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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
Commission File Number 001-00395
NCR CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 31-0387920
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1700 South Patterson Blvd.
Dayton, Ohio 45479
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (937) 445-5000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Number of shares of common stock, $0.01 par value per share, outstanding as of
October 31, 2000 was 96,430,673.
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TABLE OF CONTENTS
PART I. Financial Information
<TABLE>
<CAPTION>
Description Page
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<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited)
Three and Nine Months Ended September 30, 2000 and 1999 3
Condensed Consolidated Balance Sheets
September 30, 2000 (Unaudited) and December 31, 1999 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
</TABLE>
PART II. Other Information
<TABLE>
<CAPTION>
Description Page
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Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
</TABLE>
<PAGE>
Part I. Financial Information
Item 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
In millions, except per share amounts
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------- --------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
----- ----- ----- -----
Revenue
Products $ 778 $ 818 $ 2,178 $ 2,324
Services 686 712 1,989 2,111
-------- -------- -------- -------
Total Revenue 1,464 1,530 4,167 4,435
-------- -------- -------- -------
Operating Expenses
Cost of products 486 516 1,369 1,478
Cost of services 515 550 1,507 1,610
Selling, general and administrative expenses 319 330 953 995
Research and development expenses 77 82 246 247
-------- -------- -------- -------
Total Operating Expenses 1,397 1,478 4,075 4,330
-------- -------- -------- -------
Income from Operations 67 52 92 105
Interest expense (4) (3) (9) (8)
Other income, net 22 37 61 68
-------- -------- -------- -------
Income Before Income Taxes 85 86 144 165
Income tax expense 31 33 56 63
-------- -------- -------- -------
Net Income $ 54 $ 53 $ 88 $ 102
======== ======== ======== =======
Net Income per Common Share
Basic $ 0.57 $ 0.54 $ 0.93 $ 1.04
Diluted $ 0.55 $ 0.53 $ 0.90 $ 1.00
Weighted Average Common Shares Outstanding
Basic 96.1 97.6 95.1 98.3
Diluted 99.1 101.1 98.1 102.0
</TABLE>
See notes to condensed consolidated financial statements.
3
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CONDENSED CONSOLIDATED BALANCE SHEETS
In millions, except per share amounts
<TABLE>
<CAPTION>
September 30 December 31
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
Current assets
Cash and short-term investments $ 621 $ 763
Accounts receivable, net 1,152 1,197
Inventories 311 299
Other current assets 281 282
-------- ---------
Total Current Assets 2,365 2,541
Reworkable service parts, net 210 209
Property, plant and equipment, net 719 793
Other assets 1,521 1,352
-------- ---------
Total Assets $ 4,815 $ 4,895
======== =========
Liabilities and Stockholders' Equity
Current liabilities
Short-term borrowings $ 45 $ 37
Accounts payable 388 378
Payroll and benefits liabilities 244 247
Customer deposits and deferred service revenue 357 365
Other current liabilities 507 635
-------- ---------
Total Current Liabilities 1,541 1,662
Long-term debt 38 40
Pension and indemnity liabilities 309 342
Postretirement and postemployment benefits liabilities 526 570
Other liabilities 638 623
Minority interests 49 49
-------- ---------
Total Liabilities 3,101 3,286
-------- ---------
Put Options 14 13
-------- ---------
Commitments and Contingencies
Stockholders' Equity
Preferred stock: par value $0.01 per share, 100.0 shares
authorized, no shares issued or outstanding at
September 30, 2000 and December 31, 1999, respectively - -
Common stock: par value $0.01 per share, 500.0 shares
authorized, 96.3 and 93.6 shares issued and outstanding
at September 30, 2000 and December 31, 1999, 1 1
respectively
Paid-in capital 1,162 1,081
Retained earnings 554 466
Accumulated other comprehensive income (17) 48
-------- ---------
Total Stockholders' Equity 1,700 1,596
-------- ---------
Total Liabilities and Stockholders' Equity $ 4,815 $ 4,895
======== =========
</TABLE>
See notes to condensed consolidated financial statements.
4
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
In millions
<TABLE>
<CAPTION>
Nine Months Ended September 30
2000 1999
--------- ----------
<S> <C> <C>
Operating Activities
Net income $ 88 $ 102
Adjustments to reconcile net income to net cash provided
by/(used in) operating activities:
Depreciation and amortization 272 278
Net gain on sales of assets (37) (35)
Purchased research and development from acquisitions 25 -
Changes in assets and liabilities:
Receivables 61 266
Inventories (11) (9)
Current payables (19) (50)
Deferred revenue and customer deposits (7) 12
Timing of disbursements for employee severance
and pension (217) (158)
Other assets and liabilities (91) (52)
--------- ----------
Net Cash Provided by Operating Activities 64 354
--------- ----------
Investing Activities
Short-term investments, net 52 (93)
Net expenditures and proceeds for service parts (76) (74)
Expenditures for property, plant and equipment (163) (136)
Proceeds from sales of property, plant and equipment 172 89
Business acquisitions and investments (71) -
Other investing activities, net (73) (68)
--------- ----------
Net Cash Used in Investing Activities (159) (282)
--------- ----------
Financing Activities
Purchases of Company common stock (37) (161)
Short-term borrowings, net 8 13
Long-term borrowings, net (3) (1)
Other financing activities, net 55 71
--------- ----------
Net Cash Provided by/(Used in) Financing Activities 23 (78)
--------- ----------
Effect of exchange rate changes on cash and cash
equivalents (17) (6)
--------- ----------
Decrease in Cash and Cash Equivalents (89) (12)
Cash and Cash Equivalents at Beginning of Period 571 488
--------- ----------
Cash and Cash Equivalents at End of Period $ 482 $ 476
========= ==========
</TABLE>
See notes to condensed consolidated financial statements.
5
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been prepared
by NCR Corporation (NCR or the Company) without audit pursuant to the rules and
regulations of the Securities and Exchange Commission and, in the opinion of
management, include all adjustments consisting only of normal recurring
adjustments necessary for a fair presentation of the consolidated results of
operations, financial position, and cash flows for each period presented. The
consolidated results for interim periods are not necessarily indicative of
results to be expected for the full year. These financial statements should be
read in conjunction with NCR's 1999 Annual Report to Stockholders, Form 10-K for
the year ended December 31, 1999 and Form 10-Q for the quarters ended March 31,
2000 and June 30, 2000.
Certain prior year amounts have been reclassified to conform to the 2000
presentation.
