Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-Q
________________________
|
| |
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2016
Commission File Number 001-00395
________________________
NCR CORPORATION
(Exact name of registrant as specified in its charter)
________________________
|
| | |
Maryland | | 31-0387920 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
3097 Satellite Boulevard
Duluth, GA 30096
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (937) 445-5000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|
| | | | | |
Large accelerated filer | þ | | | Accelerated filer | o |
Non-accelerated filer | o | (Do not check if a smaller reporting company) | | Smaller reporting company | 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
As of October 14, 2016, there were approximately 124.1 million shares of common stock issued and outstanding.
TABLE OF CONTENTS
|
| | |
PART I. Financial Information | |
| | |
| Description | Page |
| | |
Item 1. | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Item 2. | | |
| | |
Item 3. | | |
| | |
Item 4. | | |
| |
PART II. Other Information | |
| | |
| Description | Page |
| | |
Item 1. | | |
| | |
Item 1A. | | |
| | |
Item 2. | | |
| | |
Item 6. | | |
| | |
| | |
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 September 30 | | Nine months ended September 30 |
2016 | | 2015 | | 2016 | | 2015 |
Product revenue | $ | 708 |
| | $ | 688 |
| | $ | 1,932 |
| | $ | 1,995 |
|
Service revenue | 969 |
| | 925 |
| | 2,809 |
| | 2,698 |
|
Total revenue | 1,677 |
| | 1,613 |
| | 4,741 |
| | 4,693 |
|
Cost of products | 528 |
| | 512 |
| | 1,487 |
| | 1,539 |
|
Cost of services | 672 |
| | 644 |
| | 1,951 |
| | 2,161 |
|
Selling, general and administrative expenses | 225 |
| | 224 |
| | 678 |
| | 788 |
|
Research and development expenses | 56 |
| | 53 |
| | 159 |
| | 175 |
|
Restructuring-related charges | 7 |
| | 12 |
| | 13 |
| | 33 |
|
Total operating expenses | 1,488 |
| | 1,445 |
| | 4,288 |
| | 4,696 |
|
Income (loss) from operations | 189 |
| | 168 |
| | 453 |
| | (3 | ) |
Interest expense | (41 | ) | | (42 | ) | | (130 | ) | | (131 | ) |
Other (expense), net | (8 | ) | | (7 | ) | | (33 | ) | | (14 | ) |
Income (loss) from continuing operations before income taxes | 140 |
| | 119 |
| | 290 |
| | (148 | ) |
Income tax expense | 31 |
| | 16 |
| | 75 |
| | 50 |
|
Income (loss) from continuing operations | 109 |
| | 103 |
| | 215 |
| | (198 | ) |
Loss from discontinued operations, net of tax | (2 | ) | | (4 | ) | | (2 | ) | | (4 | ) |
Net income (loss) | 107 |
| | 99 |
| | 213 |
| | (202 | ) |
Net income attributable to noncontrolling interests | 2 |
| | 1 |
| | — |
| | 4 |
|
Net income (loss) attributable to NCR | $ | 105 |
| | $ | 98 |
| | $ | 213 |
| | $ | (206 | ) |
Amounts attributable to NCR common stockholders: | | | | |
| |
|
Income (loss) from continuing operations | $ | 107 |
| | $ | 102 |
| | $ | 215 |
| | $ | (202 | ) |
Series A convertible preferred stock dividends | (13 | ) | | — |
| | (37 | ) | | — |
|
Income (loss) from continuing operations attributable to NCR common stockholders | 94 |
| | 102 |
| | 178 |
| | (202 | ) |
Loss from discontinued operations, net of tax | (2 | ) | | (4 | ) | | (2 | ) | | (4 | ) |
Net income (loss) attributable to NCR common stockholders | $ | 92 |
| | $ | 98 |
| | $ | 176 |
| | $ | (206 | ) |
Income (loss) per share attributable to NCR common stockholders: | | | | | | | |
Income (loss) per common share from continuing operations | | | | | | | |
Basic | $ | 0.76 |
| | $ | 0.60 |
| | $ | 1.41 |
| | $ | (1.19 | ) |
Diluted | $ | 0.69 |
| | $ | 0.59 |
| | $ | 1.37 |
| | $ | (1.19 | ) |
Net income (loss) per common share | | | | |
| |
|
Basic | $ | 0.74 |
| | $ | 0.58 |
| | $ | 1.40 |
| | $ | (1.22 | ) |
Diluted | $ | 0.68 |
| | $ | 0.57 |
| | $ | 1.36 |
| | $ | (1.22 | ) |
Weighted average common shares outstanding | | | | | | | |
Basic | 123.9 |
| | 169.8 |
| | 126.0 |
| | 169.5 |
|
Diluted | 155.4 |
| | 172.3 |
| | 156.8 |
| | 169.5 |
|
See Notes to Condensed Consolidated Financial Statements.
NCR Corporation
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
|
| | | | | | | | | | | | | | | |
In millions | Three months ended September 30 | | Nine months ended September 30 |
2016 | | 2015 | | 2016 | | 2015 |
Net income (loss) | $ | 107 |
| | $ | 99 |
| | $ | 213 |
| | $ | (202 | ) |
Other comprehensive income (loss): | | | | | | | |
Currency translation adjustments | | | | | | | |
Currency translation adjustments | 3 |
| | (39 | ) | | (23 | ) | | (41 | ) |
Derivatives | | | | | | | |
Unrealized gain on derivatives | 4 |
| | 2 |
| | 4 |
| | 9 |
|
(Gains) losses on derivatives recognized during the period | — |
| | (1 | ) | | 2 |
| | (3 | ) |
Less income tax expense | (1 | ) | | (1 | ) | | (1 | ) | | (2 | ) |
Employee benefit plans | | | | | | | |
Amortization of prior service benefit | (4 | ) | | (5 | ) | | (14 | ) | | (16 | ) |
Amortization of actuarial loss (benefit) | — |
| | 1 |
| | (1 | ) | | 2 |
|
Less income tax benefit | 1 |
| | 1 |
| | 4 |
| | 5 |
|
Other comprehensive income (loss) | 3 |
| | (42 | ) | | (29 | ) | | (46 | ) |
Total comprehensive income (loss) | 110 |
| | 57 |
| | 184 |
| | (248 | ) |
Less comprehensive income attributable to noncontrolling interests: | | | | | | | |
Net income | 2 |
| | 1 |
| | — |
| | 4 |
|
Currency translation adjustments | (1 | ) | | (4 | ) | | (7 | ) | | (7 | ) |
Amounts attributable to noncontrolling interests | 1 |
| | (3 | ) | | (7 | ) | | (3 | ) |
Comprehensive income (loss) attributable to NCR | $ | 109 |
| | $ | 60 |
| | $ | 191 |
| | (245 | ) |
See Notes to Condensed Consolidated Financial Statements.
