of loss of the goods sold. For software products, control is generally transferred when the customer takes possession of, or has complete access to, the software. In certain instances, customer acceptance is required prior to the passage of title and risk of loss of the delivered products. In such cases, revenue is not recognized until the customer acceptance is obtained. Delivery, acceptance, and transfer of title and risk of loss generally occur in the same reporting period. NCR's customers may request that delivery and passage of title and risk of loss occur on a bill and hold basis.
Our services revenue includes software as a service (SaaS), professional consulting, installation and maintenance support. SaaS primarily consists of fees to provide our customers access to our platform and cloud-based applications. Revenue from SaaS contracts is recognized as variable consideration directly allocated based on customer usage or on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Professional consulting primarily consists of software implementation, integration, customization and optimization services. Revenue from professional consulting contracts that involve significant production, modification or customization of the software is recognized over time as the services are performed. Revenue from professional consulting contracts that does not involve significant production, modification or customization of the software is recognized when the services are completed or customer acceptance of the service is received, if required. For installation and maintenance, control is transferred as the services are provided or ratably over the service period, or, if applicable, after customer acceptance of the service. We apply the ‘as invoiced’ practical expedient, for performance obligations satisfied over time, if the amount we may invoice corresponds directly with the value to the customer of the Company’s performance to date. This expedient
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
permits us to recognize revenue in the amount we invoice the customer.
NCR frequently enters contracts that include multiple performance obligations, including hardware, software, professional consulting services, installation services and maintenance support services. For these arrangements, the Company allocates the transaction price, at contract inception, to each performance obligation on a relative standalone selling price basis. The primary method used to estimate standalone selling price is the price that the Company charges for that good or service when the Company sells it separately in similar circumstances to similar customers.
If a contract includes software and services that involve significant production, modification or customization of the software, the services are not distinct from the software. For these contracts, both the software and professional services revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Estimated losses, if any, are recognized as soon as such losses become known.
The nature of our arrangements gives rise to several types of variable consideration including service level agreement credits, stock rotation rights, trade-in credits and volume-based rebates. At contract inception, we include this variable consideration in our transaction price when there is a basis to reasonably estimate the amount of the fee and it is probable there will not be a significant reversal. These estimates are generally made using the expected value method and a portfolio approach, based on historical experience, anticipated performance and our best judgment at the time. These estimate are reassessed at each reporting date. Because of our confidence in estimating these amounts, they are included in the transaction price of our contracts and the associated remaining performance obligations.
As a practical expedient, we do not adjust the promised amount of consideration for the effects of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised product or service to a customer and when the customer pays for that product or service will be one year or less. Payment terms with our customers are established based on industry and regional practices and generally do not exceed 30 days. We do not typically include extended payment terms in our contracts with customers.
The Company also does not adjust the transaction price for taxes collected from customers, as those amounts are netted against amounts remitted to government authorities.
We account for shipping and handling activities related to contracts with customers as costs to fulfill our promise to transfer the associated products, rather than as a separate performance obligation. Accordingly, we record amounts billed for shipping and handling costs as a component of net product sales, and classify such costs as a component of cost of products.
Accounts Receivable, net
Accounts receivable, net includes amounts billed and currently due from customers as well as amounts unbilled which typically result from sales under contracts where revenue recognized exceeds the amount billed to the customer and where the Company has an unconditional right to consideration. The amounts due are stated at their net estimated realizable value. NCR establishes provisions for doubtful accounts using percentages of accounts receivable balances to reflect historical average credit losses and specific provisions for known issues, such as risks of default.
Contract Assets and Liabilities
Contract assets include unbilled amounts where right to payment is not solely subject to the passage of time. Amounts may not exceed their net realizable value. Contract liabilities consist of advance payments, billings in excess of revenue recognized and deferred revenue.
Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. If the net position is a contract asset, the current portion is included in other current assets and the non-current portion is included in other assets in the Condensed Consolidated Balance Sheet. If the net position is a contract liability, the current portion is included in contract liabilities and the non-current portion is included in other liabilities in the Condensed Consolidated Balance Sheet.
The following table presents the net contract asset and contract liability balances as of June 30, 20182019 and January 1, 2018:
December 31, 2018.
10 |
| | | | | | | | | |
| In millions | Location in the Condensed Consolidated Balance Sheet | | June 30, 2019 | | December 31, 2018 |
| Current portion of contract assets | Other current assets | | $ | 16 |
| | $ | 22 |
|
| Current portion of contract liabilities | Contract liabilities | | $ | 546 |
| | $ | 461 |
|
| Non-current portion of contract liabilities | Other liabilities | | $ | 79 |
| | $ | 85 |
|
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
|
| | | | | | | | | |
| In millions | Location in the Condensed Consolidated Balance Sheet | | June 30, 2018 | | January 1, 2018 |
| Current portion of contract assets | Other current assets | | $ | 22 |
| | $ | 28 |
|
| Current portion of contract liabilities | Contract liabilities | | $ | 469 |
| | $ | 458 |
|
| Non-current portion of contract liabilities | Other liabilities | | $ | 90 |
| | $ | 95 |
|
During the six months ended June 30, 2018,2019, the Company recognized $266$272 million in revenue that was included in contract liabilities as of January 1,December 31, 2018.
Deferred Commissions
Our incremental costs of obtaining a contract, which consist of certain sales commissions, primarily for our SaaS revenue, are deferred and amortized on a straight-line basis over the period of expected benefit. We determined the period of expected benefit by taking into consideration customer contracts, the estimated life of the customer relationship, including renewals when the renewal commission is not commensurate with the initial commission, the expected life of the underlying technology and other factors. We classify deferred commissions as current or non-current based on the timing of when we expect to recognize the expense. The current and non-current portions of deferred commissions are included in other current assets and other assets, respectively, in the Condensed Consolidated Balance Sheet as of June 30, 2018. Amortization of deferred commissions is included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2018.
Set-up Fees and Costs
Fees for the design, configuration, implementation and installation related to the software applications that are provided as a service are recognized over the contract term, which is generally 5 years. The related costs incurred that are determined to be incremental and recoverable contract-specific costs are deferred and amortized over the period of benefit, which is generally 7 years.
Remaining Performance Obligations
Remaining performance obligations represent the transaction price of orders for which products have not been delivered or services have not been performed. As of June 30, 2018,2019, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $4$3.3 billion. The Company expects to recognize revenue on approximately three-quarters of the remaining performance obligations over the next 12 months, with the remainder recognized thereafter. The majority of our professional services are expected to be recognized over the next twelve12 months but this is contingent upon a number of factors, including customers’ needs and schedules.
The Company has made two elections whichthat affect the value of remaining performance obligations described above. We do not disclose remaining performance obligations for SaaSSoftware as a Service (SaaS) contracts where variable consideration is directly
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
allocated based on usage or when the original expected length is one year or less.
Redeemable Noncontrolling Interests and Related Party Transactions In 2011, we sold a 49% voting equity interest in NCR Brasil - Indústria de Equipamentos para Automação S.A., a subsidiary of the Company ("NCR Manaus"), to Scopus Tecnologia Ltda. (now known as Nova Paiol Participacoes Ltda., and "Nova" as used herin). During the three months ended June 30, 2019, we entered into a definitive agreement with Nova to purchase its 49% minority interest in NCR Manaus for R$11 million or approximately $3 million. The transaction, which is subject to approval by local regulatory authorities and other customary closing conditions, is currently expected to close by the end of the third quarter of 2019. However, it is possible that factors outside of our control could require us to complete the transaction at a later time or not at all.
We recognized revenue related to Banco Bradesco SA (Bradesco), the parent of Nova, totaling $3 million and $22 million, respectively, during the three and six months ended June 30, 2019 as compared to $3 million and $7 million, respectively, during the three and six months ended June 30, 2018. As of June 30, 2019 and December 31, 2018, we had zero and $15 million, respectively, in receivables outstanding from Bradesco.
Recent Accounting Pronouncements
Issued
In August 2018, the Financial Accounting Standards Board (FASB) issued an accounting standards update with new guidance on fair value measurement disclosure requirements that requires the disclosure of additions to and transfers into and out of Level 3 of the fair value hierarchy. The update also requires disclosure about the uncertainty in measurement as of the reporting date. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 with early adoption permitted. The impact of adopting this guidance is not expected to have a material impact on our consolidated financial statements.
In August 2018, the FASB issued an accounting standards update related to accounting for implementation costs incurred in a cloud computing arrangement that is also a service contract. If a cloud computing arrangement also includes an internal-use software, an intangible asset is recognized and a liability is recognized for any payments related to the software license. However, if a cloud computing arrangement does not include a software license, the entity should account for the arrangement as a service contract and any fees associated with the service are expensed as incurred. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The impact of adopting this guidance is not expected to have a material impact on our consolidated financial statements.
Adopted
In February 2016, the FASB issued a new leasing standard that superseded guidance related to accounting for leases. The guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The standard is effective for the first interim period within annual periods beginning after December 15, 2018, with early adoption permitted. We adopted using the modified retrospective approach and applied the provisions of the new leasing standard at the effective date, January 1, 2019, rather than at the beginning of the earliest period presented under the transition method provided. The standard also includes options to elect a number of practical expedients. We elected the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs and also completed the evaluation of the remaining practical expedients available under the guidance. Refer to Note 2. Leasing for additional discussion. The standard had a material effect to the total assets and total liabilities reported on the Condensed Consolidated Balance Sheet, and did not have a material effect to the Condensed Consolidated Statement of Operations or the Condensed Consolidated Statement of Cash Flows. The impact of adoption was to record operating and financing lease assets and liabilities of $448 million and $521 million, respectively, with a reduction of $73 million for deferred rent liabilities and prepaid rent balances as of January 1, 2019. Refer to Note 2. Leasing for additional disclosure.
In October 2018, the FASB issued an accounting standards update for hedge accounting guidance that we adopted during the first quarter of 2019. This guidance allows for the use of a broad Treasury repurchase agreement financing rate, which is referred to as the Secured Overnight Financing Rate (SOFR) to be used as an additional benchmark rate for hedge accounting purposes. This guidance is effective for entities that have already adopted the amendments of the hedge accounting guidance for fiscal years beginning after December 15, 2018 on a prospective basis for qualifying new or re-designated hedging relationships entered into on or after the date of adoption. The adoption of this accounting standard update did not have a material effect on our consolidated financial statements.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
2. LEASING
As discussed in Note 1. Basis of Presentation and Summary of Significant Accounting Policies, we adopted the new leasing standard using the modified retrospective approach with an effective date of January 1, 2019. Prior year financial statements were not recast under the new standard and, therefore, those amounts are not presented below. We elected the package of transition provisions available for expired or existing contracts, which allowed us to carry forward our historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs.
Lessee We lease property, vehicles and equipment under operating and financing leases. For leases with terms greater than 12 months, we record the related asset and obligation at the present value of lease payments over the term. We determine the lease term by assuming the exercise of renewal options that are reasonably certain. Leases with a lease term 12 months or less at inception are not recorded on our Condensed Consolidated Balance Sheet and are expensed on a straight-line basis over the lease term in our Condensed Consolidated Statement of Operations. Our leases may include rental escalation clauses, renewal options and/or termination options that are factored into our determination of lease payments when appropriate. When available, we use the rate implicit in the lease to discount lease payments to present value; however, most of our leases do not provide a readily determinable implicit rate. Therefore, we must estimate our incremental borrowing rate to discount the lease payments based on information available at lease commencement. Our incremental borrowing rate is based on a credit-adjusted risk-free rate at commencement date, which best approximates a secured rate over a similar term of lease. Additionally, we do not separate lease and non-lease components for any asset classes, except for those leases embedded in certain service arrangements. Fixed and in-substance fixed payments are included in the recognition of the operating and financing assets and lease liabilities, however, variable lease payments, other than those based on a rate or index, are recognized in the Condensed Consolidated Statements of Operations in the period in which the obligation for those payments is incurred. The Company’s variable lease payments generally relate to payments tied to various indexes, non-lease components and payments above a contractual minimum fixed payment.
The following table presents our lease balances as of June 30, 2019:
|
| | | | | |
| In millions | Location in the Condensed Consolidated Balance Sheet | | June 30, 2019 |
| Assets | | | |
| Operating lease assets | Operating lease assets | | $ | 414 |
|
| Finance lease assets | Property, plant and equipment, net | | 11 |
|
| Accumulated Amortization of Finance lease assets | Property, plant and equipment, net | | (1 | ) |
| Total leased assets | | | $ | 424 |
|
| Liabilities | | | |
| Current | | | |
| Operating lease liabilities | Other current liabilities | | $ | 99 |
|
| Finance lease liabilities | Other current liabilities | | 3 |
|
| Noncurrent | | | |
| Operating lease liabilities | Operating lease liabilities | | 389 |
|
| Finance lease liabilities | Other liabilities | | 7 |
|
| Total lease liabilities | | | $ | 498 |
|
The following table presents our lease costs for operating and finance leases:
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
|
| | | | | | | | |
| In millions | | Three months ended June 30, 2019 | | Six months ended June 30, 2019 |
| Operating lease cost | | $ | 34 |
| | $ | 69 |
|
| Finance lease cost | | | | |
| Amortization of leased assets | | 1 |
| | 1 |
|
| Interest on lease liabilities | | — |
| | — |
|
| Short-Term lease cost | | 1 |
| | 3 |
|
| Variable lease cost | | 7 |
| | 16 |
|
| Total lease cost | | $ | 43 |
| | $ | 89 |
|
The following table presents the supplemental cash flow information:
|
| | | | | | | | |
| In millions | | Three months ended June 30, 2019 | | Six months ended June 30, 2019 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | |
| Operating cash flows from operating leases | | $ | 38 |
| | $ | 70 |
|
| Operating cash flows from finance leases | | $ | — |
| | $ | — |
|
| Financing cash flows from finance leases | | $ | — |
| | $ | — |
|
| Lease Assets Obtained in Exchange for Lease Obligations | | | | |
| Operating Leases | | $ | 8 |
| | $ | 20 |
|
| Finance Leases | | $ | 8 |
| | $ | 9 |
|
The following table reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the finance lease liabilities and operating lease liabilities recorded on the Condensed Consolidated Balance Sheet as of June 30, 2019:
|
| | | | | | | | |
| In millions | | Operating Leases | | Finance Leases |
| 2019 | | $ | 68 |
| | $ | 2 |
|
| 2020 | | 107 |
| | 3 |
|
| 2021 | | 81 |
| | 3 |
|
| 2022 | | 61 |
| | 2 |
|
| 2023 | | 44 |
| | 1 |
|
| Thereafter | | 307 |
| | — |
|
| Total lease payments | | 668 |
| | 11 |
|
| Less: Amount representing interest | | (180 | ) | | (1 | ) |
| Present value of lease liabilities | | $ | 488 |
| | $ | 10 |
|
Prior to the adoption of the new lease accounting standard, future minimum lease payments under non-cancelable operating leases at December 31, 2018 were as follows: $128 million in 2019, $96 million in 2020, $80 million in 2021, $64 million in 2022, and $50 million in 2023.
As of June 30, 2019, we have additional operating leases, primarily for a real estate lease in Europe, that have not yet commenced of $70 million. This operating lease is expected to commence in 2021 with a lease term of 10 years.
The following table presents the weighted average remaining lease term and interest rates:
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
|
| | | |
| | June 30, 2019 |
| Weighted average lease term: | | |
| Operating leases | | 9.1 years |
|
| Finance leases | | 3.8 years |
|
| Weighted average interest rates: | | |
| Operating leases | | 6.51 | % |
| Finance leases | | 4.67 | % |
Lessor We have various arrangements for certain point-of-sale equipment under which we are the lessor. These leases meet the criteria for operating lease classification. Lease income associated with these leases is not material.
3. REVENUE RECOGNIZED UNDER PREVIOUS GUIDANCESEGMENT INFORMATION AND CONCENTRATIONS
As noted in Note 1. Basis of Presentation and Summary of Significant Accounting Policies, the Company adopted the new revenue recognition guidance effective January 1, 2018, using2019, NCR changed the modified retrospective approach.management of its business to an industry basis from the previous model of management on a solution basis, which resulted in a corresponding change to NCR's reportable segments. We have reclassified prior period segment disclosures to conform to the current period presentation. As a result of the change, the Company manages and reports the following segments:
| |
| • | Banking - We offer solutions to enable customers in the financial services industry to reduce costs, generate new revenue streams and enhance customer loyalty. These solutions include a comprehensive line of ATM and payment processing hardware and software; cash management and video banking software and customer-facing digital banking services; and related installation, maintenance, and managed and professional services. |
| |
| • | Retail - We offer solutions to customers in the retail industry designed to improve selling productivity and checkout processes as well as increase service levels. These solutions primarily include retail-oriented technologies, such as point of sale terminals and point of sale software; a retail software platform with a comprehensive suite of retail software applications; innovative self-service kiosks, such as self-checkout; as well as bar-code scanners. We also offer installation, maintenance, managed and professional services as well as payment processing solutions. |
| |
| • | Hospitality - We offer technology solutions to customers in the hospitality industry, serving businesses that range from a single store or restaurant to global chains and sports and entertainment venues. Our solutions include point of sale hardware and software solutions, installation, maintenance, managed and professional services as well as payment processing solutions. |
| |
| • | Other - This category includes telecommunications and technology solutions where we offer maintenance as well as managed and professional services for third-party hardware provided to select manufacturers who value and leverage our global service capability. |
These segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the chief operating decision maker in assessing segment performance and in allocating the Company's resources. Management evaluates the performance of the segments based on revenue and segment operating income. Assets are not allocated to segments, and thus are not included in the assessment of segment performance, and consequently, we recognizeddo not disclose total assets by reportable segment.
The accounting policies used to determine the cumulative effectresults of initially applying the new revenue standardoperating segments are the same as an adjustment tothose utilized for the opening balance of retained earningsconsolidated financial statements as of January 1, 2018. Adopting the new standard primarily impacted the deferral of incremental commission costs of obtaining SaaS contracts with customers. Other changes impact the timing of recognition for term-based software licensea whole. Intersegment sales and renewals,transfers are not material.
To maintain operating focus on business performance, non-operational items are excluded from the segment operating results utilized by our chief operating decision maker in evaluating segment performance and estimating variable consideration at contract inception. are separately delineated to reconcile back to total reported income from operations.
The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. As such, the following table presents the results for the threerevenue and six months ended June 30, 2018 under the previous guidance:operating income by segment:
|
| | | | | | | | | | | |
| | Three months ended June 30, 2018 |
| In millions, except per share amounts | Under Current Guidance | | Adjustments | | Under Previous Guidance |
| Condensed Consolidated Statement of Operations | | | | | |
| Product revenue | $ | 525 |
| | $ | (3 | ) | | $ | 522 |
|
| Cost of products | 451 |
| | — |
| | 451 |
|
| Loss from operations | (106 | ) | | (3 | ) | | (109 | ) |
| Loss from continuing operations before income taxes | (156 | ) | | (3 | ) | | (159 | ) |
| Income tax benefit | (12 | ) | | (1 | ) | | (13 | ) |
| Loss from continuing operations | (144 | ) | | (2 | ) | | (146 | ) |
| Net loss | (146 | ) | | (2 | ) | | (148 | ) |
| Net loss attributable to NCR | $ | (145 | ) | | $ | (2 | ) | | $ | (147 | ) |
| Loss per common share from continuing operations | | | | |
|
| Basic | $ | (1.31 | ) | | $ | (0.02 | ) | | $ | (1.33 | ) |
| Diluted | $ | (1.31 | ) | | $ | (0.02 | ) | | $ | (1.33 | ) |
| Net loss per common share | | | | |
|
| Basic | $ | (1.33 | ) | | $ | (0.02 | ) | | $ | (1.35 | ) |
| Diluted | $ | (1.33 | ) | | $ | (0.02 | ) | | $ | (1.35 | ) |
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
|
| | | | | | | | | | | | | | | |
| In millions | Three months ended June 30 | | Six months ended June 30 |
| 2019 | | 2018 | | 2019 | | 2018 |
| Revenue by segment | | | | | | | |
| Banking | $ | 868 |
| | $ | 725 |
| | $ | 1,626 |
| | $ | 1,446 |
|
| Retail | 558 |
| | 537 |
| | 1,069 |
| | 1,058 |
|
| Hospitality | 202 |
| | 198 |
| | 395 |
| | 402 |
|
| Other | 82 |
| | 77 |
| | 156 |
| | 148 |
|
| Consolidated revenue | $ | 1,710 |
| | $ | 1,537 |
| | $ | 3,246 |
| | $ | 3,054 |
|
| Operating income by segment | | | | | | | |
| Banking | $ | 129 |
| | $ | 94 |
| | $ | 224 |
| | $ | 178 |
|
| Retail | 40 |
| | 41 |
| | 66 |
| | 76 |
|
| Hospitality | 13 |
| | 19 |
| | 29 |
| | 38 |
|
| Other | 10 |
| | 11 |
| | 20 |
| | 21 |
|
| Subtotal - segment operating income | 192 |
| | 165 |
| | 339 |
| | 313 |
|
Other adjustments (1) | 35 |
| | 271 |
| | 82 |
| | 310 |
|
| Income from operations | $ | 157 |
| | $ | (106 | ) | | $ | 257 |
| | $ | 3 |
|
|
| | | | | | | | | | | |
| | Six months ended June 30, 2018 |
| In millions, except per share amounts | Under Current Guidance | | Adjustments | | Under Previous Guidance |
| Condensed Consolidated Statement of Operations | | | | | |
| Product revenue | $ | 1,051 |
| | $ | (10 | ) | | $ | 1,041 |
|
| Cost of products | 871 |
| | (2 | ) | | 869 |
|
| Income (loss) from operations | 3 |
| | (8 | ) | | (5 | ) |
| Loss from continuing operations before income taxes | (93 | ) | | (8 | ) | | (101 | ) |
| Income tax benefit | (5 | ) | | (2 | ) | | (7 | ) |
| Loss from continuing operations | (88 | ) | | (6 | ) | | (94 | ) |
| Net loss | (125 | ) | | (6 | ) | | (131 | ) |
| Net loss attributable to NCR | $ | (125 | ) | | $ | (6 | ) | | $ | (131 | ) |
| Loss per common share from continuing operations | | | | | |
| Basic | $ | (0.94 | ) | | $ | (0.05 | ) | | $ | (0.99 | ) |
| Diluted | $ | (0.94 | ) | | $ | (0.05 | ) | | $ | (0.99 | ) |
| Net loss per common share | | | | | |
| Basic | $ | (1.26 | ) | | $ | (0.05 | ) | | $ | (1.31 | ) |
| Diluted | $ | (1.26 | ) | | $ | (0.05 | ) | | $ | (1.31 | ) |
| |
(1) | The following table presents the other adjustments for NCR: |
|
| | | | | | | | | | | | | | | |
| In millions | Three months ended June 30 | | Six months ended June 30 |
| 2019 | | 2018 | | 2019 | | 2018 |
| Transformation and restructuring costs | $ | 14 |
| | $ | 66 |
| | $ | 40 |
| | $ | 82 |
|
| Asset impairment charges | — |
| | 183 |
| | — |
| | 183 |
|
| Acquisition-related amortization of intangible assets | 21 |
| | 21 |
| | 42 |
| | 44 |
|
| Acquisition-related costs | — |
| | 1 |
| | — |
| | 1 |
|
| Total other adjustments | $ | 35 |
| | $ | 271 |
|
| $ | 82 |
| | $ | 310 |
|
The following table presents balances as of June 30, 2018 under the currentrevenue by geography for NCR:
|
| | | | | | | | | | | | | | | |
| In millions | Three months ended June 30 | | Six months ended June 30 |
| 2019 | | 2018 | | 2019 | | 2018 |
| Americas | $ | 1,029 |
| | $ | 875 |
| | $ | 1,949 |
| | $ | 1,764 |
|
| Europe, Middle East and Africa (EMEA) | 452 |
| | 418 |
| | 871 |
| | 826 |
|
| Asia Pacific (APJ) | 229 |
| | 244 |
| | 426 |
| | 464 |
|
| Total revenue | $ | 1,710 |
| | $ | 1,537 |
| | $ | 3,246 |
| | $ | 3,054 |
|
The following tables present revenue from products and previous guidance:services for NCR:
|
| | | | | | | | | | | | | | | |
| In millions | Three months ended June 30 | | Six months ended June 30 |
| 2019 | | 2018 | | 2019 | | 2018 |
| Product revenue | $ | 664 |
| | $ | 525 |
| | $ | 1,203 |
| | $ | 1,051 |
|
| Professional services and installation services revenue | 270 |
| | 271 |
| | 508 |
| | 527 |
|
| Recurring revenue, including maintenance, cloud revenue and payments | 776 |
| | 741 |
| | 1,535 |
| | 1,476 |
|
| Total revenue | $ | 1,710 |
| | $ | 1,537 |
| | $ | 3,246 |
| | $ | 3,054 |
|
|
| | | | | | | | | | | |
| In millions | Under Current Guidance | | Adjustments | | Under Previous Guidance |
| Condensed Consolidated Balance Sheet | | | | | |
| Assets | | | | | |
| Accounts receivable, net | $ | 1,272 |
| | $ | 22 |
| | $ | 1,294 |
|
| Other current assets | 282 |
| | (24 | ) | | 258 |
|
| Total current assets | 2,739 |
| | (2 | ) | | 2,737 |
|
| Deferred income taxes | 472 |
| | 2 |
| | 474 |
|
| Other assets | 593 |
| | (13 | ) | | 580 |
|
| Total Assets | $ | 7,364 |
| | $ | (13 | ) | | $ | 7,351 |
|
| | | | | | |
| Liabilities | | | | | |
| Contract liabilities | $ | 469 |
| | $ | (3 | ) | | $ | 466 |
|
| Other current liabilities | 310 |
| | (2 | ) | | 308 |
|
| Total current liabilities | 1,879 |
| | (5 | ) | | 1,874 |
|
| Total liabilities | 6,144 |
| | (5 | ) | | 6,139 |
|
| Retained earnings | 594 |
| | (8 | ) | | 586 |
|
Total NCR stockholders’ equity
| 371 |
| | (8 | ) | | 363 |
|
Total stockholders’ equity
| 374 |
| | (8 | ) | | 366 |
|
Total liabilities and stockholders’ equity
| $ | 7,364 |
| | $ | (13 | ) | | $ | 7,351 |
|
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
|
| | | | | | | | | | | | | | | |
| In millions | Three months ended June 30 | | Six months ended June 30 |
| 2019 | | 2018 | | 2019 | | 2018 |
| Software | $ | 496 |
| | $ | 470 |
| | $ | 963 |
| | $ | 930 |
|
| Services | 622 |
| | 610 |
| | 1,207 |
| | 1,211 |
|
| Hardware | 592 |
| | 457 |
| | 1,076 |
| | 913 |
|
| Total revenue | $ | 1,710 |
| | $ | 1,537 |
| | $ | 3,246 |
| | $ | 3,054 |
|
4. GOODWILL AND LONG-LIVED ASSETS
In addition to our annual goodwill impairment test performed in the fourth quarter, we perform interim impairment tests for long-lived and intangible assets, including goodwill, whenever events or changes in circumstances indicate that the carrying amount of the asset (group), which is the reporting unit for goodwill purposes, may not be recoverable. As noted in the Company’s 2017 Annual Report on Form 10-K, our annual impairment test indicated that the Company's hardware segment had the least amount of excess fair value over the carrying value, where the excess of fair value over carrying value was approximately 20%.
Late in the quarter ended June 30, 2018, we determined there was an indication that the carrying value of the net assets assigned to the Hardware reporting unit may not be recoverable. This determination was based on the lowering of our full year forecast for 2018, driven by reduced revenue and gross margin rates expected for the third and fourth quarters of 2018, and the resulting impact on the current year and future cash flow projections of the Hardware reporting unit.
Given the undiscounted cash flows of the asset group, which we determined to be at the reporting unit level, were below the carrying value of the net assets, we recorded an impairment charge for the difference between the fair value and the carrying value of the long-lived assets. The fair value of the long-lived assets was determined based on the nature of the asset through either third party appraisals, replacement cost or discounted cash flow analysis.
For goodwill, consistent with the annual impairment test, fair value of the Hardware reporting unit was estimated using a weighted methodology considering the output from both the income and market approaches. The income approach incorporates the use of discounted cash flow (DCF) analysis. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including markets and market shares, sales volumes and prices, costs to produce, tax rates, capital spending, discount rate and working capital changes. The market approach is performed using the Guideline Public Companies (GPC) method which is based on earnings multiple data. Under both approaches, the fair value of the Hardware reporting unit was determined to be below the net asset value. Accordingly, we recorded an impairment charge up to the value of the goodwill assigned to the Hardware reporting unit which was the full amount recorded. Refer to Note 1. Basis of Presentation and Summary of Significant Accounting Policies, for disclosureeffective January 1, 2019, the Company began management of adoptionits business on an industry basis, changing from the previous model of management on a solution basis, which resulted in a corresponding change to NCR's reportable segments. In connection with the change in reportable segments, during the first quarter of 2019, the Company determined its reporting units and then assigned goodwill to the new accounting guidance which eliminatesreporting units based on the requirement to measurerelative fair value allocation approach. Based on this analysis, it was determined that the implied fair value of all reporting units were substantially in excess of the carrying value. We have reclassified prior period goodwill disclosures to measure a goodwill impairment charge.
As a result, the Company recorded impairment charges of $21 million related to property, plant and equipment held and used in NCR's hardware reporting unit, $16 million related to purchased intangibles and $146 million for goodwill assignedconform to the Hardware reporting unit. These charges were recorded in the line item asset impairment charges in our Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2018.current period presentation.
