Notes to Condensed Consolidated Financial Statements (Unaudited)
Index to Financial Statements and Supplemental Data
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying Condensed Consolidated Financial Statements have been prepared by NCR Corporation (NCR, the Company, we or us) without audit pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC) and, in the opinion of management, include all adjustments (consisting of normal, recurring adjustments, unless otherwise disclosed) necessary for a fair statement of the consolidated results of operations, financial position, and cash flows for each period presented. The consolidated results for the interim periods are not necessarily indicative of results to be expected for the full year. The 2018 year-end Condensed Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States (GAAP). These financial statements should be read in conjunction with NCR’s Form 10-K for the year ended December 31, 2018.
Effective January 1, 2019, NCR changed the management of its business to an industry basis from the previous model of management on a solution basis, which resulted in a corresponding change to NCR's reportable segments. We have reclassified prior period segment disclosures to conform to the current period presentation. See Note 4, Segment Information and Concentrations for additional information.
Use of Estimates The preparation of financial statements in accordance with GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and revenue and expenses during the period reported. Actual results could differ from those estimates.
Evaluation of Subsequent Events The Company evaluated subsequent events through the date that our Condensed Consolidated Financial Statements were issued. No matters were identified that required adjustment of the Condensed Consolidated Financial Statements or additional disclosure other than subsequent events disclosed in the notes to the Condensed Consolidated Financial Statements.
Reclassifications Certain prior-period amounts have been reclassified in the accompanying Condensed Consolidated Financial Statements and Notes thereto in order to conform to the current period presentation. Reclassifications had no effect on prior year net income or shareholders’ equity.
Contract Assets and Liabilities The following table presents the net contract asset and contract liability balances as of September 30, 2019 and December 31, 2018.
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Location in the Condensed Consolidated Balance Sheet
|
|
September 30, 2019
|
|
December 31, 2018
|
Current portion of contract assets
|
Other current assets
|
|
$
|
10
|
|
|
$
|
22
|
|
Current portion of contract liabilities
|
Contract liabilities
|
|
$
|
513
|
|
|
$
|
461
|
|
Non-current portion of contract liabilities
|
Other liabilities
|
|
$
|
79
|
|
|
$
|
85
|
|
During the nine months ended September 30, 2019, the Company recognized $320 million in revenue that was included in contract liabilities as of December 31, 2018.
Remaining Performance Obligations Remaining performance obligations represent the transaction price of orders for which products have not been delivered or services have not been performed. As of September 30, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $3.1 billion. The Company expects to recognize revenue on approximately three-quarters of the remaining performance obligations over the next 12 months, with the remainder recognized thereafter. The majority of our professional services are expected to be recognized over the next 12 months but this is contingent upon a number of factors, including customers’ needs and schedules.
The Company has made two elections that affect the value of remaining performance obligations described above. We do not disclose remaining performance obligations for Software as a Service (SaaS) contracts where variable consideration is directly allocated based on usage or when the original expected length is one year or less.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
Redeemable Noncontrolling Interests and Related Party Transactions In 2011, we sold a 49% voting equity interest in NCR Brasil - Indústria de Equipamentos para Automação S.A., a subsidiary of the Company ("NCR Manaus"), to Scopus Tecnologia Ltda. (now known as Nova Paiol Participacoes Ltda., and "Nova" as used herein). During the three months ended June 30, 2019, we entered into a definitive agreement with Nova to purchase its 49% minority interest in NCR Manaus for R$11 million or approximately $3 million. The transaction was approved by local regulatory authorities and closed on October 28, 2019.
We recognized revenue related to Banco Bradesco SA (Bradesco), the parent of Nova, totaling $21 million and $43 million, respectively, during the three and nine months ended September 30, 2019 as compared to $18 million and $25 million, respectively, during the three and nine months ended September 30, 2018. As of September 30, 2019 and December 31, 2018, we had $15 million, respectively, in receivables outstanding from Bradesco.
Recent Accounting Pronouncements
Issued
In June 2016, the FASB issued an accounting standards update with new guidance on accounting for credit losses on financial instruments. The new guidance includes an impairment model for estimating credit losses that is based on expected losses, rather than incurred losses. The standards update is effective prospectively for fiscal years and interim periods beginning after December 15, 2019, with early adoption permitted. The impact of adopting this guidance is not expected to have a material impact on our consolidated financial statements.
In August 2018, the Financial Accounting Standards Board (FASB) issued an accounting standards update with new guidance on fair value measurement disclosure requirements that requires the disclosure of additions to and transfers into and out of Level 3 of the fair value hierarchy. The update also requires disclosure about the uncertainty in measurement as of the reporting date. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 with early adoption permitted. The impact of adopting this guidance is not expected to have a material impact on our consolidated financial statements.
In August 2018, the FASB issued an accounting standards update related to accounting for implementation costs incurred in a cloud computing arrangement that is also a service contract. If a cloud computing arrangement also includes an internal-use software, an intangible asset is recognized and a liability is recognized for any payments related to the software license. However, if a cloud computing arrangement does not include a software license, the entity should account for the arrangement as a service contract and any fees associated with the service are expensed as incurred. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The impact of adopting this guidance is not expected to have a material impact on our consolidated financial statements.
Adopted
In February 2016, the FASB issued a new leasing standard that superseded guidance related to accounting for leases. The guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The standard is effective for the first interim period within annual periods beginning after December 15, 2018, with early adoption permitted. We adopted using the modified retrospective approach and applied the provisions of the new leasing standard at the effective date, January 1, 2019, rather than at the beginning of the earliest period presented under the transition method provided. The standard also includes options to elect a number of practical expedients. We elected the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs and also completed the evaluation of the remaining practical expedients available under the guidance. Refer to Note 2, Leasing for additional discussion. The standard had a material effect to the total assets and total liabilities reported on the Condensed Consolidated Balance Sheet, and did not have a material effect to the Condensed Consolidated Statement of Operations or the Condensed Consolidated Statement of Cash Flows. The impact of adoption was to record operating and financing lease assets and liabilities of $448 million and $521 million, respectively, with a reduction of $73 million for deferred rent liabilities and prepaid rent balances as of January 1, 2019. Refer to Note 2, Leasing for additional disclosure.
In October 2018, the FASB issued an accounting standards update for hedge accounting guidance that we adopted during the first quarter of 2019. This guidance allows for the use of a broad Treasury repurchase agreement financing rate, which is referred to as the Secured Overnight Financing Rate (SOFR) to be used as an additional benchmark rate for hedge accounting purposes. This guidance is effective for entities that have already adopted the amendments of the hedge accounting guidance for fiscal years beginning after December 15, 2018 on a prospective basis for qualifying new or re-designated hedging relationships entered into
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
on or after the date of adoption. The adoption of this accounting standard update did not have a material effect on our consolidated financial statements.
2. LEASING
As discussed in Note 1, Basis of Presentation and Summary of Significant Accounting Policies, we adopted the new leasing standard using the modified retrospective approach with an effective date of January 1, 2019. Prior year financial statements were not recast under the new standard and, therefore, those amounts are not presented below. We elected the package of transition provisions available for expired or existing contracts, which allowed us to carry forward our historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs.
Lessee We lease property, vehicles and equipment under operating and financing leases. For leases with terms greater than 12 months, we record the related asset and obligation at the present value of lease payments over the term. We determine the lease term by assuming the exercise of renewal options that are reasonably certain. Leases with a lease term 12 months or less at inception are not recorded on our Condensed Consolidated Balance Sheet and are expensed on a straight-line basis over the lease term in our Condensed Consolidated Statement of Operations. Our leases may include rental escalation clauses, renewal options and/or termination options that are factored into our determination of lease payments when appropriate. When available, we use the rate implicit in the lease to discount lease payments to present value; however, most of our leases do not provide a readily determinable implicit rate. Therefore, we must estimate our incremental borrowing rate to discount the lease payments based on information available at lease commencement. Our incremental borrowing rate is based on a credit-adjusted risk-free rate at commencement date, which best approximates a secured rate over a similar term of lease. Additionally, we do not separate lease and non-lease components for any asset classes, except for those leases embedded in certain service arrangements. Fixed and in-substance fixed payments are included in the recognition of the operating and financing assets and lease liabilities, however, variable lease payments, other than those based on a rate or index, are recognized in the Condensed Consolidated Statements of Operations in the period in which the obligation for those payments is incurred. The Company’s variable lease payments generally relate to payments tied to various indexes, non-lease components and payments above a contractual minimum fixed payment.
The following table presents our lease balances as of September 30, 2019:
|
|
|
|
|
|
|
In millions
|
Location in the Condensed Consolidated Balance Sheet
|
|
September 30, 2019
|
Assets
|
|
|
|
Operating lease assets
|
Operating lease assets
|
|
$
|
397
|
|
Finance lease assets
|
Property, plant and equipment, net
|
|
23
|
|
Accumulated Amortization of Finance lease assets
|
Property, plant and equipment, net
|
|
(2
|
)
|
Total leased assets
|
|
|
$
|
418
|
|
Liabilities
|
|
|
|
Current
|
|
|
|
Operating lease liabilities
|
Other current liabilities
|
|
$
|
91
|
|
Finance lease liabilities
|
Other current liabilities
|
|
7
|
|
Noncurrent
|
|
|
|
Operating lease liabilities
|
Operating lease liabilities
|
|
378
|
|
Finance lease liabilities
|
Other liabilities
|
|
16
|
|
Total lease liabilities
|
|
|
$
|
492
|
|
The following table presents our lease costs for operating and finance leases:
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
|
|
|
|
|
|
|
|
|
|
In millions
|
|
Three months ended September 30, 2019
|
|
Nine months ended September 30, 2019
|
Operating lease cost
|
|
$
|
32
|
|
|
$
|
101
|
|
Finance lease cost
|
|
|
|
|
Amortization of leased assets
|
|
2
|
|
|
3
|
|
Interest on lease liabilities
|
|
—
|
|
|
—
|
|
Short-Term lease cost
|
|
1
|
|
|
4
|
|
Variable lease cost
|
|
7
|
|
|
23
|
|
Total lease cost
|
|
$
|
42
|
|
|
$
|
131
|
|
The following table presents the supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
In millions
|
|
Three months ended September 30, 2019
|
|
Nine months ended September 30, 2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
34
|
|
|
$
|
104
|
|
Operating cash flows from finance leases
|
|
$
|
—
|
|
|
$
|
—
|
|
Financing cash flows from finance leases
|
|
$
|
—
|
|
|
$
|
—
|
|
Lease Assets Obtained in Exchange for Lease Obligations
|
|
|
|
|
Operating Leases
|
|
$
|
9
|
|
|
$
|
29
|
|
Finance Leases
|
|
$
|
14
|
|
|
$
|
23
|
|
The following table reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the finance lease liabilities and operating lease liabilities recorded on the Condensed Consolidated Balance Sheet as of September 30, 2019:
|
|
|
|
|
|
|
|
|
|
In millions
|
|
Operating Leases
|
|
Finance Leases
|
Remainder of 2019
|
|
$
|
34
|
|
|
$
|
2
|
|
2020
|
|
109
|
|
|
7
|
|
2021
|
|
84
|
|
|
7
|
|
2022
|
|
62
|
|
|
6
|
|
2023
|
|
45
|
|
|
3
|
|
Thereafter
|
|
307
|
|
|
—
|
|
Total lease payments
|
|
641
|
|
|
25
|
|
Less: Amount representing interest
|
|
(172
|
)
|
|
(2
|
)
|
Present value of lease liabilities
|
|
$
|
469
|
|
|
$
|
23
|
|
Prior to the adoption of the new lease accounting standard, future minimum lease payments under non-cancelable operating leases at December 31, 2018 were as follows: $128 million in 2019, $96 million in 2020, $80 million in 2021, $64 million in 2022, and $50 million in 2023.
As of September 30, 2019, we have additional operating leases, primarily for a real estate lease in Europe, that have not yet commenced of $67 million. This operating lease is expected to commence in 2021 with a lease term of 10 years.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
The following table presents the weighted average remaining lease term and interest rates:
|
|
|
|
|
|
|
September 30, 2019
|
Weighted average lease term:
|
|
|
Operating leases
|
|
9.1 years
|
|
Finance leases
|
|
3.7 years
|
|
Weighted average interest rates:
|
|
|
Operating leases
|
|
6.54
|
%
|
Finance leases
|
|
4.17
|
%
|
Lessor We have various arrangements for certain point-of-sale equipment under which we are the lessor. These leases meet the criteria for operating lease classification. Lease income associated with these leases is not material.