NCR Corporation
Condensed Consolidated Balance Sheets (Unaudited)
|
| | | | | | | |
In millions, except per share amounts | September 30, 2016 | | December 31, 2015 |
Assets | | | |
Current assets | | | |
Cash and cash equivalents | $ | 318 |
| | $ | 328 |
|
Accounts receivable, net | 1,387 |
| | 1,251 |
|
Inventories | 776 |
| | 643 |
|
Other current assets | 270 |
| | 327 |
|
Total current assets | 2,751 |
| | 2,549 |
|
Property, plant and equipment, net | 289 |
| | 322 |
|
Goodwill | 2,737 |
| | 2,733 |
|
Intangibles, net | 704 |
| | 798 |
|
Prepaid pension cost | 132 |
| | 130 |
|
Deferred income taxes | 546 |
| | 582 |
|
Other assets | 552 |
| | 521 |
|
Total assets | $ | 7,711 |
| | $ | 7,635 |
|
Liabilities and stockholders’ equity | | | |
Current liabilities | | | |
Short-term borrowings | $ | 256 |
| | $ | 13 |
|
Accounts payable | 718 |
| | 657 |
|
Payroll and benefits liabilities | 212 |
| | 189 |
|
Deferred service revenue and customer deposits | 471 |
| | 476 |
|
Other current liabilities | 345 |
| | 446 |
|
Total current liabilities | 2,002 |
| | 1,781 |
|
Long-term debt | 3,033 |
| | 3,239 |
|
Pension and indemnity plan liabilities | 709 |
| | 696 |
|
Postretirement and postemployment benefits liabilities | 127 |
| | 133 |
|
Income tax accruals | 169 |
| | 167 |
|
Other liabilities | 151 |
| | 79 |
|
Total liabilities | 6,191 |
| | 6,095 |
|
Commitments and Contingencies (Note 8) |
| |
|
Redeemable noncontrolling interest | 10 |
| | 16 |
|
Series A convertible preferred stock: par value $0.01 per share, 3.0 shares authorized, 0.9 shares issued and outstanding as of September 30, 2016 and 0.8 shares issued and outstanding as of December 31, 2015; redemption amount and liquidation preference of $858 and $824 as of September 30, 2016 and December 31, 2015, respectively | 835 |
| | 798 |
Stockholders’ equity | | | |
NCR stockholders’ equity | | | |
Preferred stock: par value $0.01 per share, 100.0 shares authorized, no shares issued and outstanding as of September 30, 2016 and December 31, 2015 | — |
| | — |
|
Common stock: par value $0.01 per share, 500.0 shares authorized, 124.0 and 133.0 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively | 1 |
| | 1 |
|
Paid-in capital | 21 |
| | — |
|
Retained earnings | 822 |
| | 869 |
|
Accumulated other comprehensive loss | (172 | ) | | (150) |
|
Total NCR stockholders’ equity | 672 |
| | 720 |
|
Noncontrolling interests in subsidiaries | 3 |
| | 6 |
|
Total stockholders’ equity | 675 |
| | 726 |
|
Total liabilities and stockholders’ equity | $ | 7,711 |
| | $ | 7,635 |
|
See Notes to Condensed Consolidated Financial Statements.
NCR Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
|
| | | | | | | |
In millions | Nine months ended September 30 |
2016 | | 2015 |
Operating activities | | | |
Net income (loss) | $ | 213 |
| | $ | (202 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
Loss from discontinued operations | 2 |
| | 4 |
|
Depreciation and amortization | 259 |
| | 229 |
|
Stock-based compensation expense | 45 |
| | 32 |
|
Deferred income taxes | 39 |
| | 26 |
|
Gain on sale of property, plant and equipment and other assets | — |
| | (1 | ) |
Loss on divestiture | 1 |
| | — |
|
Impairment of long-lived and other assets | 2 |
| | 16 |
|
Changes in assets and liabilities: | | | |
Receivables | (138 | ) | | (80 | ) |
Inventories | (128 | ) | | (86 | ) |
Current payables and accrued expenses | 68 |
| | 17 |
|
Deferred service revenue and customer deposits | 78 |
| | 72 |
|
Employee benefit plans | (38 | ) | | 367 |
|
Other assets and liabilities | (34 | ) | | 22 |
|
Net cash provided by operating activities | 369 |
| | 416 |
|
Investing activities | | | |
Expenditures for property, plant and equipment | (45 | ) | | (47 | ) |
Additions to capitalized software | (115 | ) | | (117 | ) |
Proceeds from divestiture | 47 |
| | — |
|
Other investing activities, net | (8 | ) | | — |
|
Net cash used in investing activities | (121 | ) | | (164 | ) |
Financing activities | | | |
Short term borrowings, net | (2 | ) | | — |
|
Payments on term credit facilities | (84 | ) | | (312 | ) |
Payments on revolving credit facilities | (736 | ) | | (977 | ) |
Borrowings on revolving credit facilities | 856 |
| | 881 |
|
Debt issuance costs | (8 | ) | | — |
|
Repurchases of Company common stock | (250 | ) | | — |
|
Proceeds from employee stock plans | 10 |
| | 12 |
|
Tax withholding payments on behalf of employees | (7 | ) | | (10 | ) |
Other financing activities | (2 | ) | | — |
|
Net cash used in financing activities | (223 | ) | | (406 | ) |
Cash flows from discontinued operations | | | |
Net cash used in operating activities | (30 | ) | | (27 | ) |
Effect of exchange rate changes on cash and cash equivalents | (5 | ) | | (27 | ) |
Decrease in cash and cash equivalents | (10 | ) | | (208 | ) |
Cash and cash equivalents at beginning of period | 328 |
| | 511 |
|
Cash and cash equivalents at end of period | $ | 318 |
| | $ | 303 |
|
See Notes to Condensed Consolidated Financial Statements.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 2015 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, 2015.
Effective January 1, 2016, NCR began management of its business on a solution basis, changing from the previous model of management on a line of business 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 13, “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. No matters were identified that required adjustment of the Condensed Consolidated Financial Statements or additional disclosure.
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.
Divestiture On May 27, 2016, NCR completed the sale of all but the Middle East and Africa (MEA) assets of its Interactive Printer Solutions (IPS) business to Atlas Holdings LLC for cash consideration of $47 million. In connection with the sale, NCR agreed to provide Atlas Holdings LLC with certain support services on a short-term basis following the closing under a transition services agreement. During the nine months ended September 30, 2016, a loss on sale of $1 million was recorded to other (expense), net in the Condensed Consolidated Statement of Operations. The remaining assets and liabilities related to the MEA IPS business did not transfer in the third quarter of 2016 as previously expected, and as such, as of September 30, 2016, were no longer classified as held for sale in the Condensed Consolidated Balance Sheet.
Related Party Transactions In 2011, concurrent with the sale of a noncontrolling interest in our subsidiary, NCR Brasil - Indústria de Equipamentos para Automação S.A., (NCR Manaus) to Scopus Tecnologia Ltda. (Scopus), we entered into a Master Purchase Agreement (MPA) with Banco Bradesco SA (Bradesco), the parent of Scopus. Through the MPA, Bradesco agreed to purchase up to 30,000 ATMs from us over the 5-year term of the agreement. Pricing of the ATMs adjusted over the term of the MPA using certain formulas based on prevailing market pricing. We recognized revenue related to Bradesco totaling $24 million and $52 million during the three and nine months ended September 30, 2016, respectively, as compared to $20 million and $42 million during the three and nine months ended September 30, 2015. As of September 30, 2016 and December 31, 2015, we had $11 million, respectively, in receivables outstanding from Bradesco.
Recent Accounting Pronouncements
Issued
In May 2014, the FASB issued a new revenue recognition standard that will supersede current 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. Subsequently, the FASB issued clarification standards regarding principal versus agent and identifying performance obligations and licensing. The standards will be effective for the first interim period within annual periods beginning after December 15, 2017, with early adoption permitted for annual periods beginning after December 15, 2016, and can be adopted either
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the date of adoption. The Company is evaluating the impact that adopting this guidance will have on its consolidated financial statements.
In February 2016, the 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. The Company is evaluating the impact that adopting this guidance will have on its consolidated financial statements.
In March 2016, the FASB issued a new employee share based payment standard that will supersede current guidance related to accounting for stock-based compensation. The guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid in capital pools. The guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. The standard will be effective for the first interim period within annual periods beginning after December 15, 2016, with early adoption permitted. Adoption approach varies based on the amendment topic. The Company is evaluating the impact that adopting this guidance will have on its consolidated financial statements.