2. SUPPLEMENTAL FINANCIAL INFORMATION (in millions)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------- -----------------------
Comprehensive Income 2000 1999 2000 1999
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Net income $ 54 $ 53 $ 88 $ 102
Other comprehensive income/(loss), net of tax:
Unrealized (loss)/gain on securities (3) - (35) 8
Additional minimum pension liability - - 6 -
Currency translation adjustments (22) 54 (36) 9
--------- --------- ---------- ---------
Total comprehensive income $ 29 $ 107 $ 23 $ 119
========= ========= ============ =========
</TABLE>
<TABLE>
<CAPTION>
September 30 December 31
2000 1999
------------ -----------
<S> <C> <C>
Cash and Short-Term Investments
Cash and cash equivalents $ 482 $ 571
Short-term investments 139 192
----------- -----------
Total cash and short-term investments $ 621 $ 763
=========== ===========
Inventories
Finished goods $ 245 $ 241
Work in process and raw materials 66 58
----------- -----------
Total inventories $ 311 $ 299
=========== ===========
</TABLE>
3. SEGMENT INFORMATION
Beginning in the third quarter of 2000, the Company's reportable segments are
Store Automation, Self Service, Data Warehousing, Systemedia, Payment and
Imaging, and All Other. The Payment and Imaging solution, which was previously
reported as part of All Other, was reported separately during the third quarter
due to its relative contribution to NCR's overall consolidated results. All of
these segments include hardware, software, professional consulting and customer
support services. Customer support services include maintenance services,
staging and implementation services, networking, multi-vendor integration
services, consulting services, solution-specific support services and
outsourcing solutions.
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The following tables present data for revenue and operating income/(loss) by
solution operating segments for the quarters ended September 30 (in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------- ------------------------
2000 1999 2000 1999
---------- --------- -------- ---------
<S> <C> <C> <C> <C>
Revenue
Store Automation $ 358 $ 370 $ 944 $ 1,055
Self Service 365 383 1,035 1,096
Data Warehousing 272 221 803 613
Systemedia 123 120 365 352
Payment and Imaging 73 82 220 244
All other segments 273 354 800 1,075
---------- --------- -------- ---------
Consolidated revenue $ 1,464 $ 1,530 $ 4,167 $ 4,435
========== ========= ======== =========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------- -------------------------
2000 1999 2000 1999
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating Income/(Loss)
Store Automation $ 6 $ 15 $ (34) $ 29
Self Service 49 61 120 155
Data Warehousing (12) (38) (27) (130)
Systemedia 3 5 11 15
Payment and Imaging 11 8 30 17
All other segments 15 1 39 19
Restructuring and other special charges (1) (5) - (47) -
---------- --------- --------- ---------
Consolidated operating income $ 67 $ 52 $ 92 $ 105
========== ========= ========= =========
</TABLE>
(1) Includes restructuring and other related charges and acquisition related
in-process research and development charges. (See Notes 7 and 9 of the Notes to
Condensed Consolidated Financial Statements). In-process research and
development charges during the first nine months of 2000 were $25 million ($20
million, Data Warehousing and $5 million, Store Automation).
4. CONTINGENCIES
In the normal course of business, NCR is subject to various regulations,
proceedings, lawsuits, claims and other matters, including actions under laws
and regulations related to the environment and health and safety, among others.
NCR believes the amounts provided in its consolidated financial statements, as
prescribed by generally accepted accounting principles, are adequate in light of
the probable and estimable liabilities. However, there can be no assurances that
the actual amounts required to discharge alleged liabilities from various
lawsuits, claims, legal proceedings and other matters, including the Fox River
matter discussed below, and to comply with applicable laws and regulations, will
not exceed the amounts reflected in NCR's consolidated financial statements or
will not have a material adverse effect on its consolidated results of
operations, financial condition or cash flows. Any amounts of costs that may be
incurred in excess of those amounts provided as of September 30, 2000 cannot
currently be determined.
Environmental Matters
NCR's facilities and operations are subject to a wide range of environmental
protection laws. 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
7
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private party seeking contribution to site cleanup costs, as a potentially
responsible party (PRP) at a number of sites pursuant to various state and
federal laws, including the Federal Water Pollution Control Act (FWPCA) and
comparable state statutes, and the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended (CERCLA), and comparable
state statutes.
Various federal agencies, Native American tribes and the State of Wisconsin
(Claimants) consider NCR to be a PRP under the FWPCA and CERCLA for alleged
natural resource damages (NRD) and remediation liability with respect to the Fox
River and related Green Bay environment (Fox River System) due to, among other
things, sediment contamination in the Fox River System allegedly resulting in
part from NCR's former carbonless paper manufacturing in Wisconsin. Claimants
have also notified a number of other paper manufacturing companies of their
status as PRPs resulting from their ongoing or former paper manufacturing
operations in the Fox River Valley, and Claimants have entered into a Memorandum
of Agreement among themselves to coordinate their actions, including the
assertion of claims against the PRPs. Additionally, the federal NRD Claimants
have notified NCR and the other PRPs of their intent to commence a NRD lawsuit,
but have not as yet instituted litigation. In addition, one of the Claimants,
the United States Environmental Protection Agency (USEPA), has formally proposed
the Fox River for inclusion on the CERCLA National Priorities List. In February
1999, the State of Wisconsin made available for public review a draft remedial
investigation and feasibility study (RI/FS), which outlines a variety of
alternatives for addressing the Fox River sediments. While the draft RI/FS did
not advocate any specific alternative or combination of alternatives, the
estimated total costs provided in the draft RI/FS ranged from $0 for no action
(which appears to be an unlikely choice) to between $143 million and $721
million depending on the alternative selected. The USEPA has indicated that the
final RI/FS will be issued by year end 2000 and that a decision on the
anticipated remedial action will be made in 2001. In addition, one of the
federal NRD claimants has released an interim estimate of alleged losses from
lost recreational fishing opportunities of between $106 million and $147
million. The federal Claimants have stated their intent to issue a Restoration
and Compensation Determination Plan (RCDP) in the fourth quarter of 2000. This
document will set out proposed alternatives for the natural resource damages
claims. NCR, in conjunction with the other PRPs, has developed a substantial
body of evidence that it believes should demonstrate that selection of
alternatives involving river-wide restoration/remediation, particularly massive
dredging, would be inappropriate and unnecessary. However, because there is
ongoing debate within the scientific, regulatory, legal, public policy and
legislative communities over how to properly manage large areas of contaminated
sediments, NCR believes there is a high degree of uncertainty about the
appropriate scope of alternatives that may ultimately be required by the
Claimants. An accurate estimate of NCR's ultimate share of
restoration/remediation and damages liability cannot be made at this time due to
uncertainties with respect to: the scope and cost of the potential alternatives;
the outcome of further federal and state NRD assessments; the amount of NCR's
share of such restoration/remediation expenses; the timing of any
restoration/remediation; the evolving nature of restoration/remediation
technologies and governmental policies; the contributions from other parties;
and the recoveries from insurance carriers and other indemnitors. NCR believes
the other currently named PRPs would be required and able to pay substantial
shares toward restoration and remediation, and that there are additional
parties, some of which have substantial resources, that may also be liable.