3. BUSINESS COMBINATIONS
On July 1, 2019, NCR completed its acquisition of D3 Technology, Inc., ("D3"), a leading provider of online and mobile banking for the Large Financial Institution market, for approximately $84 million, of which $83 million was paid in cash. The remaining $1 million is payable within 12 months from the date of acquisition. The D3 acquisition further expands our digital banking strategy as we extend our market share in large domestic banks and international banks. As a result of the acquisition, D3 became a wholly owned subsidiary of NCR.
Recording of Assets Acquired and Liabilities Assumed The fair value of consideration transferred to acquire D3 was allocated to the identifiable assets acquired and liabilities assumed based upon their estimated fair values as of the date of the acquisition as set forth below. This allocation has not been completed as of September 30, 2019; however, the preliminary purchase price allocation is presented in the table below.
|
|
|
|
|
In millions
|
Fair Value
|
Cash acquired
|
$
|
9
|
|
Tangible assets acquired
|
6
|
|
Acquired intangible assets other than goodwill
|
20
|
|
Acquired goodwill
|
54
|
|
Deferred tax assets
|
3
|
|
Liabilities assumed
|
(8
|
)
|
Total purchase consideration
|
$
|
84
|
|
Goodwill represents the future economic benefits arising from other assets acquired that could not be individually separately recognized. The goodwill arising from the acquisition consists of revenue synergies expected from combining the operations of NCR and D3. It is expected that none of the goodwill recognized in connection with the acquisition will be deductible for tax purposes. The goodwill arising from the acquisition has been allocated to our Banking segment. Refer to Note 5, Goodwill and Long-Lived Assets for the carrying amounts of goodwill by segment as of September 30, 2019.
The following table sets forth the components of the intangible assets acquired as of the acquisition date:
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
|
|
|
|
|
|
|
|
Estimated Fair Value
|
|
Weighted Average Amortization Period (1)
|
|
(In millions)
|
|
(In years)
|
Direct customer relationships
|
$
|
7
|
|
|
11
|
Technology - Software
|
11
|
|
|
5
|
Tradenames
|
2
|
|
|
7
|
Total acquired intangible assets
|
$
|
20
|
|
|
|
(1) Determination of the weighted average period of the individual categories of intangible assets was based on the nature of applicable intangible asset and the expected future cash flows to be derived from the intangible asset. Amortization of intangible assets with definite lives is recognized over the period of time the assets are expected to contribute to future cash flows.
In connection with the closing of the acquisition, the Company incurred approximately $1 million of transaction costs, which has been included within selling, general and administrative expenses in the Condensed Consolidated Statements of Operations for the year-to-date period ended September 30, 2019.
The operating results of D3 have been included within NCR’s results as of the closing date of the acquisition. Supplemental pro forma information and actual revenue and earnings since the acquisition dates have not been provided as this acquisition did not have a material impact on the Company's Condensed Consolidated Statements of Operations.
4. SEGMENT INFORMATION AND CONCENTRATIONS
As noted in Note 1, Basis of Presentation and Summary of Significant Accounting Policies, effective January 1, 2019, NCR changed the management of its business to an industry basis from the previous model of management on a solution basis, which resulted in a corresponding change to NCR's reportable segments. We have reclassified prior period segment disclosures to conform to the current period presentation. As a result of the change, the Company manages and reports the following segments:
|
|
•
|
Banking - We offer solutions to enable customers in the financial services industry to reduce costs, generate new revenue streams and enhance customer loyalty. These solutions include a comprehensive line of ATM and payment processing hardware and software; cash management and video banking software and customer-facing digital banking services; and related installation, maintenance, and managed and professional services.
|
|
|
•
|
Retail - We offer solutions to customers in the retail industry designed to improve selling productivity and checkout processes as well as increase service levels. These solutions primarily include retail-oriented technologies, such as point of sale terminals and point of sale software; a retail software platform with a comprehensive suite of retail software applications; innovative self-service kiosks, such as self-checkout; as well as bar-code scanners. We also offer installation, maintenance, managed and professional services as well as payment processing solutions.
|
|
|
•
|
Hospitality - We offer technology solutions to customers in the hospitality industry, serving businesses that range from a single store or restaurant to global chains and sports and entertainment venues. Our solutions include point of sale hardware and software solutions, installation, maintenance, managed and professional services as well as payment processing solutions.
|
|
|
•
|
Other - This category includes telecommunications and technology solutions where we offer maintenance as well as managed and professional services for third-party hardware provided to select manufacturers who value and leverage our global service capability.
|
These segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the chief operating decision maker in assessing segment performance and in allocating the Company's resources. Management evaluates the performance of the segments based on revenue and segment operating income. Assets are not allocated to segments, and thus are not included in the assessment of segment performance, and consequently, we do not disclose total assets by reportable segment.
The accounting policies used to determine the results of the operating segments are the same as those utilized for the consolidated financial statements as a whole. Intersegment sales and transfers are not material.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
To maintain operating focus on business performance, non-operational items are excluded from the segment operating results utilized by our chief operating decision maker in evaluating segment performance and are separately delineated to reconcile back to total reported income from operations.
The following table presents revenue and operating income by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Three months ended September 30
|
|
Nine months ended September 30
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Revenue by segment
|
|
|
|
|
|
|
|
Banking
|
$
|
942
|
|
|
$
|
795
|
|
|
$
|
2,568
|
|
|
$
|
2,241
|
|
Retail
|
539
|
|
|
483
|
|
|
1,608
|
|
|
1,541
|
|
Hospitality
|
216
|
|
|
193
|
|
|
611
|
|
|
595
|
|
Other
|
86
|
|
|
79
|
|
|
242
|
|
|
227
|
|
Consolidated revenue
|
$
|
1,783
|
|
|
$
|
1,550
|
|
|
$
|
5,029
|
|
|
$
|
4,604
|
|
Operating income by segment
|
|
|
|
|
|
|
|
Banking
|
$
|
146
|
|
|
$
|
102
|
|
|
$
|
370
|
|
|
$
|
280
|
|
Retail
|
36
|
|
|
29
|
|
|
102
|
|
|
105
|
|
Hospitality
|
10
|
|
|
15
|
|
|
39
|
|
|
53
|
|
Other
|
10
|
|
|
15
|
|
|
30
|
|
|
36
|
|
Subtotal - segment operating income
|
202
|
|
|
161
|
|
|
541
|
|
|
474
|
|
Other adjustments (1)
|
30
|
|
|
36
|
|
|
112
|
|
|
346
|
|
Income from operations
|
$
|
172
|
|
|
$
|
125
|
|
|
$
|
429
|
|
|
$
|
128
|
|
|
|
(1)
|
The following table presents the other adjustments for NCR:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Three months ended September 30
|
|
Nine months ended September 30
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Transformation and restructuring costs
|
$
|
7
|
|
|
$
|
16
|
|
|
$
|
47
|
|
|
$
|
98
|
|
Asset impairment charges
|
—
|
|
|
—
|
|
|
—
|
|
|
183
|
|
Acquisition-related amortization of intangible assets
|
22
|
|
|
20
|
|
|
64
|
|
|
64
|
|
Acquisition-related costs
|
1
|
|
|
—
|
|
|
1
|
|
|
1
|
|
Total other adjustments
|
$
|
30
|
|
|
$
|
36
|
|
|
$
|
112
|
|
|
$
|
346
|
|
The following table presents revenue by geography for NCR:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Three months ended September 30
|
|
Nine months ended September 30
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Americas
|
$
|
1,104
|
|
|
$
|
898
|
|
|
$
|
3,053
|
|
|
$
|
2,662
|
|
Europe, Middle East and Africa (EMEA)
|
458
|
|
|
414
|
|
|
1,329
|
|
|
1,240
|
|
Asia Pacific (APJ)
|
221
|
|
|
238
|
|
|
647
|
|
|
702
|
|
Total revenue
|
$
|
1,783
|
|
|
$
|
1,550
|
|
|
$
|
5,029
|
|
|
$
|
4,604
|
|
The following tables present revenue from products and services for NCR:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Three months ended September 30
|
|
Nine months ended September 30
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Product revenue
|
$
|
712
|
|
|
$
|
534
|
|
|
$
|
1,915
|
|
|
$
|
1,585
|
|
Professional services and installation services revenue
|
273
|
|
|
276
|
|
|
781
|
|
|
803
|
|
Recurring revenue, including maintenance, cloud revenue and payments
|
798
|
|
|
740
|
|
|
2,333
|
|
|
2,216
|
|
Total revenue
|
$
|
1,783
|
|
|
$
|
1,550
|
|
|
$
|
5,029
|
|
|
$
|
4,604
|
|
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Three months ended September 30
|
|
Nine months ended September 30
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Software
|
$
|
512
|
|
|
$
|
480
|
|
|
$
|
1,475
|
|
|
$
|
1,410
|
|
Services
|
640
|
|
|
616
|
|
|
1,847
|
|
|
1,827
|
|
Hardware
|
631
|
|
|
454
|
|
|
1,707
|
|
|
1,367
|
|
Total revenue
|
$
|
1,783
|
|
|
$
|
1,550
|
|
|
$
|
5,029
|
|
|
$
|
4,604
|
|
5. GOODWILL AND LONG-LIVED ASSETS
As noted in Note 1, Basis of Presentation and Summary of Significant Accounting Policies, effective January 1, 2019, the Company began management of its business on an industry basis, changing from the previous model of management on a solution basis, which resulted in a corresponding change to NCR's reportable segments. In connection with the change in reportable segments, during the first quarter of 2019, the Company determined its reporting units and then assigned goodwill to the new reporting units based on the relative fair value allocation approach. Based on this analysis, it was determined that the fair value of all reporting units were substantially in excess of the carrying value. We have reclassified prior period goodwill disclosures to conform to the current period presentation.
The carrying amounts of goodwill by segment as of September 30, 2019 and December 31, 2018 are included in the table below. Foreign currency fluctuations are included within other adjustments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
September 30, 2019
|
In millions
|
Goodwill
|
|
Accumulated Impairment Losses
|
|
Total
|
|
Additions
|
|
Impairment
|
|
Other
|
|
Goodwill
|
|
Accumulated Impairment Losses
|
|
Total
|
Banking
|
$
|
1,718
|
|
|
$
|
(101
|
)
|
|
$
|
1,617
|
|
|
$
|
54
|
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
1,770
|
|
|
$
|
(101
|
)
|
|
$
|
1,669
|
|
Retail
|
571
|
|
|
(34
|
)
|
|
537
|
|
|
1
|
|
|
—
|
|
|
(1
|
)
|
|
571
|
|
|
(34
|
)
|
|
537
|
|
Hospitality
|
385
|
|
|
(23
|
)
|
|
362
|
|
|
11
|
|
|
—
|
|
|
(1
|
)
|
|
395
|
|
|
(23
|
)
|
|
372
|
|
Other
|
187
|
|
|
(11
|
)
|
|
176
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
187
|
|
|
(11
|
)
|
|
176
|
|
Total goodwill
|
$
|
2,861
|
|
|
$
|
(169
|
)
|
|
$
|
2,692
|
|
|
$
|
66
|
|
|
$
|
—
|
|
|
$
|
(4
|
)
|
|
$
|
2,923
|
|
|
$
|
(169
|
)
|
|
$
|
2,754
|
|
Additions during 2019 represent purchase accounting adjustments related to the acquisition of JetPay Corporation, goodwill arising from several acquisitions of resellers within the Hospitality segment that were completed in the first and second quarters of 2019, and goodwill arising from the acquisition of D3 Technology in the third quarter of 2019.