2. GOODWILL AND PURCHASED INTANGIBLE ASSETS
Goodwill
The carrying amounts of goodwill by segment as of September 30, 2016 and December 31, 2015 are included in the table below. Foreign currency fluctuations are included within other adjustments.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2015 | | | | | | | | September 30, 2016 |
In millions | Goodwill | | Accumulated Impairment Losses | | Total | | Additions | | Impairment | | Other | | Goodwill | | Accumulated Impairment Losses | | Total |
Software | $ | 1,936 |
| | $ | (7 | ) | | $ | 1,929 |
| | $ | 9 |
| | $ | — |
| | $ | (5 | ) | | $ | 1,940 |
| | $ | (7 | ) | | $ | 1,933 |
|
Services | 658 |
| | — |
| | 658 |
| | — |
| | — |
| | — |
| | 658 |
| | — |
| | 658 |
|
Hardware | 162 |
| | (16 | ) | | 146 |
| | — |
| | — |
| | — |
| | 162 |
| | (16 | ) | | 146 |
|
Total goodwill | $ | 2,756 |
| | $ | (23 | ) | | $ | 2,733 |
| | $ | 9 |
| | $ | — |
| | $ | (5 | ) | | $ | 2,760 |
| | $ | (23 | ) | | $ | 2,737 |
|
Purchased Intangible Assets
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) | | September 30, 2016 | | December 31, 2015 |
In millions | | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
Identifiable intangible assets | | | | | | | | | |
Reseller & customer relationships | 1 - 20 | | $ | 659 |
| | $ | (119 | ) | | $ | 659 |
| | $ | (92 | ) |
Intellectual property | 2 - 8 | | 393 |
| | (290 | ) | | 392 |
| | (244 | ) |
Customer contracts | 8 | | 89 |
| | (61 | ) | | 89 |
| | (46 | ) |
Tradenames | 2 - 10 | | 73 |
| | (40 | ) | | 73 |
| | (33 | ) |
Total identifiable intangible assets | | | $ | 1,214 |
| | $ | (510 | ) | | $ | 1,213 |
| | $ | (415 | ) |
The aggregate amortization expense (actual and estimated) for identifiable intangible assets for the following periods is:
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
|
| | | | | | | | | | | |
In millions | Three months ended September 30, 2016 | | Nine months ended September 30, 2016 | | Remainder of 2016 (estimated) |
Amortization expense | $ | 31 |
| | $ | 95 |
| | $ | 29 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | For the years ended December 31 (estimated) |
In millions | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 |
Amortization expense | | $ | 116 |
| | $ | 85 |
| | $ | 75 |
| | $ | 57 |
| | $ | 49 |
|
3. DEBT OBLIGATIONS
The following table summarizes the Company's short-term borrowings and long-term debt:
|
| | | | | | | | | | | | |
| September 30, 2016 | | December 31, 2015 |
In millions, except percentages | Amount | | Weighted-Average Interest Rate | | Amount | | Weighted-Average Interest Rate |
Short-Term Borrowings | | | | | | | |
Current portion of Senior Secured Credit Facility (1) | $ | 45 |
| | 2.53% | | $ | — |
| | |
Trade Receivables Securitization Facility (1) | 200 |
| | 1.25% | | — |
| | |
Other (1) | 11 |
| | 7.41% | | 13 |
| | 6.34% |
| Total short-term borrowings | $ | 256 |
| | | | $ | 13 |
| | |
Long-Term Debt | | | | | | | |
Senior Secured Credit Facility: | | | | | | | |
| Term loan facility (1) | $ | 833 |
| | 2.53% | | $ | 956 |
| | 2.95% |
| Revolving credit facility (1) | 20 |
| | 2.53% | | 100 |
| | 2.61% |
Senior notes: |
|
| | | | | | |
| 5.00% Senior Notes due 2022 | 600 |
| | | | 600 |
| | |
| 4.625% Senior Notes due 2021 | 500 |
| | | | 500 |
| | |
| 5.875% Senior Notes due 2021 | 400 |
| | | | 400 |
| | |
| 6.375% Senior Notes due 2023 | 700 |
| | | | 700 |
| | |
Other (1) | 11 |
| | 6.98% | | 17 |
| | 7.16% |
Deferred Financing Fees | (31 | ) | | | | (34 | ) | | |
| Total long-term debt | $ | 3,033 |
| | | | $ | 3,239 |
| | |
| |
(1) | Interest rates are weighted average interest rates as of September 30, 2016 and December 31, 2015. The Senior Secured Credit Facility incorporates the impact of the interest rate swap agreement described in Note 11, "Derivatives and Hedging Instruments." |
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 September 30, 2016, the Senior Secured Credit Facility consisted of a term loan facility with an aggregate principal amount outstanding of $878 million. The revolving credit facility had an aggregate principal amount of $1.1 billion, of which $20 million was outstanding as of September 30, 2016. The revolving credit facility also allows a portion of the availability to be used for outstanding letters of credit, and as of September 30, 2016, 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 $11 million beginning June 30, 2016, $17 million beginning 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
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
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.
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 on or prior to December 31, 2017, (a) the sum of 4.25 and an amount (not to exceed 0.50) to reflect debt used to reduce NCR’s unfunded pension liabilities to (b) 1.00, (ii) 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 (iii) 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 September 30, 2016, the maximum consolidated leverage ratio under the Senior Secured Credit Facility was 4.35 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.
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
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
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.
The Company has the option to redeem the 5.00% Notes, in whole or in part, at any time on or after July 15, 2017, at a redemption price of 102.5%, 101.667%, 100.833% and 100% during the 12-month periods commencing on July 15, 2017, 2018, 2019 and 2020 and thereafter, respectively, plus accrued and unpaid interest to the redemption date. Prior to July 15, 2017, the Company may redeem the 5.00% Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a make-whole premium and accrued and unpaid interest to the redemption date.
The Company has the option to redeem the 4.625% Notes, in whole or in part, at any time on or after February 15, 2017, at a redemption price of 102.313%, 101.156% and 100% during the 12-month periods commencing on February 15, 2017, 2018 and 2019 and thereafter, respectively, plus accrued and unpaid interest to the redemption date. Prior to February 15, 2017, the Company may redeem the 4.625% Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a make-whole premium and accrued and unpaid interest to the redemption date. Prior to February 15, 2016, the Company may redeem the 4.625% Notes in an aggregate principal amount not to exceed 35% of the aggregate principal amount of the notes originally issued at a redemption price of 104.625% plus accrued and unpaid interest to the redemption date, with the net cash proceeds from one or more qualified equity offerings under certain further requirements.
The Company has the option to redeem the 5.875% Notes, in whole or in part, at any time on or after December 15, 2017, at a redemption price of 102.938%, 101.469% and 100% during the 12-month periods commencing on December 15, 2017, 2018 and 2019 and thereafter, respectively, plus accrued and unpaid interest to the redemption date. Prior to December 15, 2017, the Company may redeem the 5.875% Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a make-whole premium and accrued and unpaid interest to the redemption date. Prior to December 15, 2016, the Company may redeem the 5.875% Notes in an aggregate principal amount not to exceed 35% of the aggregate principal amount of the notes originally issued at a redemption price of 105.875% plus accrued and unpaid interest to the redemption date, with the net cash proceeds from one or more qualified equity offerings under certain further requirements.
The Company has the option to redeem the 6.375% Notes, in whole or in part, at any time on or after December 15, 2018, at a redemption price of 103.188%, 102.125%, 101.063% and 100% during the 12-month periods commencing on December 15, 2018, 2019, 2020 and 2021 and thereafter, respectively, plus accrued and unpaid interest to the redemption date. Prior to December 15, 2018, the Company may redeem the 6.375% Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a make-whole premium and accrued and unpaid interest to the redemption date. Prior to December 15, 2016, the Company may redeem the 6.375% Notes in an aggregate principal amount not to exceed 35% of the aggregate principal amount of the notes originally issued at a redemption price of 106.375% plus accrued and unpaid interest to the redemption date, with the net cash proceeds from one or more qualified equity offerings under certain further requirements.