Further, in 1978 NCR sold the business to which the claims apply, and NCR and
the buyer have reached an interim settlement agreement under which the parties
are sharing both defense and liability costs.
It is difficult to estimate the future financial impact of environmental laws,
including potential liabilities. NCR accrues environmental provisions when it
is probable that a liability has been incurred and the amount or range of the
liability is reasonably estimable. Provisions for estimated losses from
environmental restoration and remediation are, depending on the site, based
primarily on internal and third-party environmental studies, estimates as to the
number and participation level of any other PRPs, the extent of the
contamination, and the nature of required remedial and restoration actions.
Accruals are adjusted as further information develops or circumstances change.
Management expects that the amounts accrued from time to time will be paid out
over the period of investigation, negotiation, remediation and restoration for
the applicable sites, which may as to the Fox River site be 10 to 20 years or
more. The amounts provided for environmental matters in NCR's consolidated
financial statements are the estimated gross undiscounted amount of such
liabilities, without deductions for insurance or third-party indemnity claims.
Except for the sharing arrangement described above with respect to the Fox
River, in those cases where insurance carriers or third-party indemnitors have
agreed to pay any amounts and management believes that collectibility of such
amounts is probable, the amounts are reflected as receivables in the
consolidated financial statements.
8
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5. STOCK REPURCHASE PROGRAM
In 1999, the Board of Directors authorized two share repurchase programs valued
at a total of $500 million. The first program was authorized on April 15, 1999
for $250 million and was completed in the fourth quarter of 1999. The second
program was authorized on October 21, 1999 for $250 million. As of September 30,
2000, the Company has incurred $69 million of the $250 million authorized in
October 1999. In the first nine months of 2000, approximately 1,075,000 shares
were repurchased on the open market at an average price of $34.04 per share.
6. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the weighted
average number of shares outstanding during the reported period. The calculation
of diluted earnings per share is similar to basic, except that the weighted
average number of shares outstanding include the additional dilution from
potential common stock such as stock options and restricted stock awards, when
appropriate.
7. RESTRUCTURING
During the fourth quarter of 1999, NCR approved a restructuring plan designed to
accelerate the Company's transformation from a computer hardware and product
company to a technology solutions and services provider. The plan led to an
alignment around the key solutions, an expected elimination of approximately
1,250 positions and an enhanced leverage of the investment in NCR's Data
Warehousing offering. A pre-tax charge of $125 million was recorded in the
fourth quarter of 1999 to provide for restructuring and other related charges as
a result of the plan. There was $73 million of restructuring and other related
liabilities incurred in connection with the 1999 business restructuring, which
were shown as current liabilities in NCR's 1999 year end balance sheet.
In addition to the pre-tax charge of $125 million recorded in the fourth quarter
of 1999, during the first nine months of 2000, the Company recorded $22 million
of costs relating to the settlement of customer obligations that were not
complete as of December 31, 1999. Included in this $22 million was $21 million
recorded in cost of revenue and $1 million recorded in selling, general and
administrative expense. The Company expects to complete all of the remaining
customer settlements as cost effectively as possible in the fourth quarter of
2000, estimated at an additional $10 million.
In total, the Company expects the pre-tax charge of $125 million to result in
cash outlays of $83 million, of which $76 million relates to employee
separations that were accrued under the Company's post-employment benefits plan,
as well as non-cash write-offs of $42 million. The cash outlays are primarily
for employee separations, contract cancellations and settlement of customer
obligations. As of September 30, 2000, substantially all cash outlays for other
than employee separations had been made. No adjustments have been made to the
restructuring and other related liabilities recorded in the fourth quarter of
1999.
In total, the plan called for approximately 1,250 employee separations. As of
the end of the third quarter 2000, approximately 67% of the planned employee
separations were complete and as of September 30, 2000, the Company has incurred
cash outlays for employee separations of $38 million.
8. PUT OPTIONS
In a series of private placements, NCR sold put options that entitle the holder
of each option to sell to the Company, by physical delivery, shares of common
stock at a specified price. The options sold in the fourth quarter of 1999 and
through the second quarter of 2000 have all expired. At the end of the second
quarter of 2000, the company had options outstanding for 600,000 shares. Of
these 600,000 options, 200,000 expired unexercised and 400,000 were repurchased
at an average price of $37.00 per share. NCR sold additional options in the
third quarter of 2000 totaling 600,000 shares of which 200,000 expired
unexercised. At the end of the third quarter of 2000, the total amount that
related to the Company's remaining potential repurchase obligation of 400,000
shares of common stock was $14 million. The put option obligations had no
significant effect on diluted earnings per share for the period presented, and
the net proceeds from the sale of the put options are shown as an increase to
paid-in capital.
Following the end of the third quarter, the 400,000 of outstanding options
expired unexercised.
9
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The activity is summarized as follows:
Put Options Outstanding
Cumulative ------------------------
Net Premium Number of Potential
In millions Received Options Obligation
------------------------------------------------------------------------
December 31, 1998 $ - - $ -
Sales 1.1 0.4 13.1
Exercises - - -
Expirations - - -
------------------------------------------------------------------------
December 31, 1999 $1.1 0.4 $ 13.1
Sales 1.0 0.4 14.8
Exercises - - -
Expirations - (0.4) (13.1)
------------------------------------------------------------------------
March 31, 2000 $2.1 0.4 $ 14.8
Sales 2.8 1.0 36.8
Exercises - - -
Expirations - (0.8) (29.6)
------------------------------------------------------------------------
June 30, 2000 $4.9 0.6 $ 22.0
Sales 1.1 0.6 21.4
Exercises - (0.4) (14.8)
Expirations - (0.4) (14.3)
------------------------------------------------------------------------
September 30, 2000 (1) $6.0 0.4 $ 14.3
========================================================================
(1) As of November 3, 2000, all outstanding options had expired.
9. ACQUISITIONS
On October 16, 2000, the Company acquired 4Front Technologies, Inc. (4Front).
