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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
Commission File Number 001-00395
NCR CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 31-0387920
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1700 South Patterson Blvd.
Dayton, Ohio 45479
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (937) 445-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $.01 per share New York Stock Exchange
Securities to be registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of February 23, 2001 was approximately $4.4 billion. At February
23, 2001, there were 95,857,603 shares of common stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Portions of the registrant's Proxy Statement dated March 7, 2001,
issued in connection with the annual meeting of stockholders.
TABLE OF CONTENTS
Item Description Page
- ---- ----------- ----
PART I
1. Business............................................................................... 1
2. Properties............................................................................. 4
3. Legal Proceedings...................................................................... 4
4. Submission of Matters to a Vote of Security Holders.................................... 4
4.(a) Executive Officers of the Registrant................................................... 4
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters.............. 6
6. Selected Financial Data................................................................ 6
7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 7
7.(a) Quantitative and Qualitative Disclosures about Market Risk............................. 14
7.(b) Recent Developments.................................................................... 15
8. Financial Statements and Supplementary Data............................................ 15
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 35
PART III
10. Directors and Executive Officers of the Registrant..................................... 35
11. Executive Compensation................................................................. 35
12. Security Ownership of Certain Beneficial Owners and Management......................... 35
13. Certain Relationships and Related Transactions......................................... 35
PART IV
14. Financial Statement Schedules, Reports on Form 8-K and Exhibits........................ 36
This Report contains trademarks, service marks, and registered marks of the
Company and its subsidiaries, and other companies, as indicated.
PART I
Item 1. BUSINESS
General
NCR Corporation and its subsidiaries (NCR or the Company) provide solutions
worldwide that are designed specifically to enable businesses to build, expand
and enhance their relationships with their customers by facilitating
transactions and transforming data from transactions into useful business
information.
Through the Company's presence at customer interaction points, such as point-of-
sale workstations, automated teller machines (ATMs) and web-enabled kiosks,
Retail Store Automation and Financial Self Service solutions enable companies to
capture and process consumer transactions. NCR then provides powerful Data
Warehousing solutions that help businesses understand and serve each customer as
a clearly defined market of one, responding with programs designed to improve
customer acquisition, retention and profitability. NCR offers specific
solutions for the retail and financial industries and also provides solutions
for industries including telecommunications, transportation, insurance,
utilities and electronic commerce, as well as consumer goods manufacturers and
government entities. These solutions are built on a foundation of long-
established industry knowledge and consulting expertise, value-adding software,
global customer support services, a complete line of consumable and media
products and a range of hardware technology.
NCR was originally incorporated in 1884 and was a publicly traded company on the
New York Stock Exchange prior to its merger with a wholly-owned subsidiary of
AT&T Corp. (AT&T) on September 19, 1991. Effective December 31, 1996, AT&T
distributed to its stockholders all of its interest in NCR (the Distribution) on
the basis of one share of NCR common stock for each 16 shares of AT&T common
stock. The Distribution resulted in approximately 101.4 million shares of NCR
common stock outstanding as of December 31, 1996. NCR common stock is listed on
the New York Stock Exchange and trades under the symbol "NCR".
Revenue by similar classes of products and services is reported in Note 10,
"Segment Information and Concentrations" of Notes to Consolidated Financial
Statements included in Item 8 of this report.
Geographic information is reported in Note 10, "Segment Information and
Concentrations" of Notes to Consolidated Financial Statements included in Item 8
of this report.
NCR operates in one industry, the information technology industry, and its
business is structured along the six operating segments described below. Each
segment includes hardware, software, professional consulting and customer
support services. Customer support services, including maintenance, staging and
implementation, networking, multi-vendor integration, consulting, industry-
specific support and outsourcing services, complement each of the Company's
solution offerings by supporting the high availability technology environment in
which NCR's solutions are utilized.
Data Warehousing Solutions
Products, Services and Solutions
Data Warehousing solutions combine hardware (e.g., servers and disk storage
systems), software (e.g., Teradata/(R)/ database and customer relationship
management applications), professional consulting services and customer
maintenance and support services. Data Warehousing solutions are designed to
enable businesses, across a multitude of industries, to simply and quickly
leverage detailed customer, supplier and partner information into actionable
opportunities.
Target Markets and Distribution Channels
The major industry markets served by NCR's Data Warehousing solutions include
the retail, financial, telecommunications, transportation, insurance, utilities
and electronic commerce industries, as well as consumer goods manufacturers and
government entities.
Data Warehousing solutions are delivered through a combination of direct and
indirect channels. In recent years, over 90% of NCR's revenue from the Data
Warehousing segment have been generated by the Company's direct sales force.
The remaining revenues have historically been generated from the indirect
channel and through alliances with value-added resellers, distributors and OEMs.
Competition
NCR faces significant competition in the industries served by the Data
Warehousing solutions in all geographic areas where it operates. NCR believes
that key competitive factors in these markets are vendor experience, customer
referrals, database sophistication, support and professional service
capabilities, quality of the solutions or products, total cost of ownership and
industry knowledge of the vendor and platform scalability. In addition, the
movement toward common industry standards (such as Intel processors and
UNIX/(R)/ and Microsoft operating systems) has accelerated product development,
but has also made differentiation more difficult. Hardware and operating system
commoditization has extended beyond PCs into the server business. In the
markets in which the Data Warehousing solutions compete, customers require
applications, database software, system software, hardware, professional
services systems integration skills and ongoing solution support. Many
competitors offer one or two of these components, but NCR believes it is one of
few companies that can provide complete, open solutions that include all of
these customer requirements. NCR's competitors include companies such as
International Business Machines (IBM) and Oracle Corporation.
1
Financial Self Service Solutions
Products, Services and Solutions
Providing an extensive line of ATMs, and related software and services, Self
Service solutions are designed to quickly and reliably process high volumes of
everyday transactions. Incorporating advanced features such as web enablement,
check cashing, bill payment and the sale of non-cash items, Self Service
solutions enable businesses to further reduce costs, generate new revenue
streams and build customer loyalty.
Target Markets and Distribution Channels
NCR's Self Service solutions primarily serve the financial services industry
with particular focus on retail banking which includes traditional providers of
consumer banking and financial services. Self service solutions also serve the
retail markets through convenience banking products designed to complement their
core businesses. Self Service solutions customers are located throughout the
world in both established and emerging markets.
NCR has historically distributed most of its Self Service products and services
through NCR's direct sales channel, although certain revenues are derived
through sales by distributors. Approximately 80% of the traditional Self
Service product sales were sold by the direct sales force; the remainder was
sold through indirect channels.
Competition
NCR faces significant competition in the financial services industry in all
geographic areas where it operates. The primary areas of competition can vary,
but typically include: quality of the solutions or products, total cost of
ownership, industry knowledge of the vendor, the vendor's ability to provide and
support a total end-to-end solution, the vendor's ability to integrate new and
existing systems, the fit of the vendor's strategic vision with the customer's
strategic direction, and the quality of the vendor's support and consulting
services. NCR's primary competitor is Diebold, Inc., but other competitors
exist and vary by product and service offering, as well as geographic area.
Retail Store Automation Solutions
Products, Services and Solutions
Combining NCR's retail industry expertise, software and hardware technologies,
and a full range of implementation, consulting and maintenance services, Store
Automation solutions deliver traditional retail solutions such as point-of-sale
workstations and scanners, as well as advanced solutions in the emerging areas
of self-checkout, web-enabled kiosks and electronic shelf labels. Store
Automation solutions are designed to improve selling productivity and checkout
processes, and increase service levels for retailers.
Target Markets and Distribution Channels
Primarily serving the retail industry, NCR delivers Store Automation solutions
for the general merchandise, food and drug, and hospitality segments. The
general merchandise segment includes department stores, specialty retailers,
mass merchandisers and catalog stores. The food and drug segment includes
supermarkets, hypermarkets, grocery, drug, wholesalers and convenience stores.
The hospitality segment includes lodging (hotel/motel), fast food/quick service
and other restaurants.
NCR's Store Automation solutions are offered through a combination of direct and
indirect channels. The majority (over 90% in recent years) of solutions are
sold by NCR's direct sales force, with the remainder sold through alliances with
value-added resellers, distributors and dealers. NCR provides supporting
services, including collateral sales materials, sales leads, porting facilities
and marketing programs to the sales channel.
Competition
NCR faces significant competition in the retail industry in all geographic areas
where it operates. The Company believes that key competitive factors can vary
by geographic area but typically include quality of the solutions or products,
total cost of ownership, industry knowledge of the vendor, and knowledge,
experience and quality of the vendor's consulting and support services. NCR's
competitors vary by market segment, product, service offering and geographic
area.
Payment and Imaging Solutions
Products, Services and Solutions
Consisting of hardware, software, and professional consulting, outsourcing and
customer support services, NCR's comprehensive Payment and Imaging solutions
enable item-based transactions to be digitally captured, processed and retained
within a flexible, scalable environment. Payment and Imaging solutions utilize
advanced recognition and workflow technologies to automate item processing,
helping businesses increase efficiency and reduce operating costs.
Target Markets and Distribution Channels
NCR's Payment and Imaging solutions primarily serve the financial services
industry with particular focus on retail banking, insurance and credit card
operations. Efficiently processing high volumes of remittances, Payment and
Imaging solutions also serve markets outside of the financial services
industries, such as utility companies. Payment and Imaging solutions customers
are located throughout the world.
NCR has historically distributed most of its Payment and Imaging products and
services through NCR's direct sales channel, although certain revenues are
derived through sales by distributors. In recent years, over 90% of the
traditional Payment and Imaging product sales were sold by the direct sales
force; the remainder was sold through indirect channels.
2
Competition
NCR faces significant competition in the financial services industry in all
geographic areas where it operates. The primary areas of competition can vary,
but typically include: quality of the solutions or products, total cost of
ownership, industry knowledge of the vendor, the vendor's ability to provide and
support a total end-to-end solution, the vendor's ability to integrate new and
existing systems, the fit of the vendor's strategic vision with the customer's
strategic direction, and the quality of the vendor's support and consulting
services. NCR's competitors vary by product, service offering and geographic
area.
Systemedia Division
Products, Services and Solutions
Systemedia develops, produces and markets a complete line of business
consumables to complement the Company's solutions. These products include paper
rolls, paper products and imaging supplies for ink jet, laser, impact and
thermal-transfer printers. Systemedia products are designed to reduce media
related failures, and enable businesses to improve transaction accuracy while
reducing overall costs.
Target Markets and Distribution Channels
The major industry segments targeted by the Systemedia Division include general
merchandise, food and drug, hospitality, financial services and consumer goods
manufacturing. The Systemedia Division has a direct sales force in 30 countries
focused on providing solutions to major accounts. In addition, Systemedia
products are sold through office product resellers, value-added resellers and
telemarketing.
Competition
Competition in the consumable and media solutions business is significant and
varies by geographic area and product group. The primary areas of competitive
differentiation are typically quality, logistics and supply chain management
expertise, and total cost of ownership. While price is always a factor,
Systemedia focuses on total cost of ownership for all of its products and
services. Total cost of ownership takes into account not only the per unit cost
of the media, but also service, usage and support costs over the life of the
system.
Other
NCR's Other category accumulates the results of operations not attributable to
the segments identified above.
Research and Development
Information regarding research and development activities is included in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", of this report under the caption "Operating Expenses".
Seasonality
Information regarding seasonality is included in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations", of
this report under the caption "Operating Results Fluctuations".
Backlog
NCR's operating results and the amount and timing of revenue are affected by
numerous factors, including the volume, mix and timing of orders received during
a period and conditions in the information technology industry and in the
general economy. The Company believes that backlog is not a meaningful indicator
of future business prospects due to the shortening of product delivery schedules
and the significant portion of revenue related to its customer support services
business, for which order information is not recorded. Accordingly, NCR believes
that backlog information is not material to an understanding of its business.
Sources and Availability of Raw Materials
Information regarding sources and availability of raw materials is included in
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations", of this report under the caption "Reliance on Third Parties".
Patents and Trademarks
NCR owns approximately 1,400 patents in the United States and 1,500 in foreign
countries. The foreign patents are generally counterparts of NCR's United States
patents. Many of the patents owned by NCR are licensed to others and NCR is
licensed to use certain patents owned by others. In connection with the
Distribution, NCR entered into an extensive cross-licensing agreement with AT&T
and Lucent Technologies Inc. ("Lucent"), a former subsidiary of AT&T. While
NCR's portfolio of patents and patent applications in aggregate is of
significant value to NCR, the Company does not believe that any particular
individual patent is itself of material importance to NCR's business as a whole.
NCR has registered certain trademarks and service marks in the United States and
in a number of foreign countries. NCR considers the mark "NCR" and many of its
other trademarks and service marks to be valuable assets.
Employees
At January 31, 2001, NCR had approximately 32,960 employees and contractors.
3
Environmental Matters
Information regarding environmental matters is included in Note 11, "Commitments
and Contingencies", of Notes to Consolidated Financial Statements included in
Item 8 of this report.
Item 2. PROPERTIES
As of February 23, 2001, NCR operated approximately 695 facilities consisting of
approximately 14.7 million square feet throughout the world. On a square
footage basis, approximately 61% are owned and 39% are leased. Within the total
facility portfolio, NCR operates approximately 31 research and development and
manufacturing facilities totaling approximately 3.9 million square feet, 83% of
which is owned. The remaining 10.8 million square feet within the facility
portfolio includes office, repair, warehouse, and other miscellaneous sites, and
is 53% owned. NCR maintains facilities in 73 countries.
NCR's business units are headquartered in: Dayton, Ohio (Teradata Solutions
Division and Systemedia Division); London, United Kingdom (Financial Solutions
Group); and Atlanta, Georgia (Retail Solutions Group).
NCR believes its plants and facilities are suitable and adequate, and have
sufficient productive capacity to meet its current needs.
Item 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 4.(a) EXECUTIVE OFFICERS OF THE REGISTRANT
The Executive Officers of NCR (as of February 23, 2001) are as follows:
Name Age Position and Offices Held
- ---- --- -------------------------
Lars Nyberg 49 Chairman of the Board, Chief Executive
Officer, and President
William Amelio 43 Executive Vice President and Chief Operating
Officer, Retail and Financial Group
David Bearman 55 Senior Vice President and Chief Financial
Officer
Mark V. Hurd 44 Executive Vice President and Chief Operating
Officer, Teradata Division
Wilbert J. M. Buiter 42 Senior Vice President, Human Resources
Patrick G. Cronin 40 Senior Vice President, Financial Solutions
Division
Robert A. Davis 50 Chief Quality Officer and Chief of Staff,
Retail and Financial Group
Anthony Fano* 57 Senior Vice President, Retail Solutions
Division
Gerald A. Gagliardi 53 Senior Vice President, Worldwide Customer
Services Division
Jonathan S. Hoak 51 Senior Vice President and General Counsel
Mohsen Sohi 41 Senior Vice President, Retail Solutions
Division
Keith Taylor 50 Vice President, Systemedia Division
* Mr. Fano has announced his intention to retire from the Company effective
April 2, 2001.
NCR's Executive Committee
Lars Nyberg. Mr. Nyberg has been Chairman, Chief Executive Officer, and
President of NCR since June 1, 1995. Before joining NCR, from 1993 to 1995, Mr.
Nyberg was Chairman and Chief Executive Officer of the Communications Division
for Philips Electronics NV ("Philips"), an electronics and electrical products
company. He also served as a member of the Philips Group Management Committee
during that time. In 1992, Mr. Nyberg was appointed Managing Director, Philips
Consumer Electronics Division. From 1990 to 1992, he was the Chairman and Chief
Executive Officer of Philips Computer Division. Mr. Nyberg is a director of
Sandvik AB based in Sweden. He became a director of NCR in 1995.
William Amelio. Prior to joining NCR in July 2000, William Amelio served as
President and Chief Executive Officer of the Transportation and Power Systems
Division of Honeywell International, Inc. starting December 1999. From April
1997 to December 1999, he was President of the Turbocharging business at
AlliedSignal, Inc. before that company's merger with Honeywell. Before joining
AlliedSignal in 1997, Mr. Amelio spent 18 years serving in a variety of
progressively senior engineering and technical leadership roles at IBM
Corporation.
4
David Bearman. David Bearman joined NCR in September 1998. Before coming to
NCR, he was Executive Vice President and Chief Financial Officer for Cardinal
Health, Inc. from 1989 to August 1998. Before joining Cardinal Health, he served
in various financial leadership positions at General Electric Company from 1965
to 1989.
Mark Hurd. Mark Hurd joined NCR in 1980. After several marketing assignments,
he became Vice President of Americas Professional Services in 1994. From 1995
to 1998, he was Vice President, Worldwide Marketing and Americas Sales. Prior
to assuming his current position in July 2000, he was Senior Vice President,
Teradata Solutions Division from October 25, 1999 to July 2000 and Senior Vice
President, National Accounts Solutions Group from November 12, 1998 to October
25, 1999.