NCR’s purchased intangible assets, reported in intangibles, net in the Condensed Consolidated Balance Sheets, were specifically identified when acquired, and are deemed to have finite lives. The gross carrying amount and accumulated amortization for NCR’s identifiable intangible assets were as set forth in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
Period
(in Years)
|
|
September 30, 2019
|
|
December 31, 2018
|
In millions
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
Identifiable intangible assets
|
|
|
|
|
|
|
|
|
|
Reseller & customer relationships
|
1 - 20
|
|
$
|
732
|
|
|
$
|
(258
|
)
|
|
$
|
726
|
|
|
$
|
(218
|
)
|
Intellectual property
|
2 - 8
|
|
454
|
|
|
(390
|
)
|
|
443
|
|
|
(373
|
)
|
Customer contracts
|
8
|
|
89
|
|
|
(88
|
)
|
|
89
|
|
|
(87
|
)
|
Tradenames
|
1 - 10
|
|
76
|
|
|
(66
|
)
|
|
75
|
|
|
(60
|
)
|
Total identifiable intangible assets
|
|
|
$
|
1,351
|
|
|
$
|
(802
|
)
|
|
$
|
1,333
|
|
|
$
|
(738
|
)
|
The aggregate amortization expense (actual and estimated) for identifiable intangible assets for the following periods is:
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Three months ended September 30, 2019
|
Nine months ended September 30, 2019
|
Remainder of 2019 (estimated)
|
Amortization expense
|
$
|
22
|
|
$
|
64
|
|
$
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31 (estimated)
|
In millions
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
Amortization expense
|
|
$
|
71
|
|
|
$
|
63
|
|
|
$
|
58
|
|
|
$
|
55
|
|
|
$
|
49
|
|
6. DEBT OBLIGATIONS
The following table summarizes the Company's short-term borrowings and long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
In millions, except percentages
|
Amount
|
|
Weighted-Average Interest Rate
|
|
Amount
|
|
Weighted-Average Interest Rate
|
Short-Term Borrowings
|
|
|
|
|
|
|
|
Current portion of Senior Secured Credit Facility (1)
|
$
|
3
|
|
|
4.55%
|
|
$
|
84
|
|
|
4.51%
|
Trade Receivables Securitization Facility
|
200
|
|
|
2.92%
|
|
100
|
|
|
3.37%
|
Other (1)
|
5
|
|
|
5.44%
|
|
1
|
|
|
4.92%
|
|
Total short-term borrowings
|
$
|
208
|
|
|
|
|
$
|
185
|
|
|
|
Long-Term Debt
|
|
|
|
|
|
|
|
Senior Secured Credit Facility:
|
|
|
|
|
|
|
|
|
Term loan facility (1)
|
$
|
347
|
|
|
4.55%
|
|
$
|
675
|
|
|
4.51%
|
|
Revolving credit facility (1)
|
400
|
|
|
3.80%
|
|
120
|
|
|
4.49%
|
Senior notes:
|
|
|
|
|
|
|
|
|
|
5.00% Senior Notes due 2022
|
600
|
|
|
|
|
600
|
|
|
|
|
4.625% Senior Notes due 2021
|
—
|
|
|
|
|
500
|
|
|
|
|
5.875% Senior Notes due 2021
|
400
|
|
|
|
|
400
|
|
|
|
|
6.375% Senior Notes due 2023
|
700
|
|
|
|
|
700
|
|
|
|
|
5.750% Senior Notes due 2027
|
500
|
|
|
|
|
—
|
|
|
|
|
6.125% Senior Notes due 2029
|
500
|
|
|
|
|
—
|
|
|
|
Deferred financing fees
|
(28
|
)
|
|
|
|
(18
|
)
|
|
|
Other (1)
|
3
|
|
|
0.05%
|
|
3
|
|
|
0.59%
|
|
Total long-term debt
|
$
|
3,422
|
|
|
|
|
$
|
2,980
|
|
|
|
|
|
(1)
|
Interest rates are weighted-average interest rates as of September 30, 2019 and December 31, 2018.
|
Senior Secured Credit Facility On August 28, 2019, the Company entered into an amended and restated senior secured credit facility with and among certain foreign subsidiaries of NCR (the Foreign Borrowers), the lenders party thereto and JPMorgan Chase Bank, N.A. (JPMCB) as the administrative agent, refinancing its term loan facility and revolving credit facility thereunder (the Senior Secured Credit Facility). The Senior Secured Credit Facility consists of a term loan facility with an aggregate principal commitment of $750 million, of which $350 million was outstanding as of September 30, 2019. The Senior Secured Credit Facility permits the Company to draw the remaining $400 million under the term loan facility at any time on or prior to December 31, 2019, which was subsequently drawn on October 10, 2019. Additionally, the Senior Secured Credit Facility provides for a five-year revolving credit facility with an aggregate principal commitment of $1.1 billion, of which $400 million was outstanding as of September 30, 2019. The revolving credit facility also allows a portion of the availability to be used for letters of credit, and as of September 30, 2019, there were no letters of credit outstanding. As a result of amending the Senior Secured Credit Facility, the Company wrote off approximately $5 million of deferred financing fees which were recorded within interest expense during the three and nine months ended September 30, 2019 in the Condensed Consolidated Statements of Operations. Additionally, the Company incurred debt issuance fees of $15 million that have been deferred and will be recognized in interest expense over the term of the Senior Secured Credit Facility.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
Up to $400 million of the revolving credit facility is available to the Foreign Borrowers. Term loans were made to the Company in U.S. Dollars, and loans under the revolving credit facility are available in U.S. Dollars, Euros and Pound Sterling.
The outstanding principal balance of the term loan facility is required to be repaid in equal quarterly installments of approximately 0.25% of the aggregate principal amount beginning with the fiscal quarter ending December 31, 2019, with the balance being due at maturity on August 28, 2026. Borrowings under the revolving portion of the credit facility are due August 28, 2024. Amounts outstanding under the Senior Secured Credit Facility for the revolving loan facility bear interest at LIBOR (or, in the case of amounts denominated in Euros, EURIBOR), or, at NCR’s option, in the case of amounts denominated in U.S. Dollars, at a base rate equal to the highest of (a) the federal funds rate plus 0.50%, (b) the rate interest last quoted by the Wall Street Journal as the “prime rate” and (c) the one-month LIBOR rate plus 1.00% (the Base Rate), plus, in each case, a margin ranging from 1.25% to 2.25% for LIBOR-based loans or EURIBOR-based revolving loans and ranging from 0.25% to 1.25% for Base Rate-based revolving loans, in each case, depending on the Company’s consolidated leverage ratio. The terms of the Senior Secured Credit Facility also require certain other fees and payments to be made by the Company, including a commitment fee on the undrawn portion of the revolving credit facility. Amounts outstanding under the Senior Secured Credit Facility for the term loan facility bear interest at LIBOR plus 2.5% margin per annum, or, at NCR's option, the Base Rate plus a 1.50% margin per annum.
The obligations of the Company and Foreign Borrowers under the Senior Secured Credit Facility are guaranteed by certain of the Company's wholly-owned subsidiaries. The Senior Secured Credit Facility and these guarantees are secured by a first priority lien and security interest in certain equity interests owned by the Company and the guarantor subsidiaries in certain of their respective domestic and foreign subsidiaries, and a perfected first priority lien and security interest in substantially all of the Company's U.S. assets and the assets of the guarantor subsidiaries, subject to certain exclusions. These security interests would be released if the Company achieves an “investment grade” rating, and will remain released so long as the Company maintains that rating.
The Senior Secured Credit Facility includes affirmative and negative covenants that restrict or limit the ability of the Company and its subsidiaries to, among other things, incur indebtedness; create liens on assets; engage in certain fundamental corporate changes or changes to the Company's business activities; make investments; sell or otherwise dispose of assets; engage in sale-leaseback or hedging transactions; repurchase stock, pay dividends or make similar distributions; repay other indebtedness; engage in certain affiliate transactions; or enter into agreements that restrict the Company's ability to create liens, pay dividends or make loan repayments. The Senior Secured Credit Facility also includes financial covenants that require the Company to maintain:
|
|
•
|
a consolidated leverage ratio on the last day of any fiscal quarter, not to exceed (i) in the case of any fiscal quarter ending and on or prior to March 31, 2021, (a) the sum of 4.50 and an amount (not to exceed 0.50) to reflect debt used to reduce NCR’s unfunded pension liabilities to (b) 1.00, and (ii) in the case of any fiscal quarter ending after March 31, 2021 and on or prior to March 31, 2023, (a) the sum of 4.25 and an amount (not to exceed 0.50) to reflect debt used to reduce NCR’s unfunded pension liabilities to (b) 1.00; and (iii) in the case of any fiscal quarter ending after March 31, 2023, (a) the sum of 4.00 and an amount (no to exceed 0.50) to reflect debt used to reduce our unfunded pension liabilities to (b) 1.00.
|
The Company has the option to elect to increase the maximum permitted leverage ratio by 0.25 in connection with the consummation of any material acquisition (as defined in the Senior Secured Credit Facility) for four fiscal quarters, but in no event will the maximum permitted leverage ratio, inclusive of all increases, exceed 4.75 to 1.00. At September 30, 2019, the maximum consolidated leverage ratio under the Senior Secured Credit Facility was 4.75 to 1.00.
The Senior Secured Credit Facility also includes provisions for events of default, which are customary for similar financings. Upon the occurrence of an event of default, the lenders may, among other things, terminate the loan commitments, accelerate all loans and require cash collateral deposits in respect of outstanding letters of credit. If the Company is unable to pay or repay the amounts due, the lenders could, among other things, proceed against the collateral granted to them to secure such indebtedness.
The Company may request, at any time and from time to time, but the lenders are not obligated to fund, the establishment of one or more incremental term loans and/or revolving credit facilities (subject to the agreement of existing lenders or additional financial institutions to provide such term loans and/or revolving credit facilities) with commitments in an aggregate amount not to exceed the sum of (i) $150 million, plus (ii) such amount as would not cause the leverage ratio under the Senior Secured Credit Facility, calculated on a pro forma basis including the incremental facility and assuming that it and the revolver are fully drawn, to exceed 3.00 to 1.00, and the proceeds of which can be used for working capital requirements and other general corporate purposes.
Senior Unsecured Notes On September 17, 2012, the Company issued $600 million aggregate principal amount of 5.00% senior unsecured notes due in 2022 (the 5.00% Notes). The 5.00% Notes were sold at 100% of the principal amount and will mature on
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
July 15, 2022. On December 18, 2012, the Company issued $500 million aggregate principal amount of 4.625% senior unsecured notes due in 2021 (the 4.625% Notes). The 4.625% Notes were sold at 100% of the principal amount and will mature on February 15, 2021. On December 19, 2013, the Company issued $400 million aggregate principal amount of 5.875% senior unsecured notes due in 2021 (the 5.875% Notes) and $700 million aggregate principal amount of 6.375% senior unsecured notes due in 2023 (the 6.375% Notes). The 5.875% Notes were sold at 100% of the principal amount and will mature on December 15, 2021 and the 6.375% Notes were sold at 100% of the principal amount and will mature on December 15, 2023. On August 21, 2019, the Company issued $500 million aggregate principal amount of 5.750% senior unsecured notes due in 2027 (the 5.750% Notes) and $500 million aggregate principal amount of 6.125% senior unsecured notes due in 2029 (the 6.125% Notes). The 5.750% Notes were sold at 100% of the principal amount and will mature on September 1, 2027. The 6.125% Notes were sold at 100% of the principal amount and will mature on September 1, 2029.
On August 8, 2019, the Company issued a notice of full redemption to redeem all of the outstanding aggregate principal amount of the 4.625% Notes. On September 7, 2019, the 4.625% Notes were redeemed at a price equal to (i) 100% of the aggregate principal amount of the Notes and (ii) accrued and unpaid interest to, but not including, the redemption date. Upon deposit of the redemption payment, the 4.625% Notes were satisfied and discharged in accordance with its terms.
As a result of the redemption of the 4.625% Notes, the Company wrote off approximately $1 million of deferred financing fees which was recorded within interest expense during the three and nine months ended September 30, 2019 in the Condensed Consolidated Statements of Operations. For the issuance of the 5.750% Notes and the 6.125% Notes, the Company incurred debt issuance fees of $15 million that have been deferred and will be recognized in interest expense over the term of the indentures.
The Company has the option to redeem the 5.750% Notes, in whole or in part, at any time on or after September 1, 2022, at a redemption price of 102.875%, 101.438%, and 100% during the 12-month periods commencing on September 1, 2022, 2023, and 2024 and thereafter, respectively, plus accrued and unpaid interest to the redemption date. Prior to September 1, 2022, the Company may redeem the 5.750% Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a make-whole premium and accrued and unpaid interest to the redemption date.