4Front is a leading provider and integrator of information technology services,
consisting of specialized computer services and web-based solutions. 4Front, an
employer of approximately 1,900 people, is headquartered in London and has a
strong pan-European market presence in the United Kingdom, France, Italy,
Germany, Belgium, the Netherlands, Spain and Sweden. This acquisition further
strengthens NCR's position in providing high availability service solutions and
enables the Company to better service the complex needs of its global customers.
The merger will be accounted for as a purchase and, accordingly, the operating
results of 4Front will be included in the Company's consolidated financial
statements from October 17, 2000 forward. The Company will incur special charges
related to the integration beginning in the fourth quarter of 2000.
In the third quarter of 2000, the Company announced the acquisition of the
remaining 50 percent interest in Stirling Douglas Group (SDG), a leading demand
chain management application software firm. As a result of this purchase, SDG is
now a wholly owned subsidiary of NCR. The acquisition enhances NCR's ability to
offer business-to-business e-commerce solutions between retailers and suppliers
through real-time inventory management while reducing overhead costs. The in-
process research and development charge incurred in the third quarter associated
with the acquisition of the remaining 50 percent interest in SDG was $1 million.
10
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Restructuring
During the fourth quarter of 1999, our management approved a restructuring plan
designed to accelerate our transformation from a computer hardware and product
company, to a technology solutions and services provider. The plan led to an
alignment around our key solutions, an expected elimination of approximately
1,250 positions and enhanced leverage of the investment in our Data Warehousing
offering. A pre-tax charge of $125 million was recorded in the fourth quarter of
1999 to provide for restructuring and other related charges as a result of our
plan. There was $73 million of restructuring and other related liabilities
incurred in connection with the 1999 business restructuring, which were shown as
current liabilities in our 1999 year end balance sheet.
In addition to the pre-tax charge of $125 million recorded in the fourth quarter
of 1999, during the first nine months of 2000, we recorded $22 million of costs
relating to the settlement of customer obligations that were not complete as of
December 31, 1999. Included in this $22 million was $21 million recorded in cost
of revenue and $1 million recorded in selling, general and administrative
expense. We expect to complete all of the remaining customer settlements as cost
effectively as possible in the fourth quarter of 2000, estimated at an
additional $10 million.
In total, we expect the pre-tax charge of $125 million to result in cash outlays
of $83 million, of which $76 million relates to employee separations that were
accrued under our post-employment benefits plan, as well as non-cash write-offs
of $42 million. The cash outlays are primarily for employee separations,
contract cancellations and settlement of customer obligations. As of September
30, 2000, substantially all cash outlays for other than employee separations had
been made. No adjustments have been made to the restructuring and other related
liabilities recorded in the fourth quarter of 1999.
In total, the plan called for approximately 1,250 employee separations. As of
the end of the third quarter 2000, approximately 67% of the planned employee
separations were complete and as of September 30, 2000, we have incurred cash
outlays for employee separations of $38 million.
We anticipate annual savings of approximately $75 million as a result of our
restructuring plan and estimate that we generated $57 million of the anticipated
savings in the first nine months of 2000. The savings primarily come from the
elimination of losses in our non-core solutions that we exited as well as other
cost savings related to employee separations within our infrastructure support
organizations. We estimate that 75% of these savings were recognized as a
reduction in operating expenses with the balance being recognized as a reduction
in cost of revenue.
Results of Operations
Beginning in the third quarter of 2000, reportable segments are Store
Automation, Self Service, Data Warehousing, Systemedia, Payment and Imaging, and
All Other. The Payment and Imaging solution, which was previously reported as
part of All Other, was reported separately during the third quarter due to its
relative contribution to our overall consolidated results. All of these segments
include hardware, software, professional consulting and customer support
services. Customer support services include maintenance services, staging and
implementation services, networking, multi-vendor integration services,
consulting services, solution-specific support services and outsourcing
solutions.
11
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Three Months Ended September 30, 2000 Compared to Three Months Ended September
------------------------------------------------------------------------------
30, 1999
--------
For the quarters ended September 30, the effects of significant special items,
which include restructuring and other related charges of $4 million in
connection with the action announced in October 1999 and acquisition related in-
process research and development charges of $1 million, have been excluded from
the gross margin, operating expenses and operating income amounts presented and
discussed below. (See Notes 7 and 9 of the Notes to Condensed Consolidated
Financial Statements and the discussion of acquisitions below).
In millions 2000 1999
-----------------------------------------------------------------------------
Consolidated revenue $1,464 $1,530
Consolidated gross margin 467 464
Consolidated operating expenses:
Selling, general and administrative expenses 319 330
Research and development expenses 76 82
-----------------------------------------------------------------------------
Consolidated income from operations $ 72 $ 52
=============================================================================
Revenue: Revenue for the three months ended September 30, 2000 was $1,464
million, a decrease of 4% from the third quarter of 1999. When adjusted for the
impact of changes in currency exchange rates, revenue decreased 1%.
The revenue decline in the third quarter of 2000 compared to the prior year
primarily reflects the exit of our non-core solutions, the termination of
service associated with equipment retired as a result of Year 2000 replacement,
product availability issues for our Store Automation solutions, and the impact
of currency fluctuations on all solutions. By solution, our revenue in the third
quarter of 2000 reflects increased sales of our Data Warehousing solutions of
23% and Systemedia products of 3%. Offsetting the revenue growth in Data
Warehousing and Systemedia were declines in sales of our Store Automation
solutions of 3%, Self Service solutions of 5%, Payment and Imaging of 11% and
our All Other segment of 23%. On an aggregate basis, revenue in our core
solutions increased 1% compared with the prior year due primarily to strong
revenue growth in our Data Warehousing solution.
Revenue in the third quarter of 2000 compared with the third quarter of 1999
decreased 3% in the Americas region and 16% in the Europe/Middle East/Africa
region. The decline in the Europe/Middle East/Africa region was primarily due to
the impact of currency fluctuations on all solutions and the exit of our non-
core solutions. Revenue in the Asia Pacific region, excluding Japan, increased
19% over the prior year while Japan increased 1%. The revenue growth in the Asia
Pacific region, excluding Japan, reflects strong growth in sales of our Data
Warehousing and Self Service solutions partially offset by declines in our non-
core solutions. When adjusted for the impact of changes in foreign currency
exchange rates, revenue increased 25% in the Asia Pacific region, excluding
Japan, and decreased 3% in the Americas region, 7% in the Europe/Middle
East/Africa region and 3% in Japan. The Americas region comprised 55% of our
total revenue in the third quarter of 2000, the Europe/Middle East/Africa region
comprised 27%, Japan comprised 9% and the Asia Pacific region, excluding Japan,
comprised 9%.
Gross Margin and Operating Expenses: Gross margin as a percentage of revenue
increased 1.6 percentage points to 31.9% in the third quarter of 2000 from 30.3%
in the third quarter of 1999. Products gross margin increased 0.6 percentage
points to 37.5% in the third quarter of 2000 from 36.9% in the third quarter of
1999. This increase is primarily attributable to product margin rate improvement
in our Data Warehousing solutions as a result of increased volume. Services
gross margin increased 2.7 percentage points to 25.5% in the third quarter of
2000 from 22.8% in the third quarter of 1999. This increase is attributable to
margin rate improvements in our consulting business due primarily to improved
utilization of our technical consultants.
Selling, general and administrative expenses decreased $11 million, or 3.3%, in
the third quarter of 2000 from the third quarter of 1999 reflecting the exit of
our non-core solutions and our focus on expense containment initiatives. As a
percentage of revenue, selling, general and administrative expenses were 21.8%
in the third quarter of 2000 and 21.6% in the third quarter of 1999. Research
and development expenses decreased $6 million to $76 million in the third
quarter of 2000. As a percentage of revenue, research and development expenses
were 5.2% in the third quarter of 2000 compared to 5.4% in the third quarter of
1999. The third quarter research and development expenses reflect increased
investments in our strategic operating segments that were more than offset by
spending reductions in our non-core/exited operating segments.
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Gross margins and operating expenses were favorably impacted in the third
quarter of 2000 and 1999 from our pension benefits plan with an additional $17
million of income being recognized in the third quarter of 2000. Gross margins
and operating expenses were unfavorably impacted in the third quarter of 2000
and 1999 from our post-employment and post-retirement benefit plans and
associated investments with $2 million more expense in the third quarter of
2000. The net impact on operating results from our combined pension, post-
retirement and post-employment plans was $15 million additional income in the
third quarter of 2000 as compared to the third quarter of 1999.
Income Before Income Taxes: Operating income was $72 million in the third
quarter of 2000 compared to $52 million in the third quarter of 1999.
Other income, net of expenses, was $18 million in the third quarter of 2000
compared to $34 million in the third quarter of 1999. Other income in 2000
includes approximately $19 million of gains on sales of facilities compared to
$28 million in 1999.
Provision for Income Taxes: Income tax provisions for interim periods are based
on estimated annual income tax rates. The provision for income taxes in the
third quarter of 2000 was $31 million compared to $33 million in the third
quarter of 1999.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
--------------------------------------------------------------------------------
1999
----
For the nine months ended September 30, the effects of significant special
items, which include restructuring and other related charges of $22 million in
connection with the action announced in October 1999 and acquisition related in-
process research and development charges of $25 million, have been excluded from
the gross margin, operating expenses and operating income amounts presented and
discussed below. (See Notes 7 and 9 of the Notes to Condensed Consolidated
Financial Statements and the discussion of acquisitions below).
In millions 2000 1999
-------------------------------------------------------------------------
Consolidated revenue $4,167 $4,435
Consolidated gross margin 1,312 1,347
Consolidated operating expenses:
Selling, general and administrative expenses 952 995
Research and development expenses 221 247
-------------------------------------------------------------------------
Consolidated income from operations $ 139 $ 105
=========================================================================
Revenue: Revenue for the nine months ended September 30, 2000 was $4,167
million, a decrease of 6% from the first nine months of 1999. When adjusted for
the impact of changes in currency exchange rates, revenue decreased 4%.
The revenue decline in the third quarter of 2000 compared to the prior year
primarily reflects the exit of our non-core solutions, the termination of
service associated with equipment retired as a result of Year 2000 replacement,
product availability issues for our Store Automation solutions and the impact of
currency fluctuations on all solutions. By solution, our revenue for the first
nine months of 2000 reflects increased sales of our Data Warehousing solutions
of 31% and Systemedia products of 4%. Offsetting the revenue growth in Data
Warehousing and Systemedia were declines in sales of our Store Automation
solutions of 11%, Self Service solutions of 6%, Payment and Imaging solutions of
10% and our All Other segment of 26%. On an aggregate basis, revenue in our core
solutions was flat with the prior year.
Revenue in the first nine months of 2000 compared with the first nine months of
1999 decreased 6% in the Americas region and 17% in Europe/Middle East/Africa
region. The decline in the Europe/Middle East/Africa region was primarily due to
the impact of currency fluctuations on all solutions and the exit of our non-
core solutions. Revenue in the Asia Pacific region, excluding Japan, increased
25% over the prior year while Japan increased 1%. The revenue growth in the Asia
Pacific region reflects strong sales in our Data Warehousing, Payment and
Imaging, and Self Service solutions. When adjusted for the impact of changes in
foreign currency exchange rates, revenue on a local currency basis increased 29%
in the Asia Pacific region, excluding Japan, and decreased 6% in the Americas
region, 9% in the Europe/Middle East/Africa region, and 8% in Japan. The
Americas region comprised 53% of NCR's total revenue in the first nine months of
2000, the Europe/Middle East/Africa region comprised 28%, Japan comprised 10%
and the Asia Pacific region, excluding Japan, comprised 9%.
Gross Margin and Operating Expenses: Gross margin as a percentage of revenue
increased 1.1 percentage points to 31.5% in the first nine months of 2000 from
30.4% in the same period of 1999. Products gross margin increased 0.9 percentage
points to 37.3% in the first nine months of 2000. This increase is primarily
attributable to product margin rate improvement in our
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Data Warehousing and Payment and Imaging solutions. Services gross margin
increased 1.4 percentage points to 25.1% in the first nine months of 2000
primarily due to improved utilization of our technical consultants.
Selling, general and administrative expenses decreased $43 million, or 4.3%, in
the first nine months of 2000 from the first nine months of 1999 reflecting the
exit of our non-core solutions and our focus on expense containment initiatives.
As a percentage of revenue, selling, general and administrative expenses were
22.8% in the first nine months of 2000 and 22.4% in the first nine months of
1999. Research and development expenses in the first nine months of 2000 reflect
increased investments in our strategic operating segments, which were more than
offset by spending reductions in our non-core/exited operating segments. As a
result of this, research and development expenses decreased $26 million to $221
million in the first nine months of 2000. As a percentage of revenue, research
and development expenses were 5.3% in the first nine months of 2000 compared to
5.6% in the first nine months of 1999.