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 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. 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 $467 million and $368 million of outstanding accounts receivable as of September 30, 2016 and December 31, 2015, respectively, and these amounts are included in accounts receivable, net in the Company’s Condensed Consolidated Balance Sheets.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
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.
Debt Maturities Maturities of long-term debt outstanding, in principal amounts, at September 30, 2016 are summarized below:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | For the years ended December 31 | | |
In millions | | Total | | October 1, 2016 through December 31, 2016 | | 2017 | | 2018 | | 2019 | | 2020 | | Thereafter |
Debt maturities | | $ | 3,320 |
| | $ | 214 |
| | $ | 50 |
| | $ | 63 |
| | $ | 85 |
| | $ | 95 |
| | $ | 2,813 |
|
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 September 30, 2016 and December 31, 2015 was $3.40 billion and $3.21 billion, respectively. Management's 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.
4. RESTRUCTURING PLAN
In July 2014, we announced a restructuring plan to strategically reallocate resources so that we can focus on our higher-growth, higher-margin opportunities in the software-driven consumer transaction technologies industry. The program is centered on ensuring that our people and processes are aligned with our continued transformation and includes: rationalizing our product portfolio to eliminate overlap and redundancy; taking steps to end-of-life older commodity product lines that are costly to maintain and provide low margins; moving lower productivity services positions to our new centers of excellence due to the positive impact of services innovation; and reducing layers of management and organizing around divisions to improve decision-making, accountability and strategic execution.
As a result of the restructuring plan, the Company recorded a total charge of $7 million and $17 million in the three and nine months ended September 30, 2016, respectively, and $12 million and $36 million in the three and nine months ended September 30, 2015, respectively. The Company expects to achieve annualized run-rate savings of approximately $105 million in 2016. Our estimate of restructuring-related opportunities in connection with this restructuring plan for 2016 is approximately $20 million to $25 million.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
Charges related to the restructuring plan for the the three and nine months ended September 30 were:
|
| | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
In millions | 2016 | | 2015 | | 2016 | | 2015 |
Severance and other employee-related costs | | | | | | | |
ASC 712 charges included in restructuring-related charges | $ | 2 |
| | $ | — |
| | $ | 4 |
| | $ | (5 | ) |
ASC 420 charges included in restructuring-related charges | 1 |
| | 7 |
| | (1 | ) | | 12 |
|
Inventory-related charges | | | | | | | |
Charges included in cost of products | — |
| | — |
| | — |
| | 3 |
|
Charges included in cost of services | — |
| | — |
| | 4 |
| | — |
|
Asset-related charges | | | | | | | |
External and internal use software impairment charges included in restructuring-related charges | — |
| | — |
| | 2 |
| | 2 |
|
Impairment of long-lived assets included in restructuring- related charges | — |
| | — |
| | — |
| | 14 |
|
Other exit costs | | | | | | | |
Other exit costs included in restructuring-related charges | 4 |
| | 5 |
| | 8 |
| | 10 |
|
Total restructuring charges | $ | 7 |
| | $ | 12 |
| | $ | 17 |
| | $ | 36 |
|
In the nine months ended September 30, 2016 and 2015, asset related charges included the write-off of internal and external use capitalized software for projects that have been abandoned. In the nine months ended September 30, 2015, asset related charges included the impairment of long-lived assets that were no longer considered strategic and were held for sale. The Company utilized Level 3 inputs, as defined in the fair value hierarchy, to measure the fair value.
The results by segment, as disclosed in Note 13, "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 total liabilities relating to the restructuring plan, which are included on the Condensed Consolidated Balance Sheets in other current liabilities.
|
| | | | | | | |
In millions | 2016 | | 2015 |
Employee Severance and Other Exit Costs | | | |
Beginning balance as of January 1 | $ | 20 |
| | $ | 60 |
|
Cost recognized during the period | 13 |
| | 22 |
|
Change in estimated payments | (2 | ) | | (5 | ) |
Utilization | (28 | ) | | (51 | ) |
Foreign currency translation adjustments | — |
| | (2 | ) |
Ending balance as of September 30 | $ | 3 |
| | $ | 24 |
|
5. 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 $31 million and $16 million for the three months ended September 30, 2016 and 2015, respectively. The increase in income tax expense was primarily driven by a less favorable change in uncertain tax positions, including $17 million of income tax benefits for audit settlements in foreign jurisdictions in the three months ended September 30, 2015, partially offset by a favorable mix of earnings in continuing operations.
Income tax expense was $75 million and $50 million for the nine months ended September 30, 2016 and 2015, respectively. The increase in income tax expense was primarily driven by a less favorable change in uncertain tax positions, including $17 million of income tax benefits for audit settlements in foreign jurisdictions in the nine months ended September 30, 2015, partially offset by a favorable mix of earnings in continuing operations, excluding the settlement of the UK London pension plan. During the nine months ended September 30, 2015 there was no tax benefit recorded on the $427 million charge related to the settlement of the UK London pension plan due to a valuation allowance against deferred tax assets in the United Kingdom. Refer to Note 7, “Employee Benefit Plans,” for additional discussion on the settlement of the UK London pension plan.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
6. STOCK COMPENSATION PLANS
As of September 30, 2016, the Company’s primary type of stock-based compensation was restricted stock units. Stock-based compensation expenses for the following periods were:
|
| | | | | | | | | | | | | | | |
In millions | Three months ended September 30 | | Nine months ended September 30 |
2016 | | 2015 | | 2016 | | 2015 |
Restricted stock units | $ | 16 |
| | $ | 12 |
| | $ | 45 |
| | $ | 32 |
|
Tax benefit | (6) |
| | (4) |
| | (14 | ) | | (10 | ) |
Total stock-based compensation (net of tax) | $ | 10 |
| | $ | 8 |
| | $ | 31 |
| | $ | 22 |
|
Stock-based compensation expense is recognized in the financial statements based upon fair value.
During the first quarter of 2016, the Company issued price-contingent restricted stock units with a performance period of 60 months. Vesting of these units is dependent upon the attainment of target stock prices and service conditions. The Company estimated the fair value and derived service period using the Monte Carlo simulation option pricing model. The Company amortizes the fair value of these awards over the explicit service period of 36 to 48 months, which was longer than the derived service period, adjusted for estimated forfeitures. Provided that the explicit service period is rendered, the total fair value of the price-contingent restricted stock units at the date of grant is recognized as compensation expense even if the market condition is not achieved. However, the number of shares that ultimately vest can vary significantly with the performance of the specified market criteria. The weighted-average assumptions used and the resulting estimates of fair value were as follows:
|
| |
| Nine months ended September 30, 2016 |
Expected volatility | 33.9% |
Expected dividend yield | — |
Risk-free rate | 1.21% |
Weighted average fair value per share | $14.93 |
Expected volatility is based on the historical volatility derived from NCR stock price movements over the last 60 months. The risk-free interest rate was based upon the U.S. Treasury yield curve in effect at the time of grant with a remaining term of 60 months.
As of September 30, 2016, the total unrecognized compensation cost of $130 million related to unvested restricted stock grants is expected to be recognized over a weighted average period of approximately 1.3 years.