The Company has the option to redeem the 6.125% Notes, in whole or in part, at any time on or after September 1, 2024, at a redemption price of 103.063%, 102.042%, 101.021% and 100% during the 12-month periods commencing on September 1, 2024, 2025, 2026 and 2027 and thereafter, respectively, plus accrued and unpaid interest to the redemption date. Prior to September 1, 2024, the Company may redeem the 6.125% Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a make-whole premium and accrued and unpaid interest to the redemption date.
The senior unsecured notes are guaranteed, fully and unconditionally, on an unsecured senior basis, by our subsidiary, NCR International, Inc. Under the indentures for these notes, the Company, has the option to redeem each series of notes, in whole or in part, at various times for specified prices, plus accrued and unpaid interest.
The terms of the indentures for these notes limit the ability of the Company and certain of its subsidiaries to, among other things, incur additional debt or issue redeemable preferred stock; pay dividends or make certain other restricted payments or investments; incur liens; sell assets; incur restrictions on the ability of the Company's subsidiaries to pay dividends to the Company; enter into affiliate transactions; engage in sale and leaseback transactions; and consolidate, merge, sell or otherwise dispose of all or substantially all of the Company's or such subsidiaries' assets. These covenants are subject to significant exceptions and qualifications. For example, if these notes are assigned an investment grade rating by Moody's or S&P and no default has occurred or is continuing, certain covenants will be terminated.
Trade Receivables Securitization Facility In November 2014, the Company established a two-year revolving trade receivables securitization facility (the A/R Facility) with PNC Bank, National Association (PNC) as the administrative agent, and various lenders. In November 2016, the Company amended the A/R Facility to extend the maturity date to November 2018. In November 2018, the Company amended the A/R Facility to extend the maturity date to November 2020. The A/R Facility provides for up to $200 million in funding based on the availability of eligible receivables and other customary factors and conditions.
Under the A/R Facility, NCR sells and/or contributes certain of its U.S. trade receivables to a wholly-owned, bankruptcy-remote subsidiary as they are originated, and advances by the lenders to that subsidiary are secured by those trade receivables. The assets of this financing subsidiary are restricted as collateral for the payment of its obligations under the A/R Facility, and its assets and credit are not available to satisfy the debts and obligations owed to the creditors of the Company. The Company includes the assets, liabilities and results of operations of this financing subsidiary in its consolidated financial statements. The financing subsidiary
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
owned $645 million and $526 million of outstanding accounts receivable as of September 30, 2019 and December 31, 2018, respectively, and these amounts are included in accounts receivable, net in the Company’s Condensed Consolidated Balance Sheets.
The financing subsidiary pays annual commitment and other customary fees to the lenders, and advances by a lender under the A/R Facility accrue interest (i) at a reserve-adjusted LIBOR rate or a base rate equal to the highest of (a) the applicable lender’s prime rate or (b) the federal funds rate plus 0.50%, if the lender is a committed lender, or (ii) based on commercial paper interest rates if the lender is a commercial paper conduit lender. Advances may be prepaid at any time without premium or penalty.
The A/R Facility contains various customary affirmative and negative covenants and default and termination provisions that provide for the acceleration of the advances under the A/R Facility in circumstances including, but not limited to, failure to pay interest or principal when due, breach of representation, warranty or covenant, certain insolvency events or failure to maintain the security interest in the trade receivables, and defaults under other material indebtedness.
Fair Value of Debt The Company utilized Level 2 inputs, as defined in the fair value hierarchy, to measure the fair value of the long-term debt, which, as of September 30, 2019 and December 31, 2018 was $3.73 billion and $3.11 billion, respectively. Management's fair value estimates were based on quoted prices for recent trades of NCR’s long-term debt, quoted prices for similar instruments, and inquiries with certain investment communities.
7. INCOME TAXES
Income tax provisions for interim (quarterly) periods are based on an estimated annual effective income tax rate calculated separately from the effect of significant, infrequent or unusual items. Income tax expense was $4 million for the three months ended September 30, 2019 compared to income tax benefit of $15 million for the three months ended September 30, 2018. The change was primarily driven by lower discrete benefits recognized in the current period. In the three months ended September 30, 2018, income tax was benefited by tax method changes filed during the prior year that resulted in lower deferred tax assets subject to the downward rate remeasurement resulting from U.S. Tax Reform as well as discrete benefits from tax restructuring transactions. In the three months ended September 30, 2019, the discrete benefits were primarily the release of a $25 million valuation allowance related to certain non-US deferred tax assets.
Income tax expense was $28 million for the nine months ended September 30, 2019 compared to an income tax benefit of $20 million for the nine months ended September 30, 2018. The change in income tax expense was primarily driven by lower discrete benefits recognized in the current period. In the nine months ended September 30, 2018, income tax was benefited by tax method changes filed during the prior year that resulted in lower deferred tax assets subject to the downward rate remeasurement resulting from U.S. Tax Reform, discrete benefits from tax restructuring transactions as well as favorable audit settlements in international jurisdictions. In the nine months ended September 30, 2019, the discrete benefits were primarily the release of a $25 million valuation allowance related to certain non-US deferred tax assets.
The Company regularly reviews our deferred tax assets for recoverability based on the evaluation of positive and negative evidence. During the three months ended September 30, 2019, the Company made the determination that there was sufficient positive evidence to release the valuation allowance in one non-US jurisdiction, resulting in a $25 million tax benefit noted above.
The Company engages in continuous discussions and negotiations with taxing authorities regarding tax matters, and the Company has determined that over the next 12 months it expects to resolve certain tax matters related to U.S. and foreign jurisdictions. As a result, as of September 30, 2019, we estimate that it is reasonably possible that gross unrecognized tax benefits may decrease by $10 million to $17 million in the next 12 months.
8. STOCK COMPENSATION PLANS
As of September 30, 2019, the Company’s primary type of stock-based compensation was restricted stock units and stock options. Stock-based compensation expense for the following periods were:
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Three months ended September 30
|
|
Nine months ended September 30
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Restricted stock units
|
$
|
25
|
|
|
$
|
13
|
|
|
$
|
67
|
|
|
$
|
50
|
|
Stock options
|
2
|
|
|
1
|
|
|
6
|
|
|
2
|
|
Employee stock purchase plan
|
1
|
|
|
1
|
|
|
3
|
|
|
3
|
|
Stock-based compensation expense
|
28
|
|
|
15
|
|
|
76
|
|
|
55
|
|
Tax benefit
|
(5
|
)
|
|
—
|
|
|
(12
|
)
|
|
(7
|
)
|
Total stock-based compensation expense (net of tax)
|
$
|
23
|
|
|
$
|
15
|
|
|
$
|
64
|
|
|
$
|
48
|
|
Stock-based compensation expense is recognized in the financial statements based upon grant date fair value. The Company granted stock options and the weighted average fair value of option grants was estimated based on the below weighted average assumptions, which was $8.07 and $9.80 for the nine months ended September 30, 2019 and 2018, respectively. The stock options that were granted for the nine months ended September 30, 2019 and 2018 had a seven year contractual term and will vest over four years.
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30
|
|
2019
|
|
2018
|
Dividend yield
|
$
|
—
|
|
|
$
|
—
|
|
Risk-free interest rate
|
2.50
|
%
|
|
2.50
|
%
|
Expected volatility
|
34.79
|
%
|
|
34.88
|
%
|
Expected holding period (years)
|
3.9
|
|
|
3.8
|
|
Expected volatility is calculated as the historical volatility of the Company’s stock over a period equal to the expected term of the options, as management believes this is the best representation of prospective trends. The Company uses historical data to estimate option exercise and employee terminations within the valuation model. The expected holding period represents the period of time that options are expected to be outstanding. The risk-free interest rate for periods within the contractual life of the option is based on a blend of the three and five-year U.S. Treasury yield curve in effect at the time of grant.
As of September 30, 2019, the total unrecognized compensation cost of $101 million related to unvested restricted stock grants is expected to be recognized over a weighted average period of approximately 0.9 years. As of September 30, 2019, the total unrecognized compensation cost of $28 million related to unvested stock option grants is expected to be recognized over a weighted average period of approximately 1.6 years.
Employee Stock Purchase Plan The Company's Employee Stock Purchase Plan ("ESPP") provides employees a 15% discount on stock purchases using a three-month look-back feature where the discount is applied to the stock price that represents the lower of NCR’s closing stock price on either the first day or the last day of each calendar quarter. Participants can contribute between 1% and 10% of their compensation.
For the three months ended September 30, 2019, employees purchased 0.2 million shares, at a discounted price of $26.44. For the three months ended September 30, 2018, employees purchased 0.2 million shares, at a discounted price of $25.59.
9. EMPLOYEE BENEFIT PLANS
Components of net periodic benefit cost (income) of the pension plans for the three months ended September 30 were as follows:
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
U.S. Pension Benefits
|
|
International Pension Benefits
|
|
Total Pension Benefits
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
2
|
|
Interest cost
|
16
|
|
|
16
|
|
|
5
|
|
|
4
|
|
|
21
|
|
|
20
|
|
Expected return on plan assets
|
(10
|
)
|
|
(10
|
)
|
|
(8
|
)
|
|
(9
|
)
|
|
(18
|
)
|
|
(19
|
)
|
Amortization of prior service cost
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
1
|
|
Net periodic benefit cost (income)
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
(1
|
)
|
|
$
|
(2
|
)
|
|
$
|
5
|
|
|
$
|
4
|
|
Components of net periodic benefit cost (income) of the pension plans for the nine months ended September 30 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
U.S. Pension Benefits
|
|
International Pension Benefits
|
|
Total Pension Benefits
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
6
|
|
|
$
|
4
|
|
|
$
|
6
|
|
Interest cost
|
49
|
|
|
46
|
|
|
15
|
|
|
15
|
|
|
64
|
|
|
61
|
|
Expected return on plan assets
|
(32
|
)
|
|
(32
|
)
|
|
(23
|
)
|
|
(25
|
)
|
|
(55
|
)
|
|
(57
|
)
|
Amortization of prior service cost
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
1
|
|
Net periodic benefit cost (income)
|
$
|
17
|
|
|
$
|
14
|
|
|
$
|
(3
|
)
|
|
$
|
(3
|
)
|
|
$
|
14
|
|
|
$
|
11
|
|
The benefit from the postretirement plan for the following periods were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Three months ended September 30
|
|
Nine months ended September 30
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Amortization of:
|
|
|
|
|
|
|
|
Prior service benefit
|
$
|
(2
|
)
|
|
$
|
(1
|
)
|
|
$
|
(4
|
)
|
|
$
|
(4
|
)
|
Actuarial loss
|
1
|
|
|
—
|
|
|
1
|
|
|
1
|
|
Net postretirement benefit
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
|
$
|
(3
|
)
|
|
$
|
(3
|
)
|
The net cost of the postemployment plan for the following periods were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30
|
|
Nine months ended September 30
|
In millions
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net service cost
|
$
|
5
|
|
|
$
|
4
|
|
|
$
|
24
|
|
|
$
|
23
|
|
Interest cost
|
—
|
|
|
—
|
|
|
2
|
|
|
2
|
|
Amortization of:
|
|
|
|
|
|
|
|
Prior service benefit
|
—
|
|
|
(2
|
)
|
|
(2
|
)
|
|
(4
|
)
|
Actuarial gain
|
(1
|
)
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
Net benefit cost
|
$
|
4
|
|
|
$
|
2
|
|
|
$
|
22
|
|
|
$
|
21
|
|
Employer Contributions
Pension For the three and nine months ended September 30, 2019, NCR contributed $6 million and $17 million, respectively, to its international pension plans. NCR anticipates contributing an additional $11 million to its international pension plans for a total of $28 million in 2019.
Postretirement For the three and nine months ended September 30, 2019, NCR contributed zero and $1 million of contributions, respectively, to its U.S. postretirement plan. NCR anticipates contributing an additional $1 million to its U.S. postretirement plan for a total of $2 million in 2019.