The carrying amounts of goodwill by segment as of June 30, 20182019 and December 31, 20172018 are included in the table below. Foreign currency fluctuations are included within other adjustments.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 | | | | | | | | June 30, 2019 |
| In millions | Goodwill | | Accumulated Impairment Losses | | Total | | Additions | | Impairment | | Other | | Goodwill | | Accumulated Impairment Losses | | Total |
| Banking | $ | 1,718 |
| | $ | (101 | ) | | $ | 1,617 |
| | $ | — |
| | $ | — |
| | $ | (1 | ) | | $ | 1,717 |
| | $ | (101 | ) | | $ | 1,616 |
|
| Retail | 571 |
| | (34 | ) | | 537 |
| | 5 |
| | — |
| | — |
| | 576 |
| | (34 | ) | | 542 |
|
| Hospitality | 385 |
| | (23 | ) | | 362 |
| | 11 |
| | — |
| | — |
| | 396 |
| | (23 | ) | | 373 |
|
| Other | 187 |
| | (11 | ) | | 176 |
| | — |
| | — |
| | — |
| | 187 |
| | (11 | ) | | 176 |
|
| Total goodwill | $ | 2,861 |
| | $ | (169 | ) | | $ | 2,692 |
| | $ | 16 |
| | $ | — |
| | $ | (1 | ) | | $ | 2,876 |
| | $ | (169 | ) | | $ | 2,707 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | | | | | | | June 30, 2018 |
| In millions | Goodwill | | Accumulated Impairment Losses | | Total | | Additions | | Impairment | | Other | | Goodwill | | Accumulated Impairment Losses | | Total |
| Software | $ | 1,944 |
| | $ | (7 | ) | | $ | 1,937 |
| | $ | — |
| | $ | — |
| | $ | (5 | ) | | $ | 1,939 |
| | $ | (7 | ) | | $ | 1,932 |
|
| Services | 658 |
| | — |
| | 658 |
| | — |
| | — |
| | — |
| | 658 |
| | — |
| | 658 |
|
| Hardware | 162 |
| | (16 | ) | | 146 |
| | — |
| | (146 | ) | | — |
| | 162 |
| | (162 | ) | | — |
|
| Total goodwill | $ | 2,764 |
| | $ | (23 | ) | | $ | 2,741 |
| | $ | — |
| | $ | (146 | ) | | $ | (5 | ) | | $ | 2,759 |
| | $ | (169 | ) | | $ | 2,590 |
|
Additions during 2019 represent a purchase accounting adjustment related to the acquisition of JetPay Corporation as well as goodwill from several acquisitions of resellers within the Hospitality segment that were completed in the first and second quarters of 2019.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
NCR’s purchased intangible assets, reported in intangibles, net in the Condensed Consolidated Balance Sheets, were specifically identified when acquired, and are deemed to have finite lives. The gross carrying amount and accumulated amortization for NCR’s identifiable intangible assets were as set forth in the table below.
|
| | | | | | | | | | | | | | | | | |
| | Amortization Period (in Years) | | June 30, 2019 | | December 31, 2018 |
| In millions | | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
| Identifiable intangible assets | | | | | | | | | |
| Reseller & customer relationships | 1 - 20 | | $ | 726 |
| | $ | (244 | ) | | $ | 726 |
| | $ | (218 | ) |
| Intellectual property | 2 - 8 | | 443 |
| | (384 | ) | | 443 |
| | (373 | ) |
| Customer contracts | 8 | | 89 |
| | (88 | ) | | 89 |
| | (87 | ) |
| Tradenames | 2 - 10 | | 75 |
| | (64 | ) | | 75 |
| | (60 | ) |
| Total identifiable intangible assets | | | $ | 1,333 |
| | $ | (780 | ) | | $ | 1,333 |
| | $ | (738 | ) |
|
| | | | | | | | | | | | | | | | | |
| | Amortization Period (in Years) | | June 30, 2018 | | December 31, 2017 |
| In millions | | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
| Identifiable intangible assets | | | | | | | | | |
| Reseller & customer relationships | 1 - 20 | | $ | 659 |
| | $ | (194 | ) | | $ | 659 |
| | $ | (170 | ) |
| Intellectual property | 2 - 8 | | 393 |
| | (364 | ) | | 410 |
| | (351 | ) |
| Customer contracts | 8 | | 89 |
| | (84 | ) | | 89 |
| | (81 | ) |
| Tradenames | 2 - 10 | | 73 |
| | (55 | ) | | 73 |
| | (51 | ) |
| Total identifiable intangible assets | | | $ | 1,214 |
| | $ | (697 | ) | | $ | 1,231 |
| | $ | (653 | ) |
The aggregate amortization expense (actual and estimated) for identifiable intangible assets for the following periods is:
|
| | | | | | | | | |
| In millions | Three months ended June 30, 2019 | Six months ended June 30, 2019 | Remainder of 2019 (estimated) |
| Amortization expense | $ | 21 |
| $ | 42 |
| $ | 43 |
|
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
|
| | | | | | | | | | | |
| In millions | Three months ended June 30, 2018 | | Six months ended June 30, 2018 | | Remainder of 2018 (estimated) |
| Amortization expense | $ | 21 |
| | $ | 44 |
| | $ | 41 |
|
| | | | | For the years ended December 31 (estimated) | | For the years ended December 31 (estimated) |
| In millions | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 |
| Amortization expense | | $ | 75 |
| | $ | 57 |
| | $ | 49 |
| | $ | 45 |
| | $ | 43 |
| | $ | 68 |
| | $ | 59 |
| | $ | 55 |
| | $ | 52 |
| | $ | 47 |
|
5. DEBT OBLIGATIONS
The following table summarizes the Company's short-term borrowings and long-term debt:
| | | | | June 30, 2018 | | December 31, 2017 | | June 30, 2019 | | December 31, 2018 |
| In millions, except percentages | In millions, except percentages | Amount | | Weighted-Average Interest Rate | | Amount | | Weighted-Average Interest Rate | In millions, except percentages | Amount | | Weighted-Average Interest Rate | | Amount | | Weighted-Average Interest Rate |
| Short-Term Borrowings | Short-Term Borrowings | | | | | Short-Term Borrowings | | | | |
Current portion of Senior Secured Credit Facility (1) | Current portion of Senior Secured Credit Facility (1) | $ | 56 |
| | 3.84% | | $ | 51 |
| | 3.21% | Current portion of Senior Secured Credit Facility (1) | $ | 90 |
| | 4.41% | | $ | 84 |
| | 4.51% |
| Trade Receivables Securitization Facility | Trade Receivables Securitization Facility | 100 |
| | 3.02% | | — |
| | Trade Receivables Securitization Facility | 100 |
| | 3.25% | | 100 |
| | 3.37% |
Other (2) | Other (2) | 4 |
| | 6.71% | | 1 |
| | 3.71% | Other (2) | 8 |
| | 5.73% | | 1 |
| | 4.92% |
| | Total short-term borrowings | $ | 160 |
| | $ | 52 |
| | Total short-term borrowings | $ | 198 |
| | $ | 185 |
| |
| Long-Term Debt | Long-Term Debt | | | | | Long-Term Debt | | | | |
| Senior Secured Credit Facility: | Senior Secured Credit Facility: | | | | | Senior Secured Credit Facility: | | | | |
| | Term loan facility (1) | $ | 720 |
| | 3.84% | | $ | 759 |
| | 3.21% | Term loan facility (1) | $ | 630 |
| | 4.41% | | $ | 675 |
| | 4.51% |
| | Revolving credit facility (1) | 50 |
| | 3.86% | | — |
| | Revolving credit facility (1) | 100 |
| | 4.41% | | 120 |
| | 4.49% |
| Senior notes: | Senior notes: |
|
| | | | Senior notes: |
|
| | | |
| | 5.00% Senior Notes due 2022 | 600 |
| | 600 |
| | 5.00% Senior Notes due 2022 | 600 |
| | 600 |
| |
| | 4.625% Senior Notes due 2021 | 500 |
| | 500 |
| | 4.625% Senior Notes due 2021 | 500 |
| | 500 |
| |
| | 5.875% Senior Notes due 2021 | 400 |
| | 400 |
| | 5.875% Senior Notes due 2021 | 400 |
| | 400 |
| |
| | 6.375% Senior Notes due 2023 | 700 |
| | 700 |
| | 6.375% Senior Notes due 2023 | 700 |
| | 700 |
| |
| Deferred financing fees | Deferred financing fees | (21 | ) | | (23 | ) | | Deferred financing fees | (15 | ) | | (18 | ) | |
Other (2) | 3 |
| | 1.31% | | 3 |
| | 1.62% | |
Other (1) | | Other (1) | 3 |
| | 0.44% | | 3 |
| | 0.59% |
| | Total long-term debt | $ | 2,952 |
| | $ | 2,939 |
| | Total long-term debt | $ | 2,918 |
| | $ | 2,980 |
| |
| |
(1) | Interest rates are weighted-average interest rates as of June 30, 20182019 and December 31, 2017.2018. |
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
| |
(2)
| Interest rates are weighted-average interest rates as of June 30, 2018 and December 31, 2017 primarily related to various international credit facilities. |
Senior Secured Credit Facility On March 31, 2016, the Company amended and restated its senior secured credit facility with and among certain foreign subsidiaries of NCR (the Foreign Borrowers), the lenders party thereto and JPMorgan Chase Bank, NA (JPMCB) as the administrative agent, and refinanced its term loan facility and revolving credit facility thereunder (the Senior Secured Credit Facility). As of June 30, 2018,2019, the Senior Secured Credit Facility consisted of a term loan facility with an aggregate principal amount outstanding of $776$720 million and a revolving credit facility with an aggregate principal amount of $1.1 billion, of which $50$100 million was outstanding. The revolving credit facility also allows a portion of the availability to be used for outstanding letters of credit, and as of June 30, 2018,2019, there were no letters of credit outstanding.
Up to $400 million of the revolving credit facility is available to the Foreign Borrowers. Term loans were made to the Company in U.S. Dollars, and loans under the revolving credit facility are available in U.S. Dollars, Euros and Pound Sterling.
The outstanding principal balance of the term loan facility is required to be repaid in equal quarterly installments of approximately $17 million beginningwhich began on June 30, 2018, and $23 million beginning June 30, 2019, with the balance being due at maturity on March 31, 2021. Borrowings under the revolving portion of the credit facility are due March 31, 2021. Amounts outstanding under the Senior Secured Credit Facility bear interest at LIBOR (or, in the case of amounts denominated in Euros, EURIBOR), or, at NCR’s option, in the case of amounts denominated in U.S. Dollars, at a base rate equal to the highest of (a) the federal funds rate plus 0.50%, (b) JPMCB’s “prime rate” and (c) the one-month LIBOR rate plus 1.00% (the Base Rate), plus, in each case, a margin ranging from 1.25% to 2.25% for LIBOR-based loans that are either term loans or revolving loans and EURIBOR-based revolving loans and ranging from 0.25% to 1.25% for Base Rate-based loans that are either term loans or revolving loans, in each case, depending on the Company’s consolidated leverage ratio. The terms of the Senior Secured Credit Facility also require certain other fees and payments to be made by the Company, including a commitment fee on the undrawn portion of the revolving credit facility.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
The obligations of the Company and Foreign Borrowers under the Senior Secured Credit Facility are guaranteed by certain of the Company's wholly-owned domestic subsidiaries. The Senior Secured Credit Facility and these guarantees are secured by a first priority lien and security interest in certain equity interests owned by the Company and the guarantor subsidiaries in certain of their respective domestic and foreign subsidiaries, and a perfected first priority lien and security interest in substantially all of the Company's U.S. assets and the assets of the guarantor subsidiaries, subject to certain exclusions. These security interests would be released if the Company achieves an “investment grade” rating, and will remain released so long as the Company maintains that rating.
The Senior Secured Credit Facility includes affirmative and negative covenants that restrict or limit the ability of the Company and its subsidiaries to, among other things, incur indebtedness; create liens on assets; engage in certain fundamental corporate changes or changes to the Company's business activities; make investments; sell or otherwise dispose of assets; engage in sale-leaseback or hedging transactions; repurchase stock, pay dividends or make similar distributions; repay other indebtedness; engage in certain affiliate transactions; or enter into agreements that restrict the Company's ability to create liens, pay dividends or make loan repayments. The Senior Secured Credit Facility also includes financial covenants that require the Company to maintain:
| |
| • | a consolidated leverage ratio on the last day of any fiscal quarter, not to exceed (i) in the case of any fiscal quarter ending after December 31, 2017 and on or prior to December 31, 2019, (a) the sum of 4.00 and an amount (not to exceed 0.50) to reflect debt used to reduce NCR’s unfunded pension liabilities to (b) 1.00, and (ii) in the case of any fiscal quarter ending after December 31, 2019, the sum of (a) 3.75 and an amount (not to exceed 0.50) to reflect debt used to reduce NCR’s unfunded pension liabilities to (b) 1.00; and |
| |
| • | an interest coverage ratio on the last day of any fiscal quarter greater than or equal to 3.50 to 1.00. |
a consolidated leverage ratio on the last day of any fiscal quarter, not to exceed (i) in the case of any fiscal quarter ending after December 31, 2017 and on or prior to December 31, 2019, (a) the sum of 4.00 and an amount (not to exceed 0.50) to reflect debt used to reduce NCR’s unfunded pension liabilities to (b) 1.00, and (ii) in the case of any fiscal quarter ending after December 31, 2019, the sum of (a) 3.75 and an amount (not to exceed 0.50) to reflect debt used to reduce NCR’s unfunded pension liabilities to (b) 1.00; and
an interest coverage ratio on the last day of any fiscal quarter greater than or equal to 3.50 to 1.00.
At June 30, 2018,2019, the maximum consolidated leverage ratio under the Senior Secured Credit Facility was 4.10 to 1.00.
The Senior Secured Credit Facility also includes provisions for events of default, which are customary for similar financings. Upon the occurrence of an event of default, the lenders may, among other things, terminate the loan commitments, accelerate all loans and require cash collateral deposits in respect of outstanding letters of credit. If the Company is unable to pay or repay the amounts due, the lenders could, among other things, proceed against the collateral granted to them to secure such indebtedness.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
The Company may request, at any time and from time to time, but the lenders are not obligated to fund, the establishment of one or more incremental term loans and/or revolving credit facilities (subject to the agreement of existing lenders or additional financial institutions to provide such term loans and/or revolving credit facilities) with commitments in an aggregate amount not to exceed the greater of (i) $150 million, and (ii) such amount as would not (a) prior to the date that the Company obtains an investment grade rating cause the leverage ratio under the Senior Secured Credit Facility, calculated on a pro forma basis including the incremental facility and assuming that it and the revolver are fully drawn, to exceed 2.50 to 1.00, and (b) on and after the date that the Company obtains an investment grade rating cause the leverage ratio under the Senior Secured Credit Facility, calculated on a pro forma basis including the incremental facility and assuming that it and the revolver are fully drawn, to exceed a ratio that is 0.50 less than the leverage ratio then applicable under the financial covenants of the Senior Secured Credit Facility, the proceeds of which can be used for working capital requirements and other general corporate purposes.
Senior Unsecured Notes On September 17, 2012, the Company issued $600 million aggregate principal amount of 5.00% senior unsecured notes due in 2022 (the 5.00% Notes). The 5.00% Notes were sold at 100% of the principal amount and will mature on July 15, 2022. On December 18, 2012, the Company issued $500 million aggregate principal amount of 4.625% senior unsecured notes due in 2021 (the 4.625% Notes). The 4.625% Notes were sold at 100% of the principal amount and will mature on February 15, 2021. On December 19, 2013, the Company issued $400 million aggregate principal amount of 5.875% senior unsecured notes due in 2021 (the 5.875% Notes) and $700 million aggregate principal amount of 6.375% senior unsecured notes due in 2023 (the 6.375% Notes). The 5.875% Notes were sold at 100% of the principal amount and will mature on December 15, 2021 and the 6.375% Notes were sold at 100% of the principal amount and will mature on December 15, 2023. The senior unsecured notes are guaranteed, fully and unconditionally, on an unsecured senior basis, by our subsidiary, NCR International, Inc. Under the indentures for these notes, the Company, has the option to redeem each series of notes, in whole or in part, at various times for specified prices, plus accrued and unpaid interest.
The terms of the indentures for these notes limit the ability of the Company and certain of its subsidiaries to, among other things, incur additional debt or issue redeemable preferred stock; pay dividends or make certain other restricted payments or investments; incur liens; sell assets; incur restrictions on the ability of the Company's subsidiaries to pay dividends to the Company; enter into affiliate transactions; engage in sale and leaseback transactions; and consolidate, merge, sell or otherwise dispose of all or
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
substantially all of the Company's or such subsidiaries' assets. These covenants are subject to significant exceptions and qualifications. For example, if these notes are assigned an investment grade rating by Moody's or S&P and no default has occurred or is continuing, certain covenants will be terminated.
Trade Receivables Securitization Facility In November 2014, the Company established a two-year revolving trade receivables securitization facility (the A/R Facility) with PNC Bank, National Association (PNC) as the administrative agent, and various lenders. In November 2016, the Company amended the A/R Facility to extend the maturity date to November 2018. In November 2018, the Company amended the A/R Facility to extend the maturity date to November 2020. The A/R Facility provides for up to $200 million in funding based on the availability of eligible receivables and other customary factors and conditions.
Under the A/R Facility, NCR sells and/or contributes certain of its U.S. trade receivables to a wholly-owned, bankruptcy-remote subsidiary as they are originated, and advances by the lenders to that subsidiary are secured by those trade receivables. The assets of this financing subsidiary are restricted as collateral for the payment of its obligations under the A/R Facility, and its assets and credit are not available to satisfy the debts and obligations owed to the creditors of the Company. The Company includes the assets, liabilities and results of operations of this financing subsidiary in its consolidated financial statements. The financing subsidiary owned $505$607 million and $491$526 million of outstanding accounts receivable as of June 30, 20182019 and December 31, 2017,2018, respectively, and these amounts are included in accounts receivable, net in the Company’s Condensed Consolidated Balance Sheets.
The financing subsidiary pays annual commitment and other customary fees to the lenders, and advances by a lender under the A/R Facility accrue interest (i) at a reserve-adjusted LIBOR rate or a base rate equal to the highest of (a) the applicable lender’s prime rate or (b) the federal funds rate plus 0.50%, if the lender is a committed lender, or (ii) based on commercial paper interest rates if the lender is a commercial paper conduit lender. Advances may be prepaid at any time without premium or penalty.
The A/R Facility contains various customary affirmative and negative covenants and default and termination provisions that provide for the acceleration of the advances under the A/R Facility in circumstances including, but not limited to, failure to pay interest or principal when due, breach of representation, warranty or covenant, certain insolvency events or failure to maintain the security interest in the trade receivables, and defaults under other material indebtedness.
Fair Value of Debt The Company utilized Level 2 inputs, as defined in the fair value hierarchy, to measure the fair value of the long-term debt, which, as of June 30, 20182019 and December 31, 20172018 was $3.16 billion and $3.073.11 billion, respectively. Management's
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
fair value estimates were based on quoted prices for recent trades of NCR’s long-term debt, quoted prices for similar instruments, and inquiries with certain investment communities.
6. INCOME TAXES
Income tax provisions for interim (quarterly) periods are based on an estimated annual effective income tax rate calculated separately from the effect of significant, infrequent or unusual items. Income tax benefitexpense was $12$15 million for the three months ended June 30, 20182019 compared to income tax expensebenefit of $33$12 million for the three months ended June 30, 2017. The decrease in income tax expense was driven by lower income before taxes, the impacts of U.S. Tax Reform and an increase in discrete benefits in the three months ended June 30, 2018. The increase in discrete benefitsincome tax expense was primarily driven by favorable audit settlementshigher income before taxes in international jurisdictions.the three months ended June 30, 2019.
Income tax benefitexpense was $5$24 million for the six months ended June 30, 20182019 compared to an income tax expensebenefit of $47$5 million for the six months ended June 30, 2017. The decrease in income tax expense was driven by lower income before taxes, the impacts of U.S. Tax Reform and an increase in discrete benefits in the six months ended June 30, 2018. The increase in discrete benefitsincome tax expense was primarily driven by favorable audit settlements in international jurisdictions, partially offset by the decrease of favorable excess tax benefits of share-based compensation awards.
U.S. Tax Reform was enacted in December 2017. The SEC staff issued SAB 118 that allowed the Company to record provisional amounts for the impacts of the legislation, with the requirement that the accounting be completed in a period not to exceed one year from the date of enactment of the legislation. Pursuant to SAB 118, we had reverted to tax law that existed prior to U.S. Tax Reform on the realizability of deferred tax assets for foreign tax credit carryforwards and future repatriation of earnings from our foreign subsidiaries. As of December 31, 2017, the Company had not completed the accounting in its entirety for the tax effects of the legislation.
Due to the timing of the enactment and complexitieshigher income before taxes in the tax legislation, we made reasonable estimates of the effects and recorded provisional amounts in our financial statements as of December 31, 2017. The provisional expense related to the re-measurement of our net U.S. deferred tax assets to the 21% corporate income tax rate and the repatriation tax, net of related foreign tax credits. As of June 30, 2018, the Company has made a $2 million reduction to the provisional amount for the repatriation tax due to additional guidance issued in the threesix months ended June 30, 2018. As we continue to evaluate the impact of U.S. Tax Reform and interpret any additional guidance issued by the U.S. Treasury Department or other standard-setting bodies, we may adjust the provisional amounts. Completion of our accounting could lead to a material increase or decrease in our effective tax rate during 2018.2019.
The Company reviewed our United Kingdom net deferred tax assets for recoverability based on the evaluation of positive and negative evidence. A full valuation allowance against net deferred tax assets will be maintained until sufficient positive evidence exists to reduce or eliminate the valuation allowance. The factors considered by management in its determination of the probability of the realization of the deferred tax assets include, but are not limited to, recent historical financial results, historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. As of June 30, 2018, the Company continued to maintain a full valuation allowance against the United Kingdom net deferred tax assets due to insufficient positive evidence and the uncertainty regarding anticipated future earnings at certain subsidiaries in the United Kingdom.
The Company engages in continuousregular discussions and negotiations with taxing authorities regarding tax matters, and the Company has determined that during 2018over the next 12 months it expects to resolve certain tax matters related to U.S. and foreign jurisdictions. As a result, as of June 30, 2018,2019, we estimate that it is reasonably possible that gross unrecognized tax benefits may decrease by $50$5 million to $55$10 million in 2018.the next 12 months.
7. STOCK COMPENSATION PLANS
As of June 30, 20182019, the Company’s primary type of stock-based compensation was restricted stock units and stock options. Stock-based compensation expense for the following periods were:
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
|
| | | | | | | | | | | | | | | |
| In millions | Three months ended June 30 | | Six months ended June 30 |
| 2019 | | 2018 | | 2019 | | 2018 |
| Restricted stock units | $ | 22 |
| | $ | 24 |
| | $ | 42 |
| | $ | 37 |
|
| Stock options | 2 |
| | 1 |
| | 4 |
| | 1 |
|
| Employee stock purchase plan | 1 |
| | 1 |
| | 2 |
| | 2 |
|
| Stock-based compensation expense | 25 |
| | 26 |
| | 48 |
| | 40 |
|
| Tax benefit | (4 | ) | | (4) |
| | (7 | ) | | (7 | ) |
| Total stock-based compensation expense (net of tax) | $ | 21 |
| | $ | 22 |
| | $ | 41 |
| | $ | 33 |
|
|
| | | | | | | | | | | | | | | |
| In millions | Three months ended June 30 | | Six months ended June 30 |
| 2018 | | 2017 | | 2018 | | 2017 |
| Restricted stock units | $ | 24 |
| | $ | 21 |
| | $ | 37 |
| | $ | 39 |
|
| Stock options | 1 |
| | — |
| | 1 |
| | — |
|
| Employee stock purchase plan | 1 |
| | 1 |
| | 2 |
| | 2 |
|
| Stock-based compensation expense | 26 |
| | 22 |
| | 40 |
| | 41 |
|
| Tax benefit | (4) |
| | (6) |
| | (7 | ) | | (12 | ) |
| Total stock-based compensation expense (net of tax) | $ | 22 |
| | $ | 16 |
| | $ | 33 |
| | $ | 29 |
|
Stock-based compensation expense is recognized in the financial statements based upon grant date fair value. During the six months ended June 30, 2018, theThe Company granted stock options and the weighted average fair value of option grants was estimated based on the below weighted average assumptions, which was $8.07 and $9.80 for the six months ended June 30, 2018. During2019 and 2018, respectively. The stock options that were granted for the six months ended June 30, 2017 the Company did not grant any stock options.2019 and 2018 had a seven year contractual term and will vest over four years.
|
| | | |
| Six months ended June 30, 2018 |
Dividend yield | $ | — |
|
Risk-free interest rate | 2.5 | % |
Expected volatility | 34.8 | % |
Expected holding period (years) | 3.8 |
|
|
| | | | | | | |
| | Six months ended June 30 |
| | 2019 | | 2018 |
| Dividend yield | $ | — |
| | $ | — |
|
| Risk-free interest rate | 2.50 | % | | 2.50 | % |
| Expected volatility | 34.79 | % | | 34.80 | % |
| Expected holding period (years) | 3.9 |
| | 3.8 |
|
Expected volatility is calculated as the historical volatility of the Company’s stock over a period equal to the expected term of the options, as management believes this is the best representation of prospective trends. The Company uses historical data to estimate option exercise and employee terminations within the valuation model. The expected holding period represents the period of time that options are expected to be outstanding. The risk-free interest rate for periods within the contractual life of the option is based on a blend of the three and five-year U.S. Treasury yield curve in effect at the time of grant.
As of June 30, 2018,2019, the total unrecognized compensation cost of $127$119 million related to unvested restricted stock grants is expected to be recognized over a weighted average period of approximately 1.2 years.1.0 year. As of June 30, 2018,2019, the total unrecognized compensation cost of $15$29 million related to unvested stock option grants is expected to be recognized over a weighted average period of approximately 1.91.7 years.
Employee Stock Purchase Plan The Company's Employee Stock Purchase Plan ("ESPP") provides employees a 15% discount on stock purchases using a three-month look-back feature where the discount is applied to the stock price that represents the lower of NCR’s closing stock price on either the first day or the last day of each calendar quarter. Participants can contribute between 1% and 10% of their compensation.
For the three months ended June 30, 2019, employees purchased 0.2 million shares, at a discounted price of $24.02. For the three months ended June 30, 2018, employees purchased 0.1 million shares, at a discounted price of $26.18. For the three months ended June 30, 2017, employees purchased 0.1 million shares, at a discounted price of $38.83.
8. EMPLOYEE BENEFIT PLANS
Components of net periodic benefit cost (income) of the pension plans for the three months endedJune 30 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| In millions | U.S. Pension Benefits | | International Pension Benefits | | Total Pension Benefits |
| 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
| Net service cost | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 2 |
| | $ | 1 |
| | $ | 2 |
|
| Interest cost | 17 |
| | 15 |
| | 5 |
| | 6 |
| | 22 |
| | 21 |
|
| Expected return on plan assets | (12 | ) | | (11 | ) | | (7 | ) | | (8 | ) | | (19 | ) | | (19 | ) |
| Net periodic benefit cost (income) | $ | 5 |
| | $ | 4 |
| | $ | (1 | ) | | $ | — |
| | $ | 4 |
| | $ | 4 |
|
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| In millions | U.S. Pension Benefits | | International Pension Benefits | | Total Pension Benefits |
| 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
| Net service cost | $ | — |
| | $ | — |
| | $ | 2 |
| | $ | 2 |
| | $ | 2 |
| | $ | 2 |
|
| Interest cost | 15 |
| | 18 |
| | 6 |
| | 5 |
| | 21 |
| | 23 |
|
| Expected return on plan assets | (11 | ) | | (15 | ) | | (8 | ) | | (8 | ) | | (19 | ) | | (23 | ) |
| Net periodic benefit cost (income) | $ | 4 |
| | $ | 3 |
| | $ | — |
| | $ | (1 | ) | | $ | 4 |
| | $ | 2 |
|
Components of net periodic benefit cost (income) of the pension plans for the six months ended June 30 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| In millions | U.S. Pension Benefits | | International Pension Benefits | | Total Pension Benefits |
| 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
| Net service cost | $ | — |
| | $ | — |
| | $ | 3 |
| | $ | 4 |
| | $ | 3 |
| | $ | 4 |
|
| Interest cost | 33 |
| | 30 |
| | 10 |
| | 11 |
| | 43 |
| | 41 |
|
| Expected return on plan assets | (22 | ) | | (22 | ) | | (15 | ) | | (16 | ) | | (37 | ) | | (38 | ) |
| Net periodic benefit cost (income) | $ | 11 |
| | $ | 8 |
| | $ | (2 | ) | | $ | (1 | ) | | $ | 9 |
| | $ | 7 |
|
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| In millions | U.S. Pension Benefits | | International Pension Benefits | | Total Pension Benefits |
| 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
| Net service cost | $ | — |
| | $ | — |
| | $ | 4 |
| | $ | 4 |
| | $ | 4 |
| | $ | 4 |
|
| Interest cost | 30 |
| | 36 |
| | 11 |
| | 10 |
| | 41 |
| | 46 |
|
| Expected return on plan assets | (22 | ) | | (29 | ) | | (16 | ) | | (17 | ) | | (38 | ) | | (46 | ) |
| Net periodic benefit cost (income) | $ | 8 |
| | $ | 7 |
| | $ | (1 | ) | | $ | (3 | ) | | $ | 7 |
| | $ | 4 |
|
The benefit from the postretirement plan for the following periods were:
|
| | | | | | | | | | | | | | | |
| In millions | Three months ended June 30 | | Six months ended June 30 |
| 2019 | | 2018 | | 2019 | | 2018 |
| Amortization of: | | | | | | | |
| Prior service benefit | $ | (1 | ) | | $ | (2 | ) | | $ | (2 | ) | | $ | (3 | ) |
| Actuarial loss | — |
| | 1 |
| | — |
| | 1 |
|
| Net postretirement benefit | $ | (1 | ) | | $ | (1 | ) | | $ | (2 | ) | | $ | (2 | ) |
|
| | | | | | | | | | | | | | | |
| | Three months ended June 30 | | Six months ended June 30 |
| 2018 | | 2017 | | 2018 | | 2017 |
| Amortization of: | | | | | | | |
| Prior service benefit | $ | (2 | ) | | $ | (2 | ) | | $ | (3 | ) | | $ | (3 | ) |
| Actuarial loss | 1 |
| | 1 |
| | 1 |
| | 1 |
|
| Net postretirement benefit | $ | (1 | ) | | $ | (1 | ) | | $ | (2 | ) | | $ | (2 | ) |
The net cost of the postemployment plan for the following periods were:
|
| | | | | | | | | | | | | | | |
| | Three months ended June 30 | | Six months ended June 30 |
| In millions | 2019 | | 2018 | | 2019 | | 2018 |
| Net service cost | $ | 5 |
| | $ | 9 |
| | $ | 19 |
| | $ | 19 |
|
| Interest cost | 1 |
| | 1 |
| | 2 |
| | 2 |
|
| Amortization of: | | | | | | | |
| Prior service benefit | (1 | ) | | (1 | ) | | (2 | ) | | (2 | ) |
| Actuarial gain | — |
| | — |
| | (1 | ) | | — |
|
| Net benefit cost | $ | 5 |
| | $ | 9 |
| | $ | 18 |
| | $ | 19 |
|
|
| | | | | | | | | | | | | | | |
| | Three months ended June 30 | | Six months ended June 30 |
| In millions | 2018 | | 2017 | | 2018 | | 2017 |
| Net service cost | $ | 9 |
| | $ | 5 |
| | $ | 19 |
| | $ | 19 |
|
| Interest cost | 1 |
| | — |
| | 2 |
| | 1 |
|
| Amortization of: | | | | | | | |
| Prior service benefit | (1 | ) | | (1 | ) | | (2 | ) | | (2 | ) |
| Actuarial gain | — |
| | (1 | ) | | — |
| | (2 | ) |
| Net benefit cost | $ | 9 |
| | $ | 3 |
| | $ | 19 |
| | $ | 16 |
|
Employer Contributions
The components of pension, postretirement and postemployment expense (benefit), other than net service cost, are included in other (expense), net in the Condensed Consolidated Statements of Operations for
Pension For the three and six months endedJune 30, 2018 and June 30, 2017.
Employer Contributions
Pension For the three and six months endedJune 30, 20182019, NCR contributed $6$5 million and $13$11 million, respectively, to its international pension plans. NCR anticipates contributing an additional $17 million to its international pension plans for a total of $30$28 million in 2018.2019.
Postretirement For the three and six months endedJune 30, 20182019, NCR contributed zero and $1$1 million of contributions, respectively, to its U.S. postretirement plan. NCR anticipates contributing an additional $1 million to its U.S. postretirement plan for a total of $2 million in 20182019.
Postemployment For the three and six months endedJune 30, 20182019, NCR contributed $10$8 million and $18$22 million, respectively, to its postemployment plans. NCR anticipates contributing an additional $42$8 million to its postemployment plans for a total of $60$30 million in 20182019.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
9. COMMITMENTS AND CONTINGENCIES
In the normal course of business, NCR is subject to various proceedings, lawsuits, claims and other matters, including, for example, those that relate to the environment and health and safety, labor and employment, employee benefits, import/export compliance, intellectual property, data privacy and security, product liability, commercial disputes and regulatory compliance, among others. Additionally, NCR is subject to diverse and complex laws and regulations, including those relating to corporate governance, public disclosure and reporting, environmental safety and the discharge of materials into the environment, product safety, import and export compliance, data privacy and security, antitrust and competition, government contracting, anti-corruption, and labor and human resources, which are rapidly changing and subject to many possible changes in the future. Compliance with these laws and regulations, including changes in accounting standards, taxation requirements, and federal securities laws among others, may create a substantial burden on, and substantially increase costs to NCR or could have an impact on NCR's future operating results. The Company has reflected all liabilities when a loss is considered probable and reasonably estimable in the Condensed Consolidated Financial Statements. We do not believe there is a reasonable possibility that losses exceeding amounts already recognized have been incurred, but there can be no assurances that the amounts required to satisfy alleged liabilities from such matters will not impact future operating results. Other than as stated below, the Company does not currently expect to incur material capital expenditures related to such matters. 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, but not limited to the Fox River and Kalamazoo River environmental matters and other matters discussed below, and to comply with applicable laws and regulations, will not exceed the amounts reflected in NCR’s Condensed Consolidated Financial Statements or will not have a material adverse effect on its consolidated results of operations, capital expenditures, competitive position, financial condition or cash flows.