NCR's Other Executive Officers
Wilbert Buiter. Prior to joining NCR in August 1998, Wilbert Buiter spent 15
years with Philips Electronics in a variety of operations, staff and managerial
human resources assignments. Most recently, from July 1997 to July 1998, he
served as Senior Vice President, Human Resources for Philips Consumer
Communications, a joint venture between Philips and Lucent Technologies Inc.
From 1995 to July 1997, Mr. Buiter was Senior Executive Officer of Philips'
Consumer Communications division.
Patrick Cronin. Patrick Cronin joined NCR in 1991 and was named Vice President,
Americas Professional Services in 1996. Starting in 1998, prior to his current
assignment as Senior Vice President, Financial Solutions Division in 1999, he
served as Vice President of Worldwide Professional Services. Prior to that,
from 1997 to 1998, Mr. Cronin was Vice President, Professional Services, of
NCR's Customer Services Division.
Robert A. Davis. Prior to assuming his current position in September 2000, Rob
Davis was Senior Vice President, Communication, Quality and Technology from
February 2000 to September 2000. From April 1999 to February 2000 he was Senior
Vice President of Quality and Public Relations. From 1995 to March 1999, Mr.
Davis was Senior Vice President and Chief Quality Officer for NCR.
Anthony Fano. Anthony Fano joined NCR in 1960 and served in a number of
positions in marketing and sales management. He became Vice President for the
Latin America/Middle East/Africa Group in 1991 and in 1993 was named Senior Vice
President of the quality and reengineering organization. Prior to assuming his
current position in 1995, he served as Senior Vice President of the
Europe/Middle East/Africa organization. Mr. Fano will retire from NCR in April
2001.
Gerald A. Gagliardi. Gerald Gagliardi joined NCR as Senior Vice President,
Worldwide Customer Services Division in January 2001. From June 2000 until that
time, he served as a consultant to E. M. Warburg Pincus & Company, LLC, where he
was engaged in acquisitions in the services industry. From October 1999 to June
2000, he served as President and Chief Executive Officer of Inacom Corp. Prior
to that, he spent 28 years at Unisys Corporation where he held progressively
senior management positions in that company's services division, including
Executive Vice President and President of Global Customer Services from 1995 to
1999.
Jonathan S. Hoak. Jonathan Hoak joined the Sidley & Austin law firm in 1979,
becoming a partner in 1985. He was named general attorney for AT&T Corp.'s
Federal Systems Division in 1990 and joined NCR in his current position in 1993.
Mohsen Sohi. Mohsen Sohi joined NCR in January 2001 after more than 14 years
at AlliedSignal, Inc. and its post-merger successor Honeywell International Inc.
He most recently served as President, Honeywell Electronic Materials from July
2000 to January 2001. From August 1999 to July 2000, Mr. Sohi was President,
Commercial Vehicle Systems, at AlliedSignal. Prior to that, from 1997 to August
1999, he was Vice President and General Manager, Turbocharging Systems, and from
1995 to 1997, was Director of Product Development and Technical Excellence, at
AlliedSignal.
Keith Taylor. Mr. Taylor has been Vice President, Systemedia Division, since
August 1999. From 1998 to August 1999, Mr. Taylor was Vice President, Worldwide
Customer Services, Asia/Pacific area. From 1997 to 1998, he was Director of
Logistics for NCR's Worldwide Customer Services, Europe/Middle East/Africa area.
From 1996 to 1997, Mr. Taylor was Director, Customer Services, Northern Europe
area, and from 1994 to July 1996, was Chief Financial Officer for NCR's
Worldwide Customer Services Division.
5
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
NCR common stock is listed on the New York Stock Exchange and trades under the
symbol "NCR." There were approximately 226,000 registered holders of record of
NCR common stock as of February 23, 2001. The following table presents the high
and low per share sales prices for NCR common stock for each quarter of 2000 and
1999.
2000 1999
---- ----
High Low High Low
---- --- ---- ---
1st Quarter 47 32 15/16 1st Quarter 55 3/4 40 3/8
2nd Quarter 44 5/8 34 3/4 2nd Quarter 54 9/16 37 13/16
3rd Quarter 41 5/16 32 3/8 3rd Quarter 52 5/8 30
4th Quarter 53 11/16 37 11/16 4th Quarter 38 5/8 26 11/16
NCR does not anticipate the payment of cash dividends on NCR common stock in the
foreseeable future. The declaration of dividends will be subject to the
discretion of the Board of Directors of NCR. Payment of dividends on NCR common
stock will also be subject to such limitations as may be imposed by NCR's credit
facilities from time to time.
Item 6. NCR CORPORATION SELECTED FINANCIAL DATA
Dollars in millions, except per share amounts
At and for the Year Ended December 31 2000/1/ 1999/2/ 1998/3/ 1997 1996/4/
- -------------------------------------------------- ------- ------- ------- ------- -------
Results of operations
Revenue $ 5,959 $ 6,196 $ 6,505 $ 6,589 $ 6,963
Operating expenses
Cost of revenue 4,092 4,306 4,583 4,715 4,997
Selling, general and administrative expenses 1,329 1,471 1,460 1,510 1,458
Research and development expenses 333 341 360 383 378
------- ------- ------- ------- -------
Income (loss) from operations 205 78 102 (19) 130
Interest expense 13 12 13 15 56
Other income, net 83 71 68 61 36
Gain from significant asset dispositions - 98 55 - -
------- ------- ------- ------- -------
Income before income taxes 275 235 212 27 110
Income tax expense (benefit) 97 (102) 90 20 219
------- ------- ------- ------- -------
Net income (loss) $ 178 $ 337 $ 122 $ 7 $ (109)
======= ======= ======= ======= =======
Net income (loss) per common share
Basic $ 1.87 $ 3.45 $ 1.21 $ 0.07 $ (1.07)
Diluted $ 1.82 $ 3.35 $ 1.20 $ 0.07 $ (1.07)
Financial position and other data
Cash, cash equivalents and short-term investments $ 357 $ 763 $ 514 $ 1,129 $ 1,203
Accounts receivable, net 1,338 1,197 1,556 1,471 1,457
Inventories, net 288 299 384 489 439
Property, plant and equipment and reworkable
service parts, net 960 1,002 1,104 1,106 1,207
Total assets 5,106 4,895 4,892 5,376 5,280
Debt 107 77 83 94 76
Stockholders' equity $ 1,758 $ 1,596 $ 1,447 $ 1,353 $ 1,396
Cash dividends - - - - -
Number of employees and contractors 32,900 32,800 33,100 38,300 38,600
/1/ Income from operations includes $38 million for restructuring and other
related charges, $25 million for in-process research and development
charges related to acquisitions completed in 2000, and $2 million for
integration costs related to the acquisition of 4Front Technologies, Inc.
(See Notes 3 and 7 of Notes to Consolidated Financial Statements.)
Excluding these items, the 2000 income from operations, net income and net
income per common share (diluted) would have been $270 million, $229
million and $2.34, respectively.
6
/2/ Income from operations includes $125 million for restructuring and other
related charges. (See Note 3 of Notes to Consolidated Financial
Statements.) Net income for 1999 includes the after-tax impacts of $125
million for restructuring and other related charges, $98 million of gains
from significant asset dispositions and $232 million of favorable impact
from a tax valuation allowance release. (See Notes 3 and 4 of Notes to
Consolidated Financial Statements.) Excluding these items, the 1999 income
from operations, net income and net income per common share (diluted) would
have been $203 million, $162 million and $1.61, respectively.
/3/ Income from operations includes a $50 million non-recurring pension charge.
(See Note 6 of Notes to Consolidated Financial Statements.) Net income for
1998 includes the after-tax impacts of $50 million for a non-recurring
pension charge and a $55 million significant gain from an asset
disposition. Excluding these items, the 1998 income from operations, net
income and net income per common share (diluted) would have been $152
million, $119 million and $1.17, respectively.
/4/ Operating expenses include restructuring and other related charges of $(55)
million in 1996. Net loss per share for the year ended December 31, 1996
was calculated by dividing the net loss by 101.4 million shares of common
stock. Effective December 31, 1996, AT&T Corp. distributed to its
stockholders all of its interest in NCR on the basis of one share of NCR
common stock for each 16 shares of AT&T Corp. common stock (the
Distribution). The Distribution resulted in 101.4 million shares of NCR
common stock outstanding as of December 31, 1996. Such shares are assumed
to be outstanding since January 1, 1996.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
As the relationship technology company, we provide solutions worldwide that are
designed specifically to enable businesses to build, expand and enhance their
relationships with their customers by facilitating transactions and transforming
data from transactions into valuable business information.
Through our presence at customer interaction points, such as point-of-sale
workstations, automated teller machines (ATMs) and web-enabled kiosks, our
Retail Store Automation and Financial Self Service solutions enable companies to
capture and process consumer transactions. We then provide powerful Data
Warehousing solutions that help businesses understand and serve each customer as
a clearly defined market of one, responding with programs designed to improve
customer acquisition, retention and profitability.
We offer specific solutions for the retail and financial industries and also
provide solutions for industries including telecommunications, transportation,
insurance, utilities and electronic commerce, as well as consumer goods
manufacturers and government entities. These solutions are built on a
foundation of long-established industry knowledge and consulting expertise,
value-adding software, global customer support services, a complete line of
consumable and media products and a range of hardware technology.
Revenue and Operating Margin by Solution
We categorize our key solutions as Data Warehousing, Financial Self Service and
Retail Store Automation. In addition to these key solutions, we discuss the
results of the Payment and Imaging solutions and Systemedia as reportable
segments. A sixth category, Other, accumulates the results of operations not
attributable to the formally identified reportable segments. Each segment
includes hardware, software, professional consulting and customer support
services. Customer support services, including maintenance, staging and
implementation, networking, multi-vendor integration, consulting, industry-
specific support and outsourcing services, complement each of our solution
offerings by supporting the high availability technology environments in which
our solutions are utilized.
The following table presents the gross margin, operating expenses and operating
income amounts, for the years ended December 31, excluding the effects of
restructuring and other related charges, in-process research and development
charges, integration costs related to the acquisition of 4Front Technologies,
Inc. (4Front) and a non-recurring pension charge. (See Notes 3, 6 and 7 of
Notes to Consolidated Financial Statements.)
In millions 2000 1999 1998
------ ------ ------
Consolidated revenue $5,959 $6,196 $6,505
Consolidated gross margin/1/ 1,905 1,898 1,922
Consolidated operating expenses:
Selling, general and administrative expenses/2/ 1,327 1,354 1,410
Research and development expenses/3/ 308 341 360
Consolidated income from operations $ 270 $ 203 $ 152
/1/ Consolidated gross margin excludes the impact of $37 million and $8 million
for restructuring and other related charges in 2000 and 1999, respectively.
The results for 2000 also exclude the impact of $1 million for integration
costs related to the acquisition of 4Front.
/2/ Selling, general and administrative expenses exclude the impact of $1
million and $117 million for restructuring and other related charges in
2000 and 1999, respectively. The results for 2000 also exclude the impact
of $1 million for integration costs related to the acquisition of 4Front.
In 1998, selling, general and administrative expenses exclude the impact of
a $50 million non-recurring pension charge.
/3/ Research and development expenses exclude the impact of $25 million for in-
process research and development charges related to acquisitions completed
during 2000.
7
Total revenue decreased 4% in 2000 compared to 1999. On a constant currency
basis, total revenue decreased 1% in 2000 versus the year ago period. The
decline in 2000 revenue primarily reflects the impact of exited solutions, but
also reflects the termination of services associated with equipment retired as a
result of Year 2000 replacement and recent economic slowing in the retail
industry. The decline was partially offset by strong double-digit growth in the
Data Warehousing solutions. By geographic region, revenues in 2000 decreased
from the prior year 2% in the Americas, 6% in Japan and 13% in Europe/Middle
East/Africa. Currency impacts were greatest in the Europe/Middle East/Africa
region with revenues down 4% on a constant currency basis. These declines
versus prior year were in contrast to a 24% increase in the Asia/Pacific region.
The 33% increase in income from operations in 2000 reflects continued
improvement in gross margin as a percentage of revenue, particularly in the Data
Warehousing solutions, and continued reductions in operating expenses.
In 1999, total revenue decreased 5% compared to 1998. During 1999, we achieved
increased sales in our Retail Store Automation and Data Warehousing solutions,
offset by declines in the other solutions. The declines were primarily due to
decreased revenues from the exited solutions, which included commodity hardware.
Aggregate revenues in 1999 decreased from the prior year 5% in both the Americas
and Europe/Middle East/Africa regions and 11% in Japan. These declines were in
contrast to a 13% increase in the Asia/Pacific region. The increase in income
from operations in 1999 reflected growth in our Retail Store Automation
solutions, improvement in professional consulting and customer services gross
margins and reduced operating expenses.
Overcoming a slowing U.S. economy, we expect revenue growth in 2001 as the
aggregate growth of our key solutions outpaces the decline in the commodity
hardware business. With benefits to our revenue mix from lower margin hardware
products to higher margin solutions and increased expense discipline, we expect
continued improvement in operating income.
Data Warehousing Solutions
- --------------------------
Our Data Warehousing solutions, built on advanced technologies such as the
Teradata data warehouse and complex customer relationship management
applications, help businesses synthesize large volumes of information about
customers, suppliers and partners, allowing more accurate business decisions.
Combining hardware, software, professional consulting and customer support
services and products from leading technology firms, our Data Warehousing
solutions are designed to enable businesses, across a multitude of industries,
to simply and quickly leverage detailed data into actionable opportunities.
The following table presents Data Warehousing solutions revenue and total
operating (loss) for the years ended December 31:
In millions 2000 1999 1998
------ ------ ------
Data Warehousing revenue $1,134 $ 900 $ 890
Data Warehousing operating (loss) $ (34) $(142) $(118)
Data Warehousing revenues increased 26% in 2000 compared to 1999. The
significant growth was attributable to all regions with the exception of Japan,
and was primarily the result of new customer sales growth. The substantial
decrease in operating loss in 2000 was the result of higher volumes driving
significant improvement in gross margin as a percentage of revenue. In 1999,
revenues increased 1% compared to 1998 primarily due to growth in the Americas
and Asia/Pacific regions. The increased operating loss in 1999 from 1998 was
driven primarily by increased investments in marketing, advertising and sales
resources.
In 2001, we will continue to strengthen the market position of our Data
Warehousing solutions through marketing initiatives designed to increase
customer awareness, and through development of analytical customer relationship
management applications. As a result of these investments, we expect continued
revenue growth driving to operating profitability.
Financial Self Service Solutions
- ---------------------------------
Providing a complete line of ATMs, and related software and services, Self
Service solutions are designed to quickly and reliably process high volumes of
everyday transactions. Incorporating advanced features such as web enablement,
check cashing, bill payment and the sale of non-cash items, Self Service
solutions enable businesses to reduce costs, generate new revenue streams and
build customer loyalty.
The following table presents Self Service solutions revenue and total operating
income for the years ended December 31:
In millions 2000 1999 1998
------ ------ ------
Financial Self Service revenue $1,511 $1,565 $1,626
Financial Self Service operating income $ 201 $ 224 $ 283
Self Service solutions revenues decreased 3% in 2000 compared to 1999. The
decline was primarily due to the impact of currency fluctuations, as well as a
decrease in customer services maintenance revenue driven by the retirement of
equipment as a result of Year 2000 replacement. Excluding customer services
maintenance, and adjusting for the effects of currency fluctuations, Self
Service revenues increased 4% versus the prior year. Strong revenue growth was
experienced in the Asia/Pacific region versus declines in the Americas and
Europe/Middle East/Africa regions. Operating income in 2000 decreased 10%
versus the prior year, due primarily to lower gross margin in the Americas and
Europe/Middle East/Africa regions. In 1999, revenues decreased 4% compared to a
strong 1998. The decline was the result of lower revenues in the Americas
region and Japan, offset partially by
8
growth in the Europe/Middle East/Africa region. The operating income decline in
1999 was driven by lower revenues, mix-influenced lower gross margins and
increased selling expenses.
Leveraging our worldwide presence, we expect to grow Self Service revenues and
operating income in 2001 through continued expansion in the emerging markets,
growth in the entry-level cash dispenser market, development of our outsourcing
business, further acceptance of full-featured ATMs and expense management.
Retail Store Automation Solutions
- ---------------------------------
Combining our retail industry expertise, software and hardware technologies, and
a full range of implementation, consulting and maintenance services, Store
Automation solutions deliver traditional retail solutions such as point-of-sale
workstations and scanners, as well as advanced solutions in the emerging areas
of self-checkout, web-enabled kiosks and electronic shelf labels. Our Store
Automation solutions are designed to improve selling productivity and checkout
processes, and increase service levels for retailers.
The following table presents Store Automation solutions revenue and total
operating (loss) income for the years ended December 31:
In millions 2000 1999 1998
------ ------ ------
Retail Store Automation revenue $1,359 $1,435 $1,307
Retail Store Automation operating (loss) income $ (17) $ 20 $ (32)
Store Automation revenues decreased 5% in 2000 compared to 1999. The decline in
revenues was primarily due to decreased revenues in Japan, and the Americas and
Europe/Middle East/Africa regions, offset partially by growth in the
Asia/Pacific region. The decline in the Americas was primarily the result of
softness in the retail industry related to the slowing U.S. economy. The
decline in operating income in 2000 was primarily the result of lower sales. In
1999, revenues increased 10% compared to 1998 due to growth in all regions
driven in part by Year 2000 replacement. The operating income improvement in
1999 was driven by strong sales growth and improvements in professional
consulting margin.