Postemployment For the three and nine months ended September 30, 2019, NCR contributed $6 million and $28 million, respectively, to its postemployment plans. NCR anticipates contributing an additional $2 million to its postemployment plans for a total of $30 million in 2019.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
10. COMMITMENTS AND CONTINGENCIES
In the normal course of business, NCR is subject to various proceedings, lawsuits, claims and other matters, including, for example, those that relate to the environment and health and safety, labor and employment, employee benefits, import/export compliance, intellectual property, data privacy and security, product liability, commercial disputes and regulatory compliance, among others. Additionally, NCR is subject to diverse and complex laws and regulations, including those relating to corporate governance, public disclosure and reporting, environmental safety and the discharge of materials into the environment, product safety, import and export compliance, data privacy and security, antitrust and competition, government contracting, anti-corruption, and labor and human resources, which are rapidly changing and subject to many possible changes in the future. Compliance with these laws and regulations, including changes in accounting standards, taxation requirements, and federal securities laws among others, may create a substantial burden on, and substantially increase costs to NCR or could have an impact on NCR's future operating results. The Company has reflected all liabilities when a loss is considered probable and reasonably estimable in the Condensed Consolidated Financial Statements. We do not believe there is a reasonable possibility that losses exceeding amounts already recognized have been incurred, but there can be no assurances that the amounts required to satisfy alleged liabilities from such matters will not impact future operating results. Other than as stated below, the Company does not currently expect to incur material capital expenditures related to such matters. However, there can be no assurances that the actual amounts required to satisfy alleged liabilities from various lawsuits, claims, legal proceedings and other matters, including, but not limited to the Fox River and Kalamazoo River environmental matters and other matters discussed below, and to comply with applicable laws and regulations, will not exceed the amounts reflected in NCR’s Condensed Consolidated Financial Statements or will not have a material adverse effect on its consolidated results of operations, capital expenditures, competitive position, financial condition or cash flows.
In June 2014, one of the Company’s Brazilian subsidiaries, NCR Manaus, was notified of a Brazilian federal tax assessment of R$168 million, or approximately $43 million as of December 31, 2018, including penalties and interest regarding certain federal indirect taxes for 2010 through 2012. The assessment alleges improper importation of certain components into Brazil's free trade zone that would nullify related indirect tax incentives. At the time of the assessment, we did not record an accrual for the assessment as the Company believed it had a valid position regarding indirect taxes in Brazil and, as such, filed an appeal in 2014. In December 2017, the Company prevailed in this appeal regarding substantially all of the disputed amounts. The Brazilian federal tax authority further appealed this dispute to the next procedural level, in which an intermediate tribunal decided in NCR's favor in August 2018 and issued an opinion to that effect on February 25, 2019. The Brazilian tax authorities appealed one of the matters included within this decision. In May 2019, the Supreme Administrative Court issued an opinion in favor of NCR finally resolving this matter and canceling any future assessments.
On November 6, 2019, Boston Consulting Group, Inc., a former consultant for the Company, commenced a lawsuit against the Company in the United States District Court for the District of New York. The Complaint in the matter alleges the Company breached two consulting agreements and seeks in excess of $80 million and other compensatory damages and equitable relief. While the Company at this time is unable to make any predictions about the outcome of this case or estimate any possible liability, the Company believes the allegations of money owed are grossly overstated, and the Company intends to vigorously defend this lawsuit.
Environmental Matters NCR's facilities and operations are subject to a wide range of environmental protection laws, and NCR has investigatory and remedial activities underway at a number of facilities that it currently owns or operates, or formerly owned or operated, to comply, or to determine compliance, with such laws. Also, NCR has been identified, either by a government agency or by a private party seeking contribution to site clean-up costs, as a potentially responsible party (PRP) at a number of sites pursuant to various state and federal laws, including the Federal Water Pollution Control Act, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and comparable state statutes. Other than the Fox River matter, the Kalamazoo River matter and the Ebina matter discussed below, we currently do not anticipate material expenses and liabilities from these environmental matters.
Fox River NCR is one of eight entities that were formally notified by governmental and other entities, such as local Native American tribes, that they are PRPs for environmental claims (under CERCLA and other statutes) arising out of the presence of polychlorinated biphenyls (PCBs) in sediments in the lower Fox River and in the Bay of Green Bay in Wisconsin. The other Fox River PRPs that received notices include Appleton Papers Inc. (API; now known as Appvion, Inc.), P.H. Glatfelter Company ("Glatfelter"), Georgia-Pacific Consumer Products LP (GP, successor to Fort James Operating Company), and others. NCR was identified as a PRP because of alleged PCB discharges from two carbonless copy paper manufacturing facilities it previously owned, which were located along the Fox River. NCR sold its facilities in 1978 to API. The parties have also contended that NCR is responsible for PCB discharges from paper mills owned by other companies because NCR carbonless copy paper "broke" was allegedly purchased by those other mills as a raw material.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
The United States Environmental Protection Agency (USEPA) and Wisconsin Department of Natural Resources (together, the Governments) developed clean-up plans for the upper and lower parts of the Fox River and for portions of the Bay of Green Bay. On November 13, 2007, the Governments issued a unilateral administrative order (the 2007 Order) under CERCLA to the eight original PRPs, requiring them to perform remedial work under the Governments’ clean-up plan for the lower parts of the river (operable units 2 through 5). In April 2009, NCR and API formed a limited liability company (the LLC), which entered into an agreement with an environmental remediation contractor to perform the work at the Fox River site. In-water dredging and remediation under the clean-up plan commenced shortly thereafter.
NCR and API, along with B.A.T Industries p.l.c. (BAT), share among themselves a portion of the cost of the Fox River clean-up and natural resource damages (NRD) based upon a 1998 agreement (the Cost Sharing Agreement), a 2005 arbitration award (subsequently confirmed as a judgment), and a September 30, 2014 Funding Agreement (the Funding Agreement). The Cost Sharing Agreement and the arbitration resolved disputes that arose out of the Company's 1978 sale of its Fox River facilities to API. The Cost Sharing Agreement and arbitration award resulted in a 45% share for NCR of the first $75 million of such costs (a threshold that was reached in 2008), and a 40% share for amounts in excess of $75 million. The Funding Agreement arose out of a 2012 to 2014 arbitration dispute between NCR and API, and provides for regular, ongoing funding of NCR-incurred Fox River remediation costs via contributions, made to a new limited liability corporation created by the Funding Agreement, by BAT, API and, for 2014, API's indemnitor Windward Prospects. The Funding Agreement creates an obligation on BAT and API to fund 50% of NCR’s Fox River remediation costs from October 1, 2014 forward; (API’s Fox River-related obligations under the Funding Agreement were fully satisfied in 2016); the Funding Agreement also provides NCR contractual avenues for payment of, via direct and third-party sources, (1) the difference between BAT’s and API’s 60% obligation under the Cost Sharing Agreement and arbitration award on the one hand and their ongoing (since September 2014) 50% payments under the Funding Agreement on the other, as well as (2) the difference between the amount NCR received under the Funding Agreement and the amount owed to it under the Cost Sharing Agreement and arbitration award for the period from April 2012 through September 2014. As of September 30, 2019 and December 31, 2018, the receivable under the Funding Agreement was approximately $49 million and $45 million, respectively, and was included in other assets in the Condensed Consolidated Balance Sheet. The Company anticipates that it will collect sums related to the receivable in 2020 or later, likely after the remediation efforts related to the Fox River matter, described below, are complete. This receivable is not taken into account in calculating the Company’s Fox River net reserve.
The Company's litigations relating to contribution and enforcement claims concerning the Fox River have been concluded. A proposed consent decree settlement (the CD settlement) with respect to the contribution action (a case originally filed by NCR and API) and the government enforcement action (a case originally filed by the federal and state governments against several PRPs, including the Company) was successfully negotiated by NCR and the federal and state governments and was approved on August 22, 2017 by the federal district court in Wisconsin that had been presiding over those cases. A final order of dismissal as to the Company in the contribution and government enforcement actions was subsequently entered; one party, Glatfelter, had appealed the approval of the CD settlement. On January 3, 2019, the United States lodged a proposed consent decree with the Wisconsin court, reflecting a settlement reached by the United States, Wisconsin and Glatfelter with respect to Glatfelter’s Fox River liability under the government enforcement action; a component of that settlement was withdrawal of Glatfelter’s appeal opposing the Company’s CD settlement. On March 14, 2019, the Wisconsin court approved the Glatfelter consent decree, and on April 3, 2019, Glatfelter's appeal was dismissed.
The CD settlement has now resolved the remaining Fox River-related contribution and enforcement claims against the Company. The key components of the approved CD settlement include (1) the Company’s commitment to complete the remediation of the Fox River, which is now expected to be completed in 2020; (2) the Company’s conditional agreement to waive its contribution claims against the two remaining defendants in the case, GP and Glatfelter; (3) the Company’s agreement not to appeal the trial court’s decision on divisibility of harm; (4) the Governments’ agreement to include in the settlement so-called “contribution protection” in the Company’s favor as to GP’s and Glatfelter’s contribution claims against the Company, the effect of which will be to extinguish those claims; (5) the Governments’ agreement not to pursue the Company for the Governments’ past oversight costs; and (6) the Governments’ agreement to exercise prosecutorial discretion in pursuing other parties for future oversight costs and long-term monitoring and maintenance, with the Company retaining so-called “backstop” liability in the event that the other parties fail to pay future oversight costs or to perform long-term monitoring and maintenance. Additionally, although certain state law claims by GP and Glatfelter against the Company may not be affected directly by the CD settlement, the CD settlement provides that the Company’s contribution claims against those two parties will revive if those parties attempt to assert any claims against the Company relating to the Fox River, including any state law claims.
In the quarter ending September 30, 2017, the remediation general contractor commenced an arbitration against the LLC, in a dispute over contract interpretation. The hearing on this matter was completed in June 2019, and the parties submitted post-trial briefs in August 2019. The amounts claimed by the contractor range from approximately $46 million to approximately $53 million; the Company disputed the claims and contested them vigorously during the hearing. In November 2019, having rejected substantial
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
portions of the claims, the arbitration panel awarded the contractor $10 million. The Company’s indemnitors and co-obligors, described below, are expected to bear responsibility for the majority of any award, with the Company’s share of approximately one-fourth of such award.
With respect to the Company’s prior dispute with API, which was generally superseded by the Funding Agreement, the Company received timely payments as they came due under the Funding Agreement. Although API filed for bankruptcy protection in October 2017, it had made all of the payments to the Company in connection with the Fox River that are required of it by the Funding Agreement.
NCR's eventual remediation liability, followed by long-term monitoring expected to be performed by others, will depend on a number of factors. In establishing the reserve, NCR attempts to estimate a range of reasonably possible outcomes for each of these factors, although each range is itself uncertain. NCR uses its best estimate within the range, if that is possible. Where there is a range of equally possible outcomes, and there is no amount within that range that is considered to be a better estimate than any other amount, NCR uses the low end of the range. The significant factors include: (1) the total remaining clean-up costs, including the costs associated with decommissioning the site, the expected cost impact of which is expected to be neutral or non-material to the Company, including long-term monitoring following completion of the clean-up, and what parties are assigned to discharge the post-clean-up tasks (as noted, the Company no longer expects to bear long-term monitoring costs); (2) total NRD for the site and the share that NCR will bear (which is now resolved as to the Company); (3) the share of clean-up costs that NCR will bear (which is resolved under the CD settlement); (4) NCR's transaction and litigation costs to defend itself to the extent additional litigation is required with respect to the claim brought by the general contractor; and (5) the share of NCR's payments that BAT will bear (which is governed by the Cost Sharing Agreement and the Funding Agreement, BAT has made all of the payments requested of it, and as discussed above; API is in bankruptcy and is not presumed likely to bear further shares of NCR’s payments). With respect to NRD, in connection with a certain settlement entered into by other PRPs in 2015, the Government withdrew the NRD claims it had prosecuted on behalf of NRD trustees, including those NRD claims asserted against the Company.