In June 2014, one of the Company’s Brazilian subsidiaries, NCR Manaus, was notified of a Brazilian federal tax assessment of R168R$168 million, or approximately $44 million as of June 30, 2018,2019, including penalties and interest regarding certain federal indirect taxes for 2010 through 2012. The assessment alleges improper importation of certain components into Brazil's free trade zone that would nullify related indirect tax incentives. We haveAt the time of the assessment, we did not recordedrecord an accrual for the assessment as the Company believesbelieved it hashad a valid position regarding indirect taxes in Brazil and, as such, has filed an appeal in 2014. In December 2017, the Company prevailed in this appeal regarding substantially all of the disputed amounts. However, theThe Brazilian federal tax authority has further appealed this dispute to the next procedural level, soin which an intermediate tribunal decided in NCR's favor in August 2018 and issued an opinion to that effect on February 25, 2019. The Brazilian tax authorities appealed one of the dispute is ongoing. The Companymatters included within this decision. In May 2019, the Supreme Administrative Court issued an opinion in favor of NCR finally resolving this matter and canceling any future assessments related to this matter. As such, the estimated the aggregate risk related to this matter to be betweenis zero to approximately $65 million as of June 30, 2018. Although the Company has not recorded an accrual, it is possible that the Company could be required to pay taxes, penalties and interest related to this matter, which could be material to the Company's Condensed Consolidated Financial Statements.2019.
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, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and comparable state statutes. Other than the Fox River matter and the Kalamazoo River matter discussed below, we currently do not anticipate material expenses and liabilities from these environmental matters.
Fox River NCR is one of eight entities that were 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. The other Fox River PRPs that received notices include Appleton Papers Inc. (API; now known as Appvion, Inc.), P.H. Glatfelter Company ("Glatfelter"), Georgia-Pacific Consumer Products LP (GP, successor to Fort James Operating Company), and others. NCR was identified as a PRP because of alleged PCB discharges from two carbonless copy paper manufacturing facilities it previously owned, which were located along the Fox River. NCR sold its facilities in 1978 to API. The parties have also contended that NCR is responsible for PCB discharges from paper mills owned by other companies because NCR carbonless copy paper "broke" was allegedly purchased by those other mills as a raw material.
The United States Environmental Protection Agency (USEPA) and Wisconsin Department of Natural Resources (together, the Governments) developed clean-up plans for the upper and lower parts of the Fox River and for portions of the Bay of Green Bay. On November 13, 2007, the Governments issued a unilateral administrative order (the 2007 Order) under CERCLA to the eight original PRPs, requiring them to perform remedial work under the Governments’ clean-up plan for the lower parts of the river (operable units 2 through 5). In April 2009, NCR and API formed a limited liability company (the LLC), which entered into an
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Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
agreement with an environmental remediation contractor to perform the work at the Fox River site. In-water dredging and remediation under the clean-up plan commenced shortly thereafter.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
NCR and API, along with B.A.T Industries p.l.c. (BAT), share among themselves a portion of the cost of the Fox River clean-up and natural resource damages (NRD) based upon a 1998 agreement (the Cost Sharing Agreement), a 2005 arbitration award (subsequently confirmed as a judgment), and a September 30, 2014 Funding Agreement (the Funding Agreement). The Cost Sharing Agreement and the arbitration resolved disputes that arose out of the Company's 1978 sale of its Fox River facilities to API. The Cost Sharing Agreement and arbitration award resulted in a 45% share for NCR of the first $75 million of such costs (a threshold that was reached in 2008), and a 40% share for amounts in excess of $75 million. The Funding Agreement arose out of a 2012 to 2014 arbitration dispute between NCR and API, and provides for regular, ongoing funding of NCR-incurred Fox River remediation costs via contributions, made to a new limited liability corporation created by the Funding Agreement, by BAT, API and, for 2014, API's indemnitor Windward Prospects. The Funding Agreement creates an obligation on BAT and API to fund 50% of NCR’s Fox River remediation costs from October 1, 2014 forward; (API’s Fox River-related obligations under the Funding Agreement were fully satisfied in 2016); the Funding Agreement also provides NCR contractual avenues for payment of, via direct and third-party sources, (1) the difference between BAT’s and API’s 60% obligation under the Cost Sharing Agreement and arbitration award on the one hand and their ongoing (since September 2014) 50% payments under the Funding Agreement on the other, as well as (2) the difference between the amount NCR received under the Funding Agreement and the amount owed to it under the Cost Sharing Agreement and arbitration award for the period from April 2012 through September 2014. As of June 30, 20182019 and December 31, 2017,2018, the receivable under the Funding Agreement was approximately $40$46 million and $38$45 million, respectively, and was included in other assets in the Condensed Consolidated Balance Sheet. The Company anticipates that it will collect sums related to the receivable in 20192020 or later, likely after the remediation efforts related to the Fox River matter, described below, are complete. This receivable is not taken into account in calculating the Company’s Fox River net reserve.
The Company's litigations relating to contribution and enforcement claims concerning the Fox River have largely been concluded. A proposed consent decree settlement (the CD settlement) with respect to the contribution action (a case originally filed by NCR and API) and the government enforcement action (a case originally filed by the federal and state governments against several PRPs, including the Company) was successfully negotiated by NCR and the federal and state governments and was approved on August 22, 2017 by the federal district court in Wisconsin whichthat had been presiding over those cases, on August 22, 2017.cases. A final order of dismissal as to the Company in the contribution and government enforcement actions was subsequently entered; one party, Glatfelter, hashad appealed the approval of the CD settlement. ThatOn January 3, 2019, the United States lodged a proposed consent decree with the Wisconsin court, reflecting a settlement reached by the United States, Wisconsin and Glatfelter with respect to Glatfelter’s Fox River liability under the government enforcement action; a component of that settlement was withdrawal of Glatfelter’s appeal remains pending.opposing the Company’s CD settlement. On March 14, 2019, the Wisconsin court approved the Glatfelter consent decree, and on April 3, 2019, Glatfelter's appeal was dismissed.
The CD settlement if approved on appeal, is now expected to resolve the remaining Fox River-related contribution and enforcement claims against the Company. The key components of the approved CD settlement include (1) the Company’s commitment to complete the remediation of the Fox River, which is now expected to be completed in 2019 or 2020; (2) the Company’s conditional agreement to waive its contribution claims against the two remaining defendants in the case, GP and Glatfelter; (3) the Company’s agreement not to appeal the trial court’s decision on divisibility of harm; (4) the Governments’ agreement to include in the settlement so-called “contribution protection” in the Company’s favor as to GP’s and Glatfelter’s contribution claims against the Company, the effect of which will be to extinguish those claims; (5) the Governments’ agreement not to pursue the Company for the Governments’ past oversight costs; and (6) the Governments’ agreement to exercise prosecutorial discretion in pursuing other parties for future oversight costs and long-term monitoring and maintenance, with the Company retaining so-called “backstop” liability in the event that the other parties fail to pay future oversight costs or to perform long-term monitoring and maintenance. Additionally, although certain state law claims by GP and Glatfelter against the Company may not be affected directly by the CD settlement, the CD settlement provides that the Company’s contribution claims against those two parties will revive if those parties attempt to assert any claims against the Company relating to the Fox River, including any state law claims.
In the quarter ending September 30, 2017, the remediation general contractor commenced an arbitration against the LLC, in a dispute over contract interpretation. That disputeThe hearing on this matter was completed in June 2019. The parties expect to submit post-trial briefs in August 2019 and at that time the case will be submitted to the arbitration panel. The amounts claimed by the contractor range from approximately $46 million to approximately $53 million; the Company disputed the claims and contested them vigorously during the hearing. To the extent, if any, that the contractor’s claims are successful, the Company’s indemnitors and co-obligors, described below, would be expected to bear responsibility for the majority of any award, with the Company’s share of approximately one-fourth of such award. A decision from the arbitration panel is scheduled for a hearing in mid-2019.not expected until at least the fourth quarter of 2019.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
With respect to the Company’s prior dispute with API, which was generally superseded by the Funding Agreement, the Company received timely payments as they came due under the Funding Agreement. Although API filed for bankruptcy protection in October 2017, it had made all of the payments to the Company in connection with the Fox River that are required of it by the Funding Agreement.
NCR's eventual remediation liability, followed by long-term monitoring expected to be performed by others, will depend on a number of factors. In establishing the reserve, NCR attempts to estimate a range of reasonably possible outcomes for each of these factors, although each range is itself uncertain. NCR uses its best estimate within the range, if that is possible. Where there is a range of equally possible outcomes, and there is no amount within that range that is considered to be a better estimate than any other amount, NCR uses the low end of the range. The significant factors include: (1) the total remaining clean-up costs, in-river remediation is expected to be completed in 2019, depending on the outcome of certain requests made by the governments concerning additional dredging, the expected cost impact of which is expected to be neutral or non-material to the Company, including long-term monitoring following completion of the clean-up, and what parties are assigned to discharge the post-clean-up tasks (as noted, the Company no longer expects to bear long-term monitoring costs); (2) total NRD for the site and the share that NCR will bear (which is now resolved as to the Company); (3) the share of clean-up costs that NCR will bear (which is resolved under the CD settlement); (4) NCR's transaction and litigation costs to defend itself in this matter (with remaining litigation believedexpected to be
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
limited to the Glatfelter appeal and the claim brought by the general contractor, both referenced above)contractor); and (5) the share of NCR's payments that BAT will bear (which is governed by the Cost Sharing Agreement and the Funding Agreement, BAT has made all of the payments requested of it, and as discussed above; API is in bankruptcy and is not presumed likely to bear further shares of NCR’s payments). With respect to NRD, in connection with a certain settlement entered into by other PRPs in 2015, the Government withdrew the NRD claims it had prosecuted on behalf of NRD trustees, including those NRD claims asserted against the Company.
Calculation of the Company's Fox River reserve is subject to several complexities, and it is possible there could be additional changes to some elements of the reserve over upcoming periods, although the Company is unable to predict or estimate such changes at this time. There can be no assurance that the clean-up and related expenditures and liabilities will not have a material effect on NCR's capital expenditures, earnings, financial condition, cash flows, or competitive position. As of June 30, 2018,2019, the gross reserve for the Fox River matter was approximately $28$14 million, compared to $36$21 million as of December 31, 2017.2018. As of June 30, 2018,2019, the net reserve for the Fox River matter was approximately $27$11 million, compared to $35$17 million as of December 31, 2017.2018. The change in the net reserve is due to payments for clean-up activities and litigation costs. NCR contributes to the LLC to fund remediation activities and generally, by contract, has funded certain amounts of remediation expenses in advance. As of June 30, 20182019 and December 31, 2017,2018, approximately zero remained from this funding. NCR's reserve for the Fox River matter is reduced as the LLC makes payments to the remediation contractor and other vendors with respect to remediation activities.
Under a 1996 agreement, AT&T Corp. (AT&T) and Nokia (as the successor to Lucent Technologies and Alcatel-Lucent USA) are responsible severally (not jointly) for indemnifying NCR for certain portions of the amounts paid by NCR for the Fox River matter over a defined threshold and subject to certain offsets. (The agreement governs certain aspects of AT&T's divestiture of NCR and of what was then known as Lucent Technologies.) Those companies have made the payments requested of them by the Company on an ongoing basis.
Kalamazoo River In November 2010, USEPA issued a "general notice letter" to NCR with respect to the Allied Paper, Inc./Portage Creek/Kalamazoo River Superfund Site (Kalamazoo River site) in Michigan. Three other companies - International Paper, Mead Corporation, and Consumers Energy - also received general notice letters at or about the same time. USEPA asserts that the site is contaminated by various substances, primarily PCBs, as a result of discharges by various paper mills located along the river. USEPA does not claim that the Company made direct discharges into the Kalamazoo River, and NCR never had facilities at or near the Kalamazoo River site, but USEPA indicated that "NCR may be liable under Section 107 of CERCLA ... as an arranger, who by contract or agreement, arranged for the disposal, treatment and/or transportation of hazardous substances at the Site." USEPA stated that it "may issue special notice letters to [NCR] and other PRPs for future RI/FS [remedial investigation / feasibility studies] and RD/RA [remedial design / remedial action] negotiations."
In connection with the Kalamazoo River site, in December 2010 the Company, along with two other defendants, was sued in federal court by three Georgia-Pacific (GP) affiliate corporations in a private-party contribution and cost recovery action for alleged pollution. The suit, pending in Michigan, asks that the Company and the other defendants to pay a "fair portion" of these companies’ costs. Various removal and remedial actions remain to be decided upon and performed at the Kalamazoo River site, the costs for which generally have not yet been determined; in 2017 Records of Decisions were issued for two parts of the river, and in 2018 such a decision was issued for another part of the river, but such decisions for the majority of the work are expected to be made only over the next several years. The suit alleges that the Company is liable to the GP entities as an "arranger" under CERCLA. The initial phase of the case was tried in a Michigan federal court in February 2013; on September 26, 2013 the court issued a decision that held NCR was liable as an “arranger” as of at least March 1969. (PCB-containing carbonless copy paper was produced
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
from approximately 1954 to April 1971, and the majority of contamination at the Kalamazoo River site had occurred prior to 1969). NCR preserved its right to appeal the September 2013 decision.
In the 2013 decision the Court did not determine NCR’s share of the overall liability. Relative shares of liability for the four companies were tried to the court in a subsequent phase of the case in December 2015. In a ruling issued on March 29, 2018, the court addressed responsibility for the costs that GP had incurred in the past, totaling to approximately $50 million;million (GP had sought approximately $105 million, but $55 million of those claims were removed by the court upon motions filed by the Company and other parties); NCR and GP were each assigned a 40% share of those costs, and the other two companies were assigned 15% and 5% as their allocations. The court entered a judgment in the case on June 19, 2018, in which it indicated that it would not allocate future costs, but would enter a declaratory judgment that the four companies together had responsibility for future costs, in amounts and shares to be determined. Cross-proceedings have been commenced to obtain recoveries from the other parties pursuant to the judgment; those proceedings are stayed pending the appeal referenced below.
NCR expects to have claims against BAT and API under the Funding Agreement, discussed above for the Kalamazoo River remediation expenses. API filed for bankruptcy protection in October 2017, and thus payment of its potential share under the Funding Agreement for so-called “future sites,” which would include the Kalamazoo River site, may be at risk, but as liability under the Cost Sharing Agreement and the Funding Agreement is joint and several, the bankruptcy is not anticipated to affect the Company’s ability to seek that amount from BAT. The Company will also have indemnity or reimbursement claims against AT&T and Nokia under the arrangement discussed above in connection with the Fox River matter after expenses have met a contractual threshold set out in the 1996 agreement referenced above in the Fox River discussion.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
In light of the 2018 decision, the Company has increased its reserve for the Kalamazoo River matter toduring 2018. The total reserve for Kalamazoo was $46 million as of June 30, 2019 as compared to $47 million as of December 31, 2018; asthat figure is reported on a basis that is net of expected contributions from the Company's co-obligors and, if and when the applicable threshold is reached, its indemnitors. As many aspects of the costs of remediation will not be determined for several years (and thus the high end of a range of possible costs for many areas of the site cannot be quantified at this time). The, the Company has made what it considers to be reasonable estimates of the low end of a range for such costs where remedies are identified, and/or of the costs of investigations and studies for areas of the river where remedies have not yet been determined, and the reserve is informed by those estimates. The extent of NCR’s potential liability remains subject to many uncertainties, particularly inasmuch as remedy decisions and cost estimates will not be generated until times in the future and as most of the work to be performed will not take place primarily if not exclusively inuntil the 2020s.2020s and 2030s. Under other assumptions or estimates for possible costs of remediation, which the Company does not at this point consider to be reasonably estimable or verifiable, it is possible that the chargereserve the Company has taken to discontinued operations reflected in this paragraph could more than approximately double.double the reflected reserve.
In July 2018 the Company appealed to the United States Court of Appeals for the SeventhSixth Circuit both the 2013 court decision, which it believes is in conflict with a decision from the Fox River trial court as to Operable Unit 1 of that site and an affirmance of that decision from the Court of Appeals for the SixthSeventh Circuit, and the 2018 court decision, on various legal grounds. The Company filed a bond to stay any execution of the judgment pending the appeal, and its application for a stay was approved by the court and remains stayed as of June 2019.
Environmental-Related Insurance Recoveries In connection with the Fox River and other environmental sites, through June 30, 2018,2019, NCR has received a combined gross total of approximately $202 million in settlements reached with various of its principal insurance carriers. Portions of many of these settlements agreed in the 2010 through 2013 timeframe are payable to a law firm that litigated the claims on the Company's behalf. Some of the settlements cover not only the Fox River but also other environmental sites; some are limited to either the Fox River or the Kalamazoo River site. Some of the settlements are directed to defense costs and some are directed to indemnity costs.indemnity; some settlements cover both defense costs and indemnity. The Company does not anticipate thethat further material insurance recoveries specific to Kalamazoo River remediation costs will be available to it, owing to considerations under applicable Michigan law. Claims with respect to Kalamazoo River defense costs have now been settled, with the amounts of those settlements included in the sum reported above.
Environmental Remediation Estimates 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.estimable in accordance with accounting guidance, where liabilities are not expected to be quantifiable or estimable for a period of years, the estimated costs of investigating those liabilities are recorded as a component of the reserve for that particular site. Provisions for estimated losses from environmental restoration and remediation are, depending on the site, based generally on internal and third-party environmental studies, estimates as to the number and participation level of other PRPs, the extent of contamination, estimated amounts for attorney and other fees, and the nature of required clean-up and restoration actions. Reserves are adjusted as further information develops or circumstances change. Management expects that the amounts reserved 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 Condensed Consolidated Financial Statements are
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
the estimated gross undiscounted amounts of such liabilities, without deductions for indemnity insurance, third-party indemnity claims or recoveries from other PRPs, except as qualified in the following sentences. In those cases where insurance carriers or third-party indemnitors have agreed to pay any amounts and management believes that collectability of such amounts is probable, the amounts are recorded in the Condensed Consolidated Financial Statements. For the Fox River and Kalamazoo River sites, as described above, assets relating to the AT&T and Nokia indemnities and to the BAT obligations are recorded as payment is supported by contractual agreements, public filings and/or payment history.
Guarantees and Product Warranties In the ordinary course of business, NCR may issue performance guarantees on behalf of its subsidiaries to certain of its customers and other parties. Some of those guarantees may be backed by standby letters of credit, surety bonds, or similar instruments. In general, under the guarantees, NCR would be obligated to perform, or cause performance, over the term of the underlying contract in the event of an unexcused, uncured breach by its subsidiary, or some other specified triggering event, in each case as defined by the applicable guarantee. NCR believes the likelihood of having to perform under any such guarantee is remote. As of June 30, 20182019 and December 31, 2017,2018, NCR had no material obligations related to such guarantees, and therefore its Condensed Consolidated Financial Statements do not have any associated liability balance.
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 historical factors, such as labor rates, average repair time, travel time, number of service calls per machine and cost of replacement parts. When a sale is consummated, the total customer revenue is recognized, provided that all revenue recognition criteria are otherwise satisfied, and the associated warranty liability is recorded using pre-established warranty percentages for the respective product classes.
From time to time, product design or quality corrections are accomplished through modification programs. When identified, associated costs of labor and parts for such programs are estimated and accrued as part of the warranty reserve.
The Company recorded the activity related to the warranty reserve for the six months ended June 30 as follows:
24 |
| | | | | | | |
| In millions | 2019 | | 2018 |
| Warranty reserve liability | | | |
| Beginning balance as of January 1 | $ | 26 |
| | $ | 26 |
|
| Accruals for warranties issued | 16 |
| | 12 |
|
| Settlements (in cash or in kind) | (20 | ) | | (17 | ) |
| Ending balance as of June 30 | $ | 22 |
| | $ | 21 |
|
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Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
|
| | | | | | | |
| In millions | 2018 | | 2017 |
| Warranty reserve liability | | | |
| Beginning balance as of January 1 | $ | 26 |
| | $ | 27 |
|
| Accruals for warranties issued | 12 |
| | 18 |
|
| Settlements (in cash or in kind) | (17 | ) | | (21 | ) |
| Ending balance as of June 30 | $ | 21 |
| | $ | 24 |
|
In addition, NCR provides its customers with certain indemnification rights. In general, NCR agrees to indemnify the customer if a third party asserts patent or other infringement on the part of its customers for its use of the Company’s products subject to certain conditions that are generally standard within the Company’s industries. On limited occasions the Company will undertake additional indemnification obligations for business reasons. From time to time, NCR also enters into agreements in connection with its acquisition and divestiture activities that include indemnification obligations by the Company. The fair value of these indemnification obligations is not readily determinable due to the conditional nature of the Company’s potential obligations and the specific facts and circumstances involved with each particular agreement. The Company has not recorded a liability in connection with these indemnifications, and no current indemnification instance is material to the Company’s financial position. Historically, any payments made by the Company under these types of agreements have not had a material effect on the Company’s consolidated financial condition, results of operations or cash flows.
10. SERIES A CONVERTIBLE PREFERRED STOCK
On December 4, 2015, NCR issued 820,000 shares of Series A Convertible Preferred Stock to certain entities affiliated with Thethe Blackstone Group L.P. (collectively, Blackstone) for an aggregate purchase price of $820 million, or $1,000 per share, pursuant to an Investment Agreement between the Company and Blackstone, dated November 11, 2015. In connection with the issuance of the Series A Convertible Preferred Stock, the Company incurred direct and incremental expenses of $26 million, including financial advisory fees, closing costs, legal expenses and other offering-related expenses. These direct and incremental expenses originally reduced the Series A Convertible Preferred Stock, and will be accreted through retained earnings as a deemed dividend from the date of issuance through the first possible known redemption date, March 16, 2024. Holders of Series A Convertible Preferred Stock are entitled to a cumulative dividend at the rate of 5.5% per annum, payable quarterly in arrears. During the three months ended June 30, 20182019 and 2017,2018, the Company paid dividends-in-kind of $12 million and $11$12 million, respectively, associated with the Series A Convertible Preferred Stock. During the six months ended June 30, 20182019 and 2017,2018, the Company paid dividends-in-kinddividends-
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Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
in-kind of $24 million and $23 million, respectively, associated with the Series A Convertible Preferred Stock. As of June 30, 20182019 and December 31, 2017,2018, the Company had accrued dividends of $3 million, respectively, associated with the Series A Convertible Preferred Stock. There were no cash dividends declared during the three and six months ended June 30, 20182019 or 2017.2018.
The Series A Convertible Preferred Stock is convertible at the option of the holders at any time into shares of common stock at a conversion price of $30.00 per share, or a conversion rate of 33.333 shares of common stock per share of Series A Convertible Preferred Stock.
Under the Investment Agreement, Blackstone agreed not to sell or otherwise transfer its shares of Series A Convertible Preferred Stock (or any shares of common stock issued upon conversion thereof) without the Company’s consent until June 4, 2017. In March 2017, we provided Blackstone with an early release from this lock-up, allowing Blackstone to sell approximately 49% of its shares of Series A Convertible Preferred Stock, and in return, Blackstone agreed to amend the Investment Agreement to extend the lock-up on the remaining 51% of its shares of Series A Convertible Preferred Stock for six months until December 1, 2017.
In connection with the early release of the lock-up, Blackstone offered for sale 342,000 shares of Series A Convertible Preferred Stock in an underwritten public offering. In addition, Blackstone converted 90,000 shares of Series A Convertible Preferred Stock into shares of our common stock and we repurchased those shares of common stock for $48.47 per share. The underwritten offering and the stock repurchase were consummated on March 17, 2017.
The repurchase of the common shares immediately upon conversion is considered a redemption of the related preferred shares. As a result, the excess of the fair value of consideration transferred over the carrying value, of $58 million, was included as a deemed dividend in adjusting the income from common stockholders in calculating earnings per share for the six months ended June 30, 2017. Additionally, we determined that the changes to the lock-up period were considered a modification of the Series A Convertible Preferred Stock. The impact of the modification, calculated as the difference in the fair value immediately before and immediately after the changes, of $4 million, was included as a deemed dividend in adjusting the income from common stockholders in calculating earnings per share for the six months ended June 30, 2017. This adjustment was recorded as an increase
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Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
to the Series A Convertible Preferred Shares and will reduce the accretion of the direct and incremental expenses associated with the original offering as described above. Refer to Note 12. Earnings per Share for additional discussion.
As of June 30, 20182019 and December 31, 2017,2018, the maximum number of common shares that could be required to be issued upon conversion of the outstanding shares of Series A Convertible Preferred Stock was 28.229.8 million and 27.529.0 million shares, respectively.
11. STOCKHOLDER'S EQUITY
Changes in stockholders' equity in the six months ended June 30, 2018 were as follows:
|
| | | | | | | | | |
| in millions | NCR Stockholders' Equity | Non-Redeemable Noncontrolling Interests in Subsidiaries | Total Stockholders' Equity |
| Balance at December 31, 2017 | $ | 719 |
| $ | 3 |
| $ | 722 |
|
| Adoption of accounting standard updates | 15 |
| — |
| 15 |
|
| Balance at January 1, 2018 | 734 |
| 3 |
| 737 |
|
| Net loss | (125 | ) | — |
| (125 | ) |
| Other comprehensive loss | (26 | ) | — |
| (26 | ) |
| Repurchases of Company common stock | (210 | ) | — |
| (210 | ) |
| Series A Convertible Preferred Stock dividends | (24 | ) | — |
| (24 | ) |
| Employee stock compensation expense | 40 |
| — |
| 40 |
|
| Tax witholdings related to vesting of stock based awards | (29 | ) | — |
| (29 | ) |
| Proceeds from employee stock plans | 11 |
| — |
| 11 |
|
| Balance at June 30, 2018 | $ | 371 |
| $ | 3 |
| $ | 374 |
|
During the six months ended June 30, 2018, the Company repurchased 6.1 million shares of its common stock for $210 million. Upon repurchase, the shares were retired. Refer to Note 1. Basis of Presentation and Summary of Significant Accounting Policies for further discussion of the adoption of accounting standard updates.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
12. EARNINGS PER SHARE
Basic earnings per share (EPS) is calculated by dividing net income or loss attributable to NCR, less any dividends (declared or cumulative undeclared), deemed dividends, accretion or decretion, redemption or induced conversion on our Series A Convertible Preferred Stock, by the weighted average number of shares outstanding during the period.
In computing diluted EPS, we adjust the numerator used in the basic EPS computation, subject to anti-dilution requirements, to add back the dividends (declared or cumulative undeclared), deemed dividends, accretion or decretion, redemption or induced conversion on our Series A Convertible Preferred Stock. We adjust the denominator used in the basic EPS computation, subject to anti-dilution requirements, to include the dilution from potential shares related to the Series A Convertible Preferred Stock and stock-based compensation plans.
The holders of Series A Convertible Preferred Stock, unvested restricted stock units and stock options do not have nonforfeitable rights to common stock dividends or common stock dividend equivalents. Accordingly, the Series A Convertible Preferred Stock, unvested restricted stock units and stock options do not qualify as participating securities. See Note 7. Stock Compensation Plans for share information on NCR’s stock compensation plans.
The components of basic earnings per share are as follows:
|
| | | | | | | | | | | | | | | | |
| In millions, except per share amounts | | Three months ended June 30 | | Six months ended June 30 |
| | 2018 | | 2017 | | 2018 | | 2017 |
| Numerator | | | | | | | | |
| (Loss) income from continuing operations | | $ | (143 | ) | | $ | 97 |
| | $ | (88 | ) | | $ | 154 |
|
| Series A Convertible Preferred Stock dividends | | (12 | ) | | (12 | ) | | (24 | ) | | (24 | ) |
| Deemed dividend on modification of Series A Convertible Preferred Stock | | — |
| | — |
| | — |
| | (4 | ) |
| Deemed dividend on Series A Convertible Preferred Stock redemption | | — |
| | — |
| | — |
| | (58 | ) |
| Net (loss) income from continuing operations attributable to NCR common stockholders | | (155 | ) | | 85 |
| | (112 | ) | | 68 |
|
| (Loss) income from discontinued operations, net of tax | | (2 | ) | | 5 |
| | (37 | ) | | 5 |
|
| Net (loss) income attributable to NCR common stockholders | | $ | (157 | ) | | $ | 90 |
| | $ | (149 | ) | | $ | 73 |
|
| | | | | | | | | |
| Denominator | | | | | | | | |
| Basic weighted average number of shares outstanding | | 117.9 |
| | 121.4 |
| | 118.6 |
| | 122.1 |
|
| | | | | | | | | |
| Basic (loss) earnings per share: | | | | | | | | |
| From continuing operations | | $ | (1.31 | ) | | $ | 0.70 |
| | $ | (0.94 | ) | | $ | 0.56 |
|
| From discontinued operations | | (0.02 | ) | | 0.04 |
| | (0.32 | ) | | 0.04 |
|
| Total basic (loss) earnings per share | | $ | (1.33 | ) | | $ | 0.74 |
| | $ | (1.26 | ) | | $ | 0.60 |
|
|
| | | | | | | | | | | | | | | | |
| In millions, except per share amounts | | Three months ended June 30 | | Six months ended June 30 |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Numerator | | | | | | | | |
| Income from continuing operations | | $ | 88 |
| | $ | (143 | ) | | $ | 125 |
| | $ | (88 | ) |
| Series A Convertible Preferred Stock dividends | | (12 | ) | | (12 | ) | | (25 | ) | | (24 | ) |
| Income from continuing operations attributable to NCR common stockholders | | 76 |
| | (155 | ) | | 100 |
| | (112 | ) |
| Loss from discontinued operations, net of tax | | — |
| | (2 | ) | | — |
| | (37 | ) |
| Net income attributable to NCR common stockholders | | $ | 76 |
| | $ | (157 | ) | | $ | 100 |
| | $ | (149 | ) |
| | | | | | | | | |
| Denominator | | | | | | | | |
| Basic weighted average number of shares outstanding | | 120.2 |
| | 117.9 |
| | 119.8 |
| | 118.6 |
|
| | | | | | | | | |
| Basic earnings per share: | | | | | | | | |
| From continuing operations | | $ | 0.63 |
| | $ | (1.31 | ) | | $ | 0.83 |
| | $ | (0.94 | ) |
| From discontinued operations | | — |
| | (0.02 | ) | | — |
| | (0.32 | ) |
| Total basic earnings per share | | $ | 0.63 |
| | $ | (1.33 | ) | | $ | 0.83 |
| | $ | (1.26 | ) |
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
The components of diluted earnings per share are as follows:
| | | In millions, except per share amounts | | Three months ended June 30 | | Six months ended June 30 | | Three months ended June 30 | | Six months ended June 30 |
| | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
| Numerator | | | | | | | | | | | | | | | | |
| (Loss) income from continuing operations | | $ | (143 | ) | | $ | 97 |
| | $ | (88 | ) | | $ | 154 |
| |
| Income from continuing operations | | | $ | 88 |
| | $ | (143 | ) | | $ | 125 |
| | $ | (88 | ) |
| Series A Convertible Preferred Stock dividends | | (12 | ) | | — |
| | (24 | ) | | (24 | ) | | — |
| | (12 | ) | | (25 | ) | | (24 | ) |
| Deemed dividend on modification of Series A Convertible Preferred Stock | | — |
| | — |
| | — |
| | (4 | ) | |
| Deemed dividend on Series A Convertible Preferred Stock redemption | | — |
| | — |
| | — |
| | (58 | ) | |
| Net (loss) income from continuing operations attributable to NCR common stockholders | | (155 | ) | | 97 |
| | (112 | ) | | 68 |
| |
| (Loss) income from discontinued operations, net of tax | | (2 | ) | | 5 |
| | (37 | ) | | 5 |
| |
| Net (loss) income attributable to NCR common stockholders | | $ | (157 | ) | | $ | 102 |
| | $ | (149 | ) | | $ | 73 |
| |
| Income from continuing operations attributable to NCR common stockholders | | | 88 |
| | (155 | ) | | 100 |
| | (112 | ) |
| Loss from discontinued operations, net of tax | | | — |
| | (2 | ) | | — |
| | (37 | ) |
| Net income attributable to NCR common stockholders | | | $ | 88 |
| | $ | (157 | ) | | $ | 100 |
| | $ | (149 | ) |
| | | | | | | | | | | | | | | | | |
| Basic weighted average number of shares outstanding | | 117.9 |
| | 121.4 |
| | 118.6 |
| | 122.1 |
| | 120.2 |
| | 117.9 |
| | 119.8 |
| | 118.6 |
|
| Dilutive effect of as-if converted Series A Convertible Preferred Stock | | — |
| | 26.6 |
| | — |
| | — |
| | 29.6 |
| | — |
| | — |
| | — |
|
| Dilutive effect of restricted stock units | | — |
| | 4.7 |
| | — |
| | 5.1 |
| | 2.9 |
| | — |
| | 3.2 |
| | — |
|
| Denominator | | 117.9 |
| | 152.7 |
| | 118.6 |
| | 127.2 |
| | 152.7 |
| | 117.9 |
| | 123.0 |
| | 118.6 |
|
| | | | | | | | | | | | | | | | | |
| Diluted (loss) earnings per share: | | | | | | | | | |
| Diluted earnings per share: | | | | | | | | | |
| From continuing operations | | $ | (1.31 | ) | | $ | 0.64 |
| | $ | (0.94 | ) | | $ | 0.53 |
| | $ | 0.58 |
| | $ | (1.31 | ) | | $ | 0.81 |
| | $ | (0.94 | ) |
| From discontinued operations | | (0.02 | ) | | 0.03 |
| | (0.32 | ) | | 0.04 |
| | — |
| | (0.02 | ) | | — |
| | (0.32 | ) |
| Total diluted (loss) earnings per share | | $ | (1.33 | ) | | $ | 0.67 |
| | $ | (1.26 | ) | | $ | 0.57 |
| |
| Total diluted earnings per share | | | $ | 0.58 |
| | $ | (1.33 | ) | | $ | 0.81 |
| | $ | (1.26 | ) |
For the three months ended June 30, 2019, it was more dilutive to assume the Series A Convertible Preferred Stock was converted to common stock and therefore the weighted average outstanding shares of common stock were adjusted by the as-if converted Series A Convertible Preferred Stock. For the three months ended June 30, 2019, weighted average restricted stock units and stock options of 4.7 million were excluded from the diluted share count because their effect would have been anti-dilutive.