In 2001, we expect the slowing U.S. economy to influence revenues in our
traditional Store Automation solutions. The impact on our traditional retail
solutions is expected to be offset by greater market acceptance of our advanced
solutions as retailers search for ways to both reduce operating costs and
improve customer service. We expect the shift in revenue between traditional
and advanced solutions, combined with expense reductions, to result in improved
profitability.
Payment and Imaging Solutions
- -----------------------------
Consisting of hardware, software, and consulting and support services, our
comprehensive Payment and Imaging solutions enable item-based transactions to be
digitally captured, processed and retained within a flexible, scalable
environment. Payment and Imaging solutions utilize advanced recognition and
workflow technologies to automate item processing, helping businesses increase
efficiency and reduce operating costs.
The following table presents Payment and Imaging solutions revenue and total
operating income for the years ended December 31:
In millions 2000 1999 1998
------ ------ ------
Payment and Imaging revenue $ 304 $ 324 $ 370
Payment and Imaging operating income $ 42 $ 17 $ 29
Payment and Imaging revenues declined 6% in 2000 compared to 1999. The revenue
decline was due to our decision to focus efforts in more profitable geographic
areas. Declines in the Americas and Europe/Middle East/Africa regions were
partially offset by double-digit growth in the Asia/Pacific region and Japan.
The substantial operating income increase in 2000 was driven by improved gross
margin and reductions in operating expenses. In 1999, revenues decreased 12%
compared to 1998 across all regions. The operating income decline in 1999
compared to 1998 was driven primarily by lower sales volume and declines in
gross margin, offset partially by a reduction in operating expenses.
Systemedia
- ----------
Systemedia develops, produces and markets a complete line of business
consumables to complement our other solutions. These products include paper
rolls, paper products and imaging supplies for ink jet, laser, impact and
thermal-transfer printers. Systemedia products are designed to reduce media
related failures, and enable businesses to improve transaction accuracy while
reducing overall costs.
The following table presents Systemedia revenue and total operating income for
the years ended December 31:
9
In millions 2000 1999 1998
------ ------ ------
Systemedia revenue $ 502 $ 506 $ 515
Systemedia operating income $ 15 $ 30 $ 35
Systemedia revenues decreased 1% in 2000 compared to 1999 primarily due to
currency fluctuations and weakness in the retail industry. On a constant
currency basis, Systemedia revenues increased 2%. Declines in the Europe/Middle
East/Africa and Asia/Pacific regions were in contrast to growth in the Americas
region and Japan. Operating income declined in 2000 primarily due to
competitive pricing pressures impacting gross margin yield and increasing paper
prices. In 1999, revenues decreased 2% compared to 1998. The decline was
primarily due to our decision to exit sales in certain countries and specific
low-margin business within the indirect channel in the Europe/Middle East/Africa
region, partially offset by revenue increases in Japan. Operating income
declined in 1999 due to the revenue decline and increased selling, general and
administrative expenses.
Gross Margin
Gross margin as a percentage of revenue increased 1.4 percentage points in 2000
versus prior year. The gross margin increase in 2000 reflects a 0.8 percentage
point increase in product gross margin and a 1.9 percentage point increase in
services gross margin. Product gross margin in 2000 reflects a favorable sales
mix, which includes increased sales within our higher-margin solutions, such as
Data Warehousing, and decreased sales of lower-margin products within our exited
solutions. The improvement in services gross margin was driven by strong margin
improvements in our professional consulting services, and increased margins for
transactional support services within our key solutions. Gross margin as a
percentage of revenue increased 1.1 percentage points in 1999 compared to 1998.
The gross margin increase in 1999 consisted of a 1.8 percentage point increase
in product gross margin and a 1.0 percentage point increase in services gross
margin. Gross margin improvements in 1999 reflect a favorable sales mix and
improved professional consulting margin.
Operating Expenses
Selling, general and administrative expenses decreased $27 million or 2% in 2000
compared to a decrease of $56 million or 4% in 1999. The decrease in 2000 was
primarily due to lower selling expenses and employee reductions related to the
restructuring plan, offset partially by increases in marketing expense and
amortization of goodwill from acquisitions. The decrease in 1999 was primarily
due to the continued focus on expense discipline, standardization of financial
reporting, invoicing, logistics and order processing in centralized shared
service centers and employee reductions. As a percentage of revenue, selling,
general and administrative expenses were 22.3%, 21.9% and 21.7% in 2000, 1999
and 1998, respectively.
Research and development expenses decreased $33 million or 10% in 2000 compared
to a decrease of $19 million or 5% in 1999. Investment in our key solutions
increased by 11%, but was more than offset by spending reductions in non-
key/exited solutions. As a percentage of revenue, research and development
expenses were 5.2% in 2000 compared to 5.5% in both 1999 and 1998.
Income Before Income Tax
Operating income increased 33% to $270 million in 2000 versus operating income
of $203 million in 1999. Operating income in 1998 was $152 million. Operating
income was favorably impacted during 2000 by our pension benefit plans with an
additional $64 million of income being recognized during 2000 versus 1999.
Operating income was unfavorably impacted during 2000 by postemployment and
postretirement benefit plans, and associated investments, with an additional $38
million of expense being recognized during 2000 versus 1999. The net impact on
operating results from the combined pension, postretirement and postemployment
benefit plans was $26 million of additional income in 2000 versus 1999.
Operating income was unfavorably impacted during 2000 by goodwill amortization
with an additional $13 million of expense being recognized in 2000 versus 1999.
Interest expense was $13 million in 2000, $12 million in 1999 and $13 million in
1998. Other income, net, was $83 million in 2000, $169 million in 1999 and $123
million in 1998. In 1999, other income included $98 million in significant gains
on the sales of facilities, and in 1998, other income reflected a $55 million
significant gain from an asset disposition related to the sale of the TOP
END/(R)/ middleware technology and product family. Other income also includes
interest income of $31 million, $26 million and $44 million in 2000, 1999 and
1998, respectively.
Income Tax
Income tax expense (benefit) was $97 million in 2000, $(102) million in 1999 and
$90 million in 1998. The 1999 income tax benefit was due primarily to the $232
million reduction in the Company's U.S. deferred tax valuation allowance as a
result of our U.S. operations achieving sustained profitability. Our effective
tax rate was approximately 33%, 38% and 43% in 2000, 1999 and 1998,
respectively, excluding the impact of the tax valuation release, restructuring
and other related charges, in-process research and development charges,
integration costs related to the acquisition of 4Front, significant gains from
disposition of assets and the non-recurring pension charge.
Financial Condition, Liquidity and Capital Resources
Our cash, cash equivalents and short-term investments totaled $357 million at
December 31, 2000, compared with $763 million at December 31, 1999 and $514
million at December 31, 1998. The decrease in 2000 was primarily due to
increased investment activities totaling $319 million, including our acquisition
of 4Front, and disbursements for employee severance related to the 1999
restructuring plan.
10
We generated cash from operations of $171 million in 2000 and $607 million in
1999, and used cash in operations of $79 million in 1998. The cash generated
from operations in 2000 was driven primarily by operating results, partially
offset by the timing of disbursements for employee severance and pension.
Receivable balances increased $80 million in 2000 compared to a $358 million
decrease in 1999. The increase in receivables in 2000 was primarily
attributable to the timing of revenue in the fourth quarter, partially offset by
approximately $58 million in factored receivables. Inventory balances decreased
$28 million in 2000 compared to a decrease of $85 million in 1999. The cash
generated from operations in 1999 was driven primarily by improved operating
results, dramatic asset management improvements and the timing of disbursements
for employee severance and pension.
Net cash used in investing activities was $367 million, $326 million and $186
million in 2000, 1999 and 1998, respectively. The net use of cash in investing
activities in 2000 primarily represents business acquisitions and investments,
and capital expenditures, offset by a reduction in short-term investments. In
2000, we reduced net short-term investments by $182 million compared to an
increase in net short-term investments of $165 million in 1999. The decrease in
2000 reflects the liquidation of our short-term position to fund acquisition
activities totaling a net use of $319 million. Capital expenditures, excluding
expenditures for reworkable service parts, were $216 million, $187 million and
$205 million for the years ended 2000, 1999 and 1998, respectively. Proceeds
from sales of property, plant and equipment are primarily driven by initiatives
to reduce our owned, excess real estate.
Net cash used in financing activities was $7 million, $194 million and $154
million in 2000, 1999 and 1998, respectively. In December of 2000, our Board of
Directors approved a systematic share repurchase program to offset the dilutive
effects of the employee stock purchase plan and outstanding options. Combined
with share repurchase programs approved in April and October 1999, we used $110
million of cash to repurchase shares during 2000, and $269 million to repurchase
shares during 1999.
In 1996, we entered into a five-year, unsecured revolving credit facility with a
syndicate of commercial banks and financial institutions. The credit facility
provides that we may borrow, from time to time, on a revolving credit basis an
aggregate principal amount of up to $600 million. We expect to be able to use
the available funds at any time for capital expenditure needs, repayment of
existing debt obligations, working capital and general corporate purposes. The
credit facility matures in 2001 and contains certain representations and
warranties, conditions, affirmative, negative and financial covenants and events
of default customary for such a facility. Interest rates charged on borrowings
outstanding under the credit facility are based on market rates. In addition, a
portion of the credit facility is available for the issuance of letters of
credit as we require. No amounts were outstanding under the facility as of
December 31, 2000, 1999 or 1998.
We believe that cash flows from operations, the credit facility (existing or
future arrangements) and other short- and long-term debt financings, if any,
will be sufficient to satisfy our future working capital, research and
development, capital expenditures and other financing requirements for the
foreseeable future.
Restructuring
During the fourth quarter of 1999, we established a restructuring plan designed
to accelerate our transformation from a computer hardware and product company to
a technology solutions and services provider. The plan contemplated an
alignment around three key solutions (Data Warehousing, Financial Self Service
and Retail Store Automation), the elimination of approximately 1,250 associate
positions, the exit of certain commodity hardware businesses and an enhanced
leverage of the investment in our Data Warehousing offering.
In connection with the restructuring plan, we recorded a pre-tax charge of $125
million in the fourth quarter of 1999. The charge included a $76 million
accrual under postemployment benefit plans related to employee separations, $35
million of charges related to asset impairments, $7 million of charges for the
write-off of software licenses and inventory write-downs and $7 million of
charges for other items. Cash payments under the plan totaled $46 million, and
we anticipate that future cash payments under the plan will not be significant.
In addition, we expected to incur approximately $55 million of period costs
during 2000, primarily related to settling customer obligations that were not
complete as of December 31, 1999. These obligations were resolved for
approximately $38 million, or $17 million less than originally expected. We
recorded the costs associated with these obligations through charges of $37
million in cost of revenue and $1 million in selling, general and administrative
expenses. The restructuring plan was substantially completed at December 31,
2000.
As a result of the restructuring, we achieved an estimated savings of more than
$75 million in 2000 due primarily to the elimination of losses in the exited
solutions, as well as through cost savings related to employee separations
within our support organizations. In addition, we experienced a revenue decline
of approximately $360 million as a result of our decision to exit specific non-
key solutions in certain geographic areas.
Factors That May Affect Future Results
This annual report on Form 10-K and other documents that we file with the
Securities and Exchange Commission, as well as other oral or written statements
we may make from time to time, contain information based on management's beliefs
and include forward-looking statements (within the meaning of the Private
Securities Litigation Reform Act of 1995) that involve a number of known and
unknown risks, uncertainties and assumptions. These forward-looking statements
are not guarantees of future performance, and there are a number of factors,
including those listed below, which could cause actual outcomes and results to
differ materially from the results contemplated by such forward-looking
statements. We do not undertake any obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
11
Competition
- -----------
Our ability to compete effectively within the technology industry is critical to
our future success.
We compete in the intensely competitive information technology industry. This
industry is characterized by rapidly changing technology, evolving industry
standards, frequent new product introductions, price and cost reductions, and
increasingly greater commoditization of products, making differentiation
difficult. In addition, this intense competition increases pressure on gross
margins that could impact our business and operating results. Our competitors
include other large, successful companies in the technology industry such as:
Diebold, Inc., International Business Machines (IBM), Oracle Corporation, Unisys
Corporation and Wincor Nixdorf Gmbh & Co., some of which have widespread
penetration of their platforms. If we are unable to compete successfully, the
demand for our solutions, including products and services, would decrease. Any
reduction in demand could lead to fewer customer orders, a decrease in the
prices of our products and services, reduced revenues, reduced margins,
operating inefficiencies, reduced levels of profitability and loss of market
share. These competitive pressures could impact our business and operating
results.
Our future competitive performance depends on a number of factors, including our
ability to: rapidly and continually design, develop and market, or otherwise
obtain and introduce solutions and related products and services for our
customers that are competitive in the marketplace; offer a wide range of
solutions from web-enabled kiosks to enterprise data warehouses; offer solutions
to customers that operate effectively within a computing environment, which
include the integration of hardware and software from multiple vendors; offer
products that are reliable and that ensure the security of data and information;
offer high quality, high availability services; market and sell all of our
solutions effectively and produce and deliver solutions at competitive operating
margins.
Introduction of New Solutions
- ------------------------------
The solutions we sell are very complex, and we need to rapidly and successfully
develop and introduce new solutions.
We operate in a very competitive, rapidly changing environment, and our future
success depends on our ability to develop and introduce new solutions that our
customers choose to buy. If we are unable to develop new solutions, our
business and operating results would be impacted. This includes our efforts to
rapidly develop and introduce data warehousing software applications. The
development process for our complex solutions, including our software
application development programs, requires high levels of innovation from both
our developers and our suppliers of the components embedded in our solutions.
In addition, the development process can be lengthy and costly. It requires us
to commit a significant amount of resources to bring our business solutions to
market. If we are unable to anticipate our customers' needs and technological
trends accurately, or are otherwise unable to complete development efficiently,
we would be unable to introduce new solutions into the market on a timely basis,
if at all, and our business and operating results would be impacted. In
addition, if we are unable to successfully market and sell both existing and
newly developed solutions, such as our self-checkout and electronic shelf label
solutions, our operating results would be impacted.
Our solutions, which contain both hardware and software products, may contain
known as well as undetected errors which may be found after the products'
introduction and shipment. While we attempt to fix errors that we believe would
be considered critical by our customers prior to shipment, we may not be able to
detect or fix all such errors, and this could result in lost revenues, delays in
customer acceptance and incremental costs, which would all impact our operating
results.
Reliance on Third Parties
- -------------------------
Third party suppliers provide important elements to our solutions.
We rely on many suppliers for necessary parts and components to complete our
solutions. In most cases, there are a number of vendors producing the parts and
components that we utilize. However, there are some components that are
purchased from single sources due to price, quality, technology or other
reasons. For example, we depend on chips and microprocessors from Intel
Corporation and operating systems from UNIX/(R)/ and Microsoft Windows NT/(R)/.
Certain parts and components used in the manufacture of our ATMs and the
delivery of some of our Store Automation solutions are also supplied by single
sources. If we were unable to purchase the necessary parts and components from
a particular vendor and we had to find an alternative supplier for such parts
and components, our new and existing product shipments and solutions deliveries
could be delayed, impacting our business and operating results.
We have, from time to time, formed alliances with third parties (such as the
outsourcing arrangements with Solectron Corporation to manufacture hardware)
that have complementary products, services and skills. These alliances
introduce risks that we cannot control such as non-performance by third parties
and difficulties with or delays in integrating elements provided by third
parties into our solutions. The failure of third parties to provide high
quality products or services that conform to the required specifications could
impair the delivery of our solutions on a timely basis and impact our business
and operating results.
Acquisitions and Alliances
- --------------------------
Our ability to successfully integrate acquisitions or effectively manage
alliance activities will help drive future growth.
As part of our overall solutions strategy, we intend to continue to make
investments in companies, products, services and technologies, either through
acquisitions, joint ventures or strategic alliances. Acquisitions and alliance
activities inherently involve risks. The risks we may encounter include those
associated with assimilating and integrating different business operations,
corporate cultures, personnel, infrastructures and technologies or products
acquired or licensed, retaining key employees and the potential for unknown
liabilities within the acquired or combined business. The investment or
alliance may also disrupt our
12
ongoing business, or we may not be able to successfully incorporate acquired
products, services or technologies into our solutions and maintain quality.
Business acquisitions typically result in intangible assets being recorded and
amortized in future years. Future operating results could be impacted if our
acquisitions do not generate profitable results in excess of the related
amortization expense.
Operating Result Fluctuations
- -----------------------------
We expect our revenues and operating results to fluctuate for a number of
reasons.
Future operating results will continue to be subject to fluctuations based on a
variety of factors, including:
Seasonality. Our sales are historically seasonal, with revenue higher in the
- -----------
fourth quarter of each year. During the three quarters ending in March, June
and September, we have historically experienced less favorable results than in
the quarter ending in December. Such seasonality also causes our working
capital cash flow requirements to vary from quarter to quarter depending on the
variability in the volume, timing and mix of product sales. In addition,
revenue in the third month of each quarter is typically higher than in the first
and second months. These factors, among other things, make forecasting more
difficult and may adversely affect our ability to predict financial results
accurately.
Acquisitions and Alliances. As part of our solutions strategy, we intend to
- --------------------------
continue to acquire technologies, products and businesses as well as form
strategic alliances and joint ventures. As these activities take place and we
begin to include the financial results related to these investments, our
operating results will fluctuate. For example, the acquisition of 4Front will
result in incremental customer services revenue, margin and operating expenses.
Multi-National Operations
- -------------------------
Continuing to generate substantial revenues from our multi-national operations
helps to balance our risks and meet our strategic goals.
Currently, approximately 59% of our revenues come from our international
operations. We believe that our geographic diversity may help to mitigate some
risks associated with geographic concentrations of operations (e.g., adverse
changes in foreign currency exchange rates or business disruptions due to
economic or political uncertainties). However, our ability to sell our
solutions domestically in the United States and internationally is subject to
the following risks, among others: general economic and political conditions in
each country which could adversely affect demand for our solutions in these
markets, as evidenced by the recent economic slowing in the U.S. retail
industry; currency exchange rate fluctuations which could result in lower demand
for our products as well as generate currency translation losses; currency
changes such as the euro introduction which could affect cross border
competition and pricing and require modifications to our offerings to
accommodate the changeover; and changes to and compliance with a variety of
local laws and regulations which may increase our cost of doing business in
these markets or otherwise prevent us from effectively competing in these
markets.
Employees
- ---------
Hiring and retaining highly qualified employees helps us to achieve our business
objectives.
Our employees are vital to our success, and our ability to attract and retain
highly skilled technical, sales, consulting and other key personnel is critical
as these key employees are difficult to replace. The expansion of high
technology companies has increased demand and competition for qualified
personnel. If we are not able to attract or retain highly qualified employees
in the future, our business and operating results could be impacted.
Intellectual Property
- ---------------------
As a technology company, our intellectual property portfolio is key to our
future success.
Our intellectual property portfolio is a key component of our ability to be a
leading technology and services solutions provider. To that end, we
aggressively protect and work to enhance our proprietary rights in our
intellectual property through patent, copyright, trademark and trade secret
laws, and if our efforts fail, our business could be impacted. In addition,
many of our offerings rely on technologies developed by others, and if we were
not able to continue to obtain licenses for such technologies, our business
would be impacted. Moreover, from time to time, we receive notices from third
parties regarding patent and other intellectual property claims. Whether such
claims are with or without merit, they may require significant resources to
defend and, if an infringement claim is successful, in the event we are unable
to license the infringed technology or to substitute similar non-infringing
technology, our business could be adversely affected.
Environmental
- -------------
Our historical and ongoing manufacturing activities subject us to environmental
exposures.
We have been identified as a potentially responsible party in connection with
the Fox River matter as further described in "Environmental Matters" under Note
11 of the Notes to Consolidated Financial Statements of this annual report and
we incorporate such discussion in this Management's Discussion and Analysis of
Financial Condition and Results of Operations by reference and make it a part of
this risk factor.
Contingencies
- -------------
Like other technology companies, we face uncertainties with regard to
regulations, lawsuits and other related matters.
13
We are subject to regulations, proceedings, lawsuits, claims and other matters,
including those that relate to the environment, health and safety, and
intellectual property. Such matters are subject to the resolution of many
uncertainties; thus, outcomes are not predictable with assurance. While we
believe that amounts provided in our financial statements are currently adequate
in light of the probable and estimable liabilities, there can be no assurances
that the amounts required to discharge alleged liabilities from lawsuits, claims
and other legal proceedings and environmental matters, and to comply with
applicable environmental laws will not impact future operating results.
Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards No. 133 and No. 138
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). In June 2000, the FASB issued
Statement of Financial Accounting Standards No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an Amendment of FASB
Statement No. 133" (SFAS 138). SFAS 133 and the corresponding amendments under
SFAS 138 are effective for fiscal years beginning after June 15, 2000. We have
elected to adopt SFAS 133 and SFAS 138 effective January 1, 2001. SFAS 133 and
SFAS 138 require that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. For fair value hedge transactions
in which we are hedging changes in the fair value of an asset, liability or firm
commitment, changes in the fair value of the derivative instrument will be
offset in the income statement by changes in the hedged item's fair value. For
cash flow hedge transactions in which we are hedging the variability of cash
flows related to a variable rate asset, liability or a forecasted transaction,
changes in the fair value of the derivative instrument will generally be
reported in other comprehensive income. The gains and losses on the derivative
instrument that are reported in other comprehensive income will be reclassified
to earnings in the periods in which earnings are impacted by the variability of
the cash flows of the hedged item. In the event that a hedging instrument is
deemed to be ineffective under SFAS 133, the ineffective portion will be
recognized in current period earnings.
On January 1, 2001, we will record net-of-tax, cumulative-effect-type losses of
$6 million and $4 million, in accumulated other comprehensive income and net
income, respectively, to recognize at fair value all derivative instruments that
will be designated as hedging instruments. Included in the $4 million loss is
an immaterial expense related to derivatives that are deferred on the balance
sheet and will be de-designated as effective hedges.
Staff Accounting Bulletin No. 101
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). SAB
101 provides guidance on the recognition, presentation and disclosure of
revenues in financial statements. Consistent with the requirements to implement
SAB 101 no later than the fourth quarter for fiscal years beginning after
December 15, 1999, we adopted the provisions of SAB 101 and the resulting impact
was immaterial to our consolidated financial position, results of operations and
cash flows.
Statement of Financial Accounting Standards No. 140
In September 2000, the FASB issued Statement of Financial Accounting Standards
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" (SFAS 140). SFAS 140, which replaces Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities," revises the
standards for accounting for securitizations and other transfers of financial
assets and collateral. The standard is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001. We do not expect adoption of this standard to have any impact to our
consolidated financial position, results of operations and cash flows.
Item 7. (a) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk, including changes in foreign currency exchange
rates and interest rates. We use a variety of measures to monitor and manage
these risks, including derivative financial instruments. Since a substantial
portion of our operations and revenue occur outside the United States, and in
currencies other than the U.S. dollar, our results can be significantly impacted
by changes in foreign currency exchange rates. To manage our exposures to
changes in currency exchange rates, we enter into various derivative financial
instruments such as forward contracts and options. These instruments generally
mature within 12 months. At inception, select derivative instruments are
designated as hedges of inventory purchases and sales, and of certain financing
transactions that are firmly committed or forecasted. Generally, gains and
losses on qualifying hedged transactions are deferred and recognized in the
determination of income when the underlying transactions are realized, canceled
or otherwise terminated. When hedging certain foreign currency transactions of
a long-term investment nature, gains and losses are recorded in the currency
translation adjustment component of stockholders' equity. Gains and losses on
other foreign exchange contracts are recognized in other income or expense as
exchange rates change.
For purposes of potential risk analysis, we use sensitivity analysis to quantify
potential impacts that market rate changes may have on the fair values of our
hedge portfolio related to anticipated transactions. The sensitivity analysis
represents the hypothetical changes in value of the hedge position and does not
reflect the related gain or loss on the forecasted underlying transaction. As
of December 31, 2000 and 1999, a 10% appreciation in the value of the U.S.
dollar against foreign currencies from the prevailing market rates would result
in a $14 million increase or a $2 million dollar decrease in the fair value of
the hedge portfolio,
14
respectively. Conversely, a 10% depreciation of the U.S. dollar against foreign
currencies from the prevailing market rates would result in a $1 million
increase or a $22 million increase in the fair value of the hedge portfolio as
of December 31, 2000 and 1999, respectively.
The interest rate risk associated with our borrowing and investing activities at
December 31, 2000 was not material in relation to our consolidated financial
position, results of operations and cash flows. We generally do not use
derivative financial instruments to alter the interest rate characteristics of
our investment holdings or debt instruments.
We are potentially subject to concentrations of credit risk on accounts
receivable and financial instruments such as hedging instruments, short-term
investments and cash and cash equivalents. Credit risk includes the risk of
nonperformance by counterparties. The maximum potential loss may exceed the
amount recognized on the balance sheet. Exposure to credit risk is managed
through credit approvals, credit limits, selecting major international financial
institutions (as counterparties to hedging transactions) and monitoring
procedures. Our business often involves large transactions with customers, and
if one or more of those customers were to default in its obligations under
applicable contractual arrangements, we could be exposed to potential
significant losses. However, we believe that the reserves for potential losses
are adequate. At December 31, 2000 and 1999, we did not have any major
concentration of credit risk related to financial instruments.
Item 7. (b) RECENT DEVELOPMENTS
In March 2001, we announced concerns about the ability of Credit Card Center
(CCC), a leading distributor of ATM equipment into the U.S. small retailer
marketplace, to repay an outstanding loan and receivable to NCR. We have worked
with CCC to develop stronger customer leasing support, but CCC's revenue growth
has outpaced its capital and management resources, resulting in cash flow
deficiencies that could impact its ability to repay its obligations to NCR.
Although we will continue to work closely with CCC to successfully resolve these
issues, we anticipate that we will establish a reserve related to prior business
with CCC of approximately $42 million before tax or $28 million after tax.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Table of Contents
Report of Independent Accountants.......................................... 15
Consolidated Statements of Income for the Years Ended
December 31, 2000, 1999 and 1998........................................ 16
Consolidated Balance Sheets at December 31, 2000 and 1999.................. 17
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998........................................ 18
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 2000, 1999 and 1998.................................. 19
Notes to Consolidated Financial Statements................................. 20-34
Report of Independent Accountants
To the Board of Directors and
Stockholders of NCR Corporation
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of NCR
Corporation and its subsidiaries at December 31, 2000 and December 31, 1999, and
the results of their operations and cash flows for each of the three years in
the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedule listed in the index appearing under
Item 14(a)(2) presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial
statements. These financial statements and the financial statement schedule are
the responsibility of NCR Corporation's management; our responsibility is to
express an opinion on these financial statements and the financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Dayton, Ohio
January 22, 2001
15
NCR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
In millions, except per share amounts
For the Year Ended December 31 2000 1999 1998
- -----------------------------------------------------------------------
Revenue
Products $3,178 $3,290 $3,641
Services 2,781 2,906 2,864
- -----------------------------------------------------------------------
Total revenue 5,959 6,196 6,505
- -----------------------------------------------------------------------
Operating expenses
Cost of products 2,000 2,099 2,380
Cost of services 2,092 2,207 2,203
Selling, general and administrative expenses 1,329 1,471 1,460
Research and development expenses 333 341 360
- -----------------------------------------------------------------------
Total operating expenses 5,754 6,118 6,403
- -----------------------------------------------------------------------
Income from operations 205 78 102
- -----------------------------------------------------------------------
Interest expense 13 12 13
Other income, net 83 169 123
- -----------------------------------------------------------------------
Income before income taxes 275 235 212
- -----------------------------------------------------------------------
Income tax expense (benefit) 97 (102) 90
- -----------------------------------------------------------------------
Net income $ 178 $ 337 $ 122
- -----------------------------------------------------------------------
Net income per common share
- ---------------------------
Basic $ 1.87 $ 3.45 $ 1.21
Diluted $ 1.82 $ 3.35 $ 1.20
Weighted average common shares outstanding
- ------------------------------------------
Basic 95.1 97.6 101.0
Diluted 98.0 100.6 102.1
The accompanying notes are an integral part of the consolidated financial
statements.
16
NCR CORPORATION
CONSOLIDATED BALANCE SHEETS
In millions, except per share amounts
At December 31 2000 1999
- ------------------------------------------------------------------------------
Assets
Current assets
Cash, cash equivalents and short-term investments $ 357 $ 763
Accounts receivable, net 1,338 1,197
Inventories, net 288 299
Other current assets 251 282
- ------------------------------------------------------------------------------
Total current assets 2,234 2,541
- ------------------------------------------------------------------------------
Reworkable service parts, net 218 209
Property, plant and equipment, net 742 793
Other assets 1,912 1,352
- ------------------------------------------------------------------------------
Total assets $5,106 $4,895
- ------------------------------------------------------------------------------
Liabilities and stockholders' equity
Current liabilities
Short-term borrowings $ 96 $ 37
Accounts payable 521 378
Payroll and benefits liabilities 260 247
Customer deposits and deferred service revenue 344 365
Other current liabilities 615 635
- ------------------------------------------------------------------------------
Total current liabilities 1,836 1,662
- ------------------------------------------------------------------------------
Long-term debt 11 40
Pension and indemnity liabilities 332 342
Postretirement and postemployment benefits liabilities 466 570
Other liabilities 676 623
Minority interests 27 49
- ------------------------------------------------------------------------------
Total liabilities 3,348 3,286
- ------------------------------------------------------------------------------
Put options - 13
- ------------------------------------------------------------------------------
Commitments and contingencies (Note 11)
Stockholders' equity
Preferred stock: par value $0.01 per share, 100.0 shares
authorized, no shares issued and outstanding at
December 31, 2000 and 1999 - -
Common stock: par value $0.01 per share, 500.0
shares authorized, 95.2 and 93.6 shares issued and
outstanding at December 31, 2000 and 1999, respectively 1 1
Paid-in capital 1,156 1,081
Retained earnings 644 466
Accumulated other comprehensive (loss) income (43) 48
- ------------------------------------------------------------------------------
Total stockholders' equity 1,758 1,596
- ------------------------------------------------------------------------------
Total liabilities and stockholders' equity $5,106 $4,895
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
17
NCR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
In millions
For the Year Ended December 31 2000 1999 1998
- ----------------------------------------------------------------------------------------------------
Operating activities
Net income $ 178 $ 337 $ 122
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 361 358 364
Deferred income taxes 32 (187) 54
Net gain on sales of assets (33) (107) (47)
Purchased research and development from acquisitions 25 - -
Changes in assets and liabilities:
Receivables (80) 358 (85)
Inventories 28 85 15
Current payables 80 (41) (53)
Customer deposits and deferred service revenue (42) 13 4
Timing of disbursements for employee severance and pension (248) (148) (268)
Other assets and liabilities (130) (61) (185)
- ----------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 171 607 (79)
- ----------------------------------------------------------------------------------------------------
Investing activities
Purchases of short-term investments (26) (354) (356)
Proceeds from sales and maturities of short-term investments 208 189 573
Net expenditures and proceeds for service parts (108) (104) (82)
Expenditures for property, plant and equipment (216) (187) (205)
Proceeds from sales of property, plant and equipment 173 240 252
Business acquisitions and investments (319) (32) (274)
Other investing activities, net (79) (78) (94)
- ----------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (367) (326) (186)
- ----------------------------------------------------------------------------------------------------
Financing activities
Purchases of Company common stock (110) (269) (200)
Short-term borrowings, net 15 (13) (9)
Long-term borrowings, net (29) 7 (2)
Other financing activities, net 117 81 57
- ----------------------------------------------------------------------------------------------------
Net cash (used in) financing activities (7) (194) (154)
- ----------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (21) (4) 21
- ----------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (224) 83 (398)
Cash and cash equivalents at beginning of year 571 488 886
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 347 $ 571 $ 488
- ----------------------------------------------------------------------------------------------------
Supplemental Data
Cash paid during the year for:
Income taxes $ 68 $ 61 $ 60
Interest 14 16 13
The accompanying notes are an integral part of the consolidated financial
statements.