Gross margins and operating expenses were favorably impacted in the first nine
months of 2000 compared to the same period of 1999 from our pension benefits
plan with an additional $51 million of income being recognized through September
2000. Gross margins and operating expenses were unfavorably impacted in the
first nine months of 2000 compared to 1999 from our post-employment and post-
retirement benefit plans and associated investments with $22 million more
expense during the first nine months of 2000. The net impact on operating
results from our combined pension, post-retirement and post-employment plans was
$29 million additional income in the first nine months of 2000 as compared to
the same period of 1999.
Income Before Income Taxes: Operating income was $139 million in the first nine
months of 2000 compared to $105 million in the same period of 1999.
Other income, net of expenses, was $52 million in the first nine months of 2000
compared to $60 million in the first nine months of 1999. Other income includes
gains on sales of facilities of approximately $48 million in 2000 compared to
$39 million in 1999.
Provision for Income Taxes: Income tax provisions for interim periods are based
on estimated annual income tax rates. The provision for income taxes was $56
million in the first nine months of 2000 compared to $63 million in the first
nine months of 1999.
Financial Condition, Liquidity, and Capital Resources
Our cash, cash equivalents, and short-term investments totaled $621 million at
September 30, 2000 compared to $763 million at December 31, 1999.
Operating Activities: We generated net cash flows from operations of $64 million
in the first nine months of 2000 compared to $354 million in the first nine
months of 1999. Receivable balances decreased $61 million in the first nine
months of 2000 and $266 million in the same period in 1999. The significant
decrease in our receivable balances in the first nine months of 1999 reflected
our strong focus on collections that we have been able to maintain with
incremental improvements in the first nine months of 2000. We used $217 million
of cash in the first nine months of 2000 related to the timing of disbursements
for employee severance and pension compared to a $158 million use of cash in the
same period of 1999. The use of cash in the first nine months of 2000 relates
primarily to cash payments of benefits from unfunded pension, post-retirement,
and post-employment plans and severance related cash payments.
Investing Activities: Net cash flows used in investing activities were $159
million in the first nine months of 2000 and $282 million in the same period of
1999. In 2000, we decreased our short-term investments by $52 million as we
increased the liquidity of our overall portfolio due to expected acquisition
activity; this compared to a $93 million increase in our short-term investments
in 1999. Net expenditures and proceeds for service parts utilized $76 million of
cash in the first nine months of 2000 compared to $74 million in the same period
of 1999. Capital expenditures were $163 million for the first nine months of
2000 and $136 million in the same period of 1999. The increase in capital
expenditures primarily relates to expenditures for information technology and
expenditures for facilities to support sales and marketing activities. Proceeds
from the sales of facilities and other assets for the first nine months of 2000
was $172 million compared to $89 million in the same period of 1999. The
increase in proceeds is driven by our ongoing asset management initiative to
sell less productive assets such as real estate. Business acquisitions and
investments utilized $71 million of cash in the first nine months of 2000 and is
the result of our strategy to invest in our core solutions and related
technologies.
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Financing Activities: Net cash provided by financing activities was $23 million
in the first nine months of 2000 compared to a use of $78 million in the same
period of 1999. As of September 30, 2000, $37 million of cash was used in the
repurchase of Company stock pursuant to the stock repurchase program included in
Note 5 of the Notes to Consolidated Financial Statements; $161 million of cash
was used in the same period of 1999 to repurchase Company stock. In the first
nine months of 2000, we reported cash flows of $55 million from other financing
activities compared to $71 million in the same period of 1999. Other financing
cash flows primarily relate to share activity under our stock option and
employee stock purchase plans.
We believe that cash flows from operations, existing credit facilities, and
other short- and long-term financing, if any, will be sufficient to satisfy our
future working capital, research and development, capital expenditure and other
financing requirements for the foreseeable future.
Acquisitions: On October 16, 2000, we acquired 4Front Technologies, Inc.
(4Front). 4Front is a leading provider and integrator of information technology
services, consisting of specialized computer services and web-based solutions.
4Front, an employer of approximately 1,900 people, is headquartered in London
and has a strong pan-European market presence in the United Kingdom, France,
Italy, Germany, Belgium, the Netherlands, Spain and Sweden. This acquisition
further strengthens our position in providing high availability service
solutions and enables us to better service the complex needs of our global
customers. The merger will be accounted for as a purchase and, accordingly, the
operating results of 4Front will be included in our consolidated financial
statements from October 17, 2000 forward. We expect to incur special charges
related to the integration beginning in the fourth quarter of 2000.
In July of 2000, we announced the acquisition of the remaining 50 percent
interest in Stirling Douglas Group (SDG), a leading demand chain management
application software firm. As a result of this purchase, SDG is now a wholly
owned subsidiary of NCR. The acquisition enhances NCR's ability to offer
business-to-business e-commerce solutions between retailers and suppliers
through real-time inventory management while reducing overhead costs. The in-
process research and development charge incurred in the third quarter associated
with the acquisition of the remaining 50 percent interest in SDG was $1 million.
The pro forma results of operations through the end of the third quarter of 1999
and 2000, assuming that all 1999 and 2000 acquisitions occurred on January 1,
1999, do not differ materially from amounts reported.
Factors That May Affect Future Results
This quarterly report, other documents that we file with the Securities and
Exchange Commission, as well as other oral or written statements we may make,
contain information based on management's beliefs and include forward-looking
statements that involve a number of risks, uncertainties and assumptions. These
forward-looking statements are not guarantees of future performance, and there
are a number of factors, including those listed below, which could cause actual
outcomes and results to differ materially from the results contemplated by such
forward-looking statements.
Competition
Our ability to compete effectively within the technology industry is critical to
our future success.
We compete in the intensely competitive information technology industry. This
industry is characterized by rapidly changing technology, evolving industry
standards, frequent new product introductions, price and cost reductions, and
increasingly greater commoditization of products, making differentiation
difficult. In addition, this intense competition increases pressure on gross
margins that could impact our business and operating results. Our competitors
include other large, successful companies in the technology industry such as:
International Business Machines (IBM), Wincor Nixdorf Gmbh & Co., Unisys
Corporation, Diebold, Inc., and Oracle Corporation, some of which have
widespread penetration of their platforms. If we are unable to compete
successfully, the demand for our solutions, including products and services,
would decrease. Any reduction in demand could lead to fewer customer orders, a
decrease in the prices of our products and services, reduced revenues, reduced
margins, operating inefficiencies, reduced levels of profitability, and loss of
market share. These competitive pressures could impact our business and
operating results.