For the three months ended June 30, 2018, shares related to the as-if converted Series A Convertible Preferred Stock of 28.1 million were excluded from the diluted share count because their effect would have been anti-dilutive. TheFor the three months ended June 30, 2018, weighted shares related to as-if converted Series A Convertible Preferred Stock excluded were 28.1 million. Weighted average restricted stock units and stock options of 2.3 million were excluded from the diluted share count because their effect would have been anti-dilutive.
For the threesix months ended June 30, 2017, it was more dilutive2019, shares related to assume the Series A Convertible Preferred Stock was converted to common stock and therefore weighted average outstanding shares of common stock were adjusted by the as-if converted Series A Convertible Preferred Stock andof 29.4 million were excluded from the diluted earnings per share was calculated excludingcount because their effect would have been anti-dilutive. For the quarterly dividends.six months ended June 30, 2019, weighted average restricted stock units and stock options of 5.1 million were excluded from the diluted share count because their effect would have been anti-dilutive.
For the six months ended June 30, 2018, shares related to the as-if converted Series A Convertible Preferred Stock were excluded from the diluted share count because their effect would have been anti-dilutive. The weighted shares related to as-if converted Series A Convertible Preferred Stock excluded wereof 27.9 million. Weighted average restricted stock units of 2.3 million were excluded from the diluted share count because their effect would have been anti-dilutive
For the six months ended June 30, 2017, shares related to the as-if converted Series A Convertible Preferred Stock were excluded from the diluted share count because their effect would have been anti-dilutive. The weighted shares related to as-if converted Series A Convertible Preferred Stock, considering the existing and redeemed shares, excluded were 27.7 million. Weighted average restricted stock units of 0.5 million were excluded from the diluted share count because their effect would have been anti-dilutive. For the six months ended June 30, 2018, weighted average restricted stock units and stock options of 2.3 million were excluded from the diluted share count because their effect would have been anti-dilutive.
13.12. DERIVATIVES AND HEDGING INSTRUMENTS
NCR is exposed to risks associated with changes in foreign currency exchange rates and interest rates. NCR utilizes a variety of measures to monitor and manage these risks, including the use of derivative financial instruments. NCR has exposure to approximately 50 functional currencies. Since a substantial portion of our operations and revenue occur outside the U.S., and in
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
currencies other than the U.S. Dollar, our results can be significantly impacted, both positively and negatively, by changes in foreign currency exchange rates.
Foreign Currency Exchange Risk
The accounting guidance for derivatives and hedging requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the Condensed Consolidated Balance Sheets. The Company designates foreign exchange contracts as cash flow hedges of forecasted transactions when they are determined to be highly effective at inception.
Our risk management strategy includes hedging, on behalf of certain subsidiaries, a portion of our forecasted, non-functional currency denominated cash flows for a period of up to 15 months. As a result, some 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. The amount we hedge and the duration of hedge contracts may vary significantly. In the longer term (greater than 15 months), the subsidiaries are still subject to the effect of translating the functional currency results to U.S. Dollars. 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 and option contracts. This is primarily done through the hedging of foreign currency denominated inter-company inventory purchases by NCR’s marketing units and the foreign currency denominated inputs to our manufacturing units. The related foreign exchange contracts are designated as highly effective cash flow hedges. The gains or losses on these hedges are deferred in accumulated other comprehensive income (AOCI) and reclassified to income when the underlying hedged transaction is recorded in earnings. As of June 30, 2018,2019, the balance in AOCI related to foreign exchange derivative transactions was a gain of $3$1 million, net of tax. The gains or losses from derivative contracts related to inventory purchases are recorded in cost of products when the inventory is sold to an unrelated third party.
We also utilize foreign exchange contracts to hedge our exposure of assets and liabilities denominated in non-functional currencies. We recognize the gains and losses on these types of hedges in earnings as exchange rates change. We do not enter into hedges for speculative purposes.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
The following tables provide information on the location and amounts of derivative fair values in the Condensed Consolidated Balance Sheets:
|
| | | | | | | | | | | | | | | | | | | |
| | Fair Values of Derivative Instruments |
| | June 30, 2018 |
| In millions | Balance Sheet Location | | Notional Amount | | Fair Value | | Balance Sheet Location | | Notional Amount | | Fair Value |
| Derivatives designated as hedging instruments | | | | | | | | | | | |
| Foreign exchange contracts | Other current assets | | $ | 139 |
| | $ | 5 |
| | Other current liabilities | | $ | — |
| | $ | — |
|
| Derivatives not designated as hedging instruments | | | | | | | | | | | |
| Foreign exchange contracts | Other current assets | | $ | 164 |
| | $ | 1 |
| | Other current liabilities | | $ | 206 |
| | $ | 1 |
|
| Total derivatives | | | | | $ | 6 |
| | | | | | $ | 1 |
|
| | | | | | | | | | | | |
| | Fair Values of Derivative Instruments |
| | December 31, 2017 |
| In millions | Balance Sheet Location | | Notional Amount | | Fair Value | | Balance Sheet Location | | Notional Amount | | Fair Value |
| Derivatives designated as hedging instruments | | | | | | | | | | | |
| Foreign exchange contracts | Other current assets | | $ | 104 |
| | $ | — |
| | Other current liabilities | | $ | 142 |
| | $ | 1 |
|
| Derivatives not designated as hedging instruments | | | | | | | | | | | |
| Foreign exchange contracts | Other current assets | | $ | 101 |
| | $ | 1 |
| | Other current liabilities | | $ | 292 |
| | $ | 1 |
|
| Total derivatives | | | | | $ | 1 |
| | | | | | $ | 2 |
|
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
|
| | | | | | | | | | | | | | | | | | | |
| | Fair Values of Derivative Instruments |
| | June 30, 2019 |
| In millions | Balance Sheet Location | | Notional Amount | | Fair Value | | Balance Sheet Location | | Notional Amount | | Fair Value |
| Derivatives designated as hedging instruments | | | | | | | | | | | |
| Foreign exchange contracts | Other current assets | | $ | 89 |
| | $ | 3 |
| | Other current liabilities | | $ | — |
| | $ | — |
|
| Total derivatives designated as hedging instruments | | | | | $ | 3 |
| | | | | | $ | — |
|
| Derivatives not designated as hedging instruments | | | | | | | | | | | |
| Foreign exchange contracts | Other current assets | | $ | 154 |
| | $ | — |
| | Other current liabilities | | $ | 280 |
| | $ | 1 |
|
| Total derivatives not designated as hedging instruments | | | | | $ | — |
| | | | | | $ | 1 |
|
| Total derivatives | | | | | $ | 3 |
| | | | | | $ | 1 |
|
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Fair Values of Derivative Instruments |
| | December 31, 2018 |
| In millions | Balance Sheet Location | | Notional Amount | | Fair Value | | Balance Sheet Location | | Notional Amount | | Fair Value |
| Derivatives designated as hedging instruments | | | | | | | | | | | |
| Foreign exchange contracts | Other current assets | | $ | 169 |
| | $ | 4 |
| | Other current liabilities | | $ | — |
| | $ | — |
|
| Total derivatives designated as hedging instruments | | | | | $ | 4 |
| | | | | | $ | — |
|
| Derivatives not designated as hedging instruments | | | | | | | | | | | |
| Foreign exchange contracts | Other current assets | | $ | 219 |
| | $ | 1 |
| | Other current liabilities | | $ | 157 |
| | $ | 1 |
|
| Total derivatives not designated as hedging instruments | | | | | $ | 1 |
| | | | | | $ | 1 |
|
| Total derivatives | | | | | $ | 5 |
| | | | | | $ | 1 |
|
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
The effects of derivative instruments on the Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Comprehensive Income for the three and six months endedJune 30, 20182019 and 20172018 were as follows:
| | | In millions | Amount of Gain (Loss) Recognized in Other Comprehensive Income (OCI) on Derivative | | | | Amount of (Gain) Loss Reclassified from AOCI into the Condensed Consolidated Statement of Operations | Amount of Gain (Loss) Recognized in Other Comprehensive Income (OCI) on Derivative | | | | Amount of (Gain) Loss Reclassified from AOCI into the Condensed Consolidated Statement of Operations |
| Derivatives in Cash Flow Hedging Relationships | For the three months ended June 30, 2018 | | For the three months ended June 30, 2017 | | Location of (Gain) Loss Reclassified from AOCI into the Condensed Consolidated Statement of Operations | | For the three months ended June 30, 2018 | | For the three months ended June 30, 2017 | For the three months ended June 30, 2019 | | For the three months ended June 30, 2018 | | Location of (Gain) Loss Reclassified from AOCI into the Condensed Consolidated Statement of Operations | | For the three months ended June 30, 2019 | | For the three months ended June 30, 2018 |
| Foreign exchange contracts | $ | 9 |
| | $ | (6 | ) | | Cost of products | | $ | (1 | ) | | $ | (1 | ) | $ | — |
| | $ | 9 |
| | Cost of products | | $ | (2 | ) | | $ | (1 | ) |
| | | | | | | | | |
| In millions | Amount of Gain (Loss) Recognized in Other Comprehensive Income (OCI) on Derivative | | Amount of (Gain) Loss Reclassified from AOCI into the Condensed Consolidated Statement of Operations
| |
| Derivatives in Cash Flow Hedging Relationships | For the six months ended June 30, 2018 | | For the six months ended June 30, 2017 | | Location of (Gain) Loss Reclassified from AOCI into the Condensed Consolidated Statement of Operations (Effective Portion) | | For the six months ended June 30, 2018 | | For the six months ended June 30, 2017 | |
| Foreign exchange contracts | $ | 4 |
| | $ | (10 | ) | | Cost of products | | $ | — |
| | $ | (3 | ) | |
| | | In millions | | | Amount of Gain (Loss) Recognized in the Condensed Consolidated Statement of Operations | Amount of Gain (Loss) Recognized in Other Comprehensive Income (OCI) on Derivative | | | | Amount of (Gain) Loss Reclassified from AOCI into the Condensed Consolidated Statement of Operations |
| | | Three months ended June 30 | | Six months ended June 30 | |
| Derivatives not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in the Condensed Consolidated Statement of Operations | | 2018 | | 2017 | | 2018 | | 2017 | |
| Derivatives in Cash Flow Hedging Relationships | | For the six months ended June 30, 2019 | | For the six months ended June 30, 2018 | | Location of (Gain) Loss Reclassified from AOCI into the Condensed Consolidated Statement of Operations | | For the six months ended June 30, 2019 | | For the six months ended June 30, 2018 |
| Foreign exchange contracts | Other (expense), net | | $ | (3 | ) | | $ | — |
| | $ | (3 | ) | | $ | (2 | ) | $ | 1 |
| | $ | 4 |
| | Cost of products | | $ | (3 | ) | | $ | — |
|
|
| | | | | | | | | | | | | | | | |
| In millions | | | Amount of Gain (Loss) Recognized in the Condensed Consolidated Statement of Operations
|
| | | | Three months ended June 30 | Six months ended June 30 |
| Derivatives not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in the Condensed Consolidated Statement of Operations | | 2019 | | 2018 | 2019 | | 2018 |
| Foreign exchange contracts | Other (expense), net | | $ | (3 | ) | | $ | (3 | ) | $ | (8 | ) | | $ | (3 | ) |
Refer to Note 13, “Fair Value of Assets and Liabilities” for further information on derivative assets and liabilities recorded at fair value on a recurring basis.
Concentration of Credit Risk
NCR is potentially subject to concentrations of credit risk on accounts receivable and financial instruments such as hedging instruments 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 Condensed Consolidated Balance Sheets. 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 on its obligations under applicable contractual arrangements, the Company could be exposed to potentially significant losses. However, management believes that the reserves for potential losses are adequate. As of June 30, 20182019, we did not have any significant concentration of credit risk related to financial instruments.
14.
13. FAIR VALUE OF ASSETS AND LIABILITIES
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities recorded at fair value on a recurring basis as of June 30, 20182019 and December 31, 20172018 are set forth as follows:
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
| | | June 30, 2018 | June 30, 2019 |
| In millions | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Assets: | | | | | | | | | | | | | | |
Deposits held in money market mutual funds (1) | $ | 11 |
| | $ | 11 |
| | $ | — |
| | $ | — |
| $ | 2 |
| | $ | 2 |
| | $ | — |
| | $ | — |
|
Foreign exchange contracts (2) | 6 |
| | — |
| | 6 |
| | — |
| 3 |
| | — |
| | 3 |
| | — |
|
| Total | $ | 17 |
| | $ | 11 |
| | $ | 6 |
| | $ | — |
| $ | 5 |
| | $ | 2 |
| | $ | 3 |
| | $ | — |
|
| Liabilities: | | | | | | | | | | | | | | |
Foreign exchange contracts (3) | $ | 1 |
| | $ | — |
| | $ | 1 |
| | $ | — |
| $ | 1 |
| | $ | — |
| | $ | 1 |
| | $ | — |
|
| Total | $ | 1 |
| | $ | — |
| | $ | 1 |
| | $ | — |
| $ | 1 |
| | $ | — |
| | $ | 1 |
| | $ | — |
|
| | | | December 31, 2017 | December 31, 2018 |
| In millions | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Assets: | | | | | | | | | | | | | | |
Deposits held in money market mutual funds (1) | $ | 90 |
| | $ | 90 |
| | $ | — |
| | $ | — |
| $ | 8 |
| | $ | 8 |
| | $ | — |
| | $ | — |
|
Foreign exchange contracts (2) | 1 |
| | — |
| | 1 |
| | — |
| 5 |
| | — |
| | 5 |
| | — |
|
| Total | $ | 91 |
| | $ | 90 |
| | $ | 1 |
| | $ | — |
| $ | 13 |
| | $ | 8 |
| | $ | 5 |
| | $ | — |
|
| Liabilities: | | | | | | | | | | | | | | |
Foreign exchange contracts (3) | 2 |
| | — |
| | 2 |
| | — |
| $ | 1 |
| | $ | — |
| | $ | 1 |
| | $ | — |
|
| Total | $ | 2 |
| | $ | — |
| | $ | 2 |
| | $ | — |
| $ | 1 |
| | $ | — |
| | $ | 1 |
| | $ | — |
|
_____________
(1) Included in Cash and cash equivalents in the Condensed Consolidated Balance Sheets.
(2) Included in Other current assets in the Condensed Consolidated Balance Sheets.
(3) Included in Other current liabilities in the Condensed Consolidated Balance Sheets.
Deposits Held in Money Market Mutual Funds A portion of the Company’s excess cash is held in money market mutual funds whichthat generate interest income based on prevailing market rates. Money market mutual fund holdings are measured at fair value using quoted market prices and are classified within Level 1 of the valuation hierarchy.
Foreign Exchange Contracts As a result of our global operating activities, we are exposed to risks from changes in foreign currency exchange rates, which may adversely affect our financial condition. To manage our exposures and mitigate the impact of currency fluctuations on our financial results, we hedge our primary transactional exposures through the use of foreign exchange forward and option contracts. The foreign exchange contracts are valued using the market approach based on observable market transactions of forward rates and are classified within Level 2 of the valuation hierarchy.
Assets Measured at Fair Value on a Non-recurring Basis
From time to time, certain assets are measured at fair value on a nonrecurring basis using significant unobservable inputs (Level 3). NCR reviews the carrying values of investments when events and circumstances warrant and considers all available evidence in evaluating when declines in fair value are other-than-temporary declines. Other than the impairment charges described in Note 4. Goodwill and Long-Lived Assets,There were no material impairment charges or non-recurring fair value adjustments were recorded during the three and six months ended June 30, 20182019 and 2017.2018.
15. SEGMENT INFORMATION AND CONCENTRATIONS
The Company manages and reports the following three segments:
Software - Our software offerings include industry-based software platforms, applications and application suites for the financial services, retail, hospitality and small business industries. We also offer a portfolio of other industry-oriented software applications including cash management software, video banking software, fraud and loss prevention
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
applications, check and document imaging, remote-deposit capture and customer-facing mobile and digital banking applications for the financial services industry; and secure electronic and mobile payment solutions, sector-specific point of sale software applications, and back-office inventory and store and restaurant management applications for the retail and hospitality industries. Additionally, we provide ongoing software support and maintenance services, as well as consulting and implementation services for our software solutions.
14. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (AOCI)
Changes in AOCI by Component
Services - Our global end-to-end services solutions include assessment and preparation, staging, installation, implementation, and maintenance and support for our solutions. We also provide systems management and complete managed services for our product offerings. In addition, we provide installation, maintenance and servicing for third party networking products and computer hardware from select manufacturers. |
| | | | | | | | | | | | |
| In millions | Currency Translation Adjustments | Changes in Employee Benefit Plans | Changes in Fair Value of Effective Cash Flow Hedges | Total |
| Balance as of December 31, 2018 | $ | (234 | ) | $ | (14 | ) | $ | 2 |
| $ | (246 | ) |
| Other comprehensive income (loss) before reclassifications | 11 |
| — |
| 1 |
| 12 |
|
| Amounts reclassified from AOCI | — |
| (5 | ) | (2 | ) | (7 | ) |
| Net current period other comprehensive (loss) income | 11 |
| (5 | ) | (1 | ) | 5 |
|
| Balance as of June 30, 2019 | $ | (223 | ) | $ | (19 | ) | $ | 1 |
| $ | (241 | ) |
Reclassifications Out of AOCI
Hardware - Our hardware solutions include our suite of financial-oriented self-service ATM-related hardware, and our retail- and hospitality-oriented point of sale (POS) terminal, self-checkout (SCO) kiosk and related hardware. We also offer other self-service kiosks, such as self-check in/out kiosks for airlines, and wayfinding solutions for buildings and campuses.
These segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the chief operating decision maker in assessing segment performance and in allocating the Company's resources. Management evaluates the performance of the segments based on revenue and segment operating income. Assets are not allocated to segments, and thus are not included in the assessment of segment performance, and consequently, we do not disclose total assets by reportable segment.
The accounting policies used to determine the results of the operating segments are the same as those utilized for the consolidated financial statements as a whole. Intersegment sales and transfers are not material.
To maintain operating focus on business performance, non-operational items are excluded from the segment operating results utilized by our chief operating decision maker in evaluating segment performance and are separately delineated to reconcile back to total reported income from operations.
|
| | | | | | | | | | | | | | |
| | | For the three months ended June 30, 2019 |
| | Employee Benefit Plans | | | |
| In millions | Amortization of Actuarial Loss (Gain) | Amortization of Prior Service Benefit | Effective Cash Flow Hedge Loss (Gain) | | Total |
| Affected line in Condensed Consolidated Statement of Operations: | | | | | |
| | Cost of products | $ | — |
| $ | — |
| $ | (2 | ) | | $ | (2 | ) |
| | Selling, general and administrative expenses | — |
| (2 | ) | — |
| | (2 | ) |
| | Total before tax | $ | — |
| $ | (2 | ) | $ | (2 | ) | | $ | (4 | ) |
| | Tax expense | | | | | 1 |
|
| | Total reclassifications, net of tax | | | | | $ | (3 | ) |
32 |
| | | | | | | | | | | | | | |
| | | For the three months ended June 30, 2018 |
| | Employee Benefit Plans | | | |
| In millions | Amortization of Actuarial Loss (Gain) | Amortization of Prior Service Benefit | Effective Cash Flow Hedge Loss (Gain) | | Total |
| Affected line in Condensed Consolidated Statement of Operations: | | | | | |
| | Cost of products | $ | — |
| $ | — |
| $ | (1 | ) |
| $ | (1 | ) |
| | Cost of services | 1 |
| (1 | ) | — |
| | — |
|
| | Selling, general and administrative expenses | — |
| (1 | ) | — |
| | (1 | ) |
| | Research and development expenses | — |
| (1 | ) | — |
| | (1 | ) |
| | Total before tax | $ | 1 |
| $ | (3 | ) | $ | (1 | ) | | $ | (3 | ) |
| | Tax expense | | | | | — |
|
| | Total reclassifications, net of tax | | | | | $ | (3 | ) |
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
The following table presents revenue and operating income by segment:
|
| | | | | | | | | | | | | | |
| | | For the six months ended June 30, 2019 |
| | Employee Benefit Plans | | | |
| In millions | Amortization of Actuarial Loss (Gain) | Amortization of Prior Service Benefit | Effective Cash Flow Hedge Loss (Gain) | | Total |
| Affected line in Condensed Consolidated Statement of Operations: | | | | | |
| | Cost of products | $ | — |
| $ | — |
| $ | (3 | ) | | $ | (3 | ) |
| | Cost of services | (1 | ) | (2 | ) | — |
| | (3 | ) |
| | Selling, general and administrative expenses | — |
| (2 | ) | — |
| | (2 | ) |
| | Total before tax | $ | (1 | ) | $ | (4 | ) | $ | (3 | ) | | $ | (8 | ) |
| | Tax expense | | | | | 1 |
|
| | Total reclassifications, net of tax | | | | | $ | (7 | ) |
|
| | | | | | | | | | | | | | | |
| In millions | Three months ended June 30 | | Six months ended June 30 |
| 2018 | | 2017 | | 2018 | | 2017 |
| Revenue by segment | | | | | | | |
| Software License | $ | 68 |
| | $ | 77 |
| | $ | 138 |
| | $ | 162 |
|
| Software Maintenance | 93 |
| | 91 |
| | 184 |
| | 183 |
|
| Cloud | 155 |
| | 145 |
| | 310 |
| | 287 |
|
| Professional Services | 154 |
| | 151 |
| | 298 |
| | 284 |
|
| Software | 470 |
| | 464 |
| | 930 |
| | 916 |
|
| | | | | | | | |
| Services | 610 |
| | 588 |
| | 1,211 |
| | 1,145 |
|
| | | | | | | | |
| ATM | 180 |
| | 227 |
| | 375 |
| | 436 |
|
| SCO | 99 |
| | 96 |
| | 176 |
| | 197 |
|
| POS | 178 |
| | 213 |
| | 362 |
| | 367 |
|
| IPS | — |
| | 5 |
| | — |
| | 10 |
|
| Hardware | 457 |
| | 541 |
| | 913 |
| | 1,010 |
|
| Consolidated revenue | 1,537 |
| | 1,593 |
| | 3,054 |
| | 3,071 |
|
| Operating income (loss) by segment | | | | | | | |
| Software | 115 |
| | 127 |
| | 224 |
| | 251 |
|
| Services | 77 |
| | 74 |
| | 139 |
| | 118 |
|
| Hardware | (27 | ) | | 11 |
| | (50 | ) | | 1 |
|
| Subtotal - segment operating income | 165 |
| | 212 |
| | 313 |
| | 370 |
|
Other adjustments (1) | 271 |
| | 37 |
| | 310 |
| | 80 |
|
| (Loss) income from operations | $ | (106 | ) | | $ | 175 |
| | $ | 3 |
| | $ | 290 |
|
| |
(1)
| The following table presents the other adjustments for NCR: |
|
| | | | | | | | | | | | | | | |
| In millions | Three months ended June 30 | | Six months ended June 30 |
| 2018 | | 2017 | | 2018 | | 2017 |
| Transformation and restructuring costs | $ | 66 |
| | $ | 8 |
| | $ | 82 |
| | $ | 21 |
|
| Asset impairment charges | 183 |
| | — |
| | 183 |
| | — |
|
| Acquisition-related amortization of intangible assets | 21 |
| | 28 |
| | 44 |
| | 57 |
|
| Acquisition-related costs | 1 |
| | 1 |
| | 1 |
| | 2 |
|
| Total other adjustments | $ | 271 |
| | $ | 37 |
|
| $ | 310 |
| | $ | 80 |
|
The following table presents revenue by geography for NCR:
|
| | | | | | | | | | | |
| | | For the six months ended June 30, 2018 |
| | Employee Benefit Plans | | |
| In millions | Amortization of Actuarial Loss (Gain) | Amortization of Prior Service Benefit | | Total |
| Affected line in Condensed Consolidated Statement of Operations: | | | | |
| | Cost of services | $ | 1 |
| $ | (3 | ) | | $ | (2 | ) |
| | Selling, general and administrative expenses | — |
| (1 | ) | | (1 | ) |
| | Research and development expenses | — |
| (1 | ) | | (1 | ) |
| | Total before tax | $ | 1 |
| $ | (5 | ) | | $ | (4 | ) |
| | Tax expense | | | | 1 |
|
| | Total reclassifications, net of tax | | | | $ | (3 | ) |
|
| | | | | | | | | | | | | | | |
| In millions | Three months ended June 30 | | Six months ended June 30 |
| 2018 | | 2017 | | 2018 | | 2017 |
| Americas | $ | 875 |
| | $ | 915 |
| | $ | 1,764 |
| | $ | 1,762 |
|
| Europe, Middle East Africa (EMEA) | 418 |
| | 454 |
| | 826 |
| | 876 |
|
| Asia Pacific (APJ) | 244 |
| | 224 |
| | 464 |
| | 433 |
|
| Total revenue | $ | 1,537 |
| | $ | 1,593 |
| | $ | 3,054 |
| | $ | 3,071 |
|
The following table presents revenue from products and services for NCR:
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
|
| | | | | | | | | | | | | | | |
| In millions | Three months ended June 30 | | Six months ended June 30 |
| 2018 | | 2017 | | 2018 | | 2017 |
| Product revenue | $ | 525 |
| | $ | 618 |
| | $ | 1,051 |
| | $ | 1,172 |
|
| Professional services and installation services revenue | 271 |
| | 261 |
| | 527 |
| | 488 |
|
| Recurring revenue, including maintenance and cloud revenue | 741 |
| | 714 |
| | 1,476 |
| | 1,411 |
|
| Total revenue | $ | 1,537 |
| | $ | 1,593 |
| | $ | 3,054 |
| | $ | 3,071 |
|
16. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (AOCI)
Changes in AOCI by Component
|
| | | | | | | | | | | | |
| In millions | Currency Translation Adjustments | Changes in Employee Benefit Plans | Changes in Fair Value of Effective Cash Flow Hedges | Total |
| Balance as of December 31, 2017 | $ | (183 | ) | $ | (15 | ) | $ | (1 | ) | $ | (199 | ) |
Impact of adoption of new accounting standard (1) | — |
| 1 |
| — |
| 1 |
|
| Other comprehensive income (loss) before reclassifications | (27 | ) | — |
| 4 |
| (23 | ) |
| Amounts reclassified from AOCI | — |
| (3 | ) | — |
| (3 | ) |
| Net current period other comprehensive (loss) income | (27 | ) | (3 | ) | 4 |
| (26 | ) |
| Balance as of June 30, 2018 | $ | (210 | ) | $ | (17 | ) | $ | 3 |
| $ | (224 | ) |
(1) See Note 1. Basis of Presentation and Summary of Significant Accounting Policies for further discussion on the adoption of a new accounting standard related to stranded tax affects in AOCI as a result of U.S. Tax Reform.
Reclassifications Out of AOCI
|
| | | | | | | | | | | | | | |
| | | For the three months ended June 30, 2018 |
| | Employee Benefit Plans | | | |
| In millions | Amortization of Actuarial Loss (Gain) | Amortization of Prior Service Benefit | Effective Cash Flow Hedge Loss (Gain) | | Total |
| Affected line in Condensed Consolidated Statement of Operations: | | | | | |
| | Cost of products | $ | — |
| $ | — |
| $ | (1 | ) | | $ | (1 | ) |
| | Cost of services | 1 |
| (1 | ) | — |
| | — |
|
| | Selling, general and administrative expenses | — |
| (1 | ) | — |
| | (1 | ) |
| | Research and development expenses | — |
| (1 | ) | — |
| | (1 | ) |
| | Total before tax | $ | 1 |
| $ | (3 | ) | $ | (1 | ) | | $ | (3 | ) |
| | Tax expense | | | | | — |
|
| | Total reclassifications, net of tax | | | | | $ | (3 | ) |
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
|
| | | | | | | | | | | | | | |
| | | For the three months ended June 30, 2017 |
| | Employee Benefit Plans | | | |
| In millions | Amortization of Actuarial Loss (Gain) | Amortization of Prior Service Benefit | Effective Cash Flow Hedge Loss (Gain) | | Total |
| Affected line in Condensed Consolidated Statement of Operations: | | | | | |
| | Cost of products | $ | — |
| $ | — |
| $ | (1 | ) |
| $ | (1 | ) |
| | Cost of services | 1 |
| — |
| — |
| | 1 |
|
| | Selling, general and administrative expenses | (1 | ) | (2 | ) | — |
| | (3 | ) |
| | Research and development expenses | — |
| (1 | ) | — |
| | (1 | ) |
| | Total before tax | $ | — |
| $ | (3 | ) | $ | (1 | ) | | $ | (4 | ) |
| | Tax expense | | | | | 1 |
|
| | Total reclassifications, net of tax | | | | | $ | (3 | ) |
|
| | | | | | | | | | | |
| | | For the six months ended June 30, 2018 |
| | Employee Benefit Plans | | |
| In millions | Amortization of Actuarial Loss (Gain) | Amortization of Prior Service Benefit | | Total |
| Affected line in Condensed Consolidated Statement of Operations: | | | | |
| | Cost of services | 1 |
| (3 | ) | | (2 | ) |
| | Selling, general and administrative expenses | — |
| (1 | ) | | (1 | ) |
| | Research and development expenses | — |
| (1 | ) | | (1 | ) |
| | Total before tax | $ | 1 |
| $ | (5 | ) | | $ | (4 | ) |
| | Tax expense | | | | 1 |
|
| | Total reclassifications, net of tax | | | | $ | (3 | ) |
|
| | | | | | | | | | | | | | |
| | | For the six months ended June 30, 2017 |
| | Employee Benefit Plans | | | |
| In millions | Amortization of Actuarial Loss (Gain) | Amortization of Prior Service Benefit | Effective Cash Flow Hedge Loss (Gain) | | Total |
| Affected line in Condensed Consolidated Statement of Operations: | | | | | |
| | Cost of products | $ | — |
| $ | — |
| $ | (3 | ) | | $ | (3 | ) |
| | Cost of services | — |
| (2 | ) | — |
| | (2 | ) |
| | Selling, general and administrative expenses | (1 | ) | (2 | ) | — |
| | (3 | ) |
| | Research and development expenses | — |
| (1 | ) | — |
| | (1 | ) |
| | Total before tax | $ | (1 | ) | $ | (5 | ) | $ | (3 | ) | | $ | (9 | ) |
| | Tax expense | | | | | 2 |
|
| | Total reclassifications, net of tax | | | | | $ | (7 | ) |
17.15. RESTRUCTURING PLAN
In the second quarter of 2018, we announced a hardware transformation initiative to streamline our manufacturing operations that will help us reduce our exposure to variable hardware demand as well as increase global utilization rates and optimize our supply
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
chain network. As a part of this initiative, we plan to reduce the number of manufacturing plants and move the manufacturing operations at those plants to other existing NCR facilities and current third party suppliers.
As a result of the restructuring plan, the Company recorded a total charge of $2 million and $24 million in the three months ended June 30, 2019 and June 30, 2018, respectively, and $4 million and $24 million in the six months ended June 30, 2019 and June 30, 2018, respectively. The restructuring program was substantially completed as of June 30, 2019.
The following table summarizes the total charges related to the restructuring plan for the three and six months ended June 30, 2019:
|
| | | | | | | |
| In millions | For the three months ended June 30, 2019 | | For the six months ended June 30, 2019 |
| Severance and other employee related costs | $ | — |
| | $ | 1 |
|
| Inventory related charges | 7 |
| | 7 |
|
| Asset related charges | (6 | ) | | (6 | ) |
| Other exit costs | 1 |
| | 2 |
|
| Total charge | $ | 2 |
| | $ | 4 |
|
Severance and other employee related costs The Company recorded zero and $1 million of employee related costs in the three and six months ended June 30, 2019, respectively, in accordance with ASC 420, Exit orDisposal Cost Obligations. There were no discrete charges in accordance with ASC 712, Employers’ Accounting for Postemployment Benefits recorded in the three and six months ended June 30, 2019.
Inventory related charges The Company recorded $7 million of inventory related charges for rationalizing its product portfolio and writing down inventory to be sold to third party suppliers to the lower of cost or net realizable value in the three and six months ended June 30, 2019. These costs were included within cost of products in the Condensed Consolidated Statement of Operations.
Asset related charges The Company recorded a $6 million gain on the sale of the two plant locations in the three and six months ended June 30, 2019.
Other exit costs The Company recorded $1 million and $2 million in the three and six months ended June 30, 2019 for costs primarily related to moving inventory as well as clean-up costs from the plant locations that were closed. These costs were included within cost of products and selling, general, and administrative expenses in the Condensed Consolidated Statement of Operations.
The following table summarizes the total charges related to the restructuring plan for the three and six months ended June 30, 2018:
|
| | | | | | | |
| In millions | For the three months ended June 30, 2018 | | For the six months ended June 30, 2018 |
| Severance and other employee related costs | $ | 5 |
| | $ | 5 |
|
| Inventory related charges | 17 |
| | 17 |
|
| Other exit costs | 2 |
| | 2 |
|
| Total charge | $ | 24 |
| | $ | 24 |
|
Severance and other employee related costs The Company recorded $3 million of employee related costs in accordance with ASC 712, Employers’ Accounting for Postemployment Benefits, when the severance liability was determined to be probable and reasonably estimable in the three and six months ended June 30, 2018. The Company expects that it may incur additional charges during 2018 related to this restructuring program. Such additional charges will be expensed as incurred. The restructuring program is scheduled to be completed by the end of 2019.
Severance and other employee related costs Of the $5 million recorded $3 million was recorded as a discrete cost in accordance with ASC 712, Employers’ Accounting for Postemployment Benefits, when the severance liability was determined to be probable and reasonably estimable. The remaining $2 million of employee related costs was recorded in accordance with ASC 420, Exit orDisposal Cost Obligations. The Company made zero and $2 million in severance-related payments under ASC 712 and ASC 420, respectively, related to the restructuring plan in the three and six months ended June 30, 2018. These costs were included within cost of products in the Condensed Consolidated Statement of Operations.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
Inventory related charges The Company recorded $17 million of inventory related charges for rationalizing its product portfolio and writing down inventory to be sold to third party suppliers to the lower of cost or net realizable value.value in the three and six months ended June 30, 2018. These costs were included within cost of products in the Condensed Consolidated Statement of Operations.
Other exit costs The Company recorded $2 million for costs primarily related to moving inventory and fixed assets from the plant locations that will be closed $1 millionin the three and six months ended June 30, 2018. These costs were included within cost of which is included inproducts and selling, general, and administrative expenses and $1 million, which is included in costthe Condensed Consolidated Statement of products.Operations.
The results by segment, as disclosed in Note 15.3. Segment Information and Concentrations, exclude the impact of these costs, which is consistent with the manner by which management assesses the performance and evaluates the results of each segment. The following table summarizes the costs recorded in accordance with ASC 420, Exit or Disposal Cost Obligations, and ASC 712, Employers’ Accounting for Postemployment Benefits, and the remaining liabilities as of June 30, 2018,2019, which are included in the Condensed Consolidated Balance Sheet in Other Current Liabilities.
|
| | | |
| In millions | June 30, 2019 |
| Employee Severance and Other Exit Costs | |
| Beginning balance as of January 1 | $ | 2 |
|
| Cost recognized during the period | 3 |
|
| Utilization | (5 | ) |
| Ending balance as of June 30 | $ | — |
|
|
| | | |
| In millions | June 30, 2018 |
| Employee Severance and Other Exit Costs | |
| Beginning balance as of January 1 | $ | — |
|
| Cost recognized during the period | 7 |
|
| Utilization | (4 | ) |
| Ending balance as of June 30 | $ | 3 |
|
18.16. SUPPLEMENTAL FINANCIAL INFORMATION
The components of accounts receivable are summarized as follows:
|
| | | | | | | |
| In millions | June 30, 2019 | | December 31, 2018 |
| Accounts receivable | | | |
| Trade | $ | 1,435 |
| | $ | 1,364 |
|
| Other | 30 |
| | 23 |
|
| Accounts receivable, gross | 1,465 |
| | 1,387 |
|
| Less: allowance for doubtful accounts | (35 | ) | | (31 | ) |
| Total accounts receivable, net | $ | 1,430 |
| | $ | 1,356 |
|
|
| | | | | | | |
| In millions | June 30, 2018 | | December 31, 2017 |
| Accounts receivable | | | |
| Trade | $ | 1,262 |
| | $ | 1,270 |
|
| Other | 37 |
| | 37 |
|
| Accounts receivable, gross | 1,299 |
| | 1,307 |
|
| Less: allowance for doubtful accounts | (27 | ) | | (37 | ) |
| Total accounts receivable, net | $ | 1,272 |
| | $ | 1,270 |
|
The components of inventory are summarized as follows:
|
| | | | | | | |
| In millions | June 30, 2019 | | December 31, 2018 |
| Inventories | | | |
| Work in process and raw materials | $ | 235 |
| | $ | 237 |
|
| Finished goods | 261 |
| | 214 |
|
| Service parts | 372 |
| | 355 |
|
| Total inventories | $ | 868 |
| | $ | 806 |
|
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
|
| | | | | | | |
| In millions | June 30, 2018 | | December 31, 2017 |
| Inventories | | | |
| Work in process and raw materials | $ | 239 |
| | $ | 185 |
|
| Finished goods | 219 |
| | 190 |
|
| Service parts | 384 |
| | 405 |
|
| Total inventories | $ | 842 |
| | $ | 780 |
|
19.17. CONDENSED CONSOLIDATING SUPPLEMENTAL GUARANTOR INFORMATION
The Company's 5.00% Notes, 4.625% Notes, 5.875% Notes and 6.375% Notes are guaranteed by the Company's subsidiary, NCR International, Inc. (Guarantor Subsidiary), which is 100% owned by the Company and has guaranteed fully and unconditionally the obligations to pay principal and interest for these senior unsecured notes. The guarantees are subject to release under certain circumstances as described below:
the designation of the Guarantor Subsidiary as an unrestricted subsidiary under the indenture governing the notes;
the release of the Guarantor Subsidiary from its guarantee under the Senior Secured Credit Facility;
the release or discharge of the indebtedness that required the guarantee of the notes by the Guarantor Subsidiary;
the permitted sale or other disposition of the Guarantor Subsidiary to a third party; and
the Company's exercise of its legal defeasance option of its covenant defeasance option under the indenture governing the notes.
Refer to Note 5. Debt Obligations for additional information.
In connection with the previously completed registered exchange offers for the 5.00% Notes, 4.625% Notes, 5.875% Notes and 6.375% Notes, the Company is required to comply with Rule 3-10 of SEC Regulation S-X (Rule 3-10), and has therefore included the accompanying Condensed Consolidating Financial Statements in accordance with Rule 3-10(f) of SEC Regulation S-X.
The following supplemental information sets forth, on a consolidating basis, the condensed statements of operations and comprehensive income (loss), the condensed balance sheets and the condensed statements of cash flows for the parent issuer of these senior unsecured notes, for the Guarantor Subsidiary and for the Company and all of its consolidated subsidiaries.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
| | Condensed Consolidating Statements of Operations and Comprehensive Income (Loss) | | For the three months ended June 30, 2018 | |
| For the three months ended June 30, 2019 | | For the three months ended June 30, 2019 |
| | | | | | | | | | | | | | | | | | | |
| In millions | Parent Issuer | | Guarantor Subsidiary | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated | Parent Issuer | | Guarantor Subsidiary | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| Product revenue | $ | 258 |
| | $ | 24 |
| | $ | 306 |
| | $ | (63 | ) | | $ | 525 |
| $ | 344 |
| | $ | 3 |
| | $ | 399 |
| | $ | (82 | ) | | $ | 664 |
|
| Service revenue | 519 |
| | 8 |
| | 485 |
| | — |
| | 1,012 |
| 552 |
| | 1 |
| | 493 |
| | — |
| | 1,046 |
|
| Total revenue | 777 |
| | 32 |
| | 791 |
| | (63 | ) | | 1,537 |
| 896 |
| | 4 |
| | 892 |
| | (82 | ) | | 1,710 |
|
| Cost of products | 236 |
| | 7 |
| | 271 |
| | (63 | ) | | 451 |
| 288 |
| | 1 |
| | 332 |
| | (82 | ) | | 539 |
|
| Cost of services | 354 |
| | 3 |
| | 326 |
| | — |
| | 683 |
| 339 |
| | 1 |
| | 360 |
| | — |
| | 700 |
|
| Selling, general and administrative expenses | 130 |
| | — |
| | 131 |
| | — |
| | 261 |
| 141 |
| | — |
| | 111 |
| | — |
| | 252 |
|
| Research and development expenses | 29 |
| | — |
| | 36 |
| | — |
| | 65 |
| 34 |
| | — |
| | 28 |
| | — |
| | 62 |
|
| Asset impairment charges | 165 |
| | — |
| | 18 |
| | — |
| | 183 |
| |
| Total operating expenses | 914 |
| | 10 |
| | 782 |
| | (63 | ) | | 1,643 |
| 802 |
| | 2 |
| | 831 |
| | (82 | ) | | 1,553 |
|
| Income (loss) from operations | (137 | ) | | 22 |
| | 9 |
| | — |
| | (106 | ) | 94 |
| | 2 |
| | 61 |
| | — |
| | 157 |
|
| Interest expense | (40 | ) | | — |
| | (3 | ) | | 2 |
| | (41 | ) | (43 | ) | | — |
| | (4 | ) | | 2 |
| | (45 | ) |
| Other (expense) income, net | (12 | ) | | 1 |
| | 4 |
| | (2 | ) | | (9 | ) | (7 | ) | | 2 |
| | (2 | ) | | (2 | ) | | (9 | ) |
| Income (loss) from continuing operations before income taxes | (189 | ) | | 23 |
| | 10 |
| | — |
| | (156 | ) | 44 |
| | 4 |
| | 55 |
| | — |
| | 103 |
|
| Income tax expense (benefit) | 32 |
| | 2 |
| | (46 | ) | | — |
| | (12 | ) | (48 | ) | | (17 | ) | | 80 |
| | — |
| | 15 |
|
| Income (loss) from continuing operations before earnings in subsidiaries | (221 | ) | | 21 |
| | 56 |
| | — |
| | (144 | ) | 92 |
| | 21 |
| | (25 | ) | | — |
| | 88 |
|
| Equity in earnings of consolidated subsidiaries | 77 |
| | 62 |
| | — |
| | (139 | ) | | — |
| (4 | ) | | 62 |
| | — |
| | (58 | ) | | — |
|
| Income (loss) from continuing operations | (144 | ) | | 83 |
| | 56 |
| | (139 | ) | | (144 | ) | 88 |
| | 83 |
| | (25 | ) | | (58 | ) | | 88 |
|
| Income (loss) from discontinued operations, net of tax | (1 | ) | | — |
| | (1 | ) | | — |
| | (2 | ) | — |
| | — |
| | — |
| | — |
| | — |
|
| Net income (loss) | $ | (145 | ) | | $ | 83 |
| | $ | 55 |
| | $ | (139 | ) | | $ | (146 | ) | $ | 88 |
| | $ | 83 |
| | $ | (25 | ) | | $ | (58 | ) | | $ | 88 |
|
| Net income (loss) attributable to noncontrolling interests | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) | — |
| | — |
| | — |
| | — |
| | — |
|
| Net income (loss) attributable to NCR | $ | (145 | ) | | $ | 83 |
| | $ | 56 |
| | $ | (139 | ) | | $ | (145 | ) | $ | 88 |
| | $ | 83 |
| | $ | (25 | ) | | $ | (58 | ) | | $ | 88 |
|
| Total comprehensive income (loss) | (185 | ) | | 46 |
| | 10 |
| | (60 | ) | | (189 | ) | 163 |
| | 68 |
| | (34 | ) | | (120 | ) | | 77 |
|
| Less comprehensive income (loss) attributable to noncontrolling interests | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) | — |
| | — |
| | — |
| | — |
| | — |
|
| Comprehensive income (loss) attributable to NCR common stockholders | $ | (185 | ) | | $ | 46 |
| | $ | 14 |
| | $ | (60 | ) | | $ | (185 | ) | $ | 163 |
| | $ | 68 |
| | $ | (34 | ) | | $ | (120 | ) | | $ | 77 |
|
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
| | Condensed Consolidating Statements of Operations and Comprehensive Income (Loss) | | For the three months ended June 30, 2017 | |
| For the three months ended June 30, 2018 | | For the three months ended June 30, 2018 |
| | | | | | | | | | | | | | | | | | | |
| In millions | Parent Issuer | | Guarantor Subsidiary | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated | Parent Issuer | | Guarantor Subsidiary | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| Product revenue | $ | 329 |
| | $ | 13 |
| | $ | 336 |
| | $ | (60 | ) | | $ | 618 |
| $ | 258 |
| | $ | 24 |
| | $ | 306 |
| | $ | (63 | ) | | $ | 525 |
|
| Service revenue | 511 |
| | 7 |
| | 457 |
| | — |
| | 975 |
| 519 |
| | 8 |
| | 485 |
| | — |
| | 1,012 |
|
| Total revenue | 840 |
| | 20 |
| | 793 |
| | (60 | ) | | 1,593 |
| 777 |
| | 32 |
| | 791 |
| | (63 | ) | | 1,537 |
|
| Cost of products | 257 |
| | 9 |
| | 272 |
| | (60 | ) | | 478 |
| 236 |
| | 7 |
| | 271 |
| | (63 | ) | | 451 |
|
| Cost of services | 335 |
| | 3 |
| | 316 |
| | — |
| | 654 |
| 354 |
| | 3 |
| | 326 |
| | — |
| | 683 |
|
| Selling, general and administrative expenses | 129 |
| | 1 |
| | 98 |
| | — |
| | 228 |
| 130 |
| | — |
| | 131 |
| | — |
| | 261 |
|
| Research and development expenses | 42 |
| | — |
| | 16 |
| | — |
| | 58 |
| 29 |
| | — |
| | 36 |
| | — |
| | 65 |
|
| Asset impairment charges | | 165 |
| | — |
| | 18 |
| | — |
| | 183 |
|
| Total operating expenses | 763 |
| | 13 |
| | 702 |
| | (60 | ) | | 1,418 |
| 914 |
| | 10 |
| | 782 |
| | (63 | ) | | 1,643 |
|
| Income (loss) from operations | 77 |
| | 7 |
| | 91 |
| | — |
| | 175 |
| (137 | ) | | 22 |
| | 9 |
| | — |
| | (106 | ) |
| Interest expense | (38 | ) | | — |
| | (4 | ) | | 1 |
| | (41 | ) | (40 | ) | | — |
| | (3 | ) | | 2 |
| | (41 | ) |
| Other (expense) income, net | (11 | ) | | (1 | ) | | 9 |
| | (1 | ) | | (4 | ) | (12 | ) | | 1 |
| | 4 |
| | (2 | ) | | (9 | ) |
| Income (loss) from continuing operations before income taxes | 28 |
| | 6 |
| | 96 |
| | — |
| | 130 |
| (189 | ) | | 23 |
| | 10 |
| | — |
| | (156 | ) |
| Income tax expense (benefit) | 11 |
| | 2 |
| | 20 |
| | — |
| | 33 |
| 32 |
| | 2 |
| | (46 | ) | | — |
| | (12 | ) |
| Income (loss) from continuing operations before earnings in subsidiaries | 17 |
| | 4 |
| | 76 |
| | — |
| | 97 |
| (221 | ) | | 21 |
| | 56 |
| | — |
| | (144 | ) |
| Equity in earnings of consolidated subsidiaries | 80 |
| | 89 |
| | — |
| | (169 | ) | | — |
| 77 |
| | 62 |
| | — |
| | (139 | ) | | — |
|
| Income (loss) from continuing operations | 97 |
| | 93 |
| | 76 |
| | (169 | ) | | 97 |
| (144 | ) | | 83 |
| | 56 |
| | (139 | ) | | (144 | ) |
| Income (loss) from discontinued operations, net of tax | 5 |
| | — |
| | — |
| | — |
| | 5 |
| (1 | ) | | — |
| | (1 | ) | | — |
| | (2 | ) |
| Net income (loss) | $ | 102 |
| | $ | 93 |
| | $ | 76 |
| | $ | (169 | ) | | $ | 102 |
| $ | (145 | ) | | $ | 83 |
| | $ | 55 |
| | $ | (139 | ) | | $ | (146 | ) |
| Net income (loss) attributable to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
| Net income (loss) attributable to NCR | $ | 102 |
| | $ | 93 |
| | $ | 76 |
| | $ | (169 | ) | | $ | 102 |
| $ | (145 | ) | | $ | 83 |
| | $ | 56 |
| | $ | (139 | ) | | $ | (145 | ) |
| Total comprehensive income (loss) | 99 |
| | 106 |
| | 75 |
| | (181 | ) | | 99 |
| (185 | ) | | 46 |
| | 10 |
| | (60 | ) | | (189 | ) |
| Less comprehensive income (loss) attributable to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | (4 | ) | | — |
| | (4 | ) |
| Comprehensive income (loss) attributable to NCR common stockholders | $ | 99 |
| | $ | 106 |
| | $ | 75 |
| | $ | (181 | ) | | $ | 99 |
| $ | (185 | ) | | $ | 46 |
| | $ | 14 |
| | $ | (60 | ) | | $ | (185 | ) |
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
| | Condensed Consolidating Statements of Operations and Comprehensive Income (Loss) | | For the six months ended June 30, 2018 | |
| For the six months ended June 30, 2019 | | For the six months ended June 30, 2019 |
| | | | | | | | | | | | | | | | | | | |
| In millions | Parent Issuer | | Guarantor Subsidiary | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated | Parent Issuer | | Guarantor Subsidiary | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| Product revenue | $ | 535 |
| | $ | 29 |
| | $ | 588 |
| | $ | (101 | ) | | $ | 1,051 |
| $ | 617 |
| | $ | 5 |
| | $ | 709 |
| | $ | (128 | ) | | $ | 1,203 |
|
| Service revenue | 1,036 |
| | 16 |
| | 951 |
| | — |
| | 2,003 |
| 1,075 |
| | 3 |
| | 965 |
| | — |
| | 2,043 |
|
| Total revenue | 1,571 |
| | 45 |
| | 1,539 |
| | (101 | ) | | 3,054 |
| 1,692 |
| | 8 |
| | 1,674 |
| | (128 | ) | | 3,246 |
|
| Cost of products | 465 |
| | 11 |
| | 496 |
| | (101 | ) | | 871 |
| 534 |
| | 1 |
| | 585 |
| | (128 | ) | | 992 |
|
| Cost of services | 696 |
| | 6 |
| | 658 |
| | — |
| | 1,360 |
| 702 |
| | 2 |
| | 668 |
| | — |
| | 1,372 |
|
| Selling, general and administrative expenses | 294 |
| | 1 |
| | 211 |
| | — |
| | 506 |
| 281 |
| | — |
| | 223 |
| | — |
| | 504 |
|
| Research and development expenses | 75 |
| | — |
| | 56 |
| | — |
| | 131 |
| 67 |
| | — |
| | 54 |
| | — |
| | 121 |
|
| Asset impairment charges | 165 |
| | — |
| | 18 |
| | — |
| | 183 |
| |
| Total operating expenses | 1,695 |
| | 18 |
| | 1,439 |
| | (101 | ) | | 3,051 |
| 1,584 |
| | 3 |
| | 1,530 |
| | (128 | ) | | 2,989 |
|
| Income (loss) from operations | (124 | ) | | 27 |
| | 100 |
| | — |
| | 3 |
| 108 |
| | 5 |
| | 144 |
| | — |
| | 257 |
|
| Interest expense | (79 | ) | | — |
| | (6 | ) | | 3 |
| | (82 | ) | (86 | ) | | — |
| | (9 | ) | | 5 |
| | (90 | ) |
| Other (expense) income, net | (15 | ) | | 2 |
| | 2 |
| | (3 | ) | | (14 | ) | (20 | ) | | 4 |
| | 4 |
| | (5 | ) | | (17 | ) |
| Income (loss) from continuing operations before income taxes | (218 | ) | | 29 |
| | 96 |
| | — |
| | (93 | ) | 2 |
| | 9 |
| �� | 139 |
| | — |
| | 150 |
|
| Income tax expense (benefit) | 24 |
| | 4 |
| | (33 | ) | | — |
| | (5 | ) | 1 |
| | (18 | ) | | 41 |
| | — |
| | 24 |
|
| Income (loss) from continuing operations before earnings in subsidiaries | (242 | ) | | 25 |
| | 129 |
| | — |
| | (88 | ) | 1 |
| | 27 |
| | 98 |
| | — |
| | 126 |
|
| Equity in earnings of consolidated subsidiaries | 153 |
| | 121 |
| | — |
| | (274 | ) | | — |
| 124 |
| | 156 |
| | — |
| | (280 | ) | | — |
|
| Income (loss) from continuing operations | (89 | ) | | 146 |
| | 129 |
| | (274 | ) | | (88 | ) | 125 |
| | 183 |
| | 98 |
| | (280 | ) | | 126 |
|
| Income (loss) from discontinued operations, net of tax | (36 | ) | | — |
| | (1 | ) | | — |
| | (37 | ) | — |
| | — |
| | — |
| | — |
| | — |
|
| Net income (loss) | $ | (125 | ) | | $ | 146 |
| | $ | 128 |
| | $ | (274 | ) | | $ | (125 | ) | $ | 125 |
| | $ | 183 |
| | $ | 98 |
| | $ | (280 | ) | | $ | 126 |
|
| Net income (loss) attributable to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Net income (loss) attributable to NCR | $ | (125 | ) | | $ | 146 |
| | $ | 128 |
| | $ | (274 | ) | | $ | (125 | ) | $ | 125 |
| | $ | 183 |
| | $ | 97 |
| | $ | (280 | ) | | $ | 125 |
|
| Total comprehensive income (loss) | (151 | ) | | 108 |
| | 97 |
| | (208 | ) | | (154 | ) | 253 |
| | 185 |
| | 104 |
| | (411 | ) | | 131 |
|
| Less comprehensive income (loss) attributable to noncontrolling interests | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Comprehensive income (loss) attributable to NCR common stockholders | $ | (151 | ) | | $ | 108 |
| | $ | 100 |
| | $ | (208 | ) | | $ | (151 | ) | $ | 253 |
| | $ | 185 |
| | $ | 103 |
| | $ | (411 | ) | | $ | 130 |
|
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
| | Condensed Consolidating Statements of Operations and Comprehensive Income (Loss) | | For the six months ended June 30, 2017 | |
| For the six months ended June 30, 2018 | | For the six months ended June 30, 2018 |
| | | | | | | | | | | | | | | | | | | |
| In millions | Parent Issuer | | Guarantor Subsidiary | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated | Parent Issuer | | Guarantor Subsidiary | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| Product revenue | $ | 610 |
| | $ | 53 |
| | $ | 673 |
| | $ | (164 | ) | | $ | 1,172 |
| $ | 535 |
| | $ | 29 |
| | $ | 588 |
| | $ | (101 | ) | | $ | 1,051 |
|
| Service revenue | 1,004 |
| | 14 |
| | 881 |
| | — |
| | 1,899 |
| 1,036 |
| | 16 |
| | 951 |
| | — |
| | 2,003 |
|
| Total revenue | 1,614 |
| | 67 |
| | 1,554 |
| | (164 | ) | | 3,071 |
| 1,571 |
| | 45 |
| | 1,539 |
| | (101 | ) | | 3,054 |
|
| Cost of products | 464 |
| | 22 |
| | 580 |
| | (164 | ) | | 902 |
| 465 |
| | 11 |
| | 496 |
| | (101 | ) | | 871 |
|
| Cost of services | 673 |
| | 5 |
| | 618 |
| | — |
| | 1,296 |
| 696 |
| | 6 |
| | 658 |
| | — |
| | 1,360 |
|
| Selling, general and administrative expenses | 263 |
| | 2 |
| | 193 |
| | — |
| | 458 |
| 294 |
| | 1 |
| | 211 |
| | — |
| | 506 |
|
| Research and development expenses | 72 |
| | — |
| | 53 |
| | — |
| | 125 |
| 75 |
| | — |
| | 56 |
| | — |
| | 131 |
|
| Asset impairment charges | | 165 |
| | — |
| | 18 |
| | — |
| | 183 |
|
| Total operating expenses | 1,472 |
| | 29 |
| | 1,444 |
| | (164 | ) | | 2,781 |
| 1,695 |
| | 18 |
| | 1,439 |
| | (101 | ) | | 3,051 |
|
| Income (loss) from operations | 142 |
| | 38 |
| | 110 |
| | — |
| | 290 |
| (124 | ) | | 27 |
| | 100 |
| | — |
| | 3 |
|
| Interest expense | (77 | ) | | — |
| | (5 | ) | | 2 |
| | (80 | ) | (79 | ) | | — |
| | (6 | ) | | 3 |
| | (82 | ) |
| Other (expense) income, net | (28 | ) | | (1 | ) | | 22 |
| | (2 | ) | | (9 | ) | (15 | ) | | 2 |
| | 2 |
| | (3 | ) | | (14 | ) |
| Income (loss) from continuing operations before income taxes | 37 |
| | 37 |
| | 127 |
| | — |
| | 201 |
| (218 | ) | | 29 |
| | 96 |
| | — |
| | (93 | ) |
| Income tax expense (benefit) | 9 |
| | 18 |
| | 20 |
| | — |
| | 47 |
| 24 |
| | 4 |
| | (33 | ) | | — |
| | (5 | ) |
| Income (loss) from continuing operations before earnings in subsidiaries | 28 |
| | 19 |
| | 107 |
| | — |
| | 154 |
| (242 | ) | | 25 |
| | 129 |
| | — |
| | (88 | ) |
| Equity in earnings of consolidated subsidiaries | 126 |
| | 97 |
| | — |
| | (223 | ) | | — |
| 153 |
| | 121 |
| | — |
| | (274 | ) | | — |
|
| Income (loss) from continuing operations | 154 |
| — |
| 116 |
| | 107 |
| | (223 | ) | | 154 |
| (89 | ) | | 146 |
| | 129 |
| | (274 | ) | | (88 | ) |
| Income (loss) from discontinued operations, net of tax | 5 |
| | — |
| | — |
| | — |
| | 5 |
| (36 | ) | | — |
| | (1 | ) | | — |
| | (37 | ) |
| Net income (loss) | $ | 159 |
| | $ | 116 |
| | $ | 107 |
| | $ | (223 | ) | | $ | 159 |
| $ | (125 | ) | | $ | 146 |
| | $ | 128 |
| | $ | (274 | ) | | $ | (125 | ) |
| Net income (loss) attributable to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
|
| Net income (loss) attributable to NCR | $ | 159 |
| | $ | 116 |
| | $ | 107 |
| | $ | (223 | ) | | $ | 159 |
| $ | (125 | ) | | $ | 146 |
| | $ | 128 |
| | $ | (274 | ) | | $ | (125 | ) |
| Total comprehensive income (loss) | 174 |
| | 140 |
| | 118 |
| | (258 | ) | | 174 |
| (151 | ) | | 108 |
| | 97 |
| | (208 | ) | | (154 | ) |
| Less comprehensive income (loss) attributable to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | (3 | ) | | — |
| | (3 | ) |
| Comprehensive income (loss) attributable to NCR common stockholders | $ | 174 |
| | $ | 140 |
| | $ | 118 |
| | $ | (258 | ) | | $ | 174 |
| $ | (151 | ) | | $ | 108 |
| | $ | 100 |
| | $ | (208 | ) | | $ | (151 | ) |
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
| | Condensed Consolidating Balance Sheet | | June 30, 2018 | |
| June 30, 2019 | | June 30, 2019 |
| | | | | | | | | | | | | | | | | | | |
| In millions | Parent Issuer | | Guarantor Subsidiary | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated | Parent Issuer | | Guarantor Subsidiary | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| Assets | | | | | | | | | | | | | | | | | | |
| Current assets | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 11 |
| | $ | 6 |
| | $ | 326 |
| | $ | — |
| | $ | 343 |
| $ | 18 |
| | $ | 2 |
| | $ | 315 |
| | $ | — |
| | $ | 335 |
|
| Accounts receivable, net | 42 |
| | 12 |
| | 1,218 |
| |
|
| | 1,272 |
| 57 |
| | 1 |
| | 1,372 |
| | — |
| | 1,430 |
|
| Inventories | 311 |
| | 5 |
| | 526 |
| |
|
| | 842 |
| 309 |
| | 1 |
| | 558 |
| | — |
| | 868 |
|
| Due from affiliates | 645 |
| | 2,072 |
| | 310 |
| | (3,027 | ) | | — |
| 830 |
| | 2,081 |
| | 404 |
| | (3,315 | ) | | — |
|
| Other current assets | 121 |
| | 44 |
| | 156 |
| | (39 | ) | | 282 |
| 143 |
| | 2 |
| | 257 |
| | — |
| | 402 |
|
| Total current assets | 1,130 |
| | 2,139 |
| | 2,536 |
| | (3,066 | ) | | 2,739 |
| 1,357 |
| | 2,087 |
| | 2,906 |
| | (3,315 | ) | | 3,035 |
|
| Property, plant and equipment, net | 220 |
| | — |
| | 106 |
| |
|
| | 326 |
| 260 |
| | — |
| | 112 |
| | — |
| | 372 |
|
| Goodwill | 2,082 |
| | — |
| | 508 |
| |
|
| | 2,590 |
| 2,199 |
| | — |
| | 508 |
| | — |
| | 2,707 |
|
| Intangibles, net | 451 |
| | — |
| | 66 |
| |
|
| | 517 |
| 498 |
| | — |
| | 55 |
| | — |
| | 553 |
|
| Operating lease assets | | 270 |
| | — |
| | 144 |
| | — |
| | 414 |
|
| Prepaid pension cost | — |
| | — |
| | 127 |
| | — |
| | 127 |
| — |
| | — |
| | 151 |
| | — |
| | 151 |
|
| Deferred income taxes | 341 |
| | — |
| | 156 |
| | (25 | ) | | 472 |
| 315 |
| | 3 |
| | 150 |
| | — |
| | 468 |
|
| Investments in subsidiaries | 3,133 |
| | 2,778 |
| | — |
| | (5,911 | ) | | — |
| 3,477 |
| | 3,050 |
| | — |
| | (6,527 | ) | | — |
|
| Due from affiliates | 31 |
| | 1 |
| | 36 |
| | (68 | ) | | — |
| |
| Due from affilates | | 16 |
| | 1 |
| | — |
| | (17 | ) | | — |
|
| Other assets | 476 |
| | 64 |
| | 53 |
| | — |
| | 593 |
| 465 |
| | 1 |
| | 56 |
| | — |
| | 522 |
|
| Total assets | $ | 7,864 |
| | $ | 4,982 |
| | $ | 3,588 |
| | $ | (9,070 | ) | | $ | 7,364 |
| $ | 8,857 |
| | $ | 5,142 |
| | $ | 4,082 |
| | $ | (9,859 | ) | | $ | 8,222 |
|
| | | | | | | | | | | | | | | | | | | |
| Liabilities and stockholders’ equity | | | | | | | | | | | | | | | | | | |
| Current liabilities | | | | | | | | | | | | | | | | | | |
| Short-term borrowings | $ | 60 |
| | $ | — |
| | $ | 100 |
| | $ | — |
| | $ | 160 |
| $ | 94 |
| | $ | — |
| | $ | 104 |
| | $ | — |
| | $ | 198 |
|
| Accounts payable | 307 |
| | 3 |
| | 401 |
| | — |
| | 711 |
| 365 |
| | — |
| | 404 |
| | — |
| | 769 |
|
| Payroll and benefits liabilities | 127 |
| | — |
| | 102 |
| | — |
| | 229 |
| 125 |
| | — |
| | 110 |
| | — |
| | 235 |
|
| Contract liabilities | 236 |
| | 7 |
| | 226 |
| | — |
