<PAGE>
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 March 31, 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
May 1, 2000 was 95,138,501.
<PAGE>
TABLE OF CONTENTS
PART I. Financial Information
Description Page
----------- ----
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended March 31, 2000 and 1999 3
Condensed Consolidated Balance Sheets
March 31, 2000 (Unaudited) and December 31, 1999 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 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 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II. Other Information
Description Page
----------- ----
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
2
<PAGE>
Part I. Financial Information
Item 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
In millions, except per share amounts
Three Months Ended March 31
---------------------------
2000 1999
------ ------
Revenue
Products $ 629 $ 657
Services 626 676
------ ------
Total Revenue 1,255 1,333
------ ------
Operating Expenses
Cost of products 412 433
Cost of services 485 516
Selling, general and administrative expenses 306 312
Research and development expenses 70 80
------ ------
Total Operating Expenses 1,273 1,341
------ ------
Income/(Loss) from Operations (18) (8)
Interest expense (2) (3)
Other income, net 15 16
Income/(Loss) Before Income Taxes (5) 5
Income tax expense - 2
------ ------
Net Income/(Loss) $ (5) $ 3
====== ======
Net Income/(Loss) per Common Share
Basic $(0.05) $ 0.03
Diluted $(0.05) $ 0.03
Weighted Average Common Shares Outstanding
Basic 93.9 99.0
Diluted 93.9 102.9
See notes to condensed consolidated financial statements.
3
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS
In millions, except per share amounts
<TABLE>
<CAPTION>
March 31 December 31
2000 1999
---------- -----------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash and short-term investments $ 670 $ 763
Accounts receivable, net 1,132 1,197
Inventories 292 299
Other current assets 340 282
---------- -----------
Total Current Assets 2,434 2,541
Reworkable service parts, net 204 209
Property, plant and equipment, net 777 793
Other assets 1,379 1,352
---------- -----------
Total Assets $ 4,794 $ 4,895
========== ===========
Liabilities and Stockholders' Equity
Current liabilities
Short-term borrowings $ 39 $ 37
Accounts payable 295 378
Payroll and benefits liabilities 215 247
Customer deposits and deferred service revenue 498 365
Other current liabilities 552 635
---------- -----------
Total Current Liabilities 1,599 1,662
Long-term debt 39 40
Pension and indemnity liabilities 328 342
Postretirement and postemployment benefits liabilities 557 570
Other liabilities 612 623
Minority interests 47 49
---------- -----------
Total Liabilities 3,182 3,286
---------- -----------
Put Options 15 13
---------- -----------
Commitments and Contingencies
Stockholders' Equity
Preferred stock: par value $0.01 per share, 100.0 shares
authorized, no shares issued or outstanding at March 31, 2000
and December 31, 1999, respectively - -
Common stock: par value $0.01 per share, 500.0 shares
authorized; 94.2 and 93.6 shares issued and outstanding
at March 31, 2000 and December 31, 1999, respectively 1 1
Paid-in capital 1,101 1,081
Retained earnings 459 466
Accumulated other comprehensive income 36 48
---------- -----------
Total Stockholders' Equity 1,597 1,596
---------- -----------
Total Liabilities and Stockholders' Equity $ 4,794 $ 4,895
========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
In millions
Three Months Ended March 31
---------------------------
2000 1999
------ ------
Operating Activities
Net (loss)/income $ (5) $ 3
Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:
Depreciation and amortization 94 93
Deferred income taxes 2 -
Net loss/(gain) on sales of assets 1 (10)
Changes in operating assets and liabilities:
Receivables 74 199
Inventories 12 (15)
Current payables (136) (147)
Deferred revenue and customer deposits 134 131
Timing of disbursements for employee severance and
pension (69) (71)
Other operating assets and liabilities (83) (75)
------ ------
Net Cash Provided by Operating Activities 24 108
------ ------
Investing Activities
Short-term investments, net (20) 6
Expenditures for service parts and property, plant
and equipment (124) (85)
Proceeds from sales of facilities and other assets 52 29
Other investing activities, net (52) (7)
------ ------
Net Cash Used in Investing Activities (144) (57)
------ ------
Financing Activities
Purchase of Company common stock (2) -
Short-term borrowings, net 2 13
Long-term borrowings, net (2) -
Other financing activities, net 24 31
------ ------
Net Cash Provided by Financing Activities 22 44
------ ------
Effect of exchange rate changes on cash
and cash equivalents (15) (8)
------ ------
(Decrease)/Increase in Cash and Cash Equivalents (113) 87
Cash and Cash Equivalents at Beginning of Period 571 488
------ ------
Cash and Cash Equivalents at End of Period $ 458 $ 575
====== ======
See notes to condensed consolidated financial statements.