Our future competitive performance depends on a number of factors, including our
ability to: rapidly and continually design, develop and market, or otherwise
obtain and introduce solutions and related products and services for our
customers that are competitive in the marketplace; offer a wide range of
solutions from small electronic shelf labels to very large enterprise data
warehouses; offer solutions to customers that operate effectively within a
computing environment which includes the integration of hardware and software
from multiple vendors; offer products that are reliable and that ensure the
security of data and information; offer high-quality, high availability
services; market and sell all of our solutions effectively.
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New Solutions Introductions
The solutions we sell are very complex, and we need to rapidly and successfully
develop and introduce new solutions.
We operate in a very competitive, rapidly changing environment, and our future
success depends on our ability to develop and introduce new solutions that our
customers choose to buy. If we are unable to develop new solutions, our business
and operating results would be impacted. This includes our efforts to rapidly
develop and introduce data warehousing software applications. The development
process for our complex solutions, including our software application
development programs, requires high levels of innovation from both our
developers and our suppliers of the components embedded in our solutions. In
addition, the development process can be lengthy and costly. It requires us to
commit a significant amount of resources to bring our business solutions to
market. If we are unable to anticipate our customers' needs and technological
trends accurately, or are otherwise unable to complete development efficiently,
we would be unable to introduce new solutions into the market on a timely basis,
if at all, and our business and operating results would be impacted. In
addition, if we were unable to successfully market and sell both existing and
newly developed solutions, our operating results would be impacted.
Our solutions which contain both hardware and software products may contain
known as well as undetected errors which may be found after the products'
introduction and shipment. While we attempt to fix errors that we believe would
be considered critical by our customers prior to shipment, we may not be able to
detect or fix all such errors, and this could result in lost revenues, delays in
customer acceptance, and incremental costs which would all impact our operating
results.
Reliance on Third Parties
Third party suppliers provide important elements to our solutions.
We rely on many suppliers for necessary parts and components to complete our
solutions. In most cases, there are a number of vendors producing the parts and
components that we utilize. However, there are some components that are
purchased from single sources due to price, quality, technology or other
reasons. For example, we depend on chips and microprocessors from Intel
Corporation and operating systems from UNIX(R) and Microsoft Windows NT(R).
Certain parts and components used in the manufacture of our ATMs and the
delivery of some of our Store Automation solutions are also supplied by single
sources. If we were unable to purchase the necessary parts and components from a
particular vendor and we had to find an alternative supplier for such parts and
components, our new and existing product shipments and solutions deliveries
could be delayed, impacting our business and operating results.
We have, from time to time, formed alliances with third parties (such as the
outsourcing arrangements with Solectron Corporation to manufacture hardware)
that have complementary products, services and skills. These alliances introduce
risks that we can not control such as non-performance by third parties and
difficulties with or delays in integrating elements provided by third parties
into our solutions. The failure of third parties to provide high quality
products or services that conform to the required specifications could impair
the delivery of our solutions on a timely basis and impact our business and
operating results.
Acquisitions and Alliances
Our ability to successfully integrate acquisitions or effectively manage
alliance activities will help drive future growth.
As part of our overall solutions strategy, we have made and intend to continue
to make investments in companies, products, services and technologies, either
through acquisitions, joint ventures or strategic alliances. Acquisitions and
alliance activities inherently involve risks. The risks we may encounter include
those associated with assimilating and integrating different business
operations, corporate cultures, personnel, infrastructures and technologies or
products acquired or licensed, retaining key employees, and the potential for
unknown liabilities within the acquired or combined business. The investment or
alliance may also disrupt our ongoing business or we may not be able to
successfully incorporate acquired products, services or technologies into our
solutions and maintain quality. Business acquisitions typically result in
intangible assets being recorded and amortized in future years. Future operating
results could be impacted if our acquisitions do not generate profitable results
in excess of the related amortization expense.
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Operating Result Fluctuations
We expect our quarterly revenues and operating results to fluctuate for a number
of reasons.
Future operating results will continue to be subject to quarterly fluctuations
based on a variety of factors, including:
Seasonality. Our sales are historically seasonal, with revenue higher in the
fourth quarter of each year. During the three quarters ending in March, June and
September, we have historically experienced less favorable results than in the
quarter ending in December. Such seasonality also causes our working capital
cash flow requirements to vary from quarter to quarter depending on the
variability in the volume, timing and mix of product sales. In addition, revenue
in the third month of each quarter is typically higher than in the first and
second months. These factors, among other things, make forecasting more
difficult and may adversely affect our ability to predict financial results
accurately.
Acquisitions and Alliances. As part of our solutions strategy, we have made and
intend to continue to acquire technologies, products, and businesses as well as
form strategic alliances and joint ventures. As these activities take place and
we begin to include the financial results related to these investments, our
operating results will fluctuate. For example, the acquisition of 4Front
Technologies, Inc. will result in incremental customer services revenue, margin
and operating expenses.
Multi-National Operations
Continuing to generate substantial revenues from our multi-national operations
helps to balance our risks and meet our strategic goals.
Currently, approximately 59% of our revenues come from our international
operations. We believe that our geographic diversity may help to mitigate some
risks associated with geographic concentrations of operations (e.g., adverse
changes in foreign currency exchange rates or business disruptions due to
economic or political uncertainties). However, our ability to sell our solutions
internationally is subject to the following risks, among others: general
economic and political conditions in each country which could adversely affect
demand for our solutions in these markets, as recently occurred in certain Asian
markets; currency exchange rate fluctuations which could result in lower demand
for our products as well as generate currency translation losses, such as the
recent weakness in the Euro; currency changes such as the Euro introduction
which could affect cross border competition, pricing, and require modifications
to our offerings to accommodate the changeover; changes to and compliance with a
variety of local laws and regulations which may increase our cost of doing
business in these markets or otherwise prevent us from effectively competing in
these markets.
Restructuring
Successfully completing our restructuring activities is important as it is
designed to improve our focus and overall profitability.
As we have discussed, we plan to grow revenue and earnings through the
realignment of our businesses into our key solutions: Self Service, Store
Automation and Data Warehousing. Our success with these restructuring activities
depends on a number of factors including our ability to: execute strategies in
various markets, including electronic commerce and other new industries beyond
our traditional focus; exit certain businesses as planned; profitably replace
the lost revenues; and manage issues that may arise in connection with the
restructuring such as gaps in short-term performance, diversion of management
focus and employee morale and retention. In particular, our business plan
includes leveraging the Teradata(R) technology in electronic commerce and other
industries. If we are not successful in managing the required changes to achieve
this realignment, our business and operating results could be impacted.
Employees
Hiring and retaining highly qualified employees helps us to achieve our business
objectives.