| | 469 |
| 294 |
| | 1 |
| | 251 |
| | — |
| | 546 |
|
| Due to affiliates | 2,099 |
| | 118 |
| | 810 |
| | (3,027 | ) | | — |
| 2,478 |
| | 109 |
| | 728 |
| | (3,315 | ) | | — |
|
| Other current liabilities | 154 |
| | 5 |
| | 190 |
| | (39 | ) | | 310 |
| 208 |
| | 1 |
| | 346 |
| | — |
| | 555 |
|
| Total current liabilities | 2,983 |
| | 133 |
| | 1,829 |
| | (3,066 | ) | | 1,879 |
| 3,564 |
| | 111 |
| | 1,943 |
| | (3,315 | ) | | 2,303 |
|
| Long-term debt | 2,950 |
| | — |
| | 2 |
| | — |
| | 2,952 |
| 2,915 |
| | — |
| | 3 |
| | — |
| | 2,918 |
|
| Pension and indemnity plan liabilities | 523 |
| | — |
| | 273 |
| | — |
| | 796 |
| 514 |
| | — |
| | 253 |
| | — |
| | 767 |
|
| Postretirement and postemployment benefits liabilities | 19 |
| | 3 |
| | 110 |
| | — |
| | 132 |
| 17 |
| | 4 |
| | 99 |
| | — |
| | 120 |
|
| Income tax accruals | 21 |
| | 8 |
| | 98 |
| | — |
| | 127 |
| 25 |
| | — |
| | 69 |
| | — |
| | 94 |
|
| Due to affiliates | — |
| | 36 |
| | 32 |
| | (68 | ) | | — |
| — |
| | — |
| | 17 |
| | (17 | ) | | — |
|
| Operating lease liabilities | | 297 |
| | — |
| | 92 |
| | — |
| | 389 |
|
| Other liabilities | 163 |
| | 30 |
| | 90 |
| | (25 | ) | | 258 |
| 99 |
| | — |
| | 87 |
| | — |
| | 186 |
|
| Total liabilities | 6,659 |
| | 210 |
| | 2,434 |
| | (3,159 | ) | | 6,144 |
| 7,431 |
| | 115 |
| | 2,563 |
| | (3,332 | ) | | 6,777 |
|
| Redeemable noncontrolling interest | — |
| | — |
| | 12 |
| | — |
| | 12 |
| — |
| | — |
| | 14 |
| | — |
| | 14 |
|
| Series A convertible preferred stock | 834 |
| | — |
| | — |
| | — |
| | 834 |
| 884 |
| | — |
| | — |
| | — |
| | 884 |
|
| Stockholders’ equity |
|
| |
|
| |
|
| |
|
| |
|
| | | | | | | | | |
| Total NCR stockholders’ equity | 371 |
| | 4,772 |
| | 1,139 |
| | (5,911 | ) | | 371 |
| 542 |
| | 5,027 |
| | 1,500 |
| | (6,527 | ) | | 542 |
|
| Noncontrolling interests in subsidiaries | — |
| | — |
| | 3 |
| | — |
| | 3 |
| — |
| | — |
| | 5 |
| | — |
| | 5 |
|
| Total stockholders’ equity | 371 |
| | 4,772 |
| | 1,142 |
| | (5,911 | ) | | 374 |
| 542 |
| | 5,027 |
| | 1,505 |
| | (6,527 | ) | | 547 |
|
| Total liabilities and stockholders’ equity | $ | 7,864 |
| | $ | 4,982 |
| | $ | 3,588 |
| | $ | (9,070 | ) | | $ | 7,364 |
| $ | 8,857 |
| | $ | 5,142 |
| | $ | 4,082 |
| | $ | (9,859 | ) | | $ | 8,222 |
|
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
| | Condensed Consolidating Balance Sheet | | December 31, 2017 | |
| December 31, 2018 | | December 31, 2018 |
| | | | | | | | | | | | | | | | | | | |
| In millions | Parent Issuer | | Guarantor Subsidiary | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated | Parent Issuer | | Guarantor Subsidiary | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| Assets | | | | | | | | | | | | | | | | | | |
| Current assets | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 97 |
| | $ | 11 |
| | 429 |
| | $ | — |
| | $ | 537 |
| $ | 6 |
| | $ | 8 |
| | 450 |
| | $ | — |
| | $ | 464 |
|
| Accounts receivable, net | 62 |
| | 12 |
| | 1,196 |
| | — |
| | 1,270 |
| 37 |
| | 10 |
| | 1,309 |
| | — |
| | 1,356 |
|
| Inventories | 311 |
| | 7 |
| | 462 |
| | — |
| | 780 |
| 288 |
| | 4 |
| | 514 |
| | — |
| | 806 |
|
| Due from affiliates | 646 |
| | 1,801 |
| | 283 |
| | (2,730 | ) | | — |
| 708 |
| | 2,092 |
| | 457 |
| | (3,257 | ) | | — |
|
| Other current assets | 78 |
| | 39 |
| | 162 |
| | (36 | ) | | 243 |
| 137 |
| | 47 |
| | 255 |
| | (42 | ) | | 397 |
|
| Total current assets | 1,194 |
| | 1,870 |
| | 2,532 |
| | (2,766 | ) | | 2,830 |
| 1,176 |
| | 2,161 |
| | 2,985 |
| | (3,299 | ) | | 3,023 |
|
| Property, plant and equipment, net | 207 |
| | — |
| | 134 |
| | — |
| | 341 |
| 245 |
| | 1 |
| | 113 |
| | — |
| | 359 |
|
| Goodwill | 2,228 |
| | — |
| | 513 |
| | — |
| | 2,741 |
| 2,168 |
| | — |
| | 524 |
| | — |
| | 2,692 |
|
| Intangibles, net | 503 |
| | — |
| | 75 |
| | — |
| | 578 |
| 536 |
| | — |
| | 59 |
| | — |
| | 595 |
|
| Prepaid pension cost | — |
| | — |
| | 118 |
| | — |
| | 118 |
| — |
| | — |
| | 140 |
| | — |
| | 140 |
|
| Deferred income taxes | 334 |
| | — |
| | 157 |
| | (31 | ) | | 460 |
| 317 |
| | — |
| | 149 |
| | (18 | ) | | 448 |
|
| Investments in subsidiaries | 3,008 |
| | 2,942 |
| | — |
| | (5,950 | ) | | — |
| 3,244 |
| | 2,854 |
| | — |
| | (6,098 | ) | | — |
|
| Due from affiliates | 31 |
| | 1 |
| | 39 |
| | (71 | ) | | — |
| 16 |
| | 1 |
| | 35 |
| | (52 | ) | | — |
|
| Other assets | 472 |
| | 63 |
| | 51 |
| | — |
| | 586 |
| 453 |
| | 4 |
| | 47 |
| | — |
| | 504 |
|
| Total assets | $ | 7,977 |
| | $ | 4,876 |
| | $ | 3,619 |
| | $ | (8,818 | ) | | $ | 7,654 |
| $ | 8,155 |
| | $ | 5,021 |
| | $ | 4,052 |
| | $ | (9,467 | ) | | $ | 7,761 |
|
| | | | | | | | | | | | | | | | | | | |
| Liabilities and stockholders’ equity | | | | | | | | | | | | | | | | | | |
| Current liabilities | | | | | | | | | | | | | | | | | | |
| Short-term borrowings | $ | 52 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 52 |
| $ | 85 |
| | $ | — |
| | $ | 100 |
| | $ | — |
| | $ | 185 |
|
| Accounts payable | 382 |
| | — |
| | 380 |
| | — |
| | 762 |
| 397 |
| | 2 |
| | 498 |
| | — |
| | 897 |
|
| Payroll and benefits liabilities | 124 |
| | — |
| | 95 |
| | — |
| | 219 |
| 141 |
| | — |
| | 97 |
| | — |
| | 238 |
|
| Contract liabilities | 216 |
| | 6 |
| | 236 |
| | — |
| | 458 |
| 221 |
| | 5 |
| | 235 |
| | — |
| | 461 |
|
| Due to affiliates | 1,884 |
| | 130 |
| | 716 |
| | (2,730 | ) | | — |
| 2,177 |
| | 143 |
| | 937 |
| | (3,257 | ) | | — |
|
| Other current liabilities | 204 |
| | 5 |
| | 225 |
| | (36 | ) | | 398 |
| 201 |
| | 6 |
| | 336 |
| | (42 | ) | | 501 |
|
| Total current liabilities | 2,862 |
| | 141 |
| | 1,652 |
| | (2,766 | ) | | 1,889 |
| 3,222 |
| | 156 |
| | 2,203 |
| | (3,299 | ) | | 2,282 |
|
| Long-term debt | 2,937 |
| | — |
| | 2 |
| | — |
| | 2,939 |
| 2,978 |
| | — |
| | 2 |
| | — |
| | 2,980 |
|
| Pension and indemnity plan liabilities | 515 |
| | — |
| | 283 |
| | — |
| | 798 |
| 502 |
| | — |
| | 257 |
| | — |
| | 759 |
|
| Postretirement and postemployment benefits liabilities | 20 |
| | 3 |
| | 110 |
| | — |
| | 133 |
| 18 |
| | 3 |
| | 97 |
| | — |
| | 118 |
|
| Income tax accruals | 20 |
| | 5 |
| | 123 |
| | — |
| | 148 |
| 19 |
| | 5 |
| | 67 |
| | — |
| | 91 |
|
| Due to affiliates | — |
| | 39 |
| | 32 |
| | (71 | ) | | — |
| — |
| | 36 |
| | 16 |
| | (52 | ) | | — |
|
| Other liabilities | 94 |
| | 36 |
| | 101 |
| | (31 | ) | | 200 |
| 162 |
| | 24 |
| | 91 |
| | (18 | ) | | 259 |
|
| Total liabilities | 6,448 |
| | 224 |
| | 2,303 |
| | (2,868 | ) | | 6,107 |
| 6,901 |
| | 224 |
| | 2,733 |
| | (3,369 | ) | | 6,489 |
|
| Redeemable noncontrolling interest | — |
| | — |
| | 15 |
| | — |
| | 15 |
| — |
| | — |
| | 14 |
| | — |
| | 14 |
|
| Series A convertible preferred stock | 810 |
| | — |
| | — |
| | — |
| | 810 |
| 859 |
| | — |
| | — |
| | — |
| | 859 |
|
| Stockholders’ equity |
| |
| |
| |
| |
| | | | | | | | | |
| Total NCR stockholders’ equity | 719 |
| | 4,652 |
| | 1,298 |
| | (5,950 | ) | | 719 |
| 395 |
| | 4,797 |
| | 1,301 |
| | (6,098 | ) | | 395 |
|
| Noncontrolling interests in subsidiaries | — |
| | — |
| | 3 |
| | — |
| | 3 |
| — |
| | — |
| | 4 |
| | — |
| | 4 |
|
| Total stockholders’ equity | 719 |
| | 4,652 |
| | 1,301 |
| | (5,950 | ) | | 722 |
| 395 |
| | 4,797 |
| | 1,305 |
| | (6,098 | ) | | 399 |
|
| Total liabilities and stockholders’ equity | $ | 7,977 |
| | $ | 4,876 |
| | $ | 3,619 |
| | $ | (8,818 | ) | | $ | 7,654 |
| $ | 8,155 |
| | $ | 5,021 |
| | $ | 4,052 |
| | $ | (9,467 | ) | | $ | 7,761 |
|
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
| | Condensed Consolidating Statement of Cash Flows | | For the six months ended June 30, 2018 | |
| For the six months ended June 30, 2019 | | For the six months ended June 30, 2019 |
| | | | | | | | | | | | | | | | | | | |
| In millions | Parent Issuer | | Guarantor Subsidiary | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated | Parent Issuer | | Guarantor Subsidiary | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| Net cash provided by (used in) operating activities | $ | 105 |
| | $ | (150 | ) | | $ | 140 |
| | $ | — |
| | $ | 95 |
| $ | 230 |
| | $ | (208 | ) | | $ | 50 |
| | $ | (1 | ) | | $ | 71 |
|
| Investing activities | | | | | | | | | | | | | | | | | | |
| Expenditures for property, plant and equipment | (57 | ) | | — |
| | (13 | ) | | — |
| | (70 | ) | (17 | ) | | — |
| | (18 | ) | | — |
| | (35 | ) |
| Proceeds from sales of property, plant and equipment | | 3 |
| | — |
| | 8 |
| | — |
| | 11 |
|
| Additions to capitalized software | (71 | ) | | — |
| | (15 | ) | | — |
| | (86 | ) | (93 | ) | | — |
| | (10 | ) | | — |
| | (103 | ) |
| Proceeds from (payments of) intercompany notes | 160 |
| | 145 |
| | — |
| | (305 | ) | | — |
| 47 |
| | 255 |
| | 34 |
| | (336 | ) | | — |
|
| Investments in equity affiliates | | — |
| | — |
| | 98 |
| | (98 | ) | | — |
|
| Business acquisitions, net | | (12 | ) | | — |
| | — |
| | — |
| | (12 | ) |
| Other investing activities, net | (3 | ) | | — |
| | — |
| | — |
| | (3 | ) | 5 |
| | — |
| | — |
| | — |
| | 5 |
|
| Net cash provided by (used in) investing activities | 29 |
| | 145 |
| | (28 | ) | | (305 | ) | | (159 | ) | (67 | ) | | 255 |
| | 112 |
| | (434 | ) | | (134 | ) |
| Financing activities | | | | | | | | | | | | | | | | | | |
| Short term borrowings, net | 3 |
| | — |
| | (1 | ) | | — |
| | 2 |
| 4 |
| | — |
| | — |
| | — |
| | 4 |
|
| Payments on term credit facilities | (34 | ) | | — |
| | — |
| | — |
| | (34 | ) | (39 | ) | | — |
| | — |
| | — |
| | (39 | ) |
| Payments on revolving credit facilities | (660 | ) | | — |
| | (353 | ) | | — |
| | (1,013 | ) | (800 | ) | | — |
| | (114 | ) | | — |
| | (914 | ) |
| Borrowings on revolving credit facilities | 710 |
| | — |
| | 453 |
| | — |
| | 1,163 |
| 780 |
| | — |
| | 117 |
| | — |
| | 897 |
|
| Repurchase of Company common stock | (210 | ) | | — |
| | — |
| | — |
| | (210 | ) | |
| Proceeds from employee stock plans | 11 |
| | — |
| | — |
| | — |
| | 11 |
| 10 |
| | — |
| | — |
| | — |
| | 10 |
|
| Equity contribution | | (84 | ) | | (14 | ) | | — |
| | 98 |
| | — |
|
| Dividend distribution to consolidated subsidiaries | | — |
| | — |
| | (1 | ) | | 1 |
| | — |
|
| Borrowings (repayments) of intercompany notes | — |
| | — |
| | (305 | ) | | 305 |
| | — |
| — |
| | (34 | ) | | (302 | ) | | 336 |
| | — |
|
| Tax withholding payments on behalf of employees | (29 | ) | | — |
| | — |
| | — |
| | (29 | ) | (16 | ) | | — |
| | — |
| | — |
| | (16 | ) |
| Net cash provided by (used in) financing activities | (209 | ) | | — |
| | (206 | ) | | 305 |
| | (110 | ) | (145 | ) | | (48 | ) | | (300 | ) | | 435 |
| | (58 | ) |
| Cash flows from discontinued operations | | | | | | | | | | | | | | | | | | |
| Net cash used in operating activities | (11 | ) | | — |
| | — |
| | — |
| | (11 | ) | (11 | ) | | — |
| | — |
| | — |
| | (11 | ) |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | — |
| | — |
| | (8 | ) | | — |
| | (8 | ) | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Increase (decrease) in cash, cash equivalents and restricted cash | (86 | ) | | (5 | ) | | (102 | ) | | — |
| | (193 | ) | 7 |
| | (1 | ) | | (137 | ) | | — |
| | (131 | ) |
| Cash, cash equivalents and restricted cash at beginning of period | 97 |
| | 11 |
| | 435 |
| | — |
| | 543 |
| 12 |
| | 3 |
| | 461 |
| | — |
| | 476 |
|
| Cash, cash equivalents and restricted cash at end of period | $ | 11 |
| | $ | 6 |
| | $ | 333 |
| | $ | — |
| | $ | 350 |
| $ | 19 |
| | $ | 2 |
| | $ | 324 |
| | $ | — |
| | $ | 345 |
|
|
| | | | | | | | | | | | | | | | | | | |
| In millions | June 30, 2018 |
| Reconciliation of cash, cash equivalents and restricted cash as shown in the Condensed Consolidated Statements of Cash Flows | Parent Issuer | | Guarantor Subsidiary | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| Cash and cash equivalents | $ | 11 |
| | $ | 6 |
| | $ | 326 |
| | $ | — |
| | $ | 343 |
|
| Restricted cash included in Other assets | — |
| | — |
| | 7 |
| | — |
| | 7 |
|
| Total cash, cash equivalents and restricted cash | $ | 11 |
| | $ | 6 |
| | $ | 333 |
| | $ | — |
| | $ | 350 |
|
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
|
| | | | | | | | | | | | | | | | | | | |
| Condensed Consolidating Statement of Cash Flows |
| For the six months ended June 30, 2017 |
| | | | | | | | | | |
| In millions | Parent Issuer | | Guarantor Subsidiary | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| Net cash provided by (used in) operating activities | $ | 306 |
| | $ | (22 | ) | | $ | (144 | ) | | $ | (6 | ) | | $ | 134 |
|
| Investing activities | | | | | | | | | |
| Expenditures for property, plant and equipment | (26 | ) | | — |
| | (17 | ) | | — |
| | (43 | ) |
| Additions to capitalized software | (67 | ) | | — |
| | (17 | ) | | — |
| | (84 | ) |
| Proceeds from (payments of) intercompany notes | 99 |
| | 20 |
| | — |
| | (119 | ) | | — |
|
| Investments in equity affiliates | (2 | ) | | — |
| | — |
| | 2 |
| | — |
|
| Other investing activities, net | (1 | ) | | — |
| | 1 |
| | — |
| | — |
|
| Net cash provided by (used in) investing activities | 3 |
| | 20 |
| | (33 | ) | | (117 | ) | | (127 | ) |
| Financing activities | | | | | | | | | |
| Short term borrowings, net | 2 |
| | — |
| | 11 |
| | — |
| | 13 |
|
| Payments on term credit facilities | (23 | ) | | — |
| | (2 | ) | | — |
| | (25 | ) |
| Payments on revolving credit facilities | (575 | ) | | — |
| | (40 | ) | | — |
| | (615 | ) |
| Borrowings on revolving credit facilities | 615 |
| | — |
| | 240 |
| | — |
| | 855 |
|
| Repurchase of Company common stock | (350 | ) | | — |
| | — |
| | — |
| | (350 | ) |
| Proceeds from employee stock plans | 8 |
| | — |
| | — |
| | — |
| | 8 |
|
| Other financing activities | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) |
| Equity contribution | — |
| | — |
| | 2 |
| | (2 | ) | | — |
|
| Dividend distribution to consolidated subsidiaries | — |
| | — |
| | (6 | ) | | 6 |
| | — |
|
| Borrowings (repayments) of intercompany notes | — |
| | — |
| | (119 | ) | | 119 |
| | — |
|
| Tax withholding payments on behalf of employees | (24 | ) | | — |
| | — |
| | — |
| | (24 | ) |
| Net cash provided by (used in) financing activities | (348 | ) | | — |
| | 86 |
| | 123 |
| | (139 | ) |
| Cash flows from discontinued operations | | | | | | | | | |
| Net cash used in operating activities | (5 | ) | | — |
| | — |
| | — |
| | (5 | ) |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | — |
| | — |
| | 12 |
| | — |
| | 12 |
|
| Increase (decrease) in cash, cash equivalents, and restricted cash | (44 | ) | | (2 | ) | | (79 | ) | | — |
| | (125 | ) |
| Cash, cash equivalents and restricted cash at beginning of period | 67 |
| | 12 |
| | 428 |
| | — |
| | 507 |
|
| Cash, cash equivalents and restricted cash at end of period | $ | 23 |
| | $ | 10 |
| | $ | 349 |
| | $ | — |
| | $ | 382 |
|
|
| | | | | | | | | | | | | | | | | | | |
| In millions | June 30, 2019 |
| Reconciliation of cash, cash equivalents and restricted cash as shown in the Condensed Consolidated Statements of Cash Flows | Parent Issuer | | Guarantor Subsidiary | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| Cash and cash equivalents | $ | 18 |
| | $ | 2 |
| | $ | 315 |
| | $ | — |
| | $ | 335 |
|
| Restricted cash included in Other assets | 1 |
| | — |
| | 9 |
| | — |
| | 10 |
|
| Total cash, cash equivalents and restricted cash | $ | 19 |
| | $ | 2 |
| | $ | 324 |
| | $ | — |
| | $ | 345 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Condensed Consolidating Statement of Cash Flows |
| For the six months ended June 30, 2018 |
| | | | | | | | | | |
| In millions | Parent Issuer | | Guarantor Subsidiary | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| Net cash provided by (used in) operating activities | $ | 105 |
| | $ | (150 | ) | | $ | 140 |
| | $ | — |
| | $ | 95 |
|
| Investing activities | | | | | | | | | |
| Expenditures for property, plant and equipment | (57 | ) | | — |
| | (13 | ) | | — |
| | (70 | ) |
| Additions to capitalized software | (71 | ) | | — |
| | (15 | ) | | — |
| | (86 | ) |
| Proceeds from (payments of) intercompany notes | 160 |
| | 145 |
| | — |
| | (305 | ) | | — |
|
| Other investing activities, net | (3 | ) | | — |
| | — |
| | — |
| | (3 | ) |
| Net cash provided by (used in) investing activities | 29 |
| | 145 |
| | (28 | ) | | (305 | ) | | (159 | ) |
| Financing activities | | | | | | | | | |
| Short term borrowings, net | 3 |
| | — |
| | (1 | ) | | — |
| | 2 |
|
| Payments on term credit facilities | (34 | ) | | — |
| | — |
| | — |
| | (34 | ) |
| Payments on revolving credit facilities | (660 | ) | | — |
| | (353 | ) | | — |
| | (1,013 | ) |
| Borrowings on revolving credit facilities | 710 |
| | — |
| | 453 |
| | — |
| | 1,163 |
|
| Repurchase of Company common stock | (210 | ) | | — |
| | — |
| | — |
| | (210 | ) |
| Proceeds from employee stock plans | 11 |
| | — |
| | — |
| | — |
| | 11 |
|
| Borrowings (repayments) of intercompany notes | — |
| | — |
| | (305 | ) | | 305 |
| | — |
|
| Tax withholding payments on behalf of employees | (29 | ) | | — |
| | — |
| | — |
| | (29 | ) |
| Net cash provided by (used in) financing activities | (209 | ) | | — |
| | (206 | ) | | 305 |
| | (110 | ) |
| Cash flows from discontinued operations | | | | | | | | | |
| Net cash used in operating activities | (11 | ) | | — |
| | — |
| | — |
| | (11 | ) |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | — |
| | — |
| | (8 | ) | | — |
| | (8 | ) |
| Increase (decrease) in cash, cash equivalents, and restricted cash | (86 | ) | | (5 | ) | | (102 | ) | | — |
| | (193 | ) |
| Cash, cash equivalents and restricted cash at beginning of period | 97 |
| | 11 |
| | 435 |
| | — |
| | 543 |
|
| Cash, cash equivalents and restricted cash at end of period | $ | 11 |
| | $ | 6 |
| | $ | 333 |
| | $ | — |
| | $ | 350 |
|
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
|
| | | | | | | | | | | | | | | | | | | |
| In millions | June 30, 2018 |
| Reconciliation of cash, cash equivalents and restricted cash as shown in the Condensed Consolidated Statements of Cash Flows | Parent Issuer | | Guarantor Subsidiary | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| Cash and cash equivalents | $ | 11 |
| | $ | 6 |
| | $ | 326 |
| | $ | — |
| | $ | 343 |
|
| Restricted cash included in Other assets | — |
| | — |
| | 7 |
| | — |
| | 7 |
|
| Total cash, cash equivalents and restricted cash | $ | 11 |
| | $ | 6 |
| | $ | 333 |
| | $ | — |
| | $ | 350 |
|
|
| | | | | | | | | | | | | | | | | | | |
| In millions | June 30, 2017 |
| Reconciliation of cash, cash equivalents and restricted cash as shown in the Condensed Consolidated Statements of Cash Flows | Parent Issuer | | Guarantor Subsidiary | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| Cash and cash equivalents | $ | 23 |
| | $ | 10 |
| | $ | 344 |
| | $ | — |
| | $ | 377 |
|
| Restricted cash included in Other assets | — |
| | — |
| | 5 |
| | — |
| | 5 |
|
| Total cash, cash equivalents and restricted cash | $ | 23 |
| | $ | 10 |
| | $ | 349 |
| | $ | — |
| | $ | 382 |
|
| |
| Item 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A) |
Second Quarter Overview
The following were the significant events for the second quarter of 2018,2019, each of which is discussed more fully in later sections of this MD&A:
Revenue decreasedincreased approximately 4%11% from the prior year period and 5%14% excluding favorableunfavorable foreign currency impacts;
SoftwareBanking revenue increased 1% from the prior year period, driven by cloud revenue growth of 7%,20% and operating margin declined 290rate increased 190 basis points from the prior year period;
ServicesRetail revenue increased 4% and operating margin rate remained consistent from the prior year period;
Hardware revenue decreased 16% and operating margin rate declined 79040 basis points from the prior year period; and
The Company recorded $183 million of asset impairment charges related to its Hardware business.Hospitality revenue increased 2% and operating margin rate declined 320 basis points from the prior year period.
Strategic Overview
The rise of digital first commerce, mobile engagement and globalization have dramatically altered the relationship between business and consumer. Increasingly, mega-trends such as big data, the Internet of things and the cloud are driving the next generation of changes in consumer behavior. Consumers now expect businesses to provide a rich, integrated and personalized experience across all commerce channels, including in-store, online, mobile and mobile.in-store. NCR is at the forefront of this commerce shift, assisting businesses of every size in their digital first channel transformation journeys. Our mission is to innovatebe the leading software- and enableservices-led enterprise provider in the next generation of consumer experiencesfinancial, retail, hospitality and productivity gainstelecommunications and technology industries, with solutions designed to enrichallow businesses in the interactions of businesses withindustries we serve to deliver a rich, integrated and personalized experience to consumers across digital and physical commerce channels, enabling our customers to move their customers.business forward in a digital first environment. To fulfill this mission, we have developed a long-term growth strategy built on being a global technology solutions company that uses cloud-based and other software, coupled with end-to-end smart-edge hardware and services solutions, to helptaking better care of our customers, deliver on the promiseimproving execution of an omni-channel experience.new product introductions, accelerating revenue growth and executing spend optimization programs. We believe that our mission and long-term strategy position NCR to continue to drive growth, sustainable revenue, profit and cash flow, and to improve value for all of our stakeholders.
To deliver on our mission and strategy, we are focused on the following main initiatives in 2018:2019:
| |
| • | Customer Care - Improve the customer experience and execution of new product introductions; |
| |
| • | Stockholder Value - Accelerate profitable top-line revenue growth by investing in and shifting our revenue mix to recurring software and services revenue streams we identify as strategic growth platforms, while improving the Company’s cost structure; |
Customer Experience - Improving the customer experience by improving solution quality, availability and security.
| |
| • | Strategic Growth Platforms and Targeted Acquisitions - Increase capital expenditures in strategic growth platforms and target acquisitions to gain solutions that drive the highest growth and return on investment; |
| |
| • | Talent and Employee Care - Develop, reward and retain talent with competitive recruiting, training and effective incentive-based compensation programs; and |
| |
| • | Sales Enablement - Provide our sales force with top-performing and secure products packaged to target our desired revenue mix and drive customer delight and stockholder value, as well as invest in appropriate training programs to enable success. |
Strategic and Recurring Revenue - Continuing our focus on cloud, software platform, smart-edge devices and professional and managed services to drive profitable revenue and operating income.
Sales Effectiveness - Providing our sales force with the training, tools, support and coverage model necessary to optimize efficiency and achieve our sales plan.
Services Transformation - Driving performance and sustainable margin improvement by focusing on productivity and efficiency improvements, expanding our remote diagnostics and repair capabilities, creating greater discipline in our product lifecycle management, and employing a higher mix of managed services.
Evolving our Business Model - Continuing the shift in our business model to provide innovative end-to-end solutions for our customers, with best in class support while keeping an efficient cost structure to create competitive advantage.
New Products - Launching new industry products, powered by our platform software with best in class product lifecycle management and go-to-market support, and migrating and releasing existing licensed software products as cloud-based products.
Operating Model Innovation - Eliminating waste, utilizing effective product lifecycle management, increasing productivity, using technology as an enabler, and executing on business process improvements to reduce costs and use savings to invest in strategic initiatives, product innovation and people.
Team and Talent - Attracting, developing and retaining top talent by deploying competitive recruiting and training programs, evolving our brand, and continuously engaging with employees.
Consistent with the foregoing, we are evaluating and beginning to implement certain initiatives focused on realigning resources and optimizing our portfolio of software solutions, accelerating structural changes in our services business and streamlining our hardware operations, particularly in supply chain and manufacturing. In addition, we plan, in pursuing our strategy, to continue to manage our costs effectively, to selectively pursue acquisitions and divestitures that promote our strategy, and to selectively penetrate market adjacencies in single and emerging growth industry segments.
Potentially significant risks to the execution of our initiatives and achievement of our strategy include the strength of demand for automated teller machines and other financial services hardwarethe products we offer or will offer in the future consistent with our strategy and its effect on our businesses; our ability to generate accurate forecasts of product demand and to engage third-party suppliers appropriately to meet that demand, including the on-boarding of new or additional suppliers; domestic and global economic and credit conditions including, in particular, those resulting from the imposition or threat of protectionist trade policies or import or export tariffs, global and regional market conditions and spending trends in the financial, servicesretail and retailhospitality industries, new comprehensive U.S. tax legislation, modified or new global or regional trade agreements, the determination by the United Kingdom to exit the European Union and the execution of the same; uncertainty over further potential changes in Eurozone participation and fluctuations in oil and commodity prices; our ability to transform our business model and to sell higher-margin software and services with recurring revenue, including our ability to successfully streamline our hardware operations through manufacturing network redesign and use of outsourced manufacturing;operations; the success of our restructuring plans and cost reduction initiatives;spend optimization program; our ability to improve execution in our sales and services organizations;of new product offering or integration of acquired product offerings; market acceptance of new solutions andsolutions; competition in the information technology industry; cybersecurity risks and compliance with data privacy and protection requirements; disruptions in or problems with our data center hosting facilities; defects or errors in our products; the historical seasonality of our sales; tax rates and new US tax legislation; uncertainties or delays associated with the transition of key business leaders and foreign currency fluctuations.