Calculation of the Company's Fox River reserve is subject to several complexities, and it is possible there could be additional changes to some elements of the reserve over upcoming periods, although the Company is unable to predict or estimate such changes at this time. There can be no assurance that the clean-up and related expenditures and liabilities will not have a material effect on NCR's capital expenditures, earnings, financial condition, cash flows, or competitive position. As of September 30, 2019, the gross reserve for the Fox River matter was approximately $13 million, compared to $21 million as of December 31, 2018. As of September 30, 2019, the net reserve for the Fox River matter was approximately $10 million, compared to $17 million as of December 31, 2018. The change in the net reserve is due to payments for clean-up activities and litigation costs. NCR contributes to the LLC to fund remediation activities and generally, by contract, has funded certain amounts of remediation expenses in advance. As of September 30, 2019 and December 31, 2018, approximately zero remained from this funding. NCR's reserve for the Fox River matter is reduced as the LLC makes payments to the remediation contractor and other vendors with respect to remediation activities.
Under a 1996 agreement, AT&T Corp. (AT&T) and Nokia (as the successor to Lucent Technologies and Alcatel-Lucent USA) are responsible severally (not jointly) for indemnifying NCR for certain portions of the amounts paid by NCR for the Fox River matter over a defined threshold and subject to certain offsets. (The agreement governs certain aspects of AT&T's divestiture of NCR and of what was then known as Lucent Technologies.) Those companies have made the payments requested of them by the Company on an ongoing basis.
Kalamazoo River In November 2010, USEPA issued a "general notice letter" to NCR with respect to the Allied Paper, Inc./Portage Creek/Kalamazoo River Superfund Site (Kalamazoo River site) in Michigan. Three other companies - International Paper, Mead Corporation, and Consumers Energy - also received general notice letters at or about the same time. USEPA asserts that the site is contaminated by various substances, primarily PCBs, as a result of discharges by various paper mills located along the river. USEPA does not claim that the Company made direct discharges into the Kalamazoo River, and NCR never had facilities at or near the Kalamazoo River site, but USEPA indicated that "NCR may be liable under Section 107 of CERCLA ... as an arranger, who by contract or agreement, arranged for the disposal, treatment and/or transportation of hazardous substances at the Site." USEPA stated that it "may issue special notice letters to [NCR] and other PRPs for future RI/FS [remedial investigation / feasibility studies] and RD/RA [remedial design / remedial action] negotiations."
In connection with the Kalamazoo River site, in December 2010 the Company, along with two other defendants, was sued in federal court by three Georgia-Pacific (GP) affiliate corporations in a private-party contribution and cost recovery action for alleged pollution. The suit, pending in Michigan, asks that the Company and other defendants pay a "fair portion" of these companies’ costs. Various removal and remedial actions remain to be decided upon and performed at the Kalamazoo River site, the costs for which generally have not yet been determined; in 2017 Records of Decisions were issued for two parts of the river, and in 2018 such a decision was issued for another part of the river, but such decisions for the majority of the work are expected to be made only over the next several years. The suit alleges that the Company is liable to the GP entities as an "arranger" under CERCLA.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
The initial phase of the case was tried in a Michigan federal court in February 2013; on September 26, 2013 the court issued a decision that held NCR was liable as an “arranger” as of at least March 1969. (PCB-containing carbonless copy paper was produced from approximately 1954 to April 1971, and the majority of contamination at the Kalamazoo River site had occurred prior to 1969). NCR preserved its right to appeal the September 2013 decision.
In the 2013 decision the Court did not determine NCR’s share of the overall liability. Relative shares of liability for the four companies were tried to the court in a subsequent phase of the case in December 2015. In a ruling issued on March 29, 2018, the court addressed responsibility for the costs that GP had incurred in the past, totaling to approximately $50 million (GP had sought approximately $105 million, but $55 million of those claims were removed by the court upon motions filed by the Company and other parties); NCR and GP were each assigned a 40% share of those costs, and the other two companies were assigned 15% and 5% as their allocations. The court entered a judgment in the case on June 19, 2018, in which it indicated that it would not allocate future costs, but would enter a declaratory judgment that the four companies together had responsibility for future costs, in amounts and shares to be determined. Cross-proceedings have been commenced to obtain recoveries from the other parties pursuant to the judgment; those proceedings are stayed pending the appeal referenced below.
NCR expects to have claims against BAT and API under the Funding Agreement, discussed above for the Kalamazoo River remediation expenses. API filed for bankruptcy protection in October 2017, and thus payment of its potential share under the Funding Agreement for so-called “future sites,” which would include the Kalamazoo River site, may be at risk, but as liability under the Cost Sharing Agreement and the Funding Agreement is joint and several, the bankruptcy is not anticipated to affect the Company’s ability to seek that amount from BAT. The Company will also have indemnity or reimbursement claims against AT&T and Nokia under the arrangement discussed above in connection with the Fox River matter after expenses have met a contractual threshold set out in the 1996 agreement referenced above in the Fox River discussion.
In light of the 2018 decision, the Company increased its reserve for the Kalamazoo River matter during 2018. As of September 30, 2019, the total reserve for Kalamazoo was $46 million compared to $47 million as of December 31, 2018; that figure is reported on a basis that is net of expected contributions from the Company's co-obligors and, if and when the applicable threshold is reached, its indemnitors. As many aspects of the costs of remediation will not be determined for several years (and thus the high end of a range of possible costs for many areas of the site cannot be quantified at this time), the Company has made what it considers to be reasonable estimates of the low end of a range for such costs where remedies are identified, and/or of the costs of investigations and studies for areas of the river where remedies have not yet been determined, and the reserve is informed by those estimates. The extent of NCR’s potential liability remains subject to many uncertainties, particularly inasmuch as remedy decisions and cost estimates will not be generated until times in the future and as most of the work to be performed will not take place until the 2020s and 2030s. Under other assumptions or estimates for possible costs of remediation, which the Company does not at this point consider to be reasonably estimable or verifiable, it is possible that the reserve the Company has taken to discontinued operations reflected in this paragraph could more than approximately double the reflected reserve.
In July 2018 the Company appealed to the United States Court of Appeals for the Sixth Circuit both the 2013 court decision, which it believes is in conflict with a decision from the Fox River trial court as to Operable Unit 1 of that site and an affirmance of that decision from the Court of Appeals for the Seventh Circuit, and the 2018 court decision, on various legal grounds. The Company filed a bond to stay any execution of the judgment pending the appeal, and its application for a stay was approved by the court and remains stayed as of September 2019.
Ebina The Company is engaged in cooperative regulatory compliance activities with the government of Japan in connection with certain environmental contaminants generated in its past operations in that country. The Company has quantities of PCB and other wastes primarily from its former plant at Oiso, Japan, including capsulated undiluted solutions manufactured in the past, capacitors, light ballasts and PCB-affected soil from the Oiso plant that was excavated and placed in steel drums. These wastes are stored in a facility at Ebina, Japan in accordance with Japanese regulations governing such materials. Over the past several years Japan has enacted and amended legislation governing such wastes, and has set a current deadline for treating and disposing of (at government-constructed disposal facilities) the highest-concentration wastes by 2027. Lower-concentration wastes can be and have been disposed of via private contractors, and as of the period ended September 30, 2019, NCR had disposed of more than a third of its lower-concentration wastes.
The Company and its consultants have met and communicated regularly with the Japanese agency charged with administration of the law, and are working with that agency on a program to manage disposal of the high-concentration wastes, including tests of technologies to make the disposal more efficient. Based on communications with the agency, the earliest that high-concentration wastes can be disposed of will be in the second half of 2020, with final deadlines for various of the government-constructed disposal sites currently set for 2022, 2023 and later. Low-concentration wastes are required to be contracted for disposal by 2027, a timetable that the Company expects to meet. In September 2019, the Company’s environmental consultants, following a series of communications and meetings with the Japanese agency, at the Company’s request prepared an estimate of remaining disposal
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
costs over the coming several years. While the estimate is subject to a range of assumptions and uncertainties, including prospects of cost reduction in coordination with the agency as certain field testing to separate high-concentration and low-concentration waste progresses over the coming years, the Company has adjusted its existing reserve for the matter to take into account this cost estimate, and that reserve as of September 30, 2019 is $19 million compared to $2 million at December 31, 2018. The Japan environmental waste issue is treated as a compliance matter and not as litigation or enforcement, and the Company has received no threats of litigation or enforcement.
Environmental-Related Insurance Recoveries In connection with the Fox River and other environmental sites, through September 30, 2019, NCR has received a combined gross total of approximately $202 million in settlements reached with various of its insurance carriers. Portions of many of these settlements agreed in the 2010 through 2013 timeframe are payable to a law firm that litigated the claims on the Company's behalf. Some of the settlements cover not only the Fox River but also other environmental sites; some are limited to either the Fox River or the Kalamazoo River site. Some of the settlements are directed to defense costs and some are directed to indemnity; some settlements cover both defense costs and indemnity. The Company does not anticipate that further material insurance recoveries specific to Kalamazoo River remediation costs will be available to it, owing to considerations under applicable Michigan law. Claims with respect to Kalamazoo River defense costs have now been settled, with the amounts of those settlements included in the sum reported above.
Environmental Remediation Estimates It is difficult to estimate the future financial impact of environmental laws, including potential liabilities. NCR records environmental provisions when it is probable that a liability has been incurred and the amount or range of the liability is reasonably estimable in accordance with accounting guidance, where liabilities are not expected to be quantifiable or estimable for a period of years, the estimated costs of investigating those liabilities are recorded as a component of the reserve for that particular site. Provisions for estimated losses from environmental restoration and remediation are, depending on the site, based generally on internal and third-party environmental studies, estimates as to the number and participation level of other PRPs, the extent of contamination, estimated amounts for attorney and other fees, and the nature of required clean-up and restoration actions. Reserves are adjusted as further information develops or circumstances change. Management expects that the amounts reserved from time to time will be paid out over the period of investigation, negotiation, remediation and restoration for the applicable sites. The amounts provided for environmental matters in NCR's Condensed Consolidated Financial Statements are the estimated gross undiscounted amounts of such liabilities, without deductions for indemnity insurance, third-party indemnity claims or recoveries from other PRPs, except as qualified in the following sentences. In those cases where insurance carriers or third-party indemnitors have agreed to pay any amounts and management believes that collectability of such amounts is probable, the amounts are recorded in the Condensed Consolidated Financial Statements. For the Fox River and Kalamazoo sites, as described above, assets relating to the AT&T and Nokia indemnities and to the BAT obligations are recorded as payment is supported by contractual agreements, public filings and/or payment history.
Guarantees and Product Warranties In the ordinary course of business, NCR may issue performance guarantees on behalf of its subsidiaries to certain of its customers and other parties. Some of those guarantees may be backed by standby letters of credit, surety bonds, or similar instruments. In general, under the guarantees, NCR would be obligated to perform, or cause performance, over the term of the underlying contract in the event of an unexcused, uncured breach by its subsidiary, or some other specified triggering event, in each case as defined by the applicable guarantee. NCR believes the likelihood of having to perform under any such guarantee is remote. As of September 30, 2019 and December 31, 2018, NCR had no material obligations related to such guarantees, and therefore its Condensed Consolidated Financial Statements do not have any associated liability balance.
NCR provides its customers a standard manufacturer’s warranty and records, at the time of the sale, a corresponding estimated liability for potential warranty costs. Estimated future obligations due to warranty claims are based upon historical factors, such as labor rates, average repair time, travel time, number of service calls per machine and cost of replacement parts. When a sale is consummated, the total customer revenue is recognized, provided that all revenue recognition criteria are otherwise satisfied, and the associated warranty liability is recorded using pre-established warranty percentages for the respective product classes.
From time to time, product design or quality corrections are accomplished through modification programs. When identified, associated costs of labor and parts for such programs are estimated and accrued as part of the warranty reserve.
The Company recorded the activity related to the warranty reserve for the nine months ended September 30 as follows:
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
|
|
|
|
|
|
|
|
|
In millions
|
2019
|
|
2018
|
Warranty reserve liability
|
|
|
|
Beginning balance as of January 1
|
$
|
26
|
|
|
$
|
26
|
|
Accruals for warranties issued
|
26
|
|
|
27
|
|
Settlements (in cash or in kind)
|
(31
|
)
|
|
(32
|
)
|
Ending balance as of September 30
|
$
|
21
|
|
|
$
|
21
|
|
In addition, NCR provides its customers with certain indemnification rights. In general, NCR agrees to indemnify the customer if a third party asserts patent or other infringement on the part of its customers for its use of the Company’s products subject to certain conditions that are generally standard within the Company’s industries. On limited occasions the Company will undertake additional indemnification obligations for business reasons. From time to time, NCR also enters into agreements in connection with its acquisition and divestiture activities that include indemnification obligations by the Company. The fair value of these indemnification obligations is not readily determinable due to the conditional nature of the Company’s potential obligations and the specific facts and circumstances involved with each particular agreement. The Company has not recorded a liability in connection with these indemnifications, and no current indemnification instance is material to the Company’s financial position. Historically, payments made by the Company under these types of agreements have not had a material effect on the Company’s consolidated financial condition, results of operations or cash flows.