18
NCR CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
In millions
Accumulated
Other
Common Stock Paid-in Retained Comprehensive
------------
Shares Amount Capital Earnings (Loss) Income Total
------ ------ ------- -------- ------------- -----
December 31, 1997 103 $ 1 $1,438 $ 7 $(93) $1,353
Employee stock purchase
and stock compensation plans 2 - 57 - - 57
Purchase of Company common stock (6) - (200) - - (200)
- ------------------------------------------------------------------------------------------------------------
Subtotal 99 1 1,295 7 (93) 1,210
Net income - - - 122 - 122
Other comprehensive income, net of tax:
Currency translation adjustments - - - - 95 95
Unrealized gains on securities:
Unrealized holding gains arising
during the period - - - - 9 9
Less: reclassification adjustment for
gains included in net income - - - - (4) (4)
Additional minimum pension liability - - - - 15 15
- ------------------------------------------------------------------------------------------------------------
Comprehensive income - - - 122 115 237
- ------------------------------------------------------------------------------------------------------------
December 31, 1998 99 1 1,295 129 22 1,447
Employee stock purchase
and stock compensation plans 3 - 80 - - 80
Proceeds from sale of put options - - 1 - - 1
Reclassification of put option obligation - - (13) - - (13)
Purchase of Company common stock (8) - (282) - - (282)
- ------------------------------------------------------------------------------------------------------------
Subtotal 94 1 1,081 129 22 1,233
Net income - - - 337 - 337
Other comprehensive income, net of tax:
Currency translation adjustments - - - - (13) (13)
Unrealized gains on securities:
Unrealized holding gains arising
during the period - - - - 54 54
Less: reclassification adjustment for
gains included in net income - - - - (14) (14)
Additional minimum pension liability - - - - (1) (1)
- ------------------------------------------------------------------------------------------------------------
Comprehensive income - - - 337 26 363
- ------------------------------------------------------------------------------------------------------------
December 31, 1999 94 1 1,081 466 48 1,596
Employee stock purchase
and stock compensation plans 3 - 117 - - 117
Purchase acquisitions 1 - 64 - - 64
Proceeds from sale of put options - - 5 - - 5
Expiration of put option obligation - - 13 - - 13
Purchase of Company common stock (3) - (124) - - (124)
- ------------------------------------------------------------------------------------------------------------
Subtotal 95 1 1,156 466 48 1,671
Net income - - - 178 - 178
Other comprehensive (loss), net of tax:
Currency translation adjustments - - - - (42) (42)
Unrealized (losses) gains on securities:
Unrealized holding (losses) arising
during the period - - - - (35) (35)
Less: reclassification adjustment for
gains included in net income - - - - (3) (3)
Additional minimum pension liability - - - - (11) (11)
- ------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) - - - 178 (91) 87
- ------------------------------------------------------------------------------------------------------------
December 31, 2000 95 $ 1 $1,156 $644 $(43) $1,758
- ------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
19
NCR Corporation
Notes to Consolidated Financial Statements
Note 1. Description of Business and Significant Accounting Policies
Description of Business
- ------------------------
NCR Corporation and its subsidiaries (NCR or the Company) provide solutions
worldwide that are designed specifically to enable businesses to build, expand
and enhance their relationships with their customers by facilitating
transactions and transforming data from transactions into useful business
information.
At the checkout counter, by telephone, at a web-enabled kiosk or automated
teller machine (ATM), or over the Internet, NCR's solutions enable companies to
capture information about individual preferences and needs. The Company then
provides powerful data warehousing solutions that help businesses understand and
serve each customer as a clearly defined market of one, responding with programs
designed to improve customer acquisition, retention and profitability.
NCR offers specific solutions for the retail and financial industries and also
provides solutions for industries including telecommunications, transportation,
insurance, utilities and electronic commerce, as well as consumer goods
manufacturers and government entities. These solutions are built on a
foundation of long-established industry knowledge and consulting expertise,
value-adding software, global customer support services, a complete line of
consumable and media products and a range of hardware technology.
Basis of Consolidation
- ----------------------
The consolidated financial statements include the accounts of NCR and its
majority-owned subsidiaries in which NCR exercises significant influence and
control. Long-term investments in affiliated companies in which NCR exercises
significant influence, but which it does not control, are accounted for under
the equity method. Investments in which NCR does not exercise significant
influence (generally, when NCR has an investment of less than 20% and no
representation on the company's Board of Directors) are accounted for under the
cost method. All significant intercompany transactions and accounts have been
eliminated.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
revenues and expenses during the period reported. Actual results could differ
from those estimates.
Foreign Currency
- ----------------
For many NCR international operations, the local currency is designated as the
functional currency. Accordingly, assets and liabilities are translated into
U.S. dollars at year end exchange rates, and revenues and expenses are
translated at average exchange rates prevailing during the year. Currency
translation adjustments resulting from fluctuations in exchange rates are
recorded in other comprehensive income.
In the normal course of business, NCR enters into various financial instruments,
including derivative financial instruments. The use of foreign exchange forward
contracts and options allows NCR to reduce its exposure to changes in currency
exchange rates. Derivatives used as a part of NCR's risk management strategy,
which are designated at inception as hedges, are measured for effectiveness both
at inception and on an ongoing basis. NCR primarily uses forward contracts and
options to hedge its foreign currency exposures relating largely to inventory
purchases by marketing units and inventory sales by manufacturing units. For
foreign exchange contracts that hedge firm commitments, and foreign exchange
options contracts that hedge anticipated transactions, the gains and losses are
deferred and recognized as adjustments of carrying amounts when the underlying
hedged transaction is realized, canceled or otherwise terminated. For other
foreign exchange contracts that hedge anticipated transactions, gains and losses
are recognized currently in other income and expense as exchange rates change.
When hedging certain foreign currency transactions of a long-term investment
nature, gains and losses are recorded in the currency translation adjustment
component of stockholders' equity. Settlement payments are primarily based on
net gains and losses related to foreign exchange derivatives and are included in
cash flows from operating activities in the consolidated statements of cash
flows. At December 31, 2000, deferred net gains on foreign exchange options,
which hedged anticipated transactions, were $2 million, and the unamortized
foreign exchange option premiums were $5 million. The applicable amounts at
December 31, 1999 were $3 million and $15 million, respectively.
Revenue Recognition
- -------------------
Revenue is generally recognized when all contractual obligations have been
satisfied and collection of the resulting receivable is reasonably assured.
Revenue from product sales is recognized upon shipment, delivery, installation
or customer acceptance, based upon the substance of the arrangement or as
defined in the customer contract. Revenue from services, including maintenance
services, is recognized proportionately over the contract period, at the time of
performance or upon customer acceptance, based upon the substance of the
arrangement or as defined in the customer contract.
20
Warranty, Sales Returns and Post Sales Support
- ----------------------------------------------
Provisions for product warranties, sales returns and allowances and post sales
support are recorded in the period in which the related revenue is recognized.
Income Taxes
- ------------
Income tax expense is provided based on income before income taxes. Deferred
income taxes reflect the impact of temporary differences between assets and
liabilities recognized for financial reporting purposes and such amounts
recognized for tax purposes. These deferred taxes are measured by applying
currently enacted tax laws. NCR records valuation allowances related to its
deferred income tax assets when, in the opinion of management, it is more likely
than not that some portion or all of the deferred income tax assets will not be
realized.
Net Income Per Common Share
- ---------------------------
Basic earnings per share is calculated by dividing net income by the weighted
average number of shares outstanding during the reported period. The
calculation of diluted earnings per share is similar to basic, except that the
weighted average number of shares outstanding includes the additional dilution
from potential common stock, such as stock options and restricted stock awards.
Cash, Cash Equivalents and Short-Term Investments
- -------------------------------------------------
All short-term, highly liquid investments having original maturities of three
months or less are considered to be cash equivalents. Short-term investments
include certificates of deposit, commercial paper and other investments having
maturities less than one year. Such investments are stated at cost, which
approximates fair value at December 31, 2000 and 1999.
Transfer of Financial Assets
- ----------------------------
NCR offers its customers the option to acquire its products and services through
payment plans, financing or leasing contracts. From time to time, the Company
transfers future payments under these contracts to financing institutions on a
non-recourse basis. NCR may act as servicing agent for the purchaser and retain
collection and administrative responsibilities. These transfers are recorded as
sales of the related accounts receivable when NCR is considered to have
surrendered control of such receivables. During the fourth quarter of 2000, the
Company factored approximately $58 million of receivables. The related loss on
the factoring was immaterial to the Company's consolidated financial results.
Inventories
- -----------
Inventories are stated at the lower of average cost or net realizable value.
Investments in Marketable Securities
- ------------------------------------
All marketable securities, which are included in other assets, are deemed by
management to be available-for-sale and are reported at fair value with net
unrealized gains or losses reported, net of tax, within stockholders' equity.
Realized gains and losses are recorded based on the specific identification
method and average cost method, as appropriate, based upon the investment type.
The fair value of the Company's investments in marketable securities in
aggregate was $72 million and $118 million at December 31, 2000 and 1999,
respectively.
In 1999, the Company sold its TeraCube(R) software rights and related assets to
MicroStrategy Incorporated in exchange for $14 million of MicroStrategy
Incorporated common stock. A pre-tax realized gain of $11 million was
recognized in NCR's 1999 consolidated financial statements.
Long-Lived Assets
- -----------------
Capitalized Software
In 1999, NCR adopted the Statement of Position 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use". In accordance
with this standard, certain direct development costs associated with internal-
use software were capitalized beginning in 1999. These costs are included
within other assets and are generally amortized over three years, beginning when
the asset is substantially ready for use.
Research and development costs incurred for the development of computer software
that will be sold, leased or otherwise marketed are capitalized when
technological feasibility has been established. These costs are also included
within other assets and are generally amortized over three years, beginning when
the product is available for general release. Costs capitalized include direct
labor and related overhead costs. Amortization of capitalized software
development costs was $68 million in 2000, $63 million in 1999 and $65 million
in 1998. Accumulated amortization for capitalized software development costs
was $131 million and $102 million at December 31, 2000 and 1999, respectively.
Goodwill
Goodwill is included in other assets and is carried at cost less accumulated
amortization. Amortization is computed on a straight-line basis over useful
lives ranging from three to 20 years. Goodwill amortization expense was $33
million in 2000, $20 million in 1999 and $16 million in 1998. Accumulated
amortization was $53 million and $20 million at December 31, 2000 and 1999,
respectively.
Property, Plant and Equipment
21
Property, plant, equipment and reworkable service parts are stated at cost less
accumulated depreciation. Reworkable service parts are those parts that can be
reconditioned and used in installation and ongoing maintenance services and
integrated service solutions for NCR's customers. Depreciation is computed over
the estimated useful lives of the related assets primarily on the straight-line
basis. Buildings are depreciated over 25 to 45 years, machinery and other
equipment over three to 10 years and reworkable service parts over three to five
years.
Valuation of Long-Lived Assets
Long-lived assets such as property, plant and equipment, goodwill, software and
investments are reviewed for impairment when events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. An
impairment loss would be recognized when estimated future undiscounted cash
flows expected to result from the use of the asset and its eventual disposition
are less than its carrying amount.
Acquisitions and Divestitures
- -----------------------------
During 2000, 1999 and 1998, NCR acquired several companies that were not
significant to its financial position, results of operations and cash flows.
All of these acquisitions were accounted for as purchase business combinations
and the earnings from these acquired entities were included in NCR's
consolidated financial results from the dates of acquisition. Acquisition costs
were allocated to the acquired tangible and intangible assets and liabilities
based on fair market values, with residual amounts recorded as goodwill. The
intangible value assigned to in-process research and development was charged to
expense at the time of the acquisition. The allocation of purchase price to the
various tangible and intangible assets and liabilities are subject to
finalization of pre-existing contingencies and other purchase accounting
adjustments, none of which are expected to be material. In 2000, 1999 and 1998,
NCR sold assets related to portions of its businesses to third parties.
Unaudited pro forma financial information has not been presented because the
effects of these acquisitions and divestitures were not material on either an
individual or aggregated basis.
Reclassifications
- -----------------
Certain prior year amounts have been reclassified to conform to the 2000
presentation.
Recently Issued Accounting Pronouncements
- -----------------------------------------
Statement of Financial Accounting Standards No. 133 and No. 138
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). In June 2000, the FASB issued
Statement of Financial Accounting Standards No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an Amendment of FASB
Statement No. 133" (SFAS 138). SFAS 133 and the corresponding amendments under
SFAS 138 are effective for fiscal years beginning after June 15, 2000. NCR has
elected to adopt SFAS 133 and SFAS 138 effective January 1, 2001. SFAS 133 and
SFAS 138 require that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. For fair value hedge transactions
in which the Company is hedging changes in the fair value of an asset, liability
or firm commitment, changes in the fair value of the derivative instrument will
be offset in the income statement by changes in the hedged item's fair value.
For cash flow hedge transactions in which the Company is hedging the variability
of cash flows related to a variable rate asset, liability or a forecasted
transaction, changes in the fair value of the derivative instrument will
generally be reported in other comprehensive income. The gains and losses on
the derivative instrument that are reported in other comprehensive income will
be reclassified to earnings in the periods in which earnings are impacted by the
variability of the cash flows of the hedged item. In the event that a hedging
instrument is deemed to be ineffective under SFAS 133, the ineffective portion
will be recognized in current period earnings.
On January 1, 2001, NCR will record net-of-tax, cumulative-effect-type losses of
$6 million and $4 million, in accumulated other comprehensive income and net
income, respectively, to recognize at fair value all derivative instruments that
will be designated as hedging instruments. Included in the $4 million loss is
an immaterial expense related to derivatives that are deferred on the balance
sheet and will be de-designated as effective hedges.
Staff Accounting Bulletin No. 101
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). SAB
101 provides guidance on the recognition, presentation and disclosure of
revenues in financial statements. Consistent with the requirements to implement
SAB 101 no later than the fourth quarter for fiscal years beginning after
December 15, 1999, NCR adopted the provisions of SAB 101 and the resulting
impact was immaterial to the Company's consolidated financial position, results
of operations and cash flows.
Statement of Financial Accounting Standards No. 140
In September 2000, the FASB issued Statement of Financial Accounting Standards
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" (SFAS 140). SFAS 140, which replaces Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities," revises the
standards for accounting for securitizations and other transfers of financial
assets and collateral. The standard is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001. The
22
Company does not expect adoption of this standard to have any impact to the
Company's consolidated financial position, results of operations and cash flows.
Note 2. Supplementary Financial Information
In millions
For the Year Ended December 31 2000 1999 1998
- -------------------------------------------------------------------------------------
Other income
Interest income $ 31 $ 26 $ 44
Gain on sales of assets 33 107 47
Other, net 19 36 32
- -------------------------------------------------------------------------------------
Total other income, net $ 83 $ 169 $ 123
- -------------------------------------------------------------------------------------
At December 31 2000 1999
- -------------------------------------------------------------------------------------
Cash, cash equivalents and short-term investments
Cash and cash equivalents $ 347 $ 571
Short-term investments 10 192
- -------------------------------------------------------------------------------------
Total cash, cash equivalents and short-term investments $ 357 $ 763
- -------------------------------------------------------------------------------------
Accounts receivable
Trade $ 1,255 $ 1,047
Other 107 181
- -------------------------------------------------------------------------------------
Accounts receivable, gross 1,362 1,228
Less: allowance for doubtful accounts (24) (31)
- -------------------------------------------------------------------------------------
Total accounts receivable, net $ 1,338 $ 1,197
- -------------------------------------------------------------------------------------
Inventories
Finished goods, gross $ 262 $ 298
Work in process and raw materials, gross 83 73
- -------------------------------------------------------------------------------------
Inventories, gross 345 371
Less: inventory allowances (57) (72)
- -------------------------------------------------------------------------------------
Total inventories, net $ 288 $ 299
- -------------------------------------------------------------------------------------
Other current assets
Current deferred tax assets $ 123 $ 167
Other 128 115
- -------------------------------------------------------------------------------------
Total other current assets $ 251 $ 282
- -------------------------------------------------------------------------------------
Reworkable service parts
Reworkable service parts, gross $ 494 $ 516
Less: accumulated depreciation (276) (307)
- -------------------------------------------------------------------------------------
Total reworkable service parts, net $ 218 $ 209
- -------------------------------------------------------------------------------------
Property, plant and equipment
Land and improvements $ 103 $ 140
Buildings and improvements 641 701
Machinery and other equipment 1,107 1,170
- -------------------------------------------------------------------------------------
Property, plant and equipment, gross 1,851 2,011
Less: accumulated depreciation (1,109) (1,218)
- -------------------------------------------------------------------------------------
Total property, plant and equipment, net $ 742 $ 793
- -------------------------------------------------------------------------------------
Other assets
Prepaid pension cost $ 932 $ 811
Goodwill, net 532 118
Other 448 423
- -------------------------------------------------------------------------------------
Total other assets $ 1,912 $ 1,352
- -------------------------------------------------------------------------------------
Accumulated other comprehensive (loss) income, net of tax
Currency translation adjustments $ (12) $ 30
Unrealized gains on securities 1 39
Additional minimum pension liability and other (32) (21)
- -------------------------------------------------------------------------------------
Total accumulated other comprehensive (loss) income $ (43) $ 48
- -------------------------------------------------------------------------------------
23
Note 3. Business Restructuring
During the fourth quarter of 1999, NCR established a restructuring plan designed
to accelerate the Company's transformation from a computer hardware and product
company to a technology solutions and services provider. The plan contemplated
an alignment around three key solutions (Data Warehousing, Financial Self
Service and Retail Store Automation), the elimination of approximately 1,250
associate positions, the exit of certain commodity hardware businesses and an
enhanced leverage of the investment in the Company's Data Warehousing offering.
In connection with the restructuring plan, NCR recorded a pre-tax charge of $125
million in the fourth quarter of 1999. The charge included a $76 million
accrual under postemployment benefit plans related to employee separations, $35
million of charges related to asset impairments, $7 million of charges for the
write-off of software licenses and inventory write-downs and $7 million of
charges for other items. Cash payments under the plan totaled $46 million, and
NCR anticipates that future cash payments under the plan will not be
significant. In addition, NCR expected to incur approximately $55 million of
period costs during 2000, primarily related to settling customer obligations
that were not complete as of December 31, 1999. These obligations were resolved
for approximately $38 million, or $17 million less than originally expected.
The Company recorded the costs associated with these obligations through charges
of $37 million in cost of revenue and $1 million in selling, general and
administrative expenses. The restructuring plan was substantially completed at
December 31, 2000.
As a result of the restructuring, NCR achieved an estimated savings of more than
$75 million in 2000 due primarily to the elimination of losses in the exited
solutions, as well as through cost savings related to employee separations
within the Company's support organizations. In addition, NCR experienced a
revenue decline of approximately $360 million as a result of the Company's
decision to exit specific non-key solutions in certain geographic areas.
Note 4. Income Taxes
For the years ended December 31, income before income taxes consisted of the
following:
In millions 2000 1999 1998
- --------------------------------------------------------------------------------
Income (loss) before income taxes
U.S. $ 319 $ 264 $ 272
Foreign (44) (29) (60)
- --------------------------------------------------------------------------------
Total income before income taxes $ 275 $ 235 $ 212
- --------------------------------------------------------------------------------
For the years ended December 31, income tax expense (benefit) consisted of the
following:
In millions 2000 1999 1998
- --------------------------------------------------------------------------------
Income tax expense (benefit)
Current
Federal $ 32 $ 24 $ 21
State and local 2 2 (8)
Foreign 31 59 23
Deferred
Federal 35 (218) -
State and local 3 (14) -
Foreign (6) 45 54
- --------------------------------------------------------------------------------
Total income tax expense (benefit) $ 97 $(102) $ 90
- --------------------------------------------------------------------------------
The following table presents the principal components of the difference between
the effective tax rate and the U.S. federal statutory income tax rate for the
years ended December 31:
In millions 2000 1999 1998
- -------------------------------------------------------------------------------
Income tax expense at the U.S. federal tax rate of 35% $ 96 $ 82 $ 74
Foreign income tax differential (8) 74 98
U.S. permanent book/tax differences (principally goodwill) 6 - -
U.S. tax losses and valuation allowance - (260) (91)
Other, net 3 2 9
- -------------------------------------------------------------------------------
Total income tax expense (benefit) $ 97 $(102) $ 90
- -------------------------------------------------------------------------------
NCR's tax provisions include a provision for income taxes in those tax
jurisdictions where its subsidiaries are profitable, but reflect only a portion
of the tax benefits related to certain foreign subsidiaries' tax losses due to
the uncertainty of the ultimate realization of future benefits from these
losses. Due primarily to sustained U.S. profitability, a release of the
Company's federal and a portion of its state valuation allowance was recognized
in 1999 as U.S. tax losses and valuation allowance.
24
Deferred income tax assets and liabilities included in the balance sheets at
December 31 were as follows:
In millions 2000 1999
- ------------------------------------------------------------------------
Deferred income tax assets
Employee pensions and other benefits $ 110 $ 165
Other balance sheet reserves and allowances 170 198
Tax loss and credit carryforwards 445 353
Property, plant and equipment 29 24
Other 90 76
- ------------------------------------------------------------------------
Total deferred income tax assets 844 816
Valuation allowance (304) (285)
- ------------------------------------------------------------------------
Net deferred income tax assets 540 531
- ------------------------------------------------------------------------
Deferred income tax liabilities
Property, plant and equipment 72 93
Employee pensions and other benefits 164 135
Taxes on undistributed earnings of foreign subsidiaries 58 75
Other 63 79
- ------------------------------------------------------------------------
Total deferred income tax liabilities 357 382
- ------------------------------------------------------------------------
Total net deferred income tax assets $ 183 $ 149
- ------------------------------------------------------------------------
NCR recorded valuation allowances related to certain deferred income tax assets
due to the uncertainty of the ultimate realization of future benefits from
certain assets. The $19 million increase in valuation allowance from 1999 to
2000 represents additional deferred tax assets, primarily tax loss
carryforwards, in tax jurisdictions where there is uncertainty as to the
ultimate realization of a benefit from those additional tax losses. As of
December 31, 2000, NCR had U.S. federal and foreign tax loss carryforwards of
approximately $645 million. The tax loss carryforwards subject to expiration
expire in the years 2002 through 2020.
NCR did not provide for U.S. federal income taxes or foreign withholding taxes
on approximately $568 million and $612 million of undistributed earnings of its
foreign subsidiaries as of December 31, 2000 and 1999, respectively, because
such earnings are intended to be reinvested indefinitely.
The income tax (benefit) expense related to comprehensive income for 2000 and
1999 was $(48) million and $5 million, respectively. In 1998, the tax effect to
comprehensive income was not significant.
Note 5. Debt Obligations
NCR had debt with scheduled maturities of less than one year of $96 million and
$37 million as of December 31, 2000 and 1999, respectively. The weighted
average interest rate for such debt was 7.2% at December 31, 2000 and 7.7% at
December 31, 1999. The increase in short-term debt was due, in part, to the
acquisition of 4Front Technologies, Inc. (4Front), which increased NCR's debt
with scheduled maturities of less than one year by $36 million. NCR had long-
term debt and notes totaling $11 million and $40 million at December 31, 2000
and 1999, respectively. These obligations had U.S. dollar equivalent interest
rates ranging from 8.5% to 9.5% with scheduled maturity dates from 2002 to 2020.
The scheduled maturities of the outstanding long-term debt and notes during the
next five years are: $2 million in 2002, $3 million in 2004 and the remainder
after 2005.
In 1996, NCR entered into a five-year, unsecured revolving credit facility with
a syndicate of commercial banks and financial institutions. The credit facility
provides that NCR may borrow on a revolving credit basis an aggregate principal
amount of up to $600 million. The credit facility matures in 2001 and contains
certain representations and warranties, conditions, affirmative, negative and
financial covenants, and events of default customary for such facilities.
Interest rates charged on borrowings outstanding under the credit facility are
based on prevailing market rates. No amounts were outstanding under the
facility as of December 31, 2000 or 1999.
Note 6. Employee Benefit Plans
Pension and Postretirement Plans
NCR sponsors defined benefit plans for substantially all U.S. employees and the
majority of international employees. For salaried employees, the defined
benefit plans are based primarily upon compensation and years of service. For
certain hourly employees in the United States, the benefits are based on a fixed
dollar amount per year of service. NCR's funding policy is to contribute
annually not less than the minimum required by applicable laws and regulations.
Assets of NCR's defined benefit plans are primarily invested in publicly traded
common stocks, corporate and government debt securities, real estate investments
and cash or cash equivalents.
25
Prior to September 1998, substantially all U.S. employees who reached retirement
age while working for NCR were eligible to participate in a postretirement
benefit plan. The plan provides medical care and life insurance benefits to
retirees and their eligible dependents. In September 1998, the plan was amended
whereby U.S. participants who had not reached a certain age and years of service
with NCR were no longer eligible for such benefits. Non-U.S. employees are
typically covered under government sponsored programs, and NCR generally does
not provide postretirement benefits other than pensions to non-U.S. retirees.
NCR generally funds these benefits on a pay-as-you-go basis.
Reconciliation of the beginning and ending balances of the benefit obligations
for NCR's pension and postretirement benefit plans were:
Pension Benefits Postretirement Benefits
------------------ -------------------------
In millions 2000 1999 2000 1999
- ---------------------------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at January 1 $3,462 $3,422 $ 326 $ 316
Gross service cost 81 83 1 1
Interest cost 234 225 24 23
Amendments 52 16 (2) -
Actuarial loss (gain) 99 (31) 21 20
Benefits paid (245) (204) (38) (34)
Currency translation adjustments (93) (47) - -
Other 3 (2) - -
- -------------------------------------------------------------------------------------------
Benefit obligation at December 31 $3,593 $3,462 $ 332 $ 326
- -------------------------------------------------------------------------------------------
A reconciliation of the beginning and ending balances of the fair value of the
plan assets of NCR's pension plans follows:
Pension Benefits
------------------
In millions 2000 1999
- ---------------------------------------------------------------
Change in plan assets
Fair value of plan assets at January 1 $4,707 $4,000
Actual return on plan assets 120 924
Company contributions 62 67
Benefits paid (245) (204)
Currency translation adjustments (108) (84)
Other 4 4
- --------------------------------------------------------------
Fair value of plan assets at December 31 $4,540 $4,707
- --------------------------------------------------------------
Accrued pension and/or postretirement benefit assets (liabilities) included in
NCR's consolidated balance sheet at December 31 were:
Pension Benefits Postretirement Benefits
------------------ -------------------------
In millions 2000 1999 2000 1999
- ---------------------------------------------------------------------------------------------
Reconciliation to balance sheet
Funded status $ 947 $1,245 $ (332) $ (326)
Unrecognized net (gain) loss (380) (779) 6 (15)
Unrecognized prior service cost 66 38 (36) (46)
Unrecognized transition asset (25) (47) - -
- -------------------------------------------------------------------------------------------
Net amount recognized $ 608 $ 457 $ (362) $ (387)
- -------------------------------------------------------------------------------------------
Total recognized amounts consist of:
Prepaid benefit cost $ 932 $ 811 $ - $ -
Accrued benefit liability (366) (380) (362) (387)
Intangible asset 4 5 - -
Accumulated other comprehensive income 38 21 - -
- -------------------------------------------------------------------------------------------
Net amount recognized $ 608 $ 457 $ (362) $ (387)
- -------------------------------------------------------------------------------------------
The weighted average rates and assumptions utilized in accounting for these
plans for the years ended December 31 were:
Pension Benefits Postretirement Benefits
------------------- -------------------------
2000 1999 1998 2000 1999 1998
- ----------------------------------------------------------------------------------
Discount rate 7.0% 7.0% 6.8% 7.5% 7.5% 7.0%
Expected return on plan assets 10.0% 10.0% 10.0% - - -
Rate of compensation increase 4.2% 4.1% 4.3% 4.3% 4.3% 4.3%
26
For postretirement benefit measurement purposes, NCR assumed growth in the per
capita cost of covered health care benefits (the health care cost trend rate)
would gradually decline from 8.0% and 6.0%, pre-65 and post-65, respectively, in
2000 to 5.0% by the year 2006. In addition, a one percentage point change in
assumed health care cost trend rates would have the following effect on the
postretirement benefit costs and obligation:
In millions 1% Increase 1% Decrease
- -----------------------------------------------------------------------------
2000 service cost and interest cost $ 2 $ (2)
Postretirement benefit obligation at
December 31, 2000 $ 20 $ (18)
The net periodic benefit cost for the plans for the years ended December 31
follows:
Pension Benefits Postretirement Benefits
------------------------ -------------------------
In millions 2000 1999 1998 2000 1999 1998
- ---------------------------------------------------------------------------------------
Net service cost $ 78 $ 78 $ 75 $ 1 $ 1 $ 4
Interest cost 234 225 222 24 23 27
Expected return on plan assets (414) (360) (349) - - -
Settlement (credit) charge (8) - 46 - - -
Curtailment - - - - - (19)
Amortization of:
Transition asset (21) (22) (22) - - -
Prior service cost 23 16 17 (12) (12) (3)
Actuarial (gains) losses (16) 3 4 - - (1)
- ---------------------------------------------------------------------------------------
Net benefit cost $(124) $ (60) $ (7) $ 13 $ 12 $ 8
- ---------------------------------------------------------------------------------------
In 1998, NCR recognized a $50 million pre-tax non-recurring pension charge
relating to its Japanese subsidiary.
For pension plans with accumulated benefit obligations in excess of plan assets,
the projected benefit obligation, accumulated benefit obligation and fair value
were $483 million, $408 million and $46 million, respectively, at December 31,
2000 and $504 million, $401 million and $31 million, respectively, at December
31, 1999.
In 1996, NCR entered into an agreement with the Pension Benefit Guaranty
Corporation (PBGC) concerning the provision by NCR of additional support for its
domestic defined benefit pension plans. Under this agreement, among other terms
and conditions, NCR agreed to provide security interests in support of such
plans in collateral with an aggregate value (calculated by applying specified
discounts to market value) of $84 million. This collateral is comprised of
certain domestic real estate. NCR does not believe that its agreement with the
PBGC will have a material effect on its financial condition, results of
operations and cash flows.
Savings Plans
All U.S. employees and many international employees participate in defined
contribution savings plans. These plans generally provide either a specified
percent of pay or a matching contribution on participating employees' voluntary
elections. NCR's matching contributions typically are subject to a maximum
percentage or level of compensation. Employee contributions can be made pre-
tax, after-tax or a combination thereof. The expense under these plans was
approximately $28 million, $28 million and $24 million for 2000, 1999 and 1998,
respectively.
Other Postemployment Benefits
NCR offers various postemployment benefits to involuntarily terminated and
certain inactive employees after employment but before retirement. These
benefits are paid in accordance with NCR's established postemployment benefit
practices and policies. Postemployment benefits may include disability
benefits, supplemental unemployment benefits, severance, workers' compensation
benefits, and continuation of health care benefits and life insurance coverage.
The accrued postemployment liability at December 31, 2000 and 1999 was $197
million and $275 million, respectively.
Note 7. Business Combinations and Equity Investments
During 2000, NCR completed the following acquisitions that were accounted for as
purchase business combinations: KM Aspac Pte. Limited (d/b/a Memorex Telex Asia
Pacific), Strategic Technologies and Systems, Stirling Douglas Group, Research
Computer Services, Inc. and Ceres Integrated Solutions, LLC. These acquisitions
resulted in total goodwill of $107 million that is being amortized over various
periods of five to seven years, and in-process research and development charges
of $25 million. The total amount of stock issued as part of these acquisitions
was $64 million.
In addition to the acquisitions described above, the Company acquired 4Front
Technologies, Inc. in 2000. 4Front is a leading provider and integrator of
information technology services, consisting of specialized computer services and
web-based solutions. Based on the preliminary allocation of the purchase price,
the acquisition resulted in intangibles of approximately $324 million that are
being amortized over 10 years. The allocation of the purchase price will be
finalized in 2001. As of December 31, 2000, the
27
Company had incurred approximately $2 million of integration costs related to
the acquisition. These costs were expensed as incurred.
During 1998, NCR acquired an additional 27% ownership interest in its Japanese
subsidiary, NCR Japan, Ltd., at a cost of $274 million, increasing NCR's
ownership in the subsidiary to over 97%. The acquisition resulted in goodwill
of approximately $65 million that is being amortized over 20 years.
In addition to the items described above, NCR completed other acquisitions and
investments in smaller transactions during 2000, 1999 and 1998.
Note 8. Stock Compensation Plans, Purchases of Company Common Stock and Put
Options
Stock Compensation Plans
The NCR Management Stock Plan provides for the grant of several different forms
of stock-based benefits, including stock options, stock appreciation rights,
restricted stock awards, performance awards, other stock unit awards and other
rights, interests or options relating to shares of NCR common stock to employees
and non-employee directors. Stock options are generally granted at the fair
market value of the common stock at the date of grant, generally have a 10-year
term and vest within three years of the grant date. Grants that were issued
before 1998 generally had a four-year vesting period. Options to purchase
common stock are granted under the authority of the Board of Directors. Option
terms are determined by the Compensation Committee of the Board, and terms for
incentive stock options will not exceed 10 years, consistent with the Internal
Revenue Code. The plan was adopted by the Board of Directors, with stockholder
approval, effective January 1, 1997. The plan contains an evergreen provision
that initially authorized and made available for grant 5.6% of the outstanding
shares as of January 1, 1997, as well as sufficient shares to replace all
outstanding awards held by active NCR employees for shares of AT&T Corp. stock.
Thereafter, the number of shares authorized under the plan increases each
calendar year by 4% of the outstanding shares on the first day of the year, for
the 10-year term of the plan, without the need for additional Board approval.
The number of shares of common stock authorized, since inception of the plan,
and currently available for grant under this plan were approximately 24 million
and 5 million, respectively, at December 31, 2000.
NCR adopted the WorldShares Plan effective as of December 31, 1996, the date
AT&T Corp. distributed to its stockholders all of its interest in NCR on the
basis of one share of NCR common stock for each 16 shares of AT&T Corp. common
stock (the Distribution). The plan provides for the grant of nonstatutory stock
options to substantially all NCR employees. NCR provided each participant with
an option to purchase shares of NCR common stock with an aggregate market value
of $3,000 as of the Distribution date. Such options have an exercise price of
$33.44, equal to the market value of NCR common stock on January 2, 1997, and
have a five-year expiration period. Subject to certain conditions, participants
became fully vested and able to exercise their options January 2, 1998. The
number of shares authorized, since the inception of the plan, and currently
available for grant under this plan were approximately 7 million and 4 million,
respectively, at December 31, 2000.