Results from Operations
ThreeFor the three and Sixsix months ended June 30, 2019 compared to the three and six months ended June 30, 2018 Compared to Three and Six months ended June 30, 2017
The following table shows our results for the three and six months ended June 30:
| | | | Three months ended June 30 | | Six months ended June 30 | Three months ended June 30 | | Six months ended June 30 |
| In millions | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
| Revenue | $ | 1,537 |
| | $ | 1,593 |
| | $ | 3,054 |
| | $ | 3,071 |
| $ | 1,710 |
| | $ | 1,537 |
| | $ | 3,246 |
| | $ | 3,054 |
|
| Gross margin | $ | 403 |
| | $ | 461 |
| | $ | 823 |
| | $ | 873 |
| 471 |
| | 403 |
| | 882 |
| | 823 |
|
| Gross margin as a percentage of revenue | 26.2 | % | | 28.9 | % | | 26.9 | % | | 28.4 | % | 27.5 | % | | 26.2 | % | | 27.2 | % | | 26.9 | % |
| Operating expenses | | | | | | | | | | | | | | |
| Selling, general and administrative expenses | $ | 261 |
| | $ | 228 |
| | $ | 506 |
| | $ | 458 |
| $ | 252 |
| | $ | 261 |
| | $ | 504 |
| | $ | 506 |
|
| Research and development expenses | 65 |
| | 58 |
| | 131 |
| | 125 |
| 62 |
| | 65 |
| | 121 |
| | 131 |
|
| Asset impairment charges | 183 |
| | — |
| | 183 |
| | — |
| — |
| | 183 |
| | — |
| | 183 |
|
| (Loss) income from operations | $ | (106 | ) | | $ | 175 |
| | $ | 3 |
| | $ | 290 |
| |
| Income from operations | | $ | 157 |
| | $ | (106 | ) | | $ | 257 |
| | $ | 3 |
|
The following table shows our revenue by geographic theatergeography for the three months ended June 30:
| | | In millions | 2018 | % of Total | | 2017 | % of Total | | % Increase (Decrease) | % Increase (Decrease) Constant Currency (1) | 2019 | % of Total | | 2018 | % of Total | | % Increase (Decrease) | % Increase (Decrease) Constant Currency (1) |
| Americas | $ | 875 |
| 57% | | $ | 915 |
| 57% | | (4)% | (3)% | $ | 1,029 |
| 60% | | $ | 875 |
| 57% | | 18% | 19% |
| Europe, Middle East Africa (EMEA) | 418 |
| 27% | | 454 |
| 29% | | (8)% | (11)% | |
| Europe, Middle East and Africa (EMEA) | | 452 |
| 27% | | 418 |
| 27% | | 8% | 13% |
| Asia Pacific (APJ) | 244 |
| 16% | | 224 |
| 14% | | 9% | 8% | 229 |
| 13% | | 244 |
| 16% | | (6)% | (3)% |
| Consolidated revenue | $ | 1,537 |
| 100% | | $ | 1,593 |
| 100% | | (4)% | (5)% | $ | 1,710 |
| 100% | | $ | 1,537 |
| 100% | | 11% | 14% |
The following table shows our revenue by geographic theatergeography for the six months ended June 30:
| | | In millions | 2018 | % of Total | | 2017 | % of Total | | % Increase (Decrease) | % Increase (Decrease) Constant Currency (1) | 2019 | % of Total | | 2018 | % of Total | | % Increase (Decrease) | % Increase (Decrease) Constant Currency (1) |
| Americas | $ | 1,764 |
| 58% | | $ | 1,762 |
| 57% | | —% | $ | 1,949 |
| 60% | | $ | 1,764 |
| 58% | | 10% | 12% |
| Europe, Middle East Africa (EMEA) | 826 |
| 27% | | 876 |
| 29% | | (6)% | (11)% | |
| Europe, Middle East and Africa (EMEA) | | 871 |
| 27% | | 826 |
| 27% | | 5% | 11% |
| Asia Pacific (APJ) | 464 |
| 15% | | 433 |
| 14% | | 7% | 4% | 426 |
| 13% | | 464 |
| 15% | | (8)% | (4)% |
| Consolidated revenue | $ | 3,054 |
| 100% | | $ | 3,071 |
| 100% | | (1)% | (3)% | $ | 3,246 |
| 100% | | $ | 3,054 |
| 100% | | 6% | 9% |
The following table shows our revenue by segment for the three months ended June 30:
|
| | | | | | | | | | | | |
| In millions | 2018 | % of Total | | 2017 | % of Total | | % Increase (Decrease) | % Increase (Decrease) Constant Currency (1) |
| Software | $ | 470 |
| 30% | | $ | 464 |
| 29% | | 1% | —% |
| Services | 610 |
| 40% | | 588 |
| 37% | | 4% | 3% |
| Hardware | 457 |
| 30% | | 541 |
| 34% | | (16)% | (17)% |
| Consolidated revenue | $ | 1,537 |
| 100% | | $ | 1,593 |
| 100% | | (4)% | (5)% |
|
| | | | | | | | | | | | |
| In millions | 2019 | % of Total | | 2018 | % of Total | | % Increase (Decrease) | % Increase (Decrease) Constant Currency (1) |
| Banking | $ | 868 |
| 51% | | $ | 725 |
| 47% | | 20% | 23% |
| Retail | 558 |
| 32% | | 537 |
| 35% | | 4% | 6% |
| Hospitality | 202 |
| 12% | | 198 |
| 13% | | 2% | 3% |
| Other | 82 |
| 5% | | 77 |
| 5% | | 6% | 8% |
| Consolidated revenue | $ | 1,710 |
| 100% | | $ | 1,537 |
| 100% | | 11% | 14% |
The following table shows our revenue by segment for the six months ended June 30:
|
| | | | | | | | | | | | |
| In millions | 2018 | % of Total | | 2017 | % of Total | | % Increase (Decrease) | % Increase (Decrease) Constant Currency (1) |
| Software | $ | 930 |
| 30% | | $ | 916 |
| 30% | | 2% | —% |
| Services | 1,211 |
| 40% | | 1,145 |
| 37% | | 6% | 3% |
| Hardware | 913 |
| 30% | | 1,010 |
| 33% | | (10)% | (12)% |
| Consolidated revenue | $ | 3,054 |
| 100% | | $ | 3,071 |
| 100% | | (1)% | (3)% |
|
| | | | | | | | | | | | |
| In millions | 2019 | % of Total | | 2018 | % of Total | | % Increase (Decrease) | % Increase (Decrease) Constant Currency (1) |
| Banking | $ | 1,626 |
| 50% | | $ | 1,446 |
| 47% | | 12% | 16% |
| Retail | 1,069 |
| 33% | | 1,058 |
| 35% | | 1% | 4% |
| Hospitality | 395 |
| 12% | | 402 |
| 13% | | (2)% | —% |
| Other | 156 |
| 5% | | 148 |
| 5% | | 5% | 8% |
| Consolidated revenue | $ | 3,246 |
| 100% | | $ | 3,054 |
| 100% | | 6% | 9% |
(1) The tables above for the three and six months ended ended June 30 are presented with period-over-period revenue growth or declines on a constant currency basis. Constant currency is a non-GAAP measure that excludes the effects of foreign currency fluctuations. We calculate this information by translating prior period revenue growth at current period monthly average exchange rates. We believe that examining period-over-period revenue growth or decline excluding foreign currency fluctuations is useful for assessing the underlying performance of our business, and our management uses revenue growth adjusted for constant currency to evaluate period-over-period operating performance. This non-GAAP measure should not be considered a substitute for, or superior to, period-over-period revenue growth under GAAP.
The following table provides a reconciliation of geographic theater revenue percentage growth (GAAP) to revenue percentage growth constant currency (non-GAAP) for the three months ended June 30, 2018:2019:
| | | | Revenue % Growth (GAAP) | Favorable (unfavorable) FX impact | Revenue % Growth Constant Currency (non-GAAP) | Revenue % Growth (GAAP) | Favorable (unfavorable) FX impact | Revenue % Growth Constant Currency (non-GAAP) |
| Americas | (4)% | (1)% | (3)% | 18% | (1)% | 19% |
| EMEA | (8)% | 3% | (11)% | 8% | (5)% | 13% |
| APJ | 9% | 1% | 8% | (6)% | (3)% |
| Consolidated revenue | (4)% | 1% | (5)% | 11% | (3)% | 14% |
The following table provides a reconciliation of geographic theater revenue percentage growth (GAAP) to revenue percentage growth constant currency (non-GAAP) for the six months ended June 30, 2018:2019:
| | | | Revenue % Growth (GAAP) | Favorable (unfavorable) FX impact | Revenue % Growth Constant Currency (non-GAAP) | Revenue % Growth (GAAP) | Favorable (unfavorable) FX impact | Revenue % Growth Constant Currency (non-GAAP) |
| Americas | —% | 10 | % | (2 | )% | 12 | % |
| EMEA | (6)% | 5% | (11)% | 5 | % | (6 | )% | 11 | % |
| APJ | 7% | 3% | 4% | (8 | )% | (4 | )% | (4 | )% |
| Consolidated revenue | (1)% | 2% | (3)% | 6 | % | (3 | )% | 9 | % |
The following table provides a reconciliation of segment revenue percentage growth (GAAP) to revenue percentage growth constant currency (non-GAAP) for the three months ended June 30, 2018:
2019:
|
| | | |
| | Revenue % Growth (GAAP) | Favorable (unfavorable) FX impact | Revenue % Growth Constant Currency (non-GAAP) |
| Software | 1% | 1% | —% |
| Services | 4% | 1% | 3% |
| Hardware | (16)% | 1% | (17)% |
| Consolidated revenue | (4)% | 1% | (5)% |
|
| | | |
| | Revenue % Growth (GAAP) | Favorable (unfavorable) FX impact | Revenue % Growth Constant Currency (non-GAAP) |
| Banking | 20% | (3)% | 23% |
| Retail | 4% | (2)% | 6% |
| Hospitality | 2% | (1)% | 3% |
| Other | 6% | (2)% | 8% |
| Consolidated revenue | 11% | (3)% | 14% |
The following table provides a reconciliation of segment revenue percentage growth (GAAP) to revenue percentage growth constant currency (non-GAAP) for the six months ended June 30, 2018:2019:
|
| | | |
| | Revenue % Growth (GAAP) | Favorable (unfavorable) FX impact | Revenue % Growth Constant Currency (non-GAAP) |
| Software | 2% | 2% | —% |
| Services | 6% | 3% | 3% |
| Hardware | (10)% | 2% | (12)% |
| Consolidated revenue | (1)% | 2% | (3)% |
|
| | | |
| | Revenue % Growth (GAAP) | Favorable (unfavorable) FX impact | Revenue % Growth Constant Currency (non-GAAP) |
| Banking | 12% | (4)% | 16% |
| Retail | 1% | (3)% | 4% |
| Hospitality | (2)% | (2)% | —% |
| Other | 5% | (3)% | 8% |
| Consolidated revenue | 6% | (3)% | 9% |
Revenue
For the three months endedJune 30, 20182019 compared to the three months endedJune 30, 2017,2018, revenue decreased 4%increased 11% due to an increase in all segments. Foreign currency fluctuations had an unfavorable impact of 3% to the revenue comparison.
Banking revenue increased 20% due to a decrease73% growth in HardwareATM and ATM-related software revenue partially offsetdriven by higher backlog conversion as well as growth in services revenue. Foreign currency fluctuations unfavorably impacted the revenue comparison by 3%. Retail revenue increased 4% driven by an increase in Software and Servicespayments, strength in self-checkout, as well as growth in services revenue. Foreign currency fluctuations favorablyhad an unfavorable impact of 2% on the revenue comparison. Hospitality revenue increased 2% driven by higher cloud and payments revenue. Foreign currency fluctuations unfavorably impacted the revenue comparison by 1%.
Software revenue increased 1% driven by growth in cloud, software maintenance, and professional services, partially offset by declines in software licenses. Services revenue increased 4% due to growth in both hardware maintenance and managed and implementation services. Hardware revenue decreased 16% due to declines in Automated Teller Machine (ATM) and Point-of-Sale (POS) revenue, partially offset by an increase in Self-Checkout (SCO) revenue.
For the six months ended June 30, 20182019 compared to the six months ended June 30, 2017,2018, revenue decreased 1%increased 6% primarily due to an increase in Banking and Hospitality segments. Foreign currency fluctuations had an unfavorable impact of 3% to the revenue comparison.
Banking revenue increased 12% due to a decrease46% growth in HardwareATM revenue driven by higher backlog conversion and higher ATM-related software as well as growth in services revenue. Foreign currency fluctuations unfavorably impacted the revenue comparison by 4%. Retail revenue increased 1% driven by an increase in payments, strength in self-checkout and services revenue partially offset by an increasea large implementation services project in Softwarethe prior year. Foreign currency fluctuations unfavorably impacted the revenue comparison by 3%. Hospitality revenue decreased 2% driven by a decline in hardware revenue partially offset by growth in cloud and Servicespayments revenue. Foreign currency fluctuations favorablyunfavorably impacted the revenue comparison by 2%.
Software revenue increased 2% driven by growth in cloud, software maintenance, and professional services, partially offset by declines in software licenses. Services revenue increased 6% due to growth in both hardware maintenance and managed and implementation services. Hardware revenue decreased 10% due to declines in ATM and SCO revenue, and to a lesser extent in POS revenue.
The changes to segment revenue and the drivers thereof are discussed in further detail under "Revenue and Operating Income by Segment" below.
Gross Margin
Gross margin as a percentage of revenue in the three months ended June 30, 20182019 was 26.2%27.5% compared to 28.9%,26.2% in the three months ended June 30, 2017.2018. Gross margin in the three months ended June 30, 2019 included $10 million of costs related to restructuring and transformation initiatives and $6 million related to acquisition-related amortization of intangibles. Gross margin in the three months ended June 30, 2018 included $41 million of costs related to restructuring and transformation initiatives.initiatives and $5 million related to acquisition-related amortization of intangibles. Excluding this item,these items, gross margin as a percentage of revenue decreased slightly.from 29.2% to 28.5% due to a higher mix of hardware revenue.
Gross margin as a percentage of revenue in the the six months ended June 30, 20182019 was 26.9%27.2% compared to 28.4%26.9% in the six months ended June 30, 2017.2018. Gross margin in the six months ended June 30, 2019 included $18 million of costs related to restructuring and transformation initiatives and $12 million related to acquisition-related amortization of intangibles. Gross margin in the six months ended June 30, 2018 included $45 million related to transformation and restructuring costs and $12 million of costs related to restructuring and transformation initiatives.acquisition-related amortization of intangibles. Excluding this item,these items, gross margin as a percentage of revenue decreased slightly.
In the three and six months ended June 30, 2018, gross margin as a percentage of revenue expanded in our Services segment, which reflects the results of our strategic focus on business process improvement initiatives and a mix shift towards higher value managed services. The Services gross margin rate expansion was offset by a decline in our Software and Hardware segments. The decline in Software gross margin rate was primarilyfrom 28.8% to 28.1% due to lower software license revenue partially offset by margin expansion in cloud and software maintenance. The decline in Hardware gross margin rate was due to lower volume and an unfavorable product mix.a higher mix of hardware revenue.
Operating Expenses
Selling, general and administrative expenses were $252 million, or 14.7% as a percentage of revenue, as compared to $261 million, or 17.0% as a percentage of revenue, in the three months ended June 30, 2019 and June 30, 2018, as compared to $228 million, or 14.3% as a percentage of revenue,respectively. Selling, general and administrative expenses in the three months ended June 30, 2017.2019 included $15 million of acquisition-related amortization of intangibles and $4 million of costs related to restructuring and transformation initiatives. Selling, general, and administrative expenses in the three months ended June 30, 2018 included $16 million of acquisition-related amortization of intangibles, $22 million of costs related to our restructuring and transformation initiatives and $1 million of acquisition-related costs. Selling, general, and administrative expenses in the three months ended June 30, 2017 included $16 million of acquisition-related amortization of intangibles, $3 million of costs related to our transformation initiatives and $1 million of acquisition-related costs. Excluding these items, selling, general and administrative expenses increaseddecreased from 13.1%14.4% as a percentage of revenue in the three months ended June 30, 20172018 to 14.4%13.6% as a percentage of revenue in the three months ended June 30, 2018. The increase in selling, general and administrative expenses was2019 due to continued investmentcost reduction benefits realized partially offset by increases in the business.employee-related and real estate expenses.
Selling, general and administrative expenses were $504 million, or 15.5% as a percentage of revenue, as compared to $506 million or 16.6% as a percentage of revenue, in the six months ended June 30, 2019 and June 30, 2018, as compared to $458 million, or 14.9% as a percentage of revenue,respectively. Selling, general and administrative expenses in the six months ended June 30, 2017.2019 included $30 million of acquisition-related amortization of intangibles and $19 million of costs related to restructuring and transformation initiatives. Selling, general, and administrative expenses in the six months ended June 30, 2018 included $32 million of acquisition-related amortization of intangibles, $32 million of costs related to restructuring andour transformation initiatives, and $1 million of acquisition related costs. Selling, general, and administrative expenses in the six months ended June 30, 2017 included $32 million of acquisition-related amortization of intangibles, $7 million of costs related to our transformation initiative and $2 million of acquisition-related costs. Excluding these items, selling, general and administrative expenses increaseddecreased from 13.6% of revenue in the six months ended June 30, 2017 to 14.4% as a percentage of revenue in the six months ended June 30, 2018 to 14.0% as a percentage of revenue inthe six months ended June 30, 2019 due to continued investmentcost reduction benefits realized partially offset by increases in the business.employee-related and real estate expenses.
Research and development expenses were $62 million, or 3.6% as a percentage of revenue, in the three months ended June 30, 2019 as compared to $65 million, or 4.2% as a percentage of revenue, in the three months ended June 30, 2018 as compared to $58 million, or 3.6% as a percentage of revenue, in the three months ended June 30, 2017.2018. Research and development expenses in the three months ended June 30, 20182019 and June 30, 20172018 included $3 millionzero and $1$3 million, respectively, of costs related to our restructuring and transformation initiatives. Excluding these costs, research and development expenses as a percentage of revenue decreased slightly from 4.0% in the three months ended June 30, 2018 to 3.6% in the three months ended June 30, 20172019 due to 4.0%increased discipline for investments in the three months ended June 30, 2018.our strategic growth platforms.
Research and development expenses were $121 million, or 3.7% as a percentage of revenue, in the six months ended June 30, 2019 as compared to $131 million, or 4.3% as a percentage of revenue, in the six months ended June 30, 2018 as compared to $125 million, or 4.1% as a percentage of revenue,2018. Research and development expenses in the the six months ended June 30, 2017. Research2019 and development expenses in the six months ended June 30, 2018 and 2017 included $5$3 million and $4$5 million, respectively, of costs related to our restructuring and transformation initiatives. Excluding these costs, research and development expenses as a percentage of revenue decreased slightly from 3.9% in the six months ended June 30, 2017 to 4.1% in the six months ended June 30, 2018.2018 to 3.6% in the six months ended June 30, 2019 due to increased discipline for investments in our strategic growth platforms.
Asset impairment charges were $183 million in the three and six months ended June 30, 2018, which included a $146 million impairment of goodwill under our previous segment structure which was assigned to the Hardware reporting unit and a $37 million impairment charge related to long-lived assets held and used in our Hardware operations. Refer to Note 4. Goodwill and Long-Lived Assets of the Notes to Condensed Consolidated Financial Statements for additional discussion.
Interest and Other Expense Items
Interest expense was $41$45 million in the three months ended June 30, 20182019 compared to $41 million in the three months ended June 30, 2017.
2018. Interest expense was $82$90 million in the six months ended June 30, 20182019 compared to $80$82 million in the the six months ended June 30, 2017.2018, The increases in the three and six months ended periods were due to higher interest rates.
Other expense, net was $9 million in the three months ended June 30, 20182019 compared to $4$9 million in the three months ended June 30, 2017.2018. Other expense, net in the three months ended June 30, 2019 and 2018 and 2017 included $7$6 million and $6$7 million, respectively, of losses from foreign currency remeasurement and foreign exchange contracts not designated as hedging instruments.
Other expense, net was $17 million the six months ended June 30, 2019 compared to $14 million in the six months ended June 30, 2018 compared to $9 million2018. Other expense, net in the the six months ended June 30, 2017. Other expense, net in the six months ended2019 and June 30, 2018 and June 30, 2017 included $13$12 million and $10$13 million, respectively, of losses from foreign currency remeasurement and foreign exchange contracts not designated as hedging instruments.
Provision for Income Taxes
Income tax provisions for interim (quarterly) periods are based on an estimated annual effective income tax rate calculated separately from the effect of significant, infrequent or unusual items. Income tax expense was $15 million for the three months ended June 30, 2019 compared to income tax benefit wasof $12 million for the three months ended June 30, 2018 compared to income tax expense of $33 million for the three months ended June 30, 2017.2018. The decreasechange was primarily driven by lowerhigher income before taxes the impacts of U.S. Tax Reform and an increase in discrete benefits in the three months ended June 30, 2018. The increase in discrete benefits was primarily driven by favorable audit settlements in international jurisdictions.2019.
Income tax expense was $24 million for the six months ended June 30, 2019 compared to income tax benefit wasof $5 million for the six months ended June 30, 2018 compared to income tax expense of $47 million for the six months ended June 30, 2017.2018. The decrease in income tax expensechange was primarily driven by lowera higher income before taxes the impacts of U.S. Tax Reform and an increase in discrete benefits in the six months ended June 30, 2018. The increase in discrete benefits was primarily driven by favorable audit settlements in international jurisdictions, partially offset by the decrease of favorable excess tax benefits of share-based compensation awards.2019.
The Company reviewed our United Kingdom net deferred tax assets for recoverability based on the evaluation of positive and negative evidence. A full valuation allowance against net deferred tax assets will be maintained until sufficient positive evidence exists to reduce or eliminate the valuation allowance. The factors considered by management in its determination of the probability of the realization of the deferred tax assets include, but are not limited to, recent historical financial results, historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. As of June 30, 2018, the Company continued to maintain a full valuation allowance against the United Kingdom net deferred tax assets due to insufficient positive evidence and the uncertainty regarding anticipated future earnings at certain subsidiaries in the United Kingdom.
NCR is subject to numerous federal, state and foreign tax audits. While NCR believes that appropriate reserves exist for issues that might arise from these audits, should these audits be settled, the resulting tax effect could impact the tax provision and cash flows in 20182019 or future periods. The Company regularly reviews our deferred tax assets for recoverability based on the evaluation of positive and negative evidence; given current earnings and anticipated future earnings at certain subsidiaries, the Company believes that there is a reasonable possibility that sufficient positive evidence may become available that would allow the release of a valuation allowance within the next twelve months.
Income (Loss)Loss from Discontinued Operations
In the three months ended June 30, 2019, there was no activity related to discontinued operations. In the three months ended June 30, 2018, the loss from discontinued operations, net of tax, was $2 million net of tax, due to audit settlements partially related to Teradata. In the three months ended June 30, 2017, income from discontinued operations was $5 million due to an insurance settlement received related to environmental matters.
In the six months ended June 30, 2019, there was no activity related to discontinued operations. In the the six months ended June 30, 2018, the loss from discontinued operations, net of tax, was $37 million net of tax, due todriven by a ruling on the Kalamazoo environmental mattersite as well as audit settlements partially related to Teradata. In the six months ended June 30, 2017, income from discontinued operations was $5 million due to an insurance settlement received related to environmental matters.
Revenue and Operating Income by Segment
The Company manages and reports the following three segments:
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| • | Banking - We offer solutions to enable customers in the financial services industry to reduce costs, generate new revenue streams and enhance customer loyalty. These solutions include a comprehensive line of ATM and payment processing hardware and software; cash management and video banking software and customer-facing digital banking services; and related installation, maintenance, and managed and professional services. |
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| • | Retail - We offer solutions to customers in the retail industry designed to improve selling productivity and checkout processes as well as increase service levels. These solutions primarily include retail-oriented technologies, such as point of sale terminals and point of sale software; a retail software platform with a comprehensive suite of retail software applications; innovative self-service kiosks, such as self-checkout; as well as bar-code scanners. We also offer installation, maintenance, managed and professional services as well as payment processing solutions. |
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| • | Hospitality - We offer technology solutions to customers in the hospitality industry, serving businesses that range from a single store or restaurant to global chains and sports and entertainment venues. Our solutions include point of sale hardware and software solutions, installation, maintenance, managed and professional services as well as payment processing solutions. |
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| • | Other - This category includes telecommunications and technology solutions where we offer maintenance as well as managed and professional services for third-party hardware provided to select manufacturers who value and leverage our global service capability. |
Software - Our software offerings include industry-based software platforms, applications and application suites for the financial services, retail, hospitality and small business industries. We also offer a portfolio of other industry-oriented software applications including cash management software, video banking software, fraud and loss prevention applications, check and document imaging, remote-deposit capture and customer-facing mobile and digital banking applications for the financial services industry; and secure electronic and mobile payment solutions, sector-specific point
of sale software applications, and back-office inventory and store and restaurant management applications for the retail and hospitality industries. Additionally, we provide ongoing software support and maintenance services, as well as consulting and implementation services for our software solutions.
Services - Our global end-to-end services solutions include assessment and preparation, staging, installation, implementation, and maintenance and support for our solutions. We also provide systems management and complete managed services for our product offerings. In addition, we provide installation, maintenance and servicing for third party networking products and computer hardware from select manufacturers.
Hardware - Our hardware solutions include our suite of financial-oriented self-service ATM-related hardware, and our retail- and hospitality-oriented point of sale terminal, self-checkout kiosk and related hardware. We also offer other self-service kiosks, such as self-check in/out kiosks for airlines, and wayfinding solutions for buildings and campuses.
Each of these segments derives its revenue by selling in the sales theatersgeographies in which NCR operates. Segments are measured for profitability by the Company’s chief operating decision maker based on revenue and segment operating income. For purposes of discussing our operating results by segment, we exclude the impact of certain non-operational items from segment operating income, consistent with the manner by which management reviews each segment, evaluates performance, and reports our segment results under GAAP. This format is useful to investors because it allows analysis and comparability of operating trends. It also includes the same information that is used by NCR management to make decisions regarding the segments and to assess our financial performance. Our segment results are reconciled to total Company results reported under GAAP in Note 15.3. Segment Information and Concentrations of the Notes to Condensed Consolidated Financial Statements.
In the segment discussions below, we have disclosed the impact of foreign currency fluctuations as it relates to our segment revenue.
Software SegmentBanking
The following table shows the Software segmentBanking revenue and operating income for the three and six months ended June 30:
| | | | Three months ended June 30 | | Six months ended June 30 | Three months ended June 30 | | Six months ended June 30 |
| In millions | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
| Revenue | $ | 470 |
| | $ | 464 |
| | $ | 930 |
| | $ | 916 |
| $ | 868 |
| | $ | 725 |
| | $ | 1,626 |
| | $ | 1,446 |
|
| Operating income | $ | 115 |
| | $ | 127 |
| | $ | 224 |
| | $ | 251 |
| $ | 129 |
| | $ | 94 |
| | $ | 224 |
| | $ | 178 |
|
| Operating income as a percentage of revenue | 24.5 | % | | 27.4 | % | | 24.1 | % | | 27.4 | % | 14.9 | % | | 13.0 | % | | 13.8 | % | | 12.3 | % |
In the three and six months ended June 30, 2019 compared to the three and six months ended June 30, 2018, revenue increased 20% and 12%, respectively, due to growth in ATM and ATM-related software revenue driven by higher backlog conversion as well as growth in services revenue. The revenue growth was mainly driven by strength in the Americas and Europe. In the three and six months ended June 30, 2019, foreign currency fluctuations had an unfavorable impact of 3% and 4%, respectively, on the revenue comparison.
Operating income increased in the three and six months ended June 30, 2019 compared to the three and six months ended June 30, 2018. The increase in operating income was primarily due to a favorable mix of revenue, both by product and geography, as well as a favorable impact from productivity initiatives.
Retail
The following table shows the Retail revenue and operating income for the three and six months ended June 30:
|
| | | | | | | | | | | | | | | |
| | Three months ended June 30 | | Six months ended June 30 |
| In millions | 2019 | | 2018 | | 2019 | | 2018 |
| Revenue | $ | 558 |
| | $ | 537 |
| | $ | 1,069 |
| | $ | 1,058 |
|
| Operating income | $ | 40 |
| | $ | 41 |
| | $ | 66 |
| | $ | 76 |
|
| Operating income as a percentage of revenue | 7.2 | % | | 7.6 | % | | 6.2 | % | | 7.2 | % |
In the three months ended June 30, 20182019 compared to the three months ended June 30, 2017, Software2018, revenue increased1%, 4% driven by an increase in payment processing revenue, strength in self-checkout revenue as well as growth in cloudservices revenue. The revenue of 7%, software maintenance revenue of 2%increase was mainly driven by Americas and professional services revenue of 2%, partially offset by declines in software license revenue of 12%. Cloud revenue growth was due to the impact from prior period bookings. Professional services revenue growth was due to demand for the Company's channel transformation and digital enablement solutions. Software maintenance revenue growth was due to software license sales from prior periods. Software license revenue declined due to lower hardware sales and unattached software licenses.Europe. Foreign currency fluctuations had a favorablean unfavorable impact of 1%2% on the revenue comparison.
In the six months ended June 30, 20182019 compared to the six months ended June 30, 2017, Software2018, revenue increased 2%,1% driven by growthan increase in cloudpayment processing revenue of 8%, professional servicesand strength in self-checkout revenue of 5%, and software maintenance revenue of 1%, partially offset by declinesa large implementation services project in software licensethe prior year. The revenue of 15%. Cloud revenue growthincrease was due tomainly driven by the impact from prior period bookings. Professional services revenue growth was due to demand for the Company's channel transformationAmericas and digital enablement solutions. Software maintenance revenue growth was due to software license sales from prior periods. Software license revenue declined due to lower hardware sales and unattached software licenses.Europe. Foreign currency fluctuations had a favorablean unfavorable impact of 2%3% on the revenue comparison.
Operating income decreased in the three and six months ended June 30, 20182019 compared to the three and six months ended June 30, 2017. The decrease in operating income was driven by lower software license revenue partially offset by margin expansion in cloud and software maintenance.2018 primarily due to an unfavorable mix of revenue.
Services Segment
The following table shows the Services segmentHospitality revenue and operating loss for the three and six months ended June 30:
|
| | | | | | | | | | | | | | | |
| | Three months ended June 30 | | Six months ended June 30 |
| In millions | 2019 | | 2018 | | 2019 | | 2018 |
| Revenue | $ | 202 |
| | $ | 198 |
| | $ | 395 |
| | $ | 402 |
|
| Operating income | $ | 13 |
| | $ | 19 |
| | $ | 29 |
| | $ | 38 |
|
| Operating income as a percentage of revenue | 6.4 | % | | 9.6 | % | | 7.3 | % | | 9.5 | % |
In the three months ended June 30, 2019 compared to the three months ended June 30, 2018, revenue increased 2% due to an increase in cloud and payments revenue. The revenue increase was mainly driven by North America. Foreign currency fluctuations had an unfavorable impact of 1% on the revenue comparison.
In the six months ended June 30, 2019 compared to the six months ended June 30, 2018, revenue decreased 2% due to a decline in hardware revenue partially offset by growth in cloud and payments revenue. The revenue decline was mainly driven by North America. Foreign currency fluctuations had an unfavorable impact of 2% on the revenue comparison.
Operating income decreased in the three and six months ended June 30, 2019 compared to the three and six months ended June 30, 2018 driven by a decline in hardware revenue as well as continued investment in customer satisfaction initiatives.
Other
The following table shows the Other revenue and operating income for the three and six months ended June 30:
30:
| | | | Three months ended June 30 | | Six months ended June 30 | Three months ended June 30 | | Six months ended June 30 |
| In millions | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
| Revenue | $ | 610 |
| | $ | 588 |
| | $ | 1,211 |
| | $ | 1,145 |
| $ | 82 |
| | $ | 77 |
| | $ | 156 |
| | $ | 148 |
|
| Operating income | $ | 77 |
| | $ | 74 |
| | $ | 139 |
| | $ | 118 |
| $ | 10 |
| | $ | 11 |
| | $ | 20 |
| | $ | 21 |
|
| Operating income as a percentage of revenue | 12.6 | % | | 12.6 | % | | 11.5 | % | | 10.3 | % | 12.2 | % | | 14.3 | % | | 12.8 | % | | 14.2 | % |
In the three months ended June 30, 2019 compared to the three months ended June 30, 2018, revenue increased 6% due to an increase in hardware and hardware maintenance revenue in North America and Europe. Foreign currency fluctuations had an unfavorable impact of 2% on the revenue comparison.
In the six months ended June 30, 2019 compared to the six months ended June 30, 2018, revenue increased 5% due to an increase in hardware and hardware maintenance revenue in North America and Europe. Foreign currency fluctuations had an unfavorable impact of 3% on the revenue comparison.