11. SERIES A CONVERTIBLE PREFERRED STOCK
On December 4, 2015, NCR issued 820,000 shares of Series A Convertible Preferred Stock to certain entities affiliated with the Blackstone Group L.P. (collectively, Blackstone) for an aggregate purchase price of $820 million, or $1,000 per share, pursuant to an Investment Agreement between the Company and Blackstone, dated November 11, 2015. In connection with the issuance of the Series A Convertible Preferred Stock, the Company incurred direct and incremental expenses of $26 million, including financial advisory fees, closing costs, legal expenses and other offering-related expenses. These direct and incremental expenses originally reduced the Series A Convertible Preferred Stock, and will be accreted through retained earnings as a deemed dividend from the date of issuance through the first possible known redemption date, March 16, 2024. Holders of Series A Convertible Preferred Stock are entitled to a cumulative dividend at the rate of 5.5% per annum, payable quarterly in arrears. The Series A Convertible Preferred Stock is convertible at the option of the holders at any time into shares of common stock at a conversion price of $30.00 per share, or a conversion rate of 33.333 shares of common stock per share of Series A Convertible Preferred Stock.
Under the Investment Agreement, Blackstone agreed not to sell or otherwise transfer its shares of Series A Convertible Preferred Stock (or any shares of common stock issued upon conversion thereof) without the Company’s consent until June 4, 2017. In March 2017, we provided Blackstone with an early release from this lock-up, allowing Blackstone to sell approximately 49% of its shares of Series A Convertible Preferred Stock, and in return, Blackstone agreed to amend the Investment Agreement to extend the lock-up on the remaining 51% of its shares of Series A Convertible Preferred Stock for six months until December 1, 2017.
In connection with the early release of the lock-up, Blackstone offered for sale 342,000 shares of Series A Convertible Preferred Stock in an underwritten public offering. In addition, Blackstone converted 90,000 shares of Series A Convertible Preferred Stock into shares of our common stock and we repurchased those shares of common stock for $48.47 per share. The underwritten offering and the stock repurchase were consummated on March 17, 2017.
On September 18, 2019, NCR entered into an agreement to repurchase and convert the outstanding 512,221 shares of Series A Convertible Preferred Stock owned by Blackstone. NCR repurchased 237,673 shares of Series A Convertible Preferred Stock for total cash consideration of $302 million. The remaining shares of Blackstone's Series A Convertible Preferred Stock, including accrued dividends, were converted to approximately 9.16 million shares of common stock at a conversion price of $30.00 per share.
For the repurchase of Series A Convertible Preferred Stock, the excess of the fair value of consideration transferred over the carrying value was approximately $67 million, and has been included as a deemed dividend in adjusting the income from common stockholders in calculating earnings per share. In this analysis, we determined the fair value of the consideration transferred was not in excess of the fair value of the redeemed Series A Convertible Preferred Stock. As a result, there was no inducement provided to Blackstone for the conversion of the remaining preferred shares into common stock. Refer to Note 12. Earnings per Share, for additional discussion.
During the three months ended September 30, 2019 and 2018, the Company paid dividends-in-kind of $13 million and $11 million, respectively. During the nine months ended September 30, 2019 and 2018, the Company paid dividends-in-kind of $37 million and $34 million, respectively. As of September 30, 2019 and December 31, 2018, the Company had accrued dividends of $1 million and $3 million, respectively. There were no cash dividends declared during the three and nine months ended September 30, 2019 or 2018.
As of September 30, 2019 and December 31, 2018, the maximum number of common shares that could be required to be issued upon conversion of the outstanding shares of Series A Convertible Preferred Stock was 13.1 million and 29.0 million shares, respectively.
12. EARNINGS PER SHARE
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
Basic earnings per share (EPS) is calculated by dividing net income or loss attributable to NCR, less any dividends (declared or cumulative undeclared), deemed dividends, accretion or decretion, redemption or induced conversion on our Series A Convertible Preferred Stock, by the weighted average number of shares outstanding during the period.
In computing diluted EPS, we adjust the numerator used in the basic EPS computation, subject to anti-dilution requirements, to add back the dividends (declared or cumulative undeclared), deemed dividends, accretion or decretion, redemption or induced conversion on our Series A Convertible Preferred Stock. We adjust the denominator used in the basic EPS computation, subject to anti-dilution requirements, to include the dilution from potential shares related to the Series A Convertible Preferred Stock and stock-based compensation plans.
The holders of Series A Convertible Preferred Stock, unvested restricted stock units and stock options do not have nonforfeitable rights to common stock dividends or common stock dividend equivalents. Accordingly, the Series A Convertible Preferred Stock, unvested restricted stock units and stock options do not qualify as participating securities. See Note 8, Stock Compensation Plans for share information on NCR’s stock compensation plans.
The components of basic earnings per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions, except per share amounts
|
|
Three months ended September 30
|
|
Nine months ended September 30
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Numerator:
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
105
|
|
|
$
|
85
|
|
|
$
|
230
|
|
|
$
|
(3
|
)
|
Dividends on Series A Convertible Preferred Stock
|
|
(12
|
)
|
|
(12
|
)
|
|
(37
|
)
|
|
(36
|
)
|
Deemed dividend on Series A Convertible Preferred Stock redemption
|
|
(67
|
)
|
|
—
|
|
|
(67
|
)
|
|
—
|
|
Income from continuing operations attributable to NCR common stockholders
|
|
26
|
|
|
73
|
|
|
126
|
|
|
(39
|
)
|
Loss from discontinued operations, net of tax
|
|
(15
|
)
|
|
(1
|
)
|
|
(15
|
)
|
|
(38
|
)
|
Net income attributable to NCR common stockholders
|
|
$
|
11
|
|
|
$
|
72
|
|
|
$
|
111
|
|
|
$
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic weighted average number of shares outstanding
|
|
121.4
|
|
|
118.0
|
|
|
120.3
|
|
|
118.4
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.21
|
|
|
$
|
0.62
|
|
|
$
|
1.05
|
|
|
$
|
(0.33
|
)
|
From discontinued operations
|
|
(0.12
|
)
|
|
(0.01
|
)
|
|
(0.13
|
)
|
|
(0.32
|
)
|
Total basic earnings per share
|
|
$
|
0.09
|
|
|
$
|
0.61
|
|
|
$
|
0.92
|
|
|
$
|
(0.65
|
)
|
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
The components of diluted earnings per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions, except per share amounts
|
|
Three months ended September 30
|
|
Nine months ended September 30
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Numerator:
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
105
|
|
|
$
|
85
|
|
|
$
|
230
|
|
|
$
|
(3
|
)
|
Dividends on Series A Convertible Preferred Stock
|
|
(12
|
)
|
|
—
|
|
|
(37
|
)
|
|
(36
|
)
|
Deemed dividend on Series A Convertible Preferred Stock redemption
|
|
(67
|
)
|
|
—
|
|
|
(67
|
)
|
|
—
|
|
Income from continuing operations attributable to NCR common stockholders
|
|
26
|
|
|
85
|
|
|
126
|
|
|
(39
|
)
|
Loss from discontinued operations, net of tax
|
|
(15
|
)
|
|
(1
|
)
|
|
(15
|
)
|
|
(38
|
)
|
Net income attributable to NCR common stockholders
|
|
$
|
11
|
|
|
$
|
84
|
|
|
$
|
111
|
|
|
$
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic weighted average number of shares outstanding
|
|
121.4
|
|
|
118.0
|
|
|
120.3
|
|
|
118.4
|
|
Dilutive effect of as-if converted Series A Convertible Preferred Stock
|
|
—
|
|
|
28.4
|
|
|
—
|
|
|
—
|
|
Dilutive effect of restricted stock units and stock options
|
|
2.0
|
|
|
2.9
|
|
|
2.4
|
|
|
—
|
|
Weighted average diluted shares
|
|
123.4
|
|
|
149.3
|
|
|
122.7
|
|
|
118.4
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.21
|
|
|
$
|
0.57
|
|
|
$
|
1.03
|
|
|
$
|
(0.33
|
)
|
From discontinued operations
|
|
(0.12
|
)
|
|
(0.01
|
)
|
|
(0.12
|
)
|
|
(0.32
|
)
|
Total diluted earnings per share
|
|
$
|
0.09
|
|
|
$
|
0.56
|
|
|
$
|
0.90
|
|
|
$
|
(0.65
|
)
|
For the three months ended September 30, 2019, shares related to the as-if converted Series A Convertible Preferred Stock of 28.0 million were excluded from the diluted share count because their effect would have been anti-dilutive. The number of shares of Series A Convertible Preferred Stock that were excluded is inclusive of both existing and redeemed shares. For the three months ended September 30, 2019, weighted average restricted stock units and stock options of 4.5 million were excluded from the diluted share count because their effect would have been anti-dilutive.
For the three months ended September 30, 2018, it was more dilutive to assume the Series A Convertible Preferred Stock was converted to common stock and therefore the weighted average outstanding shares of common stock were adjusted by the as-if converted Series A Convertible Preferred Stock and diluted earnings per share was calculated excluding the quarterly dividend. For the three months ended September 30, 2018, weighted average restricted stock units and stock options of 2.9 million were excluded from the diluted share count because their effect would have been anti-dilutive.
For the nine months ended September 30, 2019, shares related to the as-if converted Series A Convertible Preferred Stock of 29.0 million were excluded from the diluted share count because their effect would have been anti-dilutive. The number of shares of Series A Convertible Preferred Stock that were excluded is inclusive of both existing and redeemed shares. For the nine months ended September 30, 2019, weighted average restricted stock units and stock options of 4.4 million were excluded from the diluted share count because their effect would have been anti-dilutive.
For the nine months ended September 30, 2018, shares related to the as-if converted Series A Convertible Preferred Stock of 28.1 million were excluded from the diluted share count because their effect would have been anti-dilutive. For the nine months ended September 30, 2018, weighted average restricted stock units and stock options of 6.7 million were excluded from the diluted share count because their effect would have been anti-dilutive.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
13. DERIVATIVES AND HEDGING INSTRUMENTS
NCR is exposed to risks associated with changes in foreign currency exchange rates and interest rates. NCR utilizes a variety of measures to monitor and manage these risks, including the use of derivative financial instruments. NCR has exposure to approximately 50 functional currencies. Since a substantial portion of our operations and revenue occur outside the U.S., and in currencies other than the U.S. Dollar, our results can be significantly impacted, both positively and negatively, by changes in foreign currency exchange rates.
Foreign Currency Exchange Risk
The accounting guidance for derivatives and hedging requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the Condensed Consolidated Balance Sheets. The Company designates foreign exchange contracts as cash flow hedges of forecasted transactions when they are determined to be highly effective at inception.
Our risk management strategy includes hedging, on behalf of certain subsidiaries, a portion of our forecasted, non-functional currency denominated cash flows for a period of up to 15 months. As a result, some of the impact of currency fluctuations on non-functional currency denominated transactions (and hence on subsidiary operating income, as stated in the functional currency), is mitigated in the near term. The amount we hedge and the duration of hedge contracts may vary significantly. In the longer term (greater than 15 months), the subsidiaries are still subject to the effect of translating the functional currency results to U.S. Dollars. To manage our exposures and mitigate the impact of currency fluctuations on the operations of our foreign subsidiaries, we hedge our main transactional exposures through the use of foreign exchange forward and option contracts. This is primarily done through the hedging of foreign currency denominated inter-company inventory purchases by NCR’s marketing units and the foreign currency denominated inputs to our manufacturing units. The related foreign exchange contracts are designated as highly effective cash flow hedges. The gains or losses on these hedges are deferred in accumulated other comprehensive income (AOCI) and reclassified to income when the underlying hedged transaction is recorded in earnings. As of September 30, 2019, the balance in AOCI related to foreign exchange derivative transactions was a gain of $2 million, net of tax. The gains or losses from derivative contracts related to inventory purchases are recorded in cost of products when the inventory is sold to an unrelated third party.