5
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been prepared
by NCR Corporation (NCR or the Company) without audit pursuant to the rules and
regulations of the Securities and Exchange Commission and, in the opinion of
management, include all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the consolidated results of operations,
financial position, and cash flows for each period presented. The consolidated
results for interim periods are not necessarily indicative of results to be
expected for the full year. These financial statements should be read in
conjunction with NCR's 1999 Annual Report to Stockholders and Form 10-K for the
year ended December 31, 1999.
Certain prior year amounts have been reclassified to conform to the 2000
presentation.
2. SUPPLEMENTAL FINANCIAL INFORMATION (in millions)
Three Months Ended March 31
---------------------------
2000 1999
------ ------
Comprehensive Income/(Loss)
Net income/(loss) $ (5) $ 3
Other comprehensive income/(loss), net of tax:
Unrealized (loss)/gain on securities (8) 9
Additional minimum pension liability 6 -
Currency translation adjustments (10) (19)
------ ------
Total comprehensive income/(loss) $ (17) $ (7)
====== ======
March 31 December 31
2000 1999
------ ------
Cash and Short-Term Investments
Cash and cash equivalents $ 458 $ 571
Short-term investments 212 192
------ ------
Total cash and short-term investments $ 670 $ 763
====== ======
Inventories
Finished goods $ 231 $ 241
Work in process and raw materials 61 58
------ ------
Total inventories $ 292 $ 299
====== ======
3. SEGMENT INFORMATION
For 2000, NCR changed its definition of strategic operating segments and the
associated reporting framework. The Company's new reporting segments are Store
Automation, Self Service, Data Warehousing, Systemedia and All Other. 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.
The following tables present data for revenue and operating income/(loss) by
solution operating segments for the quarters ended March 31 (in millions):
2000 1999
------ ------
Revenue
Store Automation $ 266 $ 319
Self Service 311 327
Data Warehousing 239 151
Systemedia 114 113
All other segments 325 423
------ ------
Consolidated revenue $1,255 $1,333
====== ======
6
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2000 1999
------ ------
Operating Income/(Loss)
Store Automation $ (27) $ (2)
Self Service 19 37
Data Warehousing (19) (69)
Systemedia 4 5
All other segments 19 21
Restructuring and other special charges (14) -
------ ------
Consolidated operating income/(loss) $ (18) $ (8)
====== ======
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 March 31, 2000 cannot
currently be determined.
Environmental Matters
NCR's facilities and operations are subject to a wide range of environmental
protection laws and has investigatory and remedial activities underway at a
number of facilities that it currently owns or operates, or formerly owned or
operated, to comply, or to determine compliance, with such laws. Also, NCR has
been identified, either by a government agency or by a private party seeking
contribution to site cleanup costs, as a potentially responsible party (PRP) at
a number of sites pursuant to various state and federal laws, including the
Federal Water Pollution Control Act (FWPCA) and comparable state statutes, and
the Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended (CERCLA), and comparable state statutes.
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. 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.
NCR, in conjunction with the other PRPs, has developed a substantial body of
evidence which 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
7
<PAGE>
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.
Legal Proceedings
NCR was named as one of the defendants in a purported class-action suit filed in
November 1996 in Florida alleging liability based on state antitrust and common-
law claims of unlawful restraints of trade, monopolization, and unfair business
practices related to a purported agreement between Siemens Nixdorf Printing
Systems, L.P. and NCR. In January 1999, NCR agreed to settle this suit with
plaintiffs for an undisclosed and non-material amount. Preliminary approval of
this settlement has been granted by the court, but final approval by the parties
to the litigation and the court is still pending.
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 March 31,
2000, the Company has committed $33 million of the $250 million authorized in
October. In the first quarter of 2000, approximately 42,000 shares were
repurchased on the open market at an average price of $35.02 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 four 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
8
<PAGE>
of 1999 to provide for restructuring and other related charges as
a result of the plan. The following table presents a roll-forward of the
remaining $73 million of restructuring and other related liabilities incurred in
connection with the 1999 business restructuring, which were all reflected as
current liabilities in NCR's balance sheet:
<TABLE>
<CAPTION>
Balance Balance
In millions Dec. 31, 1999 Additions Utilizations Mar. 31, 2000
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Type of Cost
Employee separations $67 $- $13 $54
Facility closures 2 - - 2
Contractual settlements and
other exit costs 4 - 2 2
- ------------------------------------------------------------------------------------
Total $73 $- $15 $58
====================================================================================
</TABLE>
In addition to the pre-tax charge of $125 million recorded in the fourth quarter
of 1999, in the first quarter of 2000, the Company recorded $14 million of the
$55 million of additional settlement costs the Company expects to incur in 2000.
These additional costs relate to settling customer obligations that were not
complete as of December 31, 1999. Included in this $14 million was $13 million
recorded in cost of revenue and $1 million recorded in selling, general and
administrative expenses. The Company is actively working to complete
substantially all of the remaining customer settlements by the third quarter of
2000 as cost effectively as possible.
In total, the Company expects the pre-tax charge of $125 million to result in
cash outlays of $83 million and non-cash write-offs of $42 million. The cash
outlays are primarily for employee separations, contract cancellations and
settlement of customer obligations. As of March 31, 2000, a total of $24
million of the expected cash payments had been made, of which $14 million was in
the first quarter of 2000. The balance of the cash outlays is expected to occur
over the remainder of the current year.
In total, the plan calls for approximately 1,250 employee separations. As of
the end of the first quarter 2000, approximately 39% of the planned employee
separations were complete.
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 have
all expired, unexcercised. As of the first quarter of 2000, the total amount
related to the Company's potential repurchase obligation of 400,000 shares of
common stock was $15 million. Each outstanding option was exercisable only at
expiration on May 2, 2000, at an exercise price of $37.00 per share and expired,
unexercised. 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. 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
=========================================================
9
<PAGE>
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 four key solutions, an expected elimination of approximately
1,250 positions and an 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. The following table presents a roll-forward of the
remaining $73 million of restructuring and other related liabilities incurred in
connection with the 1999 business restructuring, which were all reflected as
current liabilities in our balance sheet:
<TABLE>
<CAPTION>
Balance Balance
In millions Dec. 31, 1999 Additions Utilizations Mar. 31, 2000
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Type of Cost
Employee separations $67 $- $13 $54
Facility closures 2 - - 2
Contractual settlements and
other exit costs 4 - 2 2
- ------------------------------------------------------------------------------------
Total $73 $- $15 $58
====================================================================================
</TABLE>
In addition to the pre-tax charge of $125 million recorded in the fourth quarter
of 1999, in the first quarter of 2000, we recorded $14 million of the $55
million of additional settlement costs we expect to incur in 2000. These
additional costs relate to settling customer obligations that were not complete
as of December 31, 1999. Included in this $14 million was $13 million recorded
in cost of revenue and $1 million recorded in selling, general and
administrative expenses. We are actively working to complete substantially all
of the remaining customer settlements by the third quarter of 2000 as cost
effectively as possible.
In total, we expect the pre-tax charge of $125 million to result in cash outlays
of $83 million and non-cash write-offs of $42 million. The cash outlays are
primarily for employee separations, contract cancellations and settlement of
customer obligations. As of March 31, 2000, a total of $24 million of the
expected cash payments had been made, of which $14 million was in the first
quarter of 2000. The balance of the cash outlays is expected to occur over the
remainder of the current year. We anticipate annual savings of approximately
$75 million as a result of our restructuring plan and estimate that we generated
$11 million of the anticipated savings in the first quarter 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.
In total, the plan calls for approximately 1,250 employee separations. As of
the end of the first quarter 2000, approximately 39% of the planned employee
separations were complete.
Results of Operations
For 2000, we have changed our definition of strategic operating segments and our
associated reporting framework. Our new reporting segments are Store
Automation, Self Service, Data Warehousing, Systemedia and All Other. 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.
10
<PAGE>
For the quarters ended March 31, the effects of significant other special items
have been excluded from the gross margin, operating expenses and operating
income amounts presented and discussed below. (See Note 7 of the Notes to
Condensed Consolidated Financial Statements).
In millions 2000 1999
- ---------------------------------------------------------------------------
Consolidated revenue $1,255 $1,333
Consolidated gross margin 371 384
Consolidated operating expenses:
Selling, general and administrative expenses 305 312
Research and development expenses 70 80
Consolidated loss from operations $ (4) $ (8)
Revenue: Revenue for the three months ended March 31, 2000 was $1,255 million,
a decrease of 6% from the first quarter of 1999. When adjusted for the impact
of changes in currency exchange rates, revenue decreased 4%.
The revenue decline in the first quarter of 2000 compared to the prior year
reflects the exit of our non-core solutions, the higher first quarter 1999
revenues driven by customers' Year 2000 compliance initiatives and the
termination of service associated with equipment retired as a result of Year
2000 replacement. On an aggregate basis, revenue in our core solutions overall
were essentially flat with the prior year period. By solution, our revenue in
the first quarter of 2000 reflects increased sales of our Data Warehousing
solutions of 58% (73% excluding Customer Services maintenance) and Systemedia
products of 1%. Offsetting the revenue growth in Data Warehousing and
Systemedia were declines in sales of our Store Automation solutions of 17%, Self
Service solutions of 5%, and our other non-core solutions of 23%.
Revenue in the first quarter of 2000 compared with the first quarter of 1999
decreased 2% in the Americas, 19% in Europe/Middle East/Africa and 4% in Japan.
The Asia Pacific region, excluding Japan, increased 30%. The revenue growth in
the Asia Pacific region, excluding Japan, reflects strong growth in sales of our
Self Service, Data Warehousing and Store Automation solutions partially offset
by declines in our non-core solutions. When adjusted for the impact of changes
in foreign currency exchange rates, revenue increased 31% in the Asia Pacific
region, excluding Japan, and decreased 12% in the Europe/Middle East/Africa
region and 13% in Japan. The Americas region comprised 53% of our total revenue
in the first quarter of 2000, 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 0.8 percentage points to 29.6% in the first quarter of 2000 from 28.8%
in the first quarter of 1999. Products gross margin increased 1.0 percentage
point to 35.1% in the first quarter of 2000. This increase is primarily
attributable to product margin rate improvement in the Data Warehousing
solution. Services gross margin increased 0.3 percentage points to 24.0% in the
first quarter of 2000 from 23.7% in the first quarter of 1999. This increase is
attributable to margin rate improvements in our consulting business.
Selling, general and administrative expenses decreased $7 million, or 2%, in the
first quarter of 2000 from the first quarter of 1999. As a percentage of
revenue, selling, general and administrative expenses were 24.3% in the first
quarter of 2000 and 23.4% in the first quarter of 1999. Research and
development expenses decreased $10 million to $70 million in the first quarter
of 2000. As a percentage of revenue, research and development expenses were
5.6% in the first quarter of 2000 compared to 6.0% in the first quarter of 1999.
The first quarter 2000 research and development expenses reflect increased
investments in our strategic operating segments which were more than offset by
spending reductions in our non-core/exited operating segments.
Gross margins and operating expenses were favorably impacted in the first
quarter of 2000 and 1999 from our pension benefits plan with an additional $17
million of income being recognized in the first quarter of 2000. Gross margins
and operating expenses were unfavorably impacted in the first quarter of 2000
and 1999 from our post-employment and post-retirement benefit plans and
associated investments with $13 million more expense in the first quarter of
2000. Thus, the net impact on operating results from our combined pension,
post-retirement and post-employment plans is $4 million additional income in the
first quarter of 2000 as compared to the first quarter of 1999.
11
<PAGE>
Income Before Income Taxes: We reported an operating loss of $4 million in the
first quarter of 2000 compared to an operating loss of $8 million in the first
quarter of 1999.
Other income, net of expenses, was flat at $13 million in the first quarter of
2000 and 1999.
We reported a loss before income taxes of $5 million in the first quarter of
2000 compared to income before income taxes of $5 million in the first quarter
of 1999.
Provision for Income Taxes: Income tax provisions for interim periods are based
on estimated annual income tax rates calculated without the effect of
extraordinary charges. There was no total provision for income taxes in the
first quarter of 2000 as the tax effect of restructuring and other related
charges in the quarter offset the income tax provision on the earnings excluding
these special charges. The provision for income taxes in the first quarter of
1999 was $2 million. The first quarter 2000 income tax provision of $3 million
(excluding the tax effect of special items) compared to the 1999 period reflects
a return to more normalized tax rate levels. The normalization of tax rates is
due to continued profitability in certain tax jurisdictions, primarily the
United States.
Acquisitions: In the first quarter of 2000, we announced the acquisition of KM
Aspac Pte Ltd. (d/b/a/ Memorex Telex Asia Pacific), a high availability
networking solutions services provider. In 1999, Memorex Telex Asia Pacific's
revenue exceeded $60 million. This acquisition is directly related to NCR's
emphasis on services growth. After the end of the first quarter, on April 11,
2000, we announced the acquisition of Ceres Integrated Solutions, LLC, a leading
provider of customer relationship management solutions and a leader in retail
targeted marketing applications. The stock and cash transaction is valued at
approximately $90 million. The new division created from the Ceres acquisition,
NCR CRM Solutions Division, is expected to drive sales of new data warehouses
and expansion of existing data warehouses. The pro forma results of operations
for the first quarter of 1999, assuming that all 1999 and 2000 acquisitions
occurred on January 1, 1999, do not differ materially from amounts reported.