Operating income decreased slightly in the three and six months ended June 30, 20182019 compared to the three and six months ended June 30, 2017, Services revenue increased 4% and 6%,2018 driven by growth in hardware maintenance revenue as a result of improving trends for the Company's channel transformation solutions, combined with increased managed and implementation services revenue. In the three and six months ended June 30, 2018 foreign currency fluctuations had an favorable impact on the revenue comparison of 1% and 3%, respectively.
Operating income increased in the three and six months ended June 30, 2018 compared to the three and six months ended June 30, 2017 primarily due to higher revenue, business process improvement initiatives and a mix shift of higher value services.
Hardware Segment
The following table shows the Hardware segment revenue and operating loss for the three and six months ended June 30:
|
| | | | | | | | | | | | | | | |
| | Three months ended June 30 | | Six months ended June 30 |
| In millions | 2018 | | 2017 | | 2018 | | 2017 |
| Revenue | $ | 457 |
| | $ | 541 |
| | $ | 913 |
| | $ | 1,010 |
|
| Operating (loss) income | $ | (27 | ) | | $ | 11 |
| | $ | (50 | ) | | $ | 1 |
|
| Operating (loss) income as a percentage of revenue | (5.9 | )% | | 2.0 | % | | (5.5 | )% | | 0.1 | % |
In the three months ended June 30, 2018 compared to the three months ended June 30, 2017, Hardware revenue decreased 16% due to declines in ATM revenue of 21% and POS revenue of 16% partially offset by an increase in SCO revenue of 3%. ATM revenue declined primarily due to supply chain delays related to new product introductions. POS revenue declined due toinvestments in sale resources partially offset by the timing of customer projects for store transformation solutions. SCO revenue increased due to the timing of customer projects compared to the prior year period. Foreign currency fluctuations had a favorable impact on the revenue comparison of 1%.increase in revenue.
In the six months ended June 30, 2018 compared to the six months ended June 30, 2017, Hardware revenue decreased 10% due to declines in ATM revenue of 14%, SCO revenue of 11% and POS revenue of 1%. ATM revenue declined due to lower volume as well as supply chain delays related to new product introductions. SCO revenue decreased due to timing of customer projects compared to the prior year period. POS revenue decline due to the timing of customer projects for store transformation solutions. Foreign currency fluctuations had a favorable impact on the revenue comparison of 2%.
Operating loss increased in the three and six months ended June 30, 2018 compared to the three and six months ended June 30, 2017 driven by lower revenue and an unfavorable product mix.
Financial Condition, Liquidity, and Capital Resources
Cash provided by operating activities was $9571 million in the six months ended June 30, 20182019 compared to cash provided by operating activities of $13495 million in the six months ended June 30, 20172018. The decrease in cash provided by operating activities was due to the timing ofhigher working capital needs.capital.
NCR’s management uses a non-GAAP measure called “free cash flow” to assess the financial performance of the Company. We define free cash flow as net cash provided by (used in) operating activities and cash provided by (used in) discontinued operations, less capital expenditures for property, plant and equipment, less additions to capitalized software, plus discretionary pension contributions and settlements. We believe free cash flow information is useful for investors because it relates the operating cash flows from the Company’s continuing and discontinued operations to the capital that is spent to continue and improve business operations. In particular, free cash flow indicates the amount of cash available after capital expenditures for, among other things, investments in the Company’s existing businesses, strategic acquisitions, repurchases of NCR stock and repayment of debt obligations. Free cash flow does not represent the residual cash flow available for discretionary expenditures, since there may be
other non-discretionary expenditures that are not deducted from the measure. Free cash flow does not have a uniform definition
under GAAP, and therefore NCR’s definition may differ from other companies’ definitions of this measure. This non-GAAP measure should not be considered a substitute for, or superior to, cash flows from operating activities under GAAP.
The table below reconciles net cash provided by operating activities to NCR’s non-GAAP measure of free cash flow for the six months ended June 30:
| | | | Six months ended June 30 | Six months ended June 30 |
| In millions | 2018 | | 2017 | 2019 | | 2018 |
| Net cash provided by operating activities | $ | 95 |
| | $ | 134 |
| $ | 71 |
| | $ | 95 |
|
| Expenditures for property, plant and equipment | (70 | ) | | (43 | ) | (35 | ) | | (70 | ) |
| Additions to capitalized software | (86 | ) | | (84 | ) | (103 | ) | | (86 | ) |
| Net cash used in discontinued operations | (11 | ) | | (5 | ) | (11 | ) | | (11 | ) |
| Free cash (outflow) flow (non-GAAP) | $ | (72 | ) | | $ | 2 |
| |
| Free cash outflow (non-GAAP) | | $ | (78 | ) | | $ | (72 | ) |
The increasedecrease in expenditures for property, plant and equipment wasis primarily due to tenant improvements in our new world headquarters completed in the previous period, which arewere partially reimbursed by the lessor and included in net cash provided by operating activities. The increase in additions to capitalized software is related to the investment in our strategic growth platforms.
Financing activities and certain other investing activities are not included in our calculation of free cash flow. Other investing activities primarily include business acquisitions, divestitures and investments as well as proceeds from the sale of property, plant and equipment.
Our financing activities primarily include proceeds from employee stock plans, repurchases of NCR common stock and borrowings and repayments of credit facilities and notes. There were no repurchases of our common stock completed during the six months ended June 30, 2019. During the six months ended June 30, 2018, and 2017, we repurchased a total of $210 million and $350 million, respectively, of our common stock. During the six months ended June 30, 20182019 and 2017,2018, proceeds from employee stock plans were $1110 million and $8$11 million, respectively. During the six months ended June 30, 20182019 and 20172018, we paid $2916 million and $24$29 million, respectively, of tax withholding payments on behalf of employees for stock based awards that vested.
Long Term Borrowings As of June 30, 2018,2019, our senior secured credit facility consisted of a term loan facility with an aggregate outstanding principal balance of $776$720 million, and a revolving credit facility in an aggregate principal amount of $1.1 billion, of which $50$100 million was outstanding.outstanding, subject to certain covenant limitations. Additionally, the revolving credit facility has up to $400 million available to certain foreign subsidiaries. Loans under the revolving credit facility are available in U.S. Dollars, Euros and Pound Sterling. The revolving credit facility also allows a portion of the availability to be used for outstanding letters of credit, and as of June 30, 2018,2019, there were no letters of credit outstanding. As of December 31, 2017,2018, the outstanding principal balance of the term loan facility was $810$759 million and the outstanding balance on the revolving facility was zero.$120 million.
As of June 30, 20182019 and December 31, 20172018, we had outstanding $700 million in aggregate principal balance of 6.375% senior unsecured notes due in 2023, $600 million in aggregate principal balance of 5.00% senior unsecured notes due in 2022, $500 million in aggregate principal balance of 4.625% senior unsecured notes due in 2021 and $400 million in aggregate principal balance of 5.875% senior unsecured notes due in 2021.
Our revolving trade receivables securitization facility provides the Company with up to $200 million in funding based on the availability of eligible receivables and other customary factors and conditions. As of June 30, 20182019 and December 31, 2017,2018, the Company had $100 million and zero, respectively, outstanding under the facility.
Employee Benefit Plans In 20182019, we expect to make contributions of $30$28 million to our international pension plans, $60$30 million to our postemployment plan and $2 million to our postretirement plan. For additional information, refer to Note 8. Employee Benefit Plans of the Notes to the Condensed Consolidated Financial Statements.
Transformation and Restructuring Initiatives We Our previously announced transformation and restructuring initiatives continue to evaluateprogress and implement programs to prioritize driving margin improvement. In Services, our Mission Oneremain on track. Our services performance and profit improvement program continues to deliver revenue growth and margin expansion. Our manufacturing transformation initiatives to move to a variable cost structure by reducing the number of manufacturing plants and ramping up production with contract manufacturers is focused on transforming NCR's service margin profile through: i) productivity and efficiency improvements; ii) remote diagnostics and repair; iii) product life cycle management and iv) a higher mix of managed services. In Hardware,substantially complete. Additionally, we are streamliningbenefiting from our manufacturing operationsspend optimization program to help usdrive cost savings through operational efficiencies to generate at least $100 million of savings in 2019 and are on track with the actions completed and delivering benefits through June 30, 2019. This initiative will create efficiencies in our corporate functions, reduce our exposure to variable hardware demand as well as increase global utilization ratesspend in the non-strategic areas and optimize our supply chain network.limit discretionary spending. We
incurred a pre-tax charge of $40 million in the first half of 2019 with a cash impact of $27 million. In addition to these2019, for all initiatives, we are also in the process of transforming our organizational design, resources and software product portfolio. As we finalize and execute on these initiatives, NCR expectsexpect to incur a related pre-tax charge over the next two years in the range of approximately $200$60 million to $250 million, with $100 million to $150 million in 2018, that will be included in income from operations. Theand a cash impact of these transformation initiatives is expected to be approximately $150$70 million to $200 million over the next two years, with $100 million in 2018. We plan to achieve run-rate savings of approximately $150$80 million.
million per year by 2020. In the six months ended June 30, 2018, we incurred a $82 million pre-tax charge and $36 million of cash payments.
Series A Convertible Preferred Stock On December 4, 2015, NCR issued 820,000 shares of Series A Convertible Preferred Stock to certain entities affiliated with the Blackstone Group L.P. for an aggregate purchase price of $820 million, or $1,000 per share, pursuant to an Investment Agreement between the Company and Blackstone, dated November 11, 2015. In connection with the issuance of the Series A Convertible Preferred Stock, the Company incurred direct and incremental expenses of $26 million. These direct and incremental expenses reduced the Series A Convertible Preferred Stock, and will be accreted through retained earnings as a deemed dividend from the date of issuance through the first possible known redemption date, March 16, 2024. Holders of Series A Convertible Preferred Stock are entitled to a cumulative dividend at the rate of 5.5% per annum, payable quarterly in arrears. During the three months ended June 30, 20182019 and 2017,2018, the Company paid dividends-in-kind of $12 million and $11$12 million, respectively, associated with the Series A Convertible Preferred Stock. During the six months ended June 30, 20182019 and 2017,2018, the Company paid dividends-in-kind of $24 million and $23 million, respectively, associated with the Series A Convertible Preferred Stock. As of June 30, 20182019 and December 31, 2017,2018, the Company had accrued dividends of $3 million, respectively, associated with the Series A Convertible Preferred Stock. There were no cash dividends declared during the three and six months ended June 30, 20182019 or 2017.2018.
The Series A Convertible Preferred Stock is convertible at the option of the holders at any time into shares of common stock at a conversion price of $30.00 per share, or a conversion rate of 33.333 shares of common stock per share of Series A Convertible Preferred Stock.
As of June 30, 20182019 and December 31, 2017,2018, the maximum number of common shares that could be required to be issued upon conversion of the outstanding shares of the Series A Convertible Preferred Stock was 28.229.8 million and 27.529.0 million, respectively.
Cash and Cash Equivalents Held by Foreign Subsidiaries Cash and cash equivalents held by the Company's foreign subsidiaries at June 30, 20182019 and December 31, 20172018 were $336$322 million and $442$443 million, respectively. Under current tax laws and regulations, if cash and cash equivalents and short-term investments held outside the U.S. are distributed to the U.S. in the form of dividends or otherwise, we may be subject to additional U.S. income taxes and foreign withholding taxes, which could be significant.
Summary As of June 30, 2018,2019, our cash and cash equivalents totaled $343$335 million and our total debt was $3.13 billion. As of June 30, 2018,2019, our borrowing capacity under the revolving credit facility was approximately $1.1$1.0 billion, and under our trade receivables securitization facility was $100 million. Our ability to generate positive cash flows from operations is dependent on general economic conditions, competitive pressures, and other business and risk factors described in Item 1A of Part I of the Company’s 20172018 Annual Report on Form 10-K and Item 1A of Part II of this Quarterly Report on Form 10-Q. If we are unable to generate sufficient cash flows from operations, or otherwise comply with the terms of our credit facilities or senior unsecured notes, we may be required to seek additional financing alternatives.
We believe that we have sufficient liquidity based on our current cash position, cash flows from operations and existing financing to meet our required pension, postemployment, and postretirement plan contributions, remediation and other payments related to the Fox River and Kalamazoo River environmental matters, debt servicing obligations, and our operating requirements for the next twelve months.
Contractual and Other Commercial Commitments
The Company’s uncertain tax positions are not expected to have a significant impact on liquidity or sources and uses of capital resources. Our product warranties are discussed in Note 9. Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements.
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements as defined by SEC Regulation S-K Item 303 (a) (4) (ii).
Critical Accounting Policies and Estimates
As described in Note 1. Basis of Presentation and Summary of Significant Accounting Policies, of the Notes to Condensed Consolidated Financial Statements, we adopted various accounting standard updates effective January 1, 2018, most notably the adoption of the new revenue recognition accounting guidance.
Management reassessed the critical accounting policies as disclosed in our 20172018 Annual Report on Form 10-K and determined that other than the change in accounting for revenue recognition, there were no changes to our critical accounting policies or our estimates associated with those policies in the six months ended June 30, 20182019. See discussion in Note 2. Accounting Policies related to Revenue with Contracts with Customers of the Notes to Condensed Consolidated Financial Statements for new revenue recognition related accounting policies.
New Accounting Pronouncements
See discussion in Note 1. Basis of Presentation and Summary of Significant Accounting Policies of the Notes to Condensed Consolidated Financial Statements for new accounting pronouncements.
Forward-Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements use words such as “expect,” “anticipate,” “outlook,” “intend,” “plan,” “believe,” “will,” “should,” “would,” “could” and words of similar meaning. Statements that describe or relate to NCR’s plans, goals, intentions, strategies or financial outlook, and statements that do not relate to historical or current fact, are examples of forward-looking statements. Forward-looking statements are based on our current beliefs, expectations and assumptions, which may not prove to be accurate, and involve a number of known and unknown risks and uncertainties, many of which are out of NCR's control. Forward-looking statements are not guarantees of future performance, and there are a number of important factors that could cause actual outcomes and results to differ materially from the results contemplated by such forward-looking statements, including those factors relating to: the strength of demand for ATMs and other financial services hardware and its effect on the results of our businesses and reportable segments; our ability to generate accurate forecasts of product demand and to engage third-party suppliers appropriately to meet that demand, including the on-boarding of new or additional suppliers; domestic and global economic and credit conditions including, in particular, those resulting from uncertainty in the "BRIC" economies, economic sanctions against Russia, the determination by Britain to exit the European Union, the potential for changes to global or regional trade agreements or the imposition of protectionist trade policies, and the imposition of import or export tariffs or border adjustments; the impact of our indebtedness and its terms on our financial and operating activities; the impact of the terms of our strategic relationship with Blackstone and our Series A Convertible Preferred Stock; the transformation of our business model and our ability to sell higher-margin software and services; the possibility of disruptions in or problems with our data center hosting facilities; cybersecurity risks and compliance with data privacy and protection requirements; our ability to successfully introduce new solutions and compete in the information technology industry; our ability to improve execution in our sales and services organizations; defects or errors in our products; manufacturing disruptions, including those caused by or related to outsourced manufacturing; collectability difficulties in subcontracting relationships in Emerging Industries; the historical seasonality of our sales; foreign currency fluctuations; the availability and success of acquisitions, divestitures and alliances; our pension strategy and underfunded pension obligation; the success of our restructuring plans and cost reduction initiatives, including those in our Hardware segment; tax rates; reliance on third party suppliers; development and protection of intellectual property; workforce turnover and the ability to attract and retain skilled employees; uncertainties or delays associated with the transition of key business leaders; environmental exposures from our historical and ongoing manufacturing activities; and uncertainties with regard to regulations, lawsuits, claims and other matters across various jurisdictions. Additional information concerning these and other factors can be found in the Company's filings with the U.S. Securities and Exchange Commission, including the Company’s most recent annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Any forward-looking statement speaks only as of the date on which it is made. The Company does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Information About NCR
NCR encourages investors to visit its web site (http://www.ncr.com), which is updated regularly with financial and other important information about NCR. The contents of the Company’s web site are not incorporated into this quarterly report or the Company’s other filings with the U.S. Securities and Exchange Commission.
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| Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market Risk
We are exposed to market risks primarily from changes in foreign currency exchange rates and interest rates. It is our policy to manage our foreign exchange exposure and debt structure in order to manage capital costs, control financial risks and maintain financial flexibility over the long term. In managing market risks, we employ derivatives according to documented policies and procedures, including foreign currency contracts and interest rate swaps. We do not use derivatives for trading or speculative purposes.
Foreign Exchange Risk
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. We have exposure to approximately 50 functional currencies and are exposed to foreign currency exchange risk with respect to our sales, profits and assets and liabilities denominated in currencies other than the U.S. Dollar. Although we use financial instruments to hedge certain foreign currency risks, we are not fully protected against foreign currency fluctuations and our reported results of operations could be affected 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 and option contracts. These foreign exchange contracts are designated as highly effective cash flow hedges. This is primarily done through the hedging of foreign currency denominated inter-company inventory purchases by the marketing units. All of these transactions are forecasted. We also use derivatives not designated as hedging instruments consisting primarily of forward contracts to hedge foreign currency denominated balance sheet exposures. For these derivatives we recognize gains and losses in the same period as the remeasurement losses and gains of the related foreign currency-denominated exposures.
We utilize non-exchange traded financial instruments, such as foreign exchange forward and option contracts, that we purchase exclusively from highly rated financial institutions. We record these contracts 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.
For purposes of analyzing potential risk, 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 or depreciation in the value of the U.S. Dollar against foreign currencies from the prevailing market rates would have resulted in a corresponding increase or decrease of $128 million as of June 30, 20182019 in the fair value of the hedge portfolio. The Company expects that any increase or decrease in the fair value of the portfolio would be substantially offset by increases or decreases in the underlying exposures being hedged.
The U.S. Dollar was weakerstronger in the second quarter of 20182019 compared to the second quarter of 20172018 based on comparable weighted averages for our functional currencies. This had an 1%unfavorable impact of 3% on second quarter 20182019 revenue versus second quarter 20172018 revenue. This excludes the effects of our hedging activities and, therefore, does not reflect the actual impact of fluctuations in exchange rates on our operating income.
Interest Rate Risk
We are subject to interest rate risk principally in relation to variable-rate debt. Approximately 70% of our borrowings were on a fixed rate basis as of June 30, 2018.2019. The increase in pre-tax interest expense for the six months ended June 30, 20182019 from a hypothetical 100 basis point increase in variable interest rates would be approximately $5$6 million.
Concentrations of Credit Risk
We are potentially subject to concentrations of credit risk on accounts receivable and financial instruments, such as hedging instruments 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. If one or more of those customers were to default in its obligations under applicable contractual arrangements, we could be exposed to potentially significant losses. Moreover, a prolonged downturn in the global economy could have an adverse impact on the ability of our customers to pay their obligations on a timely basis. We believe that the reserves for potential losses are adequate. As of June 30, 20182019, we did not have any significant concentration of credit risk related to financial instruments.
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| Item 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
NCR has established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the Exchange Act)) to provide reasonable assurance that information required to be disclosed by NCR in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by NCR in the reports that it files or submits under the Exchange Act is accumulated and communicated to NCR’s management, including its Chief Executive and Chief Financial Officers, as appropriate to allow timely decisions regarding required disclosure. Based on their evaluation as of the end of the second quarter of 20182019, conducted under their supervision and with the participation of management, the Company’s Chief Executive and Chief Financial Officers have concluded that NCR’s disclosure controls and procedures are effective to meet such objectives and that NCR’s disclosure controls and procedures adequately alert them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in NCR’s Exchange Act filings.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the three months ended June 30, 20182019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information
The information required by this item is included in Note 9. Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements in this quarterly report and is incorporated herein by reference.
There have been no material changes to the risk factors previously disclosed in Part I, Item 1AIA ("Risk Factors") of the Company’s 2017Company's 2018 Annual Report on Form 10-K (the 2017 Annual Report) includes a discussion of the risks and uncertainties related to our business. The information presented below updates, and should be read in conjunction with, the risk factors and information disclosed in the 2017 Annual Report. Except as presented below, there have been no material changes from the risk factors described in the 2017 Annual Report.10-K.
Operating Results Fluctuations.Our revenue, operating results, and margins could fluctuate for a number of reasons, including those described below:
Manufacturing. At December 31, 2017:
we manufactured our ATMs in facilities located in Columbus, Georgia, USA; Manaus, Brazil; Budapest, Hungary; Beijing, China; and Chengalpattu, India;
our self-checkout solutions were manufactured in facilities located in Columbus, Georgia, USA and Budapest, Hungary;
our financial kiosk solutions were manufactured in facilities located in Beijing, China; Budapest, Hungary; Manaus, Brazil; and Chengalpattu, India;
our POS/Display terminals were manufactured in facilities located in Columbus, Georgia, USA; and Budapest, Hungary, and certain hand-held solutions were manufactured in Salzburg, Austria; and
we outsourced the manufacturing in all geographic regions of its payment solutions, some POS terminals, printers, bar code scanners and various other kiosks.
On April 23, 2018, we announced our intention to streamline our manufacturing operations by closing two manufacturing plants in the Columbus, Georgia area and another in Beijing, China, and to move the manufacturing operations at those plants to other existing NCR facilities and to current third party suppliers. If we develop or experience problems relating to product quality or on-time delivery to customers that we are unable to quickly manage and resolve, whether due to the geographical diversity of our manufacturing base, the use of contract or outsourced manufacturing, or otherwise, we could experience business interruption that could negatively impact our business and operating results.
Reliance on Third Parties. If third party suppliers upon which we rely are not able to fulfill our needs, our ability to bring our products to market in a timely fashion could be affected. In most cases, there are a number of vendors providing the services and producing the parts and components that we utilize in or in connection with our products. However, there are some services and components that are licensed or purchased from single sources due to price, quality, technology, functionality or other reasons. For example, we depend on transaction processing services from Accenture, computer chips and microprocessors from Intel and operating systems from Microsoft. Certain parts and components used in the manufacturing of our ATMs and the delivery of many of our retail solutions are also supplied by single sources. In addition, there are a number of key suppliers for our businesses that provide us with critical products for our solutions. If we were unable to secure the necessary services, including contract manufacturing, parts, software, components or products from a particular vendor, and we had to find an alternative supplier, our new and existing product shipments and solution deliveries, or the provision of contracted services, 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. These alliances represent many different types of relationships, 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. We also rely on Jabil Inc. to provide contract manufacturing services for our automated teller machines and self-service checkout solutions, primarily for our customers in the Americas. These alliances introduce risks that we cannot control, such as nonperformance by third parties and difficulties with or delays in integrating elements provided by third parties into our solutions. Lack of information technology
infrastructure, shortages in business capitalization, and manual processes and data integrity issues, particularly with smaller suppliers, can also create product time delays, inventory and invoicing problems, 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. Also, some of these third parties have access to confidential NCR and customer data, the integrity and security of which are of significant importance to the Company.
Work Environment.Continuous improvement, customer experience, restructuring and cost reduction initiatives could negatively impact productivity and business results. In the past, we have undertaken restructuring plans, and, in addition, as part of our ongoing efforts to optimize our cost structure, from time to time, we shift and realign our internal organizational structure and resources. For example, on April 23, 2018, we announced our intention to streamline our manufacturing operations by closing two manufacturing plants in the Columbus, Georgia area and another in Beijing, China, and to move the manufacturing operations at those plants to other existing NCR facilities and to current third party suppliers. These activities could temporarily result in reduced productivity levels. If we are not able to timely execute on these initiatives, or if the costs to complete these initiatives is higher than anticipated, our results of operations or financial condition could be adversely affected. In addition to these initiatives, we have initiatives to grow and expand our software business, streamline our services business, enable our sales force to better sell our solutions, invest in our software and cloud solutions and improve the experience of our customers. We typically have many such initiatives underway. If we are not successful in implementing and managing these various initiatives and minimizing any resulting loss in productivity, we may not be able to achieve targeted cost savings or productivity gains, and our business and operating results could be negatively impacted.
On January 8, 2018, we opened our new world headquarters in Atlanta, Georgia, and are in the process of relocating our headquarters operations to this facility. From time to time we may undertake similar projects with respect to our office, manufacturing or other facilities. Implementation of relocation plans such as these could result in business disruption due to a lack of business continuity, which, among other things, could have a negative impact on our productivity and business and operating results.
If we do not retain key employees, or attract quality new and replacement employees, we may not be able to meet our business objectives. Our employees are vital to our success, including the successful transformation of the Company into a software and solutions driven business. Therefore, our ability to retain our key business leaders and our highly skilled software development, technical, sales, consulting and other key personnel, including key personnel of acquired businesses, is critical. These key employees may decide to leave NCR for other opportunities, or may be unavailable for health or other reasons. In addition, as our business model evolves, we may need to attract employees with different skill sets, experience and attributes to support that evolution. If we are unable to retain our key personnel, or we are unable to attract highly qualified new and replacement employees by offering competitive compensation, secure work environments and leadership opportunities now and in the future, our business and operating results could be negatively impacted. In addition, a failure to ensure the effective and timely transfer of knowledge and a smooth transition of key employees, including our Chief Executive Officer and Chief Financial Officer, could hinder business continuity, personnel retention and operational execution, which, among other things, could have a negative impact on our productivity and business and operating results. Uncertainties or delays associated with the transition of key business leaders could also cause fluctuation in our stock price.
Our ability to effectively manage our business could be negatively impacted if we do not invest in and maintain reliable technology infrastructure and information systems. It is periodically necessary to add to, replace, upgrade or modify our technology infrastructure and internal information systems. If we are unable to expand, replace, upgrade or modify such systems in a timely and cost-effective manner, especially in light of demands on our information technology resources, our ability to capture and process financial transactions and, therefore, our financial condition, results of operations, or ability to comply with legal and regulatory reporting obligations, may be negatively impacted.
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| Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Plans and Programs
On October 19, 2016, the Board approved a share repurchase program, with no expiration from the date of authorization, for the systematic repurchase of the Company’s common stock to offset the dilutive effects of the Company’s employee stock purchase plan, equity awards and in-kind dividends on the Company’s Series A Convertible Preferred Stock. Availability under this program accrues quarterly based on the average value of dilutive issuances during the quarter.
On March 12, 2017, the Board approved a second share repurchase program, with no expiration from the date of authorization, that provides for the repurchase of up to $300 million of the Company’s common stock. On July 25, 2018, the Board authorized an incremental $200 million of share repurchases under this program.
No shares were repurchased under these programs during the three months ended June 30, 2019.
As of June 30, 2018, $902019, $290 million was available for repurchases under the March 2017 program, and approximately $272$388 million was available for repurchases under the October 2016 dilution offset program. The timing and amount of repurchases under these programs depend upon market conditions and may be made from time to time in open market purchases, privately negotiated transactions, accelerated stock repurchase programs, issuer self-tender offers or otherwise. The repurchases will be made in compliance with applicable securities laws and may be discontinued at any time.
The Company occasionally purchases vested restricted stock or exercised stock options at the current market price to cover withholding taxes. For the three months ended June 30, 2019, 71,924 shares were purchased at an average price of $29.02 per share.
The Company’s ability to repurchase its common stock is restricted under the Company’s senior secured credit facility and terms of the indentures for the Company’s senior unsecured notes, which prohibit certain share repurchases, including during the occurrence of an event of default, and establish limits on the amount that the Company is permitted to allocate to share repurchases and other restricted payments. The limitations are calculated using formulas based generally on 50% of the Company’s consolidated net income for the period beginning in the third quarter of 2012 through the end of the most recently ended fiscal quarter, subject to certain other adjustments and deductions, with certain prescribed minimums. These formulas are described in greater detail in the Company’s senior secured credit facility and the indentures for the Company’s senior unsecured notes, each of which is filed with the SEC.
Recent Repurchases
The following table provides information relating to the Company’s repurchases of common stock for the three months ended June 30, 2018, as defined in Rule 10b-18(a)(3) under the Exchange Act:
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| Time Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Current Programs (1) | | Maximum Dollar Value of Shares that May Yet be Purchased Under Programs (1) |
| April 1 through April 30, 2018 | | 448,910 |
| | $ | 31.41 |
| | 448,910 |
| | $ | 352,783,463 |
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| May 1 through May 31, 2018 | | 1,028,837 |
| | $ | 30.06 |
| | 1,028,837 |
| | $ | 321,853,547 |
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| June 1 through June 30, 2018 | | — |
| | N/A |
| | — |
| | $ | 362,436,244 |
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| Second quarter total | | 1,477,747 |
| | $ | 30.47 |
| | 1,477,747 |
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(1) The Company occasionally purchases vested restricted stock or exercised stock options at the current market price to cover withholding taxes. For the three months ended June 30, 2018, 591,053 shares were purchased at an average price of $30.81 per share.
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2.1 | SeparationArticles of Amendment and Distribution Agreement, dated asRestatement of August 27, 2007, between NCR Corporation and Teradata Corporation (Exhibit 10.1 to the Current Report on Form 8-K of Teradata Corporation dated September 6, 2007).Corporation.
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| Articles of Amendment and Restatement of NCR Corporation (incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q of NCR Corporation for the quarter ended June 30, 2016). |
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| Bylaws of NCR Corporation, as amended and restated on February 20, 2018 (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K of NCR Corporation dated February 23, 2018. |
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4.1 | Common Stock Certificate of NCR Corporation (incorporated by reference to Exhibit 4.1 from the NCR Corporation Annual Report on Form 10-K for the year ended December 31, 1999). |
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| Indenture, dated September 17, 2012, among NCR Corporation, as issuer, NCR International Inc. and Radiant Systems Inc. as subsidiary guarantors and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.01 to the Current Report on Form 8-K of NCR Corporation dated September 17, 2012). |
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| Indenture, dated December 18, 2012, among NCR Corporation, as issuer, NCR International Inc. and Radiant Systems Inc. as subsidiary guarantors and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.01 to the Current Report on Form 8-K of NCR Corporation filed December 18, 2012). |
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| Indenture, dated December 19, 2013, between NCR Escrow Corp. and U.S. Bank National Association relating to the $400 million aggregate principal amount of 5.875% senior notes due 2021 (the “5.875% Notes”) (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of NCR Corporation dated December 19, 2013 (the “December 19, 2013 Form 8-K”)). |
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| First Supplemental Indenture relating to the 5.875% Notes, dated January 10, 2014, among NCR Corporation, NCR International, Inc. and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of NCR Corporation dated January 10, 2014 (the “January 10, 2014 Form 8-K”)). |
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| Indenture, dated December 19, 2013, between NCR Escrow Corp. and U.S. Bank National Association relating to the $700 million aggregate principal amount of 6.375% senior notes due 2023 (the “6.375% Notes”) (incorporated by reference to Exhibit 4.2 to the December 19, 2013 Form 8-K). |
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| First Supplemental Indenture relating to the 6.375% Notes, dated January 10, 2014, among NCR Corporation, NCR International, Inc. and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 to the January 10, 2014 Form 8-K). |
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| Master Manufacturing Agreement, dated April 23, 2018, by and between Jabil Inc. and NCR Corporation. |
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| Master Hardware Supply Agreement, dated June 28, 2018, between Universal Global Scientific Industrial Co., Ltd. and NCR Corporation. |
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| Form of 20182019 Director Restricted Stock Unit Grant Statement under the NCR Corporation 2017 Stock Incentive Plan.
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| EmploymentFourth Amendment to Receivables Financing Agreement, dated April 27,as of November 15, 2018, between Michael Hayfordby and among NCR Corporation.Receivables LLC, as borrower, NCR Corporation, as servicer, PNC Bank, National Association, as administrative agent, and PNC Bank, National Association, MUFG Bank, Ltd. (f/k/a The Bank of Tokyo Mitsubishi UFJ, Ltd., New York Branch) and Victory Receivables Corporation, as lenders.
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| Employment Agreement, dated April 27, 2018, between Frank Martire and NCR Corporation. |
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| Letter Agreement, dated April 30, 2018 between William R. Nuti and NCR Corporation. |
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| Letter Agreement, dated May 2, 2018, between Paul E. Langenbahn and NCR Corporation. |
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| Letter Agreement, dated March 19, 2018, between Mark D. Benjamin and NCR Corporation. |
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| Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934. |
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| Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934. |
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| Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101 | Financials in XBRL Format. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | | NCR CORPORATION |
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| Date: | August 3, 20182, 2019 | By: | | /s/ Robert FishmanAndre J. Fernandez |
| | | | | Robert FishmanAndre J. Fernandez
Executive Vice President and Chief Financial Officer |