We also utilize foreign exchange contracts to hedge our exposure of assets and liabilities denominated in non-functional currencies. We recognize the gains and losses on these types of hedges in earnings as exchange rates change. We do not enter into hedges for speculative purposes.
The following tables provide information on the location and amounts of derivative fair values in the Condensed Consolidated Balance Sheets:
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values of Derivative Instruments
|
|
September 30, 2019
|
In millions
|
Balance Sheet
Location
|
|
Notional
Amount
|
|
Fair
Value
|
|
Balance Sheet
Location
|
|
Notional
Amount
|
|
Fair
Value
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other current assets
|
|
$
|
71
|
|
|
$
|
3
|
|
|
Other current liabilities
|
|
$
|
22
|
|
|
$
|
—
|
|
Total derivatives designated as hedging instruments
|
|
|
|
|
$
|
3
|
|
|
|
|
|
|
$
|
—
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other current assets
|
|
$
|
151
|
|
|
$
|
1
|
|
|
Other current liabilities
|
|
$
|
267
|
|
|
$
|
1
|
|
Total derivatives not designated as hedging instruments
|
|
|
|
|
$
|
1
|
|
|
|
|
|
|
$
|
1
|
|
Total derivatives
|
|
|
|
|
$
|
4
|
|
|
|
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values of Derivative Instruments
|
|
December 31, 2018
|
In millions
|
Balance Sheet
Location
|
|
Notional
Amount
|
|
Fair
Value
|
|
Balance Sheet
Location
|
|
Notional
Amount
|
|
Fair
Value
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other current assets
|
|
$
|
169
|
|
|
$
|
4
|
|
|
Other current liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
Total derivatives designated as hedging instruments
|
|
|
|
|
$
|
4
|
|
|
|
|
|
|
$
|
—
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other current assets
|
|
$
|
219
|
|
|
$
|
1
|
|
|
Other current liabilities
|
|
$
|
157
|
|
|
$
|
1
|
|
Total derivatives not designated as hedging instruments
|
|
|
|
|
$
|
1
|
|
|
|
|
|
|
$
|
1
|
|
Total derivatives
|
|
|
|
|
$
|
5
|
|
|
|
|
|
|
$
|
1
|
|
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
The effects of derivative instruments on the Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Amount of Gain (Loss) Recognized in Other Comprehensive Income (OCI) on Derivative
|
|
|
|
Amount of (Gain) Loss Reclassified from AOCI into the Condensed Consolidated Statement of Operations
|
Derivatives in Cash Flow Hedging Relationships
|
For the three months ended September 30, 2019
|
|
For the three months ended September 30, 2018
|
|
Location of (Gain) Loss Reclassified from AOCI into the Condensed Consolidated Statement of Operations
|
|
For the three months ended September 30, 2019
|
|
For the three months ended September 30, 2018
|
Foreign exchange contracts
|
$
|
4
|
|
|
$
|
1
|
|
|
Cost of products
|
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Amount of Gain (Loss) Recognized in Other Comprehensive Income (OCI) on Derivative
|
|
|
|
Amount of (Gain) Loss Reclassified from AOCI into the Condensed Consolidated Statement of Operations
|
Derivatives in Cash Flow Hedging Relationships
|
For the nine months ended September 30, 2019
|
|
For the nine months ended September 30, 2018
|
|
Location of (Gain) Loss Reclassified from AOCI into the Condensed Consolidated Statement of Operations
|
|
For the nine months ended September 30, 2019
|
|
For the nine months ended September 30, 2018
|
Foreign exchange contracts
|
$
|
5
|
|
|
$
|
5
|
|
|
Cost of products
|
|
$
|
(5
|
)
|
|
$
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
|
|
Amount of Gain (Loss) Recognized in the Condensed Consolidated Statement of Operations
|
|
|
|
Three months ended September 30
|
Nine months ended September 30
|
Derivatives not Designated as Hedging Instruments
|
Location of Gain (Loss) Recognized in the Condensed Consolidated Statement of Operations
|
|
2019
|
|
2018
|
2019
|
|
2018
|
Foreign exchange contracts
|
Other (expense), net
|
|
$
|
(2
|
)
|
|
$
|
(1
|
)
|
$
|
(11
|
)
|
|
$
|
(4
|
)
|
Refer to Note 14. Fair Value of Assets and Liabilities, for further information on derivative assets and liabilities recorded at fair value on a recurring basis.
Concentration of Credit Risk
NCR is potentially subject to concentrations of credit risk on accounts receivable and financial instruments such as hedging instruments and cash and cash equivalents. Credit risk includes the risk of nonperformance by counterparties. The maximum potential loss may exceed the amount recognized on the Condensed Consolidated Balance Sheets. Exposure to credit risk is managed through credit approvals, credit limits, selecting major international financial institutions (as counterparties to hedging transactions) and monitoring procedures. NCR’s business often involves large transactions with customers, and if one or more of those customers were to default on its obligations under applicable contractual arrangements, the Company could be exposed to potentially significant losses. However, management believes that the reserves for potential losses are adequate. As of September 30, 2019, we did not have any significant concentration of credit risk related to financial instruments.
14. FAIR VALUE OF ASSETS AND LIABILITIES
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities recorded at fair value on a recurring basis as of September 30, 2019 and December 31, 2018 are set forth as follows:
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
In millions
|
Total
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Deposits held in money market mutual funds (1)
|
$
|
7
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign exchange contracts (2)
|
4
|
|
|
—
|
|
|
4
|
|
|
—
|
|
Total
|
$
|
11
|
|
|
$
|
7
|
|
|
$
|
4
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Foreign exchange contracts (3)
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
Total
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
In millions
|
Total
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Deposits held in money market mutual funds (1)
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign exchange contracts (2)
|
5
|
|
|
—
|
|
|
5
|
|
|
—
|
|
Total
|
$
|
13
|
|
|
$
|
8
|
|
|
$
|
5
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Foreign exchange contracts (3)
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
Total
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
(1) Included in Cash and cash equivalents in the Condensed Consolidated Balance Sheets.
(2) Included in Other current assets in the Condensed Consolidated Balance Sheets.
(3) Included in Other current liabilities in the Condensed Consolidated Balance Sheets.
Deposits Held in Money Market Mutual Funds A portion of the Company’s excess cash is held in money market mutual funds that generate interest income based on prevailing market rates. Money market mutual fund holdings are measured at fair value using quoted market prices and are classified within Level 1 of the valuation hierarchy.
Foreign Exchange Contracts As a result of our global operating activities, we are exposed to risks from changes in foreign currency exchange rates, which may adversely affect our financial condition. To manage our exposures and mitigate the impact of currency fluctuations on our financial results, we hedge our primary transactional exposures through the use of foreign exchange forward and option contracts. The foreign exchange contracts are valued using the market approach based on observable market transactions of forward rates and are classified within Level 2 of the valuation hierarchy.
Assets Measured at Fair Value on a Non-recurring Basis
From time to time, certain assets are measured at fair value on a nonrecurring basis using significant unobservable inputs (Level 3). NCR reviews the carrying values of investments when events and circumstances warrant and considers all available evidence in evaluating when declines in fair value are other-than-temporary declines. There were no material impairment charges or non-recurring fair value adjustments recorded during the three and nine months ended September 30, 2019. In the three and nine months ended September 30, 2018, we recorded zero and $183 million, which included a $146 million impairment of goodwill under our previous segment structure assigned to the Hardware reporting unit and a $37 million impairment charge related to long-lived assets held and used in our Hardware operations.
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
15. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (AOCI)
Changes in AOCI by Component
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Currency Translation Adjustments
|
Changes in Employee Benefit Plans
|
Changes in Fair Value of Effective Cash Flow Hedges
|
Total
|
Balance as of December 31, 2018
|
$
|
(234
|
)
|
$
|
(14
|
)
|
$
|
2
|
|
$
|
(246
|
)
|
Other comprehensive income (loss) before reclassifications
|
(10
|
)
|
—
|
|
4
|
|
(6
|
)
|
Amounts reclassified from AOCI
|
—
|
|
(5
|
)
|
(4
|
)
|
(9
|
)
|
Net current period other comprehensive (loss) income
|
(10
|
)
|
(5
|
)
|
—
|
|
(15
|
)
|
Balance as of September 30, 2019
|
$
|
(244
|
)
|
$
|
(19
|
)
|
$
|
2
|
|
$
|
(261
|
)
|
Reclassifications Out of AOCI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2019
|
|
Employee Benefit Plans
|
|
|
|
In millions
|
Amortization of Actuarial Loss (Gain)
|
Amortization of Prior Service Benefit
|
Effective Cash Flow Hedge Loss (Gain)
|
|
Total
|
Affected line in Condensed Consolidated Statement of Operations:
|
|
|
|
|
|
|
Cost of products
|
$
|
—
|
|
$
|
—
|
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
|
Cost of services
|
—
|
|
(1
|
)
|
—
|
|
|
(1
|
)
|
|
Total before tax
|
$
|
—
|
|
$
|
(1
|
)
|
$
|
(2
|
)
|
|
$
|
(3
|
)
|
|
Tax expense
|
|
|
|
|
1
|
|
|
Total reclassifications, net of tax
|
|
|
|
|
$
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2018
|
|
Employee Benefit Plans
|
|
|
|
In millions
|
Amortization of Actuarial Loss (Gain)
|
Amortization of Prior Service Benefit
|
Effective Cash Flow Hedge Loss (Gain)
|
|
Total
|
Affected line in Condensed Consolidated Statement of Operations:
|
|
|
|
|
|
|
Cost of products
|
$
|
—
|
|
$
|
—
|
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
|
Cost of services
|
—
|
|
(2
|
)
|
—
|
|
|
(2
|
)
|
|
Selling, general and administrative expenses
|
—
|
|
(1
|
)
|
—
|
|
|
(1
|
)
|
|
Research and development expenses
|
—
|
|
1
|
|
—
|
|
|
1
|
|
|
Total before tax
|
$
|
—
|
|
$
|
(2
|
)
|
$
|
(2
|
)
|
|
$
|
(4
|
)
|
|
Tax expense
|
|
|
|
|
—
|
|
|
Total reclassifications, net of tax
|
|
|
|
|
$
|
(4
|
)
|
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2019
|
|
Employee Benefit Plans
|
|
|
|
In millions
|
Amortization of Actuarial Loss (Gain)
|
Amortization of Prior Service Benefit
|
Effective Cash Flow Hedge Loss (Gain)
|
|
Total
|
Affected line in Condensed Consolidated Statement of Operations:
|
|
|
|
|
|
|
Cost of products
|
$
|
—
|
|
$
|
—
|
|
$
|
(5
|
)
|
|
$
|
(5
|
)
|
|
Cost of services
|
(1
|
)
|
(3
|
)
|
—
|
|
|
(4
|
)
|
|
Selling, general and administrative expenses
|
—
|
|
(2
|
)
|
—
|
|
|
(2
|
)
|
|
Total before tax
|
$
|
(1
|
)
|
$
|
(5
|
)
|
$
|
(5
|
)
|
|
$
|
(11
|
)
|
|
Tax expense
|
|
|
|
|
2
|
|
|
Total reclassifications, net of tax
|
|
|
|
|
$
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2018
|
|
Employee Benefit Plans
|
|
|
|
In millions
|
Amortization of Actuarial Loss (Gain)
|
Amortization of Prior Service Benefit
|
Effective Cash Flow Hedge Loss (Gain)
|
|
Total
|
Affected line in Condensed Consolidated Statement of Operations:
|
|
|
|
|
|
|
Cost of products
|
$
|
—
|
|
$
|
—
|
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
|
Cost of services
|
1
|
|
(5
|
)
|
—
|
|
|
(4
|
)
|
|
Selling, general and administrative expenses
|
—
|
|
(2
|
)
|
—
|
|
|
(2
|
)
|
|
Total before tax
|
$
|
1
|
|
$
|
(7
|
)
|
$
|
(2
|
)
|
|
$
|
(8
|
)
|
|
Tax expense
|
|
|
|
|
1
|
|
|
Total reclassifications, net of tax
|
|
|
|
|
$
|
(7
|
)
|