A summary of stock option activity under the NCR Management Stock Plan and the
WorldShares Plan follows (shares in thousands):
2000 1999 1998
------------------ ------------------ ------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Under Exercise Under Exercise Under Exercise
Option Price Option Price Option Price
- -----------------------------------------------------------------------------------------------
Outstanding at January 1 14,577 $ 35.22 12,906 $ 33.13 12,521 $ 33.26
Granted 4,491 38.50 3,967 40.64 2,904 31.87
Exercised (2,327) 32.07 (1,631) 31.36 (703) 27.13
Canceled (593) 37.44 (504) 36.47 (1,552) 33.95
Forfeited (233) 34.26 (161) 33.27 (264) 36.06
- -----------------------------------------------------------------------------------------------
Outstanding at December 31 15,915 $ 36.52 14,577 $ 35.22 12,906 $ 33.13
- -----------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at
December 31, 2000 (shares in thousands):
Stock Options Outstanding Stock Options Exercisable
------------------------------------ -------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life Price Shares Price
- -----------------------------------------------------------------------------------------------
$9.68 to $14.02 26 1.16 years $11.22 26 $11.22
$16.78 to $29.22 541 2.89 years 25.18 482 25.02
$30.31 to $51.63 15,348 6.65 years 36.96 7,862 35.34
- -----------------------------------------------------------------------------------------------
Total 15,915 $36.52 8,370 $34.67
- -----------------------------------------------------------------------------------------------
28
NCR accounts for its stock-based compensation plans using the intrinsic value-
based method, which requires compensation expense for options to be recognized
when the market price of the underlying stock exceeds the exercise price on the
date of grant. Compensation cost charged against income for NCR's stock-based
plans was not material in 2000, 1999 and 1998.
Had NCR recognized stock-based compensation expense based on the fair value of
granted options at the grant date, net income and net income per diluted share
for the years ended December 31 would have been as follows:
In millions, except per share amounts 2000 1999 1998
- --------------------------------------------------------------------------------
Net income As reported $ 178 $ 337 $ 122
Pro forma 140 309 81
Net income per diluted share As reported $ 1.82 $ 3.35 $ 1.20
Pro forma 1.43 3.07 0.80
The pro forma amounts shown above are not necessarily indicative of the effects
on net income and net income per diluted share in future years.
The above pro forma net income and net income per diluted share for all periods
presented were computed using the fair value of options as calculated using the
Black-Scholes option-pricing method. The following weighted average assumptions
were used for the years ended December 31:
2000 1999 1998
---- ---- ----
Dividend yield 0.00% 0.00% 0.00%
Risk-free interest rate 6.41% 4.97% 5.35%
Expected volatility 40.00% 40.00% 40.00%
Expected holding period (years) 5 5 5
The weighted average fair value of NCR stock options calculated using the Black-
Scholes option-pricing model for options granted during the years ended December
31, 2000, 1999 and 1998 was $17.42, $17.39 and $13.85 per share, respectively.
The NCR Employee Stock Purchase Plan enables eligible employees to purchase
NCR's common stock at 85% of the average market price at the end of the last
trading day of each month. Employees may authorize payroll deductions of up to
10% of eligible compensation for common stock purchases. During 2000, 1999 and
1998, employees purchased approximately 800 thousand, 900 thousand and 1 million
shares, respectively, of NCR common stock for approximately $27 million, $30
million and $28 million, respectively. The number of shares authorized and
available for grant under this plan at December 31, 2000 were approximately 8
million and 4 million, respectively.
Purchase of Company Common Stock
On December 8, 2000, NCR's Board of Directors approved a share repurchase
program authorizing the systematic repurchase of shares of Company common stock
to offset the dilutive effect of the employee stock plans. The systematic
repurchase program will be funded by the proceeds from the purchase of shares
under the Company's Employee Stock Purchase Plan and the exercise of options.
Stock will be repurchased periodically on an ongoing basis in the open market or
through privately negotiated transactions at management's discretion. As of
December 31, 2000, the Company had committed approximately $88 million to the
repurchase of shares under this program. The repurchased shares will be added to
NCR's authorized, but unissued shares. During 2000, approximately 1.8 million
shares were repurchased under this program at an average price of $48.75 per
share. This program is expected to continue into 2001.
As of December 31, 2000, the Company had committed approximately $319 million of
the total $500 million authorized by the Board of Directors on April 15, 1999
and October 21, 1999 for share repurchase programs. During 2000, approximately
1.1 million shares were repurchased under this program at an average cost of
$34.04 per share. In 1999, a portion of the funds was used to cash out
fractional interests in NCR stock resulting from a 1-for-10 reverse stock split,
followed immediately by a 10-for-1 forward split of NCR's common stock, on May
14, 1999. This program effectively cashed out registered stockholders who held
fewer than 10 shares of NCR common stock in a record account as of May 14, 1999.
As a result of the reverse/forward stock split initiative, approximately 2.4
million shares were repurchased at a cost of $42.38 per share. Additionally,
during 1999, approximately 5.1 million shares were repurchased at an average
cost of $35.25 per share.
Put Options
At times, the Company sells put options that entitle the holder of each option
to sell to the Company, by physical delivery, shares of common stock at a
specified price. In a single private placement during the fourth quarter of
1999, the Company sold put options for 400 thousand shares of common stock.
These options expired unexercised in the first quarter of 2000. During 2000, in
a series of private placements, the Company sold put options for 2.0 million
shares of common stock. Of these 2.0 million options, 1.6 million expired
unexercised during the year and 400 thousand were exercised during the third
quarter at an average price of $37.00 per share. There were no options
outstanding at December 31, 2000.
29
The put option activity is summarized as follows:
Cumulative Put Options Outstanding
-------------------------
Net Premium Number of Potential
In millions Received Options Obligation
- --------------------------------------------------------------------------------
December 31, 1998 $ - - $ -
Sales 1.1 0.4 13.1
Exercises - - -
Expirations - - -
December 31, 1999 $ 1.1 0.4 $ 13.1
Sales 4.9 2.0 73.0
Exercises - (0.4) (14.8)
Expirations - (2.0) (71.3)
December 31, 2000 $ 6.0 - $ -
At December 31, 1999, the amount related to the Company's potential repurchase
obligation of approximately $13 million had been reclassified from stockholders'
equity to put options. Each option was exercisable only at expiration, and all
options sold during 1999 expired unexercised on March 1, 2000. These put option
obligations had no significant effect on diluted earnings per share for the
periods presented.
Note 9. Financial Instruments
In the normal course of business, NCR enters into various financial instruments,
including derivative financial instruments. These instruments primarily consist
of foreign exchange forward contracts and options that are used to reduce NCR's
exposure to changes in currency exchange rates. At inception, foreign exchange
contracts are designated as hedges of firmly committed or forecasted
transactions. These transactions are generally expected to occur in less than
one year. The forward contracts and options generally mature within 12 months.
The majority of NCR's foreign exchange forward contracts were to exchange
pounds, euro and yen.
Letters of Credit
Letters of credit are purchased guarantees that ensure NCR's performance or
payment to third parties in accordance with specified terms and conditions.
Letters of credit may expire without being drawn upon. Therefore, the total
notional or contract amounts do not necessarily represent future cash flows.
Fair Value of Financial Instruments
The fair values of long-term debt and foreign exchange contracts are based on
market quotes of similar instruments. The fair values of letters of credit are
based on fees charged for similar agreements. The table below presents the fair
value, carrying value and notional amount of foreign exchange contracts, debt
and letters of credit at December 31, 2000 and 1999. The notional amounts
represent agreed-upon amounts on which calculations of dollars to be exchanged
are based, and are an indication of the extent of NCR's involvement in such
instruments. They do not represent amounts exchanged by the parties and,
therefore, are not a measure of the instruments.
Contract
Notional Carrying Amount Fair Value
------------------- -------------------
In millions Amount Asset Liability Asset Liability
- -----------------------------------------------------------------------------------------------
2000
Foreign exchange forward contracts $886 $30 $ 39 $33 $ 44
Foreign currency options 275 15 1 15 1
Debt - - 107 - 107
Letters of credit 50 - - - -
1999
Foreign exchange forward contracts $467 $19 $ 24 $19 $ 30
Foreign currency options 403 19 2 19 2
Debt - - 77 - 77
Letters of credit 44 - - - -
Fair values of financial instruments represent estimates of possible value that
may not be realized in the future.
Concentration of Credit Risk
NCR is potentially subject to concentrations of credit risk on accounts
receivable and financial instruments such as hedging instruments, short-term
investments and cash and cash equivalents. Credit risk includes the risk of
nonperformance by counterparties. The maximum potential loss may exceed the
amount recognized on the balance sheet. Exposure to credit risk is managed
through credit approvals, credit limits, selecting major international financial
institutions (as counterparties to hedging transactions) and monitoring
procedures. NCR's business often involves large transactions with customers,
and if one or more of those customers were to default in its obligations under
applicable contractual arrangements, the Company could be exposed to
30
potential losses are adequate. At December 31, 2000 and 1999, NCR did not have
any major concentration of credit risk related to financial instruments.
Note 10. Segment Information and Concentrations
Operating Segment Information
NCR assesses performance and allocates resources based principally on its
alignment around three key solutions: Data Warehousing, Financial Self Service
and Retail Store Automation. Each solution combines hardware, software,
professional consulting, customer support and maintenance services, and third
party applications and technologies. For reporting purposes, NCR categorizes
its operations into six reportable segments: the three key solutions, Payment
and Imaging solutions, Systemedia and Other.
Designed to help businesses gain insight into consumers' activities and choices,
asset use, and operations and financial results, Data Warehousing solutions
provide the hardware, software and related services necessary to transform large
volumes of information into actionable opportunities. NCR's Data Warehousing
solutions serve a multitude of industries including retail, financial,
telecommunications, transportation, insurance, utilities and electronic
commerce, as well as consumer manufacturing and government entities. The
Company's Self Service solutions offer a complete line of ATM hardware and
software, and related services, enabling businesses to reduce costs, generate
new revenue streams and build customer loyalty. Self Service solutions
primarily serve the financial services industry, with particular focus on retail
banking. NCR's Store Automation solutions are designed to improve selling
productivity and checkout processes, and increase service levels. Primarily
serving the retail industry, Store Automation solutions deliver traditional
point-of-sale, web-enabled kiosk, self-checkout and electronic shelf label
solutions. The Company's Payment and Imaging solutions are designed to
digitally capture, process and retain item-based transactions, thereby helping
businesses reduce operating costs and increase efficiency. Payment and Imaging
solutions primarily serve the financial services industry. Systemedia develops,
produces and markets consumable media products principally for customers in
industries served by NCR's other operating segments. NCR's Other segment
accumulates the revenue and operating income not attributable to the above
operating segments, as well as unallocated corporate expenses.
The following tables present data for revenue and operating income by segment
for the years ended December 31:
In millions 2000 1999 1998
- ---------------------------------------------------------------------------------------
Revenue
Data Warehousing $ 1,134 $ 900 $ 890
Financial Self Service 1,511 1,565 1,626
Retail Store Automation 1,359 1,435 1,307
Payment and Imaging 304 324 370
Systemedia 502 506 515
Other 1,149 1,466 1,797
---------------------------
Consolidated revenue $ 5,959 $ 6,196 $ 6,505
---------------------------
Operating income (loss)
Data Warehousing $ (34) $ (142) $ (118)
Financial Self Service 201 224 283
Retail Store Automation (17) 20 (32)
Payment and Imaging 42 17 29
Systemedia 15 30 35
Other 63 54 (45)
Adjustments to reconcile operating income (loss)/1/ (65) (125) (50)
---------------------------
Consolidated operating income $ 205 $ 78 $ 102
---------------------------
/1/ Adjustments to reconcile operating income (loss) consist of restructuring
and other related charges, in-process research and development charges
associated with acquisitions completed in 2000, integration costs associated
with the acquisition of 4Front, and a non-recurring pension charge. (See
Notes 3, 6 and 7.)
31
The assets attributable to NCR's segments consist primarily of accounts
receivable, inventories and manufacturing assets dedicated to a specific
solution. Segment assets at December 31 were:
In millions 2000 1999 1998
- ----------------------------------------------------------------------------
Segment assets
Data Warehousing $ 382 $ 253 $ 321
Financial Self Service 547 500 634
Retail Store Automation 425 387 491
Payment and Imaging 86 78 99
Systemedia 194 185 192
Other 319 334 466
- ----------------------------------------------------------------------------
Segment assets 1,953 1,737 2,203
Assets not attributable to segments 3,153 3,158 2,689
- ----------------------------------------------------------------------------
Consolidated assets $5,106 $4,895 $4,892
- ----------------------------------------------------------------------------
Assets not attributable to segments consist primarily of fixed assets not
dedicated to a specific segment, prepaid pension costs, cash, cash equivalents
and short-term investments.
The following table presents revenue by geographic area for NCR for the years
ended December 31, 2000, 1999 and 1998. Revenues are attributed to geographic
areas/countries based principally upon the geographic area/country to which the
product is delivered or in which the service is provided.
In millions 2000 1999 1998
- ----------------------------------------------------------------------------
Revenue by geographic area
United States $2,427 $2,655 $2,846
Americas (excluding United States) 721 533 523
Europe/Middle East/Africa 1,661 1,941 2,046
Japan 582 612 687
Asia/Pacific (excluding Japan) 568 455 403
- ----------------------------------------------------------------------------
Consolidated revenue $5,959 $6,196 $6,505
- ----------------------------------------------------------------------------
The following table presents certain long-lived assets, primarily composed of
property, plant and equipment, prepaid pension, capitalized software and
goodwill, by country as of the years ended December 31:
In millions 2000 1999 1998
- ----------------------------------------------------------------------------
Long-lived assets
United States $1,401 $ 823 $ 782
Japan 411 456 486
All other countries 800 830 909
- ----------------------------------------------------------------------------
Consolidated long-lived assets $2,612 $2,109 $2,177
- ----------------------------------------------------------------------------
Concentrations
No single customer accounts for more than 10% of NCR's consolidated revenue. As
of December 31, 2000, NCR is not aware of any significant concentration of
business transacted with a particular customer that could, if suddenly
eliminated, have a material adverse impact on NCR's operations. NCR also does
not have a concentration of available sources of labor, services, licenses or
other rights that could, if suddenly eliminated, have a material adverse impact
on its operations.
A number of NCR's products, systems and solutions rely primarily on specific
suppliers for microprocessors and other component products, manufactured
assemblies, operating systems, commercial databases and other central
components. There can be no assurances that any sudden impact to the
availability or cost of these technologies would not have a material adverse
impact on NCR's operations.
Note 11. Commitments and Contingencies
Contingencies
In the normal course of business, NCR is subject to various regulations,
proceedings, lawsuits, claims and other matters, including actions under laws
and regulations related to the environment and health and safety, among others.
NCR believes the amounts provided in its consolidated financial statements, as
prescribed by generally accepted accounting principles, are adequate in light of
the probable and estimable liabilities. However, there can be no assurances that
the actual amounts required to discharge alleged liabilities from various
lawsuits, claims, legal proceedings and other matters, including the Fox River
matter discussed below, and to comply with applicable laws and regulations, will
not exceed the amounts reflected in NCR's consolidated financial statements or
will not have a material adverse effect on its consolidated results of
operations, financial condition and cash flows. Any amounts of costs that may be
incurred in excess of those amounts provided as of December 31, 2000 cannot
currently be determined.
32
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 cleanup costs, as a potentially responsible party (PRP) at
a number of sites pursuant to various state and federal laws, including the
Federal Water Pollution Control Act (FWPCA) and comparable state statutes, and
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended (CERCLA), and comparable state statutes.
Various federal agencies, Native American tribes and the State of Wisconsin
(Claimants) consider NCR to be a PRP under the FWPCA and CERCLA for alleged
natural resource damages (NRD) and remediation liability with respect to the Fox
River and related Green Bay environment (Fox River System) due to, among other
things, sediment contamination in the Fox River System allegedly resulting in
part from NCR's former carbonless paper manufacturing in Wisconsin. Claimants
have also notified a number of other paper manufacturing companies of their
status as PRPs resulting from their ongoing or former paper manufacturing
operations in the Fox River Valley, and Claimants have entered into a Memorandum
of Agreement among themselves to coordinate their actions, including the
assertion of claims against the PRPs. Additionally, the federal NRD Claimants
have notified NCR and the other PRPs of their intent to commence a NRD lawsuit,
but have not as yet instituted litigation. In addition, one of the Claimants,
the United States Environmental Protection Agency (USEPA), has formally proposed
the Fox River for inclusion on the CERCLA National Priorities List. In February
1999, the State of Wisconsin made available for public review a draft remedial
investigation and feasibility study (RI/FS), which outlines a variety of
alternatives for addressing the Fox River sediments. While the draft RI/FS did
not advocate any specific alternative or combination of alternatives, the
estimated total costs provided in the draft RI/FS ranged from $0 for no action
(which appears to be an unlikely choice) to between $143 million and $721
million depending on the alternative selected. The USEPA has indicated that the
final RI/FS will be issued in the first or second quarter of 2001 and that a
decision on the anticipated remedial action will be made in the third or fourth
quarter of 2001. During the fourth quarter of 2000, the federal Claimants
released a proposed Restoration and Compensation Determination Plan (RCDP). The
range of damages in the proposed RCDP is from $176 million to $333 million. NCR,
in conjunction with the other PRPs, has developed a substantial body of evidence
that it believes should demonstrate that selection of alternatives involving
river-wide restoration/remediation, particularly massive dredging, would be
inappropriate and unnecessary. However, because there is ongoing debate within
the scientific, regulatory, legal, public policy and legislative communities
over how to properly manage large areas of contaminated sediments, NCR believes
there is a high degree of uncertainty about the appropriate scope of
alternatives that may ultimately be required by the Claimants. An accurate
estimate of NCR's ultimate share of restoration/remediation and damages
liability cannot be made at this time due to uncertainties with respect to: the
scope and cost of the potential alternatives; the outcome of further federal and
state NRD assessments; the amount of NCR's share of such restoration/remediation
expenses; the timing of any restoration/remediation; the evolving nature of
restoration/remediation technologies and governmental policies; the
contributions from other parties; and the recoveries from insurance carriers and
other indemnitors. NCR believes the other currently named PRPs would be required
and able to pay substantial shares toward restoration and remediation, and that
there are additional parties, some of which have substantial resources, that may
also be liable. Further, in 1978 NCR sold the business to which the claims
apply, and NCR and the buyer have reached an interim settlement agreement under
which the parties are sharing both defense and liability costs.