Financial Condition, Liquidity, and Capital Resources
Our cash, cash equivalents, and short-term investments totaled $670 million at
March 31, 2000, compared to $763 million at December 31, 1999.
Operating Activities: We generated cash flows from operations of $24 million in
the first three months of 2000 while generating net cash flows from operations
of $108 million in the first quarter of 1999. The cash generated in operations
in the first quarter of 2000 was driven primarily by further improvements in
asset management. Receivable balances decreased $74 million in the first
quarter of 2000 and $199 million in the same period in 1999. The decrease in
receivable balances in the first quarter of 2000 and 1999 is consistent with the
seasonality of our business, whereby revenues and the associated receivables are
generally higher in the fourth quarter of the year and lower in the first
quarter. Inventory balances decreased $12 million in the first quarter of 2000
compared to an increase of $15 million in the first quarter of 1999. Despite a
historical trend of inventory balances increasing in the first, second and third
quarters, the decrease in inventory in the first quarter of 2000 reflects
management's commitment to improving inventory management.
Investing Activities: Net cash flows used in investing activities were $144
million in the first quarter of 2000 and $57 million in the first quarter of
1999. In 2000, we increased short-term investments by $20 million as compared
to a $6 million decrease in 1999. Capital expenditures were $124 million for
the first quarter of 2000 and $85 million for the comparable period in 1999.
The increase in capital expenditures generally relates to expenditures for
information systems and reworkable parts used to service customer equipment but
also includes expenditures for equipment and facilities used in manufacturing
and research and development and expenditures for facilities to support sales
and marketing activities. Other investing activities used $52 million of cash
in the first quarter of 2000 and $7 million in the comparable period for 1999.
The increase is primarily related to our recent acquisitions and capitalized
software, as well as investments in securities.
12
<PAGE>
Financing Activities: Net cash provided by financing activities was $22 million
in the first quarter of 2000 and $44 million in the first quarter of 1999. In
the first quarter of 2000, we reported cash flows of $24 million from other
financing activities which primarily related to share activity under our stock
option and employee stock purchase plans.
We believe that cash flows from operations, the credit facility, and other
short- and long-term financings, if any, will be sufficient to satisfy our
future working capital, research and development, capital expenditure, and other
financing requirements for the foreseeable future.
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 which 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, including the
successful execution of our new marketing campaign.
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.
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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 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 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.
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 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 Ceres
Integrated Solutions, LLC, will result in incremental revenue, margin and
operating expenses for our Data Warehousing solution.
14
<PAGE>
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 52% 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;
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 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.
15
<PAGE>
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. 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. The results of the foreign currency exchange
rate sensitivity analysis at March 31, 2000 and 1999 were: a 10% movement in the
levels of foreign currency exchange rates against the U.S. dollar with all other
variables held constant would result in an increase in the fair values of our
financial instruments by $9 million and a decrease of $1 million, respectively,
or an increase in fair values of our financial instruments by $20 million and
$16 million, respectively.
The interest rate risk associated with our borrowing and investing
activities at March 31, 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.
16
<PAGE>
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 8 of this
quarterly report and is incorporated in this Item 1 as by reference and made a
part hereof.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the first
quarter of 2000. NCR's Annual Meeting of Stockholders was held on April 27,
2000. At the Annual Meeting, stockholders voted on two matters: a proposal to
elect Lars Nyberg, David R. Holmes and James O. Robbins as Class A directors and
David Bohnett as a Class B director, and a proposal to approve the appointment
of PricewaterhouseCoopers LLP as the Company's independent accountants for 2000.
The number of shares voted with respect to each matter required to be reported
herein are as follows:
1. Election of Class A Directors:
Lars Nyberg For: 82,588,910 Withheld: 901,359
David R. Holmes For: 82,592,137 Withheld: 898,130
James O. Robbins For: 82,589,852 Withheld: 900,417
Election of Class B Director:
David Bohnett For: 82,589,159 Withheld: 901,106
2. Approve appointment of PricewaterhouseCoopers LLP as independent
accountants for 2000.
For: 83,001,952
Against: 159,849
Abstain: 328,448
17
<PAGE>
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).
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports filed on Form 8-K for the quarter ended March 31, 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.
18
<PAGE>
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: May 11, 2000 By: /s/ David Bearman
------------------------------------
David Bearman, Senior Vice President
and Chief Financial Officer
19
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