7. EMPLOYEE BENEFIT PLANS
Components of net periodic benefit cost (income) of the pension plans for the three months ended September 30 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
In millions | U.S. Pension Benefits | | International Pension Benefits | | Total Pension Benefits |
2016 | | 2015 | | 2016 | | 2015 | | 2016 | | 2015 |
Net service cost | $ | — |
| | $ | — |
| | $ | 2 |
| | $ | 3 |
| | $ | 2 |
| | $ | 3 |
|
Interest cost | 23 |
| | 22 |
| | 7 |
| | 7 |
| | 30 |
| | 29 |
|
Expected return on plan assets | (18 | ) | | (18 | ) | | (10 | ) | | (11 | ) | | (28 | ) | | (29 | ) |
Amortization of prior service cost | — |
| | — |
| | 1 |
| | 1 |
| | 1 |
| | 1 |
|
Curtailment | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
Net periodic benefit cost (income) | $ | 5 |
| | $ | 4 |
| | $ | — |
| | $ | 1 |
| | $ | 5 |
| | $ | 5 |
|
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
Components of net periodic benefit cost (income) of the pension plans for the nine months ended September 30 were as follows: |
| | | | | | | | | | | | | | | | | | | | | | | |
In millions | U.S. Pension Benefits | | International Pension Benefits | | Total Pension Benefits |
2016 | | 2015 | | 2016 | | 2015 | | 2016 | | 2015 |
Net service cost | $ | — |
| | $ | — |
| | $ | 6 |
| | $ | 9 |
| | $ | 6 |
| | $ | 9 |
|
Interest cost | 68 |
| | 66 |
| | 21 |
| | 34 |
| | 89 |
| | 100 |
|
Expected return on plan assets | (54 | ) | | (54 | ) | | (28 | ) | | (50 | ) | | (82 | ) | | (104 | ) |
Amortization of prior service cost | — |
| | $ | — |
| | 1 |
| | 1 |
| | 1 |
| | 1 |
|
Curtailment | — |
| | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
Settlement | — |
| | — |
| | — |
| | 427 |
| | — |
| | 427 |
|
Net periodic benefit cost (income) | $ | 14 |
| | $ | 12 |
| | $ | — |
| | $ | 419 |
| | $ | 14 |
| | $ | 431 |
|
During the second quarter of 2015, the Company completed the transfer of its UK London pension plan to an insurer. As a result of the transfer, the Company recorded a settlement loss of $427 million in the nine months ended September 30, 2015 in the Condensed Consolidated Statement of Operations.
The benefit from the postretirement plan for the three and nine months ended September 30 was:
|
| | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
In millions | 2016 | | 2015 | | 2016 | | 2015 |
Interest cost | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Amortization of: | | | | | | | |
Prior service benefit | (4 | ) | | (5 | ) | | (11 | ) | | (14 | ) |
Actuarial loss | 1 |
| | 1 |
| | 2 |
| | 2 |
|
Net postretirement benefit | $ | (3 | ) | | $ | (4 | ) | | $ | (9 | ) | | $ | (12 | ) |
The cost of the postemployment plan for the three and nine months ended September 30 was:
|
| | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
In millions | 2016 | | 2015 | | 2016 | | 2015 |
Net service cost | $ | 4 |
| | $ | 4 |
| | $ | 12 |
| | $ | 12 |
|
Interest cost | — |
| | — |
| | 1 |
| | 2 |
|
Amortization of: | | | | | | | |
Prior service benefit | (1 | ) | | (1 | ) | | (4 | ) | | (3 | ) |
Actuarial gain | (1 | ) | | — |
| | (3 | ) | | — |
|
Net benefit cost | $ | 2 |
| | $ | 3 |
| | $ | 6 |
| | $ | 11 |
|
Restructuring severance cost | 2 |
| | — |
| | 4 |
| | (5 | ) |
Total postemployment cost | $ | 4 |
| | $ | 3 |
| | $ | 10 |
| | $ | 6 |
|
Employer Contributions
Pension For the three and nine months ended September 30, 2016, NCR contributed $7 million and $20 million, respectively, to its international pension plans. In 2016, NCR anticipates contributing an additional $15 million to its international pension plans for a total of $35 million.
Postretirement For the three and nine months ended September 30, 2016, NCR contributed zero and $1 million, respectively, to its U.S. postretirement plan. NCR anticipates contributing an additional $2 million to its U.S. postretirement plan for a total of $3 million in 2016.
Postemployment For the three and nine months ended September 30, 2016, NCR contributed $11 million and $32 million, respectively, to its postemployment plans. NCR anticipates contributing an additional $1 million to its postemployment plans for a total of $33 million in 2016, which includes planned contributions associated with the previously announced restructuring plan. See Note 4, "Restructuring Plan," for additional information.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
8. 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 evolving 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 2012, NCR received anonymous allegations from a purported whistleblower regarding certain aspects of the Company's business practices in China, the Middle East and Africa. The principal allegations received in 2012 related to the Company's compliance with the Foreign Corrupt Practices Act (FCPA) and federal regulations that prohibit U.S. persons from engaging in certain activities in Syria. As previously reported, the Company and its Board of Directors completed investigations with the assistance of experienced outside counsel and resolved a related shareholder derivative action.
With respect to the FCPA, the Company made a presentation to the staff of the Securities and Exchange Commission (SEC) and the U.S. Department of Justice (DOJ) providing the facts known to the Company related to the whistleblower's FCPA allegations, and advising the government that many of these allegations were unsubstantiated. With respect to the DOJ, the Company responded to its most recent requests for documents in 2014. On June 22, 2015, the SEC staff notified the Company that it did not intend to recommend an enforcement action against the Company with respect to these matters.
With respect to Syria, in 2012 NCR voluntarily notified the U.S. Treasury Department Office of Foreign Assets Control (OFAC) of potential violations and ceased operations in Syria, which were commercially insignificant. The notification related to confusion stemming from the Company's failure to register in Syria the transfer of the Company's Syrian branch to a foreign subsidiary and to deregister the Company's legacy Syrian branch, which was a branch of NCR Corporation. The Company applied for and received from OFAC various licenses that permitted the Company to take measures required to wind down its past operations in Syria. The last such license expired in April 2016, and in connection with that expiration the Company abandoned its remaining property in Syria, which was commercially insignificant, and ended the employment of its final two employees there, who had remained employed by the Company to assist with the execution of the Company's wind-down activities pursuant to authority granted by the OFAC licenses. The Company also submitted detailed reports to OFAC regarding this matter, including a description of the Company's comprehensive export control program and related remedial measures, and a description of the abandonment and related circumstances. The Company continues to cooperate with the authorities. There can be no assurance that the Company will not be subject to fines or other remedial measures as a result of OFAC's investigation.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
In 2013 the Company, through its travel business, entered into a subcontract with a prime contractor with respect to certain information technology components of two airport construction projects in Oman. In 2015 the prime contractor’s contract with an Omani public agency was terminated for cause; the Company and the prime contractor (a joint venture) subsequently provided to each other notices of termination of the subcontract. The prime contractor subsequently filed liquidation proceedings in Oman. The Company had delivered and installed goods and services in the approximate amount of $40 million as of 2015 when the various contracts were terminated, approximately half of which sum remains due and owing. Under the terms of the subcontract, most of the payment obligations by the Omani public agency to the terminated prime contractor, and from the terminated prime contractor to the Company, had not at that time matured. The Company remains engaged in the construction projects, having been urged by the Omani public agency to enter into a new subcontract with a new prime contractor, which the Company did later in 2015. The Company has identified various avenues to pursue, against the prime contractor and others, including the parent of one of the joint venture partners in the terminated prime contractor, to obtain recoveries of the amounts owed to it. In the quarter ended September 30, 2016, the Company received payment from the Omani public agency under the agreement entered into in June 2016, as previously reported. The Company continues to maintain the previously reported reserve of approximately $20 million with respect to those portions of its claim that it considered did not meet the Company’s standard for probable recovery; that reserve was not affected by the agreement or payment referenced above.
In June 2014, one of the Company’s Brazilian subsidiaries, NCR Manaus, was notified of a Brazilian federal tax assessment of R168 million, or approximately $52 million, 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 have not recorded an accrual for the assessment, as the Company believes it has a valid position regarding indirect taxes in Brazil and, as such, has filed an appeal. However, 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. As of September 30, 2016, the Company estimated the range of possible loss related to this matter to be zero to approximately $71 million.
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 detailed 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 are 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), WTM I Co. (formerly Wisconsin Tissue Mills, now owned by Canal Corporation, formerly known as Chesapeake Corporation), CBC Corporation (formerly Riverside Paper Corporation), U.S. Paper Mills Corp. (owned by Sonoco Products Company), and Menasha Corporation. 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. Some parties contend that NCR is also 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 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 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 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
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
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 2012-14 arbitration dispute between NCR and API, and provides for regular, ongoing funding of NCR-incurred Fox River remediation costs via contributions made by BAT, API (through 2016) and API's indemnitor Windward Prospects (through 2014), to a new limited liability corporation created by the Funding Agreement. Under the Funding Agreement NCR receives (and has received) payment for 50% of its Fox River remediation costs from October 1, 2014 forward; the Funding Agreement also provides NCR opportunities to recoup, both indirectly from third parties and directly, the difference between BAT’s and API’s 60% obligation under the Cost Sharing Agreement and arbitration award on the one hand and their 50% payments under the Funding Agreement on the other, as well as 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 the end of September 2014.
Various litigation proceedings concerning the Fox River are pending, and, as the result of appellate decisions in September 2014, NCR’s potential liability for the Fox River matter, for purposes of calculating the Company’s Fox River reserve, is no longer considered to be 100% of the remediation costs in the lower parts of the river. In a contribution action filed in 2008 seeking to determine allocable responsibility of several companies and governmental entities, a federal court in Wisconsin had issued rulings in 2009 and 2011 that effectively placed all remediation liability on NCR for four of the five “operable units” of the site. In another part of the same lawsuit, the Company prevailed in a 2012 trial on claims seeking to hold it liable under an “arranger” theory for the most upriver portion of the site, operable unit 1.
On September 25, 2014, the United States Court of Appeals for the Seventh Circuit issued its ruling on appeal. That ruling vacated the lower court’s contribution decisions that were adverse to NCR (i.e., it vacated “the decision to hold NCR responsible for all of the response costs at operable units 2 through 5 in contribution”), set aside an adverse judgment against the Company in the amount of $76 million, and affirmed the Company’s favorable verdict in the “arranger” liability trial with respect to operable unit 1. The case was remanded to the federal district court in Wisconsin for further proceedings, for potential consideration of additional factors noted by the appellate court, in which proceedings NCR will vigorously contest the amount of remediation costs allocable to it, and seek to recover from other parties portions of the costs it has previously paid. The case is scheduled for trial in March 2017.
On March 23, 2015, under a case management order applicable to the remanded case the federal district court allowed the filing of certain additional contractual and other claims, including claims against the Company, as well as certain claims by API against other parties (in light of the September 2014 appellate ruling that had restored those claims), which resulted in claims for potential indemnity by those other parties against the Company (under the Funding Agreement, to the extent the Company is liable for such claims, API must pay its recoveries into the limited liability corporation created by the Funding Agreement, and the Company may then seek to obtain reimbursement under its terms). The Company also updated the amounts it is seeking in its affirmative claims against other parties. Additionally, in March 2015, notwithstanding the prior trial and appellate results that had been favorable to the Company, the court entered a ruling holding NCR liable for contamination in operable unit 1, an area upriver from the Company’s former facilities, on what the court considered to be new guidance created by the appellate court in its September 2014 decision. The Company believes the March 2015 decision incorrectly applied the appellate court ruling, which had affirmed the Company’s favorable trial result on operable unit 1. While the Company's effort to obtain special appellate review in the form of a petition for mandamus was denied on May 1, 2015 by the appellate court, in a subsequent decision dated May 15, 2015 the district court indicated, in a ruling that addressed several issues, that NCR had no liability for operable unit 1, noting “NCR discharged no PCBs in OU1, and therefore has no divisible share of the clean-up costs for that area."
In 2010 the Governments filed a lawsuit (the Government enforcement action) in Wisconsin federal court against the companies named in the 2007 Order. After a 2012 trial, in May 2013 that court held, among other things, that harm at the site is not divisible, and it entered a declaratory judgment against seven defendants (including NCR) finding them jointly and severally liable to comply with the applicable provisions of the 2007 Order. The court also issued an injunction against four companies (including NCR), ordering them to comply with the applicable provisions of the 2007 Order; only NCR complied with the injunction. Several parties, including NCR, appealed from the judgment. In a companion opinion to the ruling described in the preceding paragraph, the United States Court of Appeals for the Seventh Circuit, also on September 25, 2014, vacated the injunction, and also vacated the declaratory judgment that had been entered against the Company. The appellate court also ruled that NCR’s defense based on divisibility of harm at the site, which the district court had rejected, must be reconsidered by the district court. The declaratory judgment in the Government enforcement action with respect to liability under the 2007 Order against another defendant, Glatfelter, which pursued its appeal on grounds different from those pursued by NCR, was affirmed.
The case was remanded to the federal district court in Wisconsin for further proceedings. In a ruling on May 15, 2015, the district court ruled in NCR’s favor and rejected the Governments’ efforts to reinstate the declaratory judgment against NCR. The court issued findings in favor of the Company’s divisibility defense, and held that NCR’s share of liability for operable unit 4 was 28%
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
(the Company had then already paid more than 28% of the remediation costs for that part of the river). Various parties asked the court to reconsider its ruling, and in October 2015 the court granted those motions, with the prospect that the Company could continue to face joint and several liability for remediation of the river, in conjunction with other PRPs, although the Company’s position remains that it has performed more than its fair share of remediation costs at the site. The remaining claims in the Government enforcement action are expected to be litigated in 2016 and 2017; trial of the matter is scheduled for the spring of 2017, three days following conclusion of the trial in the contribution case referenced above. With respect to remaining remediation work, one other PRP, GP, had agreed by virtue of an earlier settlement with the Governments that it is “liable to the United States . . . for performance of all response actions that the [2007 Order] requires for” the lower portion of operable unit 4 and operable unit 5.
With respect to 2015 remediation, following negotiations with the Governments and GP the Company agreed in April 2015 to perform a portion of the work planned for 2015, and to fund approximately one-third of the cost of that work, with GP funding an equal amount. This agreement was formalized in a stipulation and proposed consent decree filed with the federal court; each party preserved its rights to recover its 2015 costs from the other in the contribution litigation. The Governments demanded that Glatfelter agree to perform or fund the remaining approximate one-third of the work. NCR and GP undertook and completed the remediation efforts they agreed to perform in 2015. Glatfelter performed only a limited portion of the work the Governments sought to require of it, and refused to perform the remainder.
As of September 30, 2016, no formal arrangement for the conduct of 2016 remediation work had been reached. NCR and GP offered to perform again the arrangement they performed in 2015, in which NCR and GP would each fund approximately one-third of the work, and NCR and GP commenced remediation work for the 2016 season on that basis. Glatfelter indicated it would fund a portion of 2016 work, but again refused to perform the approximate one-third of work that was proposed for it to perform, and instead performed only a minor quantity of work. Glatfelter’s failures to perform its work have caused the expected completion of the remediation to be extended from 2017 to 2018. NCR and GP have together funded more than two-thirds of the 2016 remediation work, and were continuing to do so as of September 30, 2016.
With respect to the Company’s prior dispute with API, which was generally superseded by the Funding Agreement, the Company has continued to receive timely payments under the Funding Agreement.
NCR's eventual remediation liability, followed by long-term monitoring, 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. In general, the most significant factors include: (1) the total remaining clean-up costs, including long-term monitoring following completion of the clean-up; (2) total NRD for the site; (3) the share of clean-up costs and NRD that NCR will bear; (4) NCR's transaction and litigation costs to defend itself in this matter for the current year; and (5) the share of NCR's payments that API and/or BAT will bear, as discussed above. With respect to NRD, in connection with a certain settlement entered into by other PRPs in the year ended December 31, 2015 the Government asked the court to allow it to withdraw the NRD claims it had prosecuted on behalf of NRD trustees, including those NRD claims asserted against the Company (the Government had represented it would do so in the course of presenting the settlement to the court for approval). The court approved this request in October 2015.
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 September 30, 2016, the net reserve for the Fox River matter was approximately $15 million, compared to $26 million as of December 31, 2015. The change in the net reserve is due to payments for clean-up activities and litigation costs. NCR contributes to the LLC in order to fund remediation activities and generally, by contract, has funded certain amounts of remediation expenses in advance. As of September 30, 2016 and December 31, 2015, 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 Lucent Technologies.) NCR's estimate of what AT&T and Nokia remain obligated to pay under the indemnity totaled approximately $11 million and $15 million as of September 30, 2016 and December 31, 2015, respectively, and is deducted in determining the net reserve discussed above.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
In connection with the Fox River and other matters, through September 30, 2016, NCR has received a combined total of approximately $173 million in settlements reached with its principal insurance carriers. Portions of most of these settlements were paid 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. Of the total amount collected to date, $9 million is subject to competing claims by API.
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 GP affiliate corporations in a contribution and cost recovery action for alleged pollution. The suit, pending in Michigan, asks that the Company pay a "fair portion" of these companies’ costs. Various removal and remedial actions remain to be performed at the Kalamazoo River site, the costs for which have not been determined. The suit alleges that the Company is liable 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 from approximately 1954 to April 1971, and the majority of contamination had occurred prior to 1969). NCR has preserved its right to appeal the September 2013 decision.
The Court did not determine NCR’s share of the overall liability, which the Company believes should be de minimis, or how NCR’s liability relates to the liability of other liable or potentially liable parties at the site. Relative shares of liability were tried to the court in a subsequent phase of the case; the trial concluded in December 2015, and posttrial briefing concluded in March 2016. The parties are awaiting the court's judgment. Prior to trial, in response to a motion filed by the Company, the court dismissed several portions of GP’s claims as time-barred, with the result that the past costs that were tried amounted to approximately $50 million. The court may or may not also rule on the allocation of future costs. If the Company is found liable for money damages or otherwise with respect to the Kalamazoo River site, it would have claims against BAT and API under the Cost Sharing Agreement, the arbitration award, the judgment and the Funding Agreement discussed above in connection with the Fox River matter (the Funding Agreement may provide partial reimbursement of such damages depending on the extent of certain recoveries, if any, against third parties under its terms). The Company would also have claims against AT&T and Nokia under the arrangement discussed above in connection with the Fox River matter. As of September 30, 2016 and December 31, 2015, the reserve for litigation expenses associated with the Kalamazoo matter was approximately $5 million and $18 million, respectively.
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. 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 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. Except for the sharing agreement with API described above with respect to a particular insurance settlement, in those cases where insurance carriers or third-party indemnitors have agreed to pay any amounts and management believes that collectibility of such amounts is probable, the amounts are recorded in the Condensed Consolidated Financial Statements. For the Fox River site, as described above, assets relating to the AT&T and Nokia indemnity and to the API/BAT obligations are recorded as payment is supported by contractual agreements, public filings and/or payment history.
Guarantees and Product Warranties Guarantees associated with NCR’s business activities are reviewed for appropriateness and impact to the Company’s Condensed Consolidated Financial Statements. As of September 30, 2016 and December 31, 2015, NCR had no material obligations related to such guarantees, and therefore its Condensed Consolidated Financial Statements do not have any associated liability balance.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
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 nine months ended September 30 as follows:
|
| | | | | | | |
In millions | 2016 | | 2015 |
Warranty reserve liability | | | |
Beginning balance as of January 1 | $ | 24 |
| | $ | 22 |
|
Accruals for warranties issued | 31 |
| | 29 |
|
Settlements (in cash or in kind) | (29 | ) | | (28 | ) |
Ending balance as of September 30 | $ | 26 |
| | $ | 23 |
|
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.
9. 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 Blackstone Capital Partners VI L.P. and Blackstone Tactical Opportunities L.L.C. (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 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 and nine months ended September 30, 2016, the Company paid dividends-in-kind of $12 million and $35 million, respectively, associated with the Series A Convertible Preferred Stock. As of September 30, 2016 and December 31, 2015, the Company had accrued dividends of $3 million and $4 million, respectively, associated with the Series A Convertible Preferred Stock. There were no cash dividends declared during the three and nine months ended September 30, 2016 or 2015, respectively.
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 September 30, 2016 and December 31, 2015, the maximum number of common shares that could be required to be issued if converted was 28.6 million and 27.4 million shares, respectively.
10. EARNINGS PER SHARE
Basic earnings per share (EPS) is calculated by dividing net income or loss attributable to NCR, less any 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 reported period.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
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) applicable to the Series A Convertible Preferred Stock. Such add-back would also include any adjustments to equity in the period to accrete the Series A Convertible Preferred Stock to its redemption price, or recorded upon a redemption or induced conversion. We adjust the denominator used in the basic EPS computation, subject to anti-dilution requirements, to include the dilution from potential shares resulting from the issuance of the Series A Convertible Preferred Stock, restricted stock units, and stock options.
The holders of Series A Convertible Preferred Stock and unvested restricted stock units do not have nonforfeitable rights to common stock dividends or common stock dividend equivalents. Accordingly, the Series A Convertible Preferred Stock and unvested restricted stock units do not qualify as participating securities. See Note 6, "Stock Compensation Plans," for share information on NCR’s stock compensation plans.
During the nine months ended September 30, 2016, the Company repurchased 10.0 million shares of its common stock for $250 million. No shares were repurchased during the three months ended September 30, 2016. The Company did not repurchase shares of its common stock during the three and nine months ended September 30, 2015. Upon repurchase, shares are retired.
The components of basic earnings per share are as follows:
|
| | | | | | | | | | | | | | | |
In millions, except per share amounts | Three months ended September 30 | | Nine months ended September 30 |
2016 | | 2015 | | 2016 | | 2015 |
Numerator | | | | | | | |
Income (loss) from continuing operations | $ | 107 |
| | $ | 102 |
| | $ | 215 |
| | $ | (202 | ) |
Loss from discontinued operations, net of tax | (2 | ) | | (4 | ) | | (2 | ) | | (4 | ) |
Net income (loss) attributable to NCR | $ | 105 |
| | $ | 98 |
| | $ | 213 |
| | $ | (206 | ) |
Series A convertible preferred stock dividends | (13 | ) | | — |
| | (37 | ) | | — |
|
Net income (loss) attributable to NCR common stockholders | $ | 92 |
| | $ | 98 |
| | $ | 176 |
| | $ | (206 | ) |
Denominator | | | | | | | |
Basic weighted average number of shares outstanding | 123.9 |
| | 169.8 |
| | 126.0 |
| | 169.5 |
|
Basic earnings per share: | | | | | | | |
From continuing operations | $ | 0.76 |
| | $ | 0.60 |
| | $ | 1.41 |
| | $ | (1.19 | ) |
From discontinued operations | (0.02 | ) | | (0.02 | ) | | (0.01 | ) | | (0.03 | ) |
Total basic earnings per share | $ | 0.74 |
| | $ | 0.58 |
| | $ | 1.40 |
| | $ | (1.22 | ) |
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 September 30 | | Nine months ended September 30 |
2016 | | 2015 | | 2016 | | 2015 |
Numerator | | | | | | | |
Income (loss) from continuing operations | $ | 107 |
| | $ | 102 |
| | $ | 215 |
| | $ | (202 | ) |
Loss from discontinued operations, net of tax | (2 | ) | | (4 | ) | | (2 | ) | | (4 | ) |
Net income (loss) attributable to NCR | $ | 105 |
| | $ | 98 |
| | $ | 213 |
| | $ | (206 | ) |
Denominator | | | | | | | |
Basic weighted average number of shares outstanding | 123.9 |
| | 169.8 |
| | 126.0 |
| | 169.5 |
|
Dilutive effect of as-if Series A Convertible Preferred Stock | 28.4 |
| | — |
| | 28.0 |
| | — |
|
Dilutive effect of employee stock options and restricted stock units | 3.1 |
| | 2.5 |
| | 2.8 |
| | — |
|
Diluted weighted average number of shares outstanding | 155.4 |
| | 172.3 |
| | 156.8 |
| | 169.5 |
|
Diluted earnings per share: | | | | | | | |
From continuing operations | $ | 0.69 |
| | $ | 0.59 |
| | $ | 1.37 |
| | $ | (1.19 | ) |
From discontinued operations | (0.01 | ) | | (0.02 | ) | | (0.01 | ) | | (0.03 | ) |
Total diluted earnings per share | $ | 0.68 |
| | $ | 0.57 |
| | $ | 1.36 |
| | $ | (1.22 | ) |
For the three and nine months ended September 30, 2016, it was more dilutive 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 and the diluted earnings per share was calculated excluding the quarterly dividend.
Additionally, during the three and nine months ended September 30, 2016, there were zero and 0.1 million weighted anti-dilutive restricted stock units outstanding, respectively. For the the three and nine months ended September 30, 2015, there were no weighted anti-dilutive restricted stock units outstanding.
Due to the net loss attributable to NCR common stockholders for the nine months ended September 30, 2015, potential common shares that would cause dilution, such as restricted stock units and stock options, were excluded from the diluted share count because their effect would have been anti-dilutive. For the nine months ended September 30, 2015, the fully diluted shares would have been 172.0 million.
11. 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 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
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
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 September 30, 2016, the balance in AOCI related to foreign exchange derivative transactions was a gain of $4 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.
Interest Rate Risk
The Company was party to an interest rate swap agreement that fixed the interest rate on a portion of the Company's LIBOR indexed floating rate borrowings under its Senior Secured Credit Facility through August 22, 2016. The Company designated the interest rate swap as a cash flow hedge of forecasted quarterly interest payments made on three-month LIBOR indexed borrowings under the Senior Secured Credit Facility. The interest rate swap was determined to be highly effective at inception.
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 |
| September 30, 2016 |
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 | | $ | 298 |
| | $ | 5 |
| | Other current liabilities | | $ | 72 |
| | $ | 1 |
|
Total derivatives designated as hedging instruments | | | | | $ | 5 |
| | | | | | $ | 1 |
|
Derivatives not designated as hedging instruments | | | | | | | | | | | |
Foreign exchange contracts | Other current assets | | $ | 153 |
| | $ | — |
| | Other current liabilities | | $ | 208 |
| | $ | 1 |
|
Total derivatives not designated as hedging instruments | | | | | — |
| | | | | | 1 |
|
Total derivatives | | | | | $ | 5 |
| | | | | | $ | 2 |
|
| | | | | | | | | | | |
| Fair Values of Derivative Instruments |
| December 31, 2015 |
In millions | Balance Sheet Location | | Notional Amount | | Fair Value | | Balance Sheet Location | | Notional Amount | | Fair Value |
Derivatives designated as hedging instruments | | | | | | | | | | | |
Interest rate swap | Other current assets | | $ | — |
| | $ | — |
| | Other current liabilities | | $ | 380 |
| | $ | 3 |
|
Foreign exchange contracts | Other current assets | | 53 |
| | 2 |
| | Other current liabilities | | 105 |
| | 1 |
|
Total derivatives designated as hedging instruments | | | | | $ | 2 |
| | | | | | $ | 4 |
|
Derivatives not designated as hedging instruments | | | | | | | | | | | |
Foreign exchange contracts | Other current assets | | $ | 191 |
| | $ | 1 |
| | Other current liabilities | | $ | 204 |
| | $ | 1 |
|
Total derivatives not designated as hedging instruments | | | | | 1 |
| | | | | | 1 |
|
Total derivatives | | | | | $ | 3 |
| | | | | | $ | 5 |
|
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
The effects of derivative instruments on the Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2016 and 2015 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
In millions | Amount of Gain (Loss) Recognized in Other Comprehensive Income (OCI) on Derivative (Effective Portion) | | | | Amount of (Gain) Loss Reclassified from AOCI into the Condensed Consolidated Statement of Operations (Effective Portion) | | | | Amount of (Gain) Loss Recognized in the Condensed Consolidated Statement of Operations (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
Derivatives in Cash Flow Hedging Relationships | For the three months ended September 30, 2016 | | For the three months ended September 30, 2015 | | Location of (Gain) Loss Reclassified from AOCI into the Condensed Consolidated Statement of Operations (Effective Portion) | | For the three months ended September 30, 2016 | | For the three months ended September 30, 2015 | | Location of (Gain) Loss Recognized in the Condensed Consolidated Statement of Operations (Ineffective Portion and Amount Excluded from Effectiveness Testing) | | For the three months ended September 30, 2016 | | For the three months ended September 30, 2015 |
Interest rate swap | $ | — |
| | $ | (1 | ) | | Interest expense | | $ | — |
| | $ | 2 |
| | Interest expense | | $ | — |
| | $ | — |
|
Foreign exchange contracts | $ | 4 |
| | $ | 3 |
| | Cost of products | | $ | — |
| | $ | (3 | ) | | Other (expense), net | | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | | | |
In millions | Amount of Gain (Loss) Recognized in Other Comprehensive Income (OCI) on Derivative (Effective Portion) | | | | Amount of (Gain) Loss Reclassified from AOCI into the Condensed Consolidated Statement of Operations (Effective Portion) | | | | Amount of (Gain) Loss Recognized in the Condensed Consolidated Statement of Operations (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
Derivatives in Cash Flow Hedging Relationships | For the nine months ended September 30, 2016 | | For the nine months ended September 30, 2015 | | Location of (Gain) Loss Reclassified from AOCI into the Condensed Consolidated Statement of Operations (Effective Portion) | | For the nine months ended September 30, 2016 | | For the nine months ended September 30, 2015 | | Location of (Gain) Loss Recognized in the Condensed Consolidated Statement of Operations (Ineffective Portion and Amount Excluded from Effectiveness Testing) | | For the nine months ended September 30, 2016 | | For the nine months ended September 30, 2015 |
Interest rate swap | $ | (1 | ) | | $ | (2 | ) | | Interest expense | | $ | 2 |
| | $ | 4 |
| | Interest expense | | $ | — |
| | $ | — |
|
Foreign exchange contracts | $ | 5 |
| | $ | 11 |
| | Cost of products | | $ | — |
| | $ | (7 | ) | | Other (expense), net | | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | |
In millions | | | Amount of Gain (Loss) Recognized in the Condensed Consolidated Statement of Operations |
| | | Three months ended September 30 | | Nine months ended September 30 |
Derivatives not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in the Condensed Consolidated Statement of Operations | | 2016 | | 2015 | | 2016 | | 2015 |
Foreign exchange contracts | Other (expense), net | | $ | 1 |
| | $ | (1 | ) | | $ | — |
| | $ | (2 | ) |
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 September 30, 2016, we did not have any significant concentration of credit risk related to financial instruments.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
12. 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 September 30, 2016 and December 31, 2015 are set forth as follows:
|
| | | | | | | | | | | | | | | |
| | | Fair Value Measurements at September 30, 2016 Using |
In millions | September 30, 2016 | | 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) | $ | 2 |
| | $ | 2 |
| | $ | — |
| | $ | — |
|
Foreign exchange contracts (2) | 5 |
| | — |
| | 5 |
| | — |
|
Total | $ | 7 |
| | $ | 2 |
| | $ | 5 |
| | $ | — |
|
|