It is difficult to estimate the future financial impact of environmental laws,
including potential liabilities. NCR accrues environmental provisions when it
is probable that a liability has been incurred and the amount or range of the
liability is reasonably estimable. Provisions for estimated losses from
environmental restoration and remediation are, depending on the site, based
primarily on internal and third-party environmental studies, estimates as to the
number and participation level of any other PRPs, the extent of the
contamination, and the nature of required remedial and restoration actions.
Accruals are adjusted as further information develops or circumstances change.
Management expects that the amounts accrued from time to time will be paid out
over the period of investigation, negotiation, remediation and restoration for
the applicable sites, which, as to the Fox River site, may be 10 to 20 years or
more. The amounts provided for environmental matters in NCR's consolidated
financial statements are the estimated gross undiscounted amounts of such
liabilities, without deductions for insurance or third-party indemnity claims.
Except for the sharing arrangement described above with respect to the Fox
River, in those cases where insurance carriers or third-party indemnitors have
agreed to pay any amounts and management believes that collectibility of such
amounts is probable, the amounts are reflected as receivables in the
consolidated financial statements.
Leases
NCR conducts certain of its sales and manufacturing operations using leased
facilities, the initial lease terms of which vary in length. Many of the leases
contain renewal options and escalation clauses. Future minimum lease payments
under noncancelable leases as of December 31, 2000 were:
Later
In millions 2001 2002 2003 2004 2005 Years Total
- ---------------------------------------------------------------------------
Operating leases $ 48 $ 40 $ 35 $ 25 $ 19 $ 149 $ 316
Total rental expense for operating leases was $83 million, $99 million and $76
million in 2000, 1999 and 1998, respectively.
33
During 2000, NCR entered into a legal agreement to lease a newly constructed
manufacturing facility in Dundee, Scotland. The construction project is being
funded entirely by the leasing company and is expected to be completed in 2002.
Upon completion of the facility, NCR has the option of committing to a 15-year
lease with minimum annual rental payments of approximately $2.4 million or to
purchase the facility at a cost of approximately $26.8 million. NCR has not
recognized any costs associated with this commitment in its 2000 results.
Note 12. Quarterly Information (Unaudited)
In millions, except
per share amounts First/1/ Second/2/ Third /3/ Fourth/4/ Total
- --------------------------------------------------------------------------------------
2000
Total revenues $1,255 $1,448 $1,464 $1,792 $5,959
Gross margin 358 470 463 576 1,867
Operating (loss) income (18) 43 67 113 205
Net (loss) income (5) 39 54 90 178
Net (loss) income per share:
Basic $(0.05) $ 0.41 $ 0.57 $ 0.93 $ 1.87
Diluted $(0.05) $ 0.39 $ 0.55 $ 0.90 $ 1.82
1999
Total revenues $1,333 $1,572 $1,530 $1,761 $6,196
Gross margin 384 499 464 543 1,890
Operating (loss) income (8) 61 52 (27) 78
Net income 3 46 53 235 337
Net income per share:
Basic $ 0.03 $ 0.47 $ 0.54 $ 2.47 $ 3.45
Diluted $ 0.03 $ 0.45 $ 0.53 $ 2.44 $ 3.35
/1/ During the first quarter of 2000, NCR recognized a $14 million expense for
restructuring and other related charges. (See Note 3.)
/2/ During the second quarter of 2000, NCR recognized a $4 million expense for
restructuring and other related charges and a $24 million in-process
research and development charge associated with acquisitions completed in
2000. (See Notes 3 and 7.)
/3/ During the third quarter of 2000, NCR recognized a $4 million expense for
restructuring and other related charge and a $1 million in-process research
and development charge associated with acquisitions completed in 2000. (See
Notes 3 and 7.) During the third quarter of 1999, net income includes a
pre-tax, significant gain of $21 million from the sale of real estate in
Madrid, Spain.
/4/ During the fourth quarter of 2000, NCR recognized a $16 million expense for
restructuring and other related charges and a $2 million charge for
integration costs associated with the acquisition of 4Front. (See Notes 3
and 7.) During the fourth quarter of 1999, NCR recognized a $125 million
expense for restructuring and other related charges and released U.S.
deferred tax valuation allowances of $232 million. (See Notes 3 and 4.) In
addition, 1999 net income includes a pre-tax, significant gain of $77
million from the sale of real estate in Akasaka, Japan.
________________________________________________________________________________
Teradata is either a registered trademark or trademark of NCR International,
Inc. in the United States and/or other countries. NCR Relationship Optimizer
and Relationship Technology are either registered trademarks or trademarks of
NCR Corporation in the United States and/or other countries. TeraCube is either
a registered trademark or trademark of MicroStrategy Incorporated. TOP END is
either a registered trademark or trademark of BEA Systems, Inc. in the United
States and/or other countries. UNIX is either a registered trademark or
trademark of The Open Group in the United States and/or other countries.
Windows NT is either a registered trademark or trademark of Microsoft
Corporation in the United States and/or other countries.
34
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
DISLCOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Most of the information required by this Item with respect to directors of NCR
is included on pages 5-7 of NCR's Proxy Statement, dated March 7, 2001, and is
incorporated herein by reference. In addition, the following information is
provided with respect to Mr. Bohnett, one of NCR's directors who has chosen not
to stand for reelection at the Company's 2001 Annual Meeting of Stockholders:
David Bohnett, 44, served as Chairman and Secretary of GeoCities, Inc., which he
founded, from 1994 until May 1999, when GeoCities merged with Yahoo!. From 1994
to 1998, Mr. Bohnett also served as GeoCities' Chief Executive Officer and
President. From 1994 to 1997, Mr. Bohnett also served as GeoCities' Chief
Financial Officer. Prior to founding GeoCities, from 1990 to 1994, Mr. Bohnett
served as Director of Product Marketing at Goal Systems International Inc.,
which merged with Legent Corp., a software company. Mr. Bohnett is a director
of Stamps.com Inc. and other privately-held ventures. He became a director of
NCR on August 10, 1999.
Information regarding executive officers is furnished in a separate disclosure
in Part I of this report because the Company did not furnish such information in
its definitive proxy statement prepared in accordance with Schedule 14A.
Information regarding Section 16(a) beneficial ownership reporting compliance of
the Company's executive officers and directors is included in the material
captioned "Section 16(a) Beneficial Ownership Reporting Compliance" on page 9 of
NCR's Proxy Statement, dated March 7, 2001, and is incorporated herein by
reference.
Item 11. EXECUTIVE COMPENSATION
The information regarding the Company's compensation of its named executive
officers is included in the material captioned "Executive Compensation" on pages
13-19 of NCR's Proxy Statement, dated March 7, 2001, and is incorporated herein
by reference. The information regarding the Company's compensation of its
directors is included in the material captioned "Compensation of Directors" on
pages 8-9 of NCR's Proxy Statement, dated March 7, 2001, and is incorporated
herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is included in the material captioned "Stock Ownership" on pages 4-5
of NCR's Proxy Statement, dated March 7, 2001, and is incorporated herein by
reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
35
PART IV
Item 14. FINANCIAL STATEMENT SCHEDULES, REPORTS ON FORM 8-K AND EXHIBITS
(a) The following documents are filed as part of this report:
(1) See index to consolidated financial statements on page 15 of this form
10-K.
(2) Financial Statement Schedule:
For each of the three years in the period ended December 31, 2000:
Schedule II - Valuation and Qualifying Accounts
(b) Reports on Form 8-K
No reports filed on Form 8-K for the quarter ended December 31, 2000.
(c) Exhibits:
Exhibits identified in parentheses below, on file with the SEC, are incorporated
herein by reference as exhibits hereto.
Exhibit No. Description
----------- -----------
3.1 Articles of Amendment and Restatement of NCR Corporation, as
amended May 14, 1999 (Exhibit 3.1 to the NCR Corporation
Form 10-Q for the period ended June 30, 1999) and Articles
Supplementary of NCR Corporation (Exhibit 3.1 to the NCR
Corporation Annual Report on Form 10-K for the year ended
December 31, 1996 (the "1996 NCR Annual Report')).
3.2 Bylaws of NCR Corporation, as amended and restated on
February 3, 2000 (Exhibit 3.2 to the NCR Corporation Annual
Report on Form 10-K for the year ended December 31, 1999
(the "1999 NCR Annual Report")).
4.1 Common Stock Certificate of NCR Corporation (Exhibit 4.1 to
the 1999 NCR Annual Report).
4.2 Preferred Share Purchase Rights Plan of NCR Corporation,
dated as of December 31, 1996, by and between NCR
Corporation and The First National Bank of Boston (Exhibit
4.2 to the 1996 NCR Annual Report).
10.1 Separation and Distribution Agreement, dated as of February
1, 1996 and amended and restated as of March 29, 1996
(Exhibit 10.1 to the Lucent Technologies Inc. Registration
Statement on Form S-1 (No. 333-00703) (the "Lucent
Registration Statement")).
10.2 Employee Benefits Agreement, dated as of November 20, 1996,
by and between AT&T Corp. and NCR Corporation (Exhibit 10.2
to the 1996 NCR Annual Report).
10.3 Volume Purchase Agreement, dated as of November 20, 1996, by
and between AT&T Corp. and NCR Corporation (Exhibit 10.3 to
the 1996 NCR Annual Report).
10.4 Patent License Agreement, effective as of March 29, 1996, by
and among AT&T Corp., NCR Corporation, and Lucent
Technologies Inc. (Exhibit 10.7 to the Lucent Registration
Statement).
10.5 Amended and Restated Technology License Agreement, effective
as of March 29, 1996, by and among AT&T Corp., NCR
Corporation, and Lucent Technologies Inc. (Exhibit 10.8 to
the Lucent Registration Statement).
10.6 Tax Sharing Agreement, dated as of February 1, 1996, and
amended and restated as of March 29, 1996, by and among AT&T
Corp., NCR Corporation, and Lucent Technologies Inc.
(Exhibit 10.6 to the Lucent Registration Statement).
10.7 NCR Management Stock Plan (Exhibit 10.8 to the 1996 NCR
Annual Report).
10.8 NCR WorldShares Plan (Exhibit 10.9 to the 1996 NCR Annual
Report).
10.9 NCR Senior Executive Retirement, Death & Disability Plan
(Exhibit 10.10 to the NCR Corporation Registration Statement
on Form 10 (No. 001-00395), dated November 25, 1996 (the
"NCR Registration Statement")).
10.10 The Retirement Plan for Officers of NCR (Exhibit 10.11 to
the NCR Registration Statement).
10.11 Credit Agreement, dated as of November 20, 1996, among NCR
Corporation, The Lenders Party thereto, The Chase Manhattan
Bank, as Administrative Agent, and Bank of America National
Trust & Savings Association, as Documentation Agent (Exhibit
10.15 to the NCR Registration Statement).
36
10.12 NCR Change-in-Control Severance Plan for Executive Officers
(Exhibit 10.16 to the 1996 NCR Annual Report).
10.13 Change-in-Control Agreement by and between NCR and Lars
Nyberg (Exhibit 10.2 to the NCR Corporation Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997).
10.14 NCR Director Compensation Program (Exhibit 10.18 to the 1996
NCR Annual Report).
10.14.1 First Amendment to the NCR Director Compensation Program
(Exhibit 10.14.1 to the 1999 NCR Annual Report).
10.14.2 Second Amendment to the NCR Director Compensation Program
(Exhibit 10.14.2 to the 1999 NCR Annual Report).
10.15 NCR Long Term Incentive Program and NCR Management Incentive
Program (Exhibit 10.19 to the 1996 Annual Report).
10.16 NCR Supplemental Pension Plan for AT&T Transfers, restated
effective January 1, 1997 (Exhibit 10.1 to the NCR
Corporation Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998).
10.17 NCR Mid-Career Hire Supplemental Pension Plan, restated
effective January 1, 1997 (Exhibit 10.2 to the NCR
Corporation Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998).
10.18 NCR Nonqualified Excess Plan, restated effective January 1,
1996 (Exhibit 10.3 to the NCR Corporation Quarterly Report
on Form 10-Q for the quarter ended March 31, 1998).
10.19 Purchase and Manufacturing Agreement, effective April 27,
1998, by and between NCR Corporation and Solectron
Corporation (Exhibit 10.1 to the NCR Corporation Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998).
Certain portions of this exhibit have been granted
confidential treatment by the Securities & Exchange
Commission.
10.20 Agreement and Plan of Merger by and among NCR Corporation,
NCR Merger Sub Inc. and 4Front Technologies, Inc. dated
August 2, 2000 (Annex A from the 4Front Technologies, Inc.
Notice of Annual Meeting of Stockholders and Proxy Statement
dated September 25, 2000).
10.21 Amendment to Agreement and Plan of Merger by and among NCR
Corporation, NCR Merger Sub Parent, Inc., NCR Merger Sub
Inc., and 4Front Technologies, Inc. dated October 6, 2000
(Exhibit 10.1(b) to the NCR Corporation Quarterly Report on
Form 10-Q for the quarter ended September 30, 2000).
10.22 Letter Agreement dated August 5, 1998 (Exhibit 10.2 to the
NCR Corporation Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998).
10.23 Termination Agreement dated May 26, 1999 (Exhibit 10.1 to
the NCR Corporation Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999).
10.24 Employment Agreement with Lars Nyberg (Exhibit 10.22 to the
1999 NCR Annual Report).
10.25 Letter Agreement dated June 20, 2000 (Exhibit 10.1 to the
NCR Corporation Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000).
10.26 Letter Agreement dated October 18, 2000.
10.27 Letter Agreement dated January 15, 2001.
21 Subsidiaries of NCR Corporation.
23.1 Consent of independent accountants.
37
NCR will furnish, without charge, to a security holder upon written request a
copy of the 2001 Proxy Statement, portions of which are incorporated herein by
reference. NCR will furnish any other exhibit at cost. Document requests are
available by calling or writing to:
NCR - Investor Relations
1700 South Patterson Boulevard
Dayton, OH 45479
Phone: 937-445-5905
investor.relations@ncr.com
http://www.ncr.com/about_NCR/ir/invest_rel.asp
38
NCR Corporation
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In millions)
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
Balance at Charged to Charged to Balance
Beginning Costs & Other at End
Description of Period Expenses Accounts Deductions of Period
----------- ---------- ---------- ---------- ---------- ---------
Year Ended December 31, 2000
Allowance for doubtful accounts $ 31 $ 17 $ - $ 24 $ 24
Deferred tax asset valuation allowance 285 - 19 - 304
Inventory valuation reserves 67 27 - 41 53
Reserves related to business restructuring 73 - (37) 36 -
Year Ended December 31, 1999
Allowance for doubtful accounts $ 47 $ 7 $ - $ 23 $ 31
Deferred tax asset valuation allowance 498 59 - 272 285
Inventory valuation reserves 93 21 - 47 67
Reserves related to business restructuring - 83 - 10 73
Year Ended December 31, 1998
Allowance for doubtful accounts $ 36 $ 26 $ - $ 15 $ 47
Deferred tax asset valuation allowance 553 103 - 158 498
Inventory valuation reserves 142 24 - 73 93
Reserves related to business restructuring 165 - (111) 54 -
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NCR CORPORATION
Date: March 8, 2001 By: /s/ Lars Nyberg
---------------
Lars Nyberg, Chairman of the
Board, Chief Executive Officer
and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Signature Title
- --------- -----
/s/ Lars Nyberg Chairman of the Board, Chief Executive
- ------------------------------
Lars Nyberg Officer and President
/s/ David Bearman Senior Vice President and Chief Financial
- ------------------------------
David Bearman Officer (Principal Financial and Accounting
Officer)
/s/ David Bohnett Director
- ------------------------------
David Bohnett
/s/ David R. Holmes Director
- ------------------------------
David R. Holmes
/s/ Linda Fayne Levinson Director
- ------------------------------
Linda Fayne Levinson
/s/ James R. Long Director
- ------------------------------
James R. Long
/s/ Ronald A. Mitsch Director
- ------------------------------
Ronald A. Mitsch
Director
- ------------------------------
C. K. Prahalad
/s/ James O. Robbins Director
- ------------------------------
James O. Robbins
/s/ William S. Stavropoulos Director
- ------------------------------
William S. Stavropoulos
Date: March 8, 2001
40