Our employees are vital to our success, and our ability to attract and retain
highly skilled technical, sales, consulting, and other key personnel is critical
as these key employees are difficult to replace. The expansion of high
technology companies has increased demand and competition for qualified
personnel. If we are not able to attract or retain highly qualified employees in
the future, this could impact our business and operating results.
Intellectual Property
As a technology company, our intellectual property portfolio is key to our
future success.
Our intellectual property portfolio is a key component of our ability to be a
leading technology and services solutions provider. To that end, we aggressively
protect and work to enhance our proprietary rights in our intellectual property
through
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patent, copyright, trademark and trade secret laws and if our efforts fail, our
business could be impacted. In addition, many of our offerings rely on
technologies developed by others and if we were not able to continue to obtain
licenses for such technologies, our business would be impacted. Moreover, from
time to time, we receive notices from third parties regarding patent and other
intellectual property claims. Whether such claims are with or without merit,
they may require significant resources to defend and, if an infringement claim
is successful, in the event we are unable to license the infringed technology or
to substitute similar non-infringing technology, our business could be adversely
affected.
Environmental
Our historical and ongoing manufacturing activities subject us to environmental
exposures.
We have been identified as a potentially responsible party in connection with
the Fox River matter as further described in "Environmental Matters" under Note
4 of the Notes to Condensed Consolidated Financial Statements on page 7 of this
quarterly report and we incorporate such discussion in this Management's
Discussion and Analysis of Financial Condition and Results of Operations by
reference and make it a part of this risk factor.
Contingencies
Like other technology companies, we face uncertainties with regard to
regulations, lawsuits and other related matters.
We are subject to regulations, proceedings, lawsuits, claims and other matters,
including those that relate to the environment, health and safety and
intellectual property. Such matters are subject to the resolution of many
uncertainties, thus, outcomes are not predictable with assurance. While we
believe that amounts provided in our financial statements are currently adequate
in light of the probable and estimable liabilities, there can be no assurances
that the amounts required to discharge alleged liabilities from lawsuits, claims
and other legal proceedings and environmental matters, and to comply with
applicable environmental laws will not impact future operating results.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk, including changes in foreign currency exchange
rates and interest rates. We use a variety of measures to monitor and manage
these risks, including derivative financial instruments. Since a substantial
portion of our operations and revenue occur outside the United States, our
results can be significantly impacted by changes in foreign currency exchange
rates. To manage our exposures to changes in currency exchange rates, we enter
into various derivative financial instruments such as forward contracts and
options. These instruments generally mature within twelve months. At inception,
the derivative instruments are designated as hedges of inventory purchases and
sales and of certain financing transactions which are firmly committed or
forecasted. Generally, gains and losses on qualifying hedged transactions are
deferred and recognized in the determination of income when the underlying
transactions are realized, canceled or otherwise terminated. When hedging
certain foreign currency transactions of a long-term investment nature, gains
and losses are recorded in the currency translation adjustment component of
stockholders' equity. Gains and losses on other foreign exchange contracts are
generally recognized currently in other income or expense as exchange rates
change.
For purposes of potential risk analysis, we use sensitivity analysis to
determine the impacts that market risk exposures may have on the fair values of
our hedge portfolio related to anticipated transactions. The foreign currency
exchange risk is computed based on the market value of future cash flows as
impacted by the changes in the rates attributable to the market risk being
measured. The sensitivity analysis represents the hypothetical changes in value
of the hedge position and does not reflect the opposite gain or loss on the
forecasted underlying transaction A 10% strengthening of the US Dollar against
foreign currencies would result in an $8 million increase in fair value at
September 30, 2000, against a $4 million decrease in fair value for the prior
period. A 10% weakening of the US Dollar against foreign currencies would result
in a $5 million increase in fair value at September 30, 2000, compared to a $20
million increase in fair value for the prior period.
The interest rate risk associated with our borrowing and investing activities at
September 30, 2000 is not material in relation to our consolidated financial
position, results of operations or cash flows. We do not generally use
derivative financial instruments to alter the interest rate characteristics of
our investment holdings or debt instruments.
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Part II. Other Information
Item 1. LEGAL PROCEEDINGS
The information required by this item is included in the material under Note 4
of the Notes to Condensed Consolidated Financial Statements on page 7 of this
quarterly report and is incorporated in this Item 1 as by reference and made a
part hereof.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Amendment and Restatement of NCR Corporation as
amended May 14, 1999 (incorporated by reference to Exhibit 3.1
from the NCR Corporation Form 10-Q for the period ended June 30,
1999) and Articles Supplementary of NCR Corporation (incorporated
by reference to Exhibit 3.1 from the NCR Corporation Annual Report
on Form 10-K for the year ended December 31, 1996 (the "1996 NCR
Annual Report")).
3.2 Bylaws of NCR Corporation, as amended and restated on February 3,
2000 (incorporated by reference to Exhibit 3.2 from the NCR
Corporation Annual Report on Form 10-K for the year ended December
31, 1999).
4.1 Common Stock Certificate of NCR Corporation (incorporated by
reference to Exhibit 4.1 from the NCR Corporation Annual Report on
Form 10-K for the year ended December 31, 1999).
4.2 Preferred Share Purchase Rights Plan of NCR Corporation, dated as
of December 31, 1996, by and between NCR Corporation and The First
National Bank of Boston (incorporated by reference to Exhibit 4.2
from the 1996 NCR Annual Report).
10.1 Letter agreement dated June 20, 2000 (incorporated by reference
to Exhibit 10.1 to the NCR Corporation Quarterly Report on Form
10-Q for the Quarter ended June 30, 2000).
10.1(a) Agreement and Plan of Merger by and among NCR Corporation, NCR
Merger Sub Inc. and 4Front Technologies, Inc. dated August 2, 2000
(incorporated by reference to Annex A from the 4Front
Technologies, Inc. Notice of Annual Meeting of Stockholders and
Proxy Statement dated September 25, 2000).
10.1(b) Amendment to Agreement and Plan of Merger by and among NCR
Corporation, NCR Merger Sub Parent, Inc., NCR Merger Sub Inc., and
4Front Technologies, Inc. dated October 6, 2000.
27 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 2000.
UNIX is a registered trademark in the United States and other countries,
exclusively licensed through X/OPEN Company Limited.
Windows NT is a registered trademark of Microsoft Corporation.
Teradata is either a registered trademark or trademark of NCR International,
Inc. in the United States and/or other countries.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NCR CORPORATION
Date: November 10, 2000 By: /s/ David Bearman
------------------------------------
David Bearman, Senior Vice President
and Chief Financial Officer
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