UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-Q
________________________
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended June 30, 2020
Commission File Number 001-00395
________________________
(Exact name of registrant as specified in its charter)
________________________
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (937 ) 445-5000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
þ | Accelerated filer | o | |||||||||||||||
Non-accelerated filer | o | Smaller reporting company | |||||||||||||||
Emerging Growth Company | |||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transaction period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
As of July 17, 2020, there were approximately 128.4 million shares of the registrant's common stock issued and outstanding.
TABLE OF CONTENTS
| PART I. Financial Information | ||||||||
| Description | Page | |||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II. Other Information | ||||||||
| Description | Page | |||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 6. | ||||||||
2
Part I. Financial Information
Item 1. FINANCIAL STATEMENTS
NCR Corporation
Condensed Consolidated Statements of Operations (Unaudited)
| In millions, except per share amounts | Three months ended June 30 | Six months ended June 30 | |||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Product revenue | $ | $ | $ | $ | |||||||||||||||||||
| Service revenue | |||||||||||||||||||||||
| Total revenue | |||||||||||||||||||||||
| Cost of products | |||||||||||||||||||||||
| Cost of services | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Research and development expenses | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Income (loss) from operations | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Other expense, net | ( | ( | ( | ( | |||||||||||||||||||
| Income (loss) from continuing operations before income taxes | |||||||||||||||||||||||
| Income tax expense (benefit) | ( | ( | |||||||||||||||||||||
| Income (loss) from continuing operations | |||||||||||||||||||||||
| Loss from discontinued operations, net of tax | |||||||||||||||||||||||
| Net income (loss) | |||||||||||||||||||||||
| Net income (loss) attributable to noncontrolling interests | |||||||||||||||||||||||
| Net income (loss) attributable to NCR | $ | $ | $ | $ | |||||||||||||||||||
| Amounts attributable to NCR common stockholders: | |||||||||||||||||||||||
| Income (loss) from continuing operations | $ | $ | $ | $ | |||||||||||||||||||
| Dividends on convertible preferred stock | ( | ( | ( | ( | |||||||||||||||||||
| Income (loss) from continuing operations attributable to NCR common stockholders | |||||||||||||||||||||||
| Loss from discontinued operations, net of tax | |||||||||||||||||||||||
| Net income (loss) attributable to NCR common stockholders | $ | $ | $ | $ | |||||||||||||||||||
| Income (loss) per share attributable to NCR common stockholders: | |||||||||||||||||||||||
| Income (loss) per common share from continuing operations | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Net income (loss) per common share | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average common shares outstanding | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
3
NCR Corporation
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
| In millions | Three months ended June 30 | Six months ended June 30 | |||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net income (loss) | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive (loss) income: | |||||||||||||||||||||||
| Currency translation adjustments | |||||||||||||||||||||||
| Currency translation gains (losses) | ( | ( | |||||||||||||||||||||
| Derivatives | |||||||||||||||||||||||
| Unrealized gains (losses) on derivatives | ( | ||||||||||||||||||||||
| Gains on derivatives recognized during the period | ( | ( | ( | ||||||||||||||||||||
| Less income tax | |||||||||||||||||||||||
| Employee benefit plans | |||||||||||||||||||||||
| Amortization of prior service benefit | ( | ( | ( | ( | |||||||||||||||||||
| Amortization of actuarial losses (gains) | ( | ( | ( | ||||||||||||||||||||
| Less income tax | |||||||||||||||||||||||
| Other comprehensive income (loss) | ( | ( | |||||||||||||||||||||
| Total comprehensive income (loss) | |||||||||||||||||||||||
| Less comprehensive income attributable to noncontrolling interests: | |||||||||||||||||||||||
| Net income (loss) | |||||||||||||||||||||||
| Currency translation losses | ( | ||||||||||||||||||||||
| Amounts attributable to noncontrolling interests | |||||||||||||||||||||||
| Comprehensive income (loss) attributable to NCR | $ | $ | $ | $ | |||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
4
NCR Corporation
Condensed Consolidated Balance Sheets (Unaudited)
| In millions, except per share amounts | June 30, 2020 | December 31, 2019 | |||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net of allowances of $54 and $44 as of June 30, 2020 and December 31, 2019, respectively | |||||||||||
| Inventories | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Intangibles, net | |||||||||||
| Operating lease assets | |||||||||||
| Prepaid pension cost | |||||||||||
| Deferred income taxes | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and stockholders’ equity | |||||||||||
| Current liabilities | |||||||||||
| Short-term borrowings | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Payroll and benefits liabilities | |||||||||||
| Contract liabilities | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Pension and indemnity plan liabilities | |||||||||||
| Postretirement and postemployment benefits liabilities | |||||||||||
| Income tax accruals | |||||||||||
| Operating lease liabilities | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and Contingencies (Note 9) | |||||||||||
| Series A convertible preferred stock: par value $0.01 per share, 3.0 shares authorized, 0.4 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively; redemption amount and liquidation preference of $405 and $399 as of June 30, 2020 and December 31, 2019, respectively | |||||||||||
| Stockholders’ equity | |||||||||||
| NCR stockholders’ equity | |||||||||||
| Preferred stock: par value $0.01 per share, 100.0 shares authorized, no shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively | |||||||||||
| Common stock: par value $0.01 per share, 500.0 shares authorized, 128.2 and 127.7 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively | |||||||||||
| Paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total NCR stockholders’ equity | |||||||||||
| Noncontrolling interests in subsidiaries | |||||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See Notes to Condensed Consolidated Financial Statements.
5
NCR Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
| In millions | Six months ended June 30 | ||||||||||
| 2020 | 2019 | ||||||||||
| Operating activities | |||||||||||
| Net income (loss) | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Loss from discontinued operations | |||||||||||
| Depreciation and amortization | |||||||||||
| Stock-based compensation expense | |||||||||||
| Deferred income taxes | ( | ( | |||||||||
| Impairment of other assets | |||||||||||
| Gain on sale of property, plant and equipment | ( | ( | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Receivables | ( | ||||||||||
| Inventories | ( | ( | |||||||||
| Current payables and accrued expenses | ( | ( | |||||||||
| Contract liabilities | |||||||||||
| Employee benefit plans | ( | ( | |||||||||
| Other assets and liabilities | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Investing activities | |||||||||||
| Expenditures for property, plant and equipment | ( | ( | |||||||||
| Proceeds from sale of property, plant and equipment | |||||||||||
| Additions to capitalized software | ( | ( | |||||||||
| Business acquisitions, net | ( | ( | |||||||||
| Purchases of investments | ( | ||||||||||
| Proceeds from sales of investments | |||||||||||
| Other investing activities, net | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Financing activities | |||||||||||
| Short term borrowings, net | |||||||||||
| Payments on term credit facilities | ( | ( | |||||||||
| Payments on revolving credit facilities | ( | ( | |||||||||
| Borrowings on term credit facilities | |||||||||||
| Borrowings on revolving credit facilities | |||||||||||
| Proceeds from issuance of senior unsecured notes | |||||||||||
| Debt issuance costs | ( | ||||||||||
| Series A Preferred Stock Dividends | ( | ||||||||||
| Repurchases of Common Stock | ( | ||||||||||
| Proceeds from employee stock plans | |||||||||||
| Tax withholding payments on behalf of employees | ( | ( | |||||||||
| Net change in client funds obligations | ( | ||||||||||
| Other financing activities | ( | ||||||||||
| Net cash provided by (used in) financing activities | ( | ||||||||||
| Cash flows from discontinued operations | |||||||||||
| Net cash provided by (used in) operating activities | ( | ||||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | ( | ||||||||||
| Increase (decrease) in cash, cash equivalents, and restricted cash | ( | ||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | |||||||||
See Notes to Condensed Consolidated Financial Statements.
6
NCR Corporation
Condensed Consolidated Statements of Changes in Stockholder's Equity (Unaudited)
| NCR Stockholders | ||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Accumulated Other Comprehensive (Loss) Income | Non-Redeemable Noncontrolling Interests in Subsidiaries | ||||||||||||||||||||||||||||||||||||||||||
| In millions | Shares | Amount | Paid-in Capital | Retained Earnings | Total | |||||||||||||||||||||||||||||||||||||||
| December 31, 2019 | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||
| Total comprehensive income (loss) | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Employee stock purchase and stock compensation plans | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Series A convertible preferred stock dividends | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||
| Repurchase of Company common stock | ( | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||
| March 31, 2020 | ( | |||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Total comprehensive income | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Employee stock purchase and stock compensation plans | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Series A convertible preferred stock dividends | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||
| June 30, 2020 | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
7
NCR Corporation
Condensed Consolidated Statements of Changes in Stockholder's Equity (Unaudited) - (Continued)
| NCR Stockholders | ||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Accumulated Other Comprehensive (Loss) Income | Non-Redeemable Noncontrolling Interests in Subsidiaries | ||||||||||||||||||||||||||||||||||||||||||
| In millions | Shares | Amount | Paid-in Capital | Retained Earnings | Total | |||||||||||||||||||||||||||||||||||||||
| December 31, 2018 | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Total comprehensive income | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Employee stock purchase and stock compensation plans | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Series A convertible preferred stock dividends | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||
| March 31, 2019 | ( | |||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||
| Total comprehensive income | — | — | — | ( | — | |||||||||||||||||||||||||||||||||||||||
| Employee stock purchase and stock compensation plans | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Repurchase of Common Stock | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Series A convertible preferred stock dividends | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||
| June 30, 2019 | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
8
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Index to Financial Statements and Supplemental Data
9
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates The preparation of financial statements in accordance with GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and revenue and expenses during the period reported.
Although our estimates contemplate current and expected future conditions, as applicable, it is reasonably possible that actual conditions could differ from our expectations, which could materially affect our results of operations and financial position. In particular, a number of estimates have been and will continue to be affected by the ongoing novel coronavirus (COVID-19) pandemic. The severity, magnitude and duration of the COVID-19 pandemic, and the resulting economic consequences, are uncertain, rapidly changing and difficult to predict. As a result, our accounting estimates and assumptions may change over time as a consequence of the effects of COVID-19.
Such changes could result in future impairments of goodwill, intangible assets, long-lived assets, incremental credit losses on accounts receivable and decreases in the carrying amount of our tax assets.
The reconciliation of cash, cash equivalents and restricted cash in the Condensed Consolidated Statements of Cash Flows is as follows:
| In millions | June 30 | ||||||||||
| 2020 | 2019 As Revised | ||||||||||
| Reconciliation of cash, cash equivalents and restricted cash as shown in the Condensed Consolidated Statements of Cash Flows | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash included in other assets | |||||||||||
| Funds held for clients included in other current assets | |||||||||||
| Cash included in settlement processing assets included in other current assets | |||||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | |||||||||
Contract Assets and Liabilities The following table presents the net contract asset and contract liability balances as of June 30, 2020 and December 31, 2019.
10
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
| In millions | Location in the Condensed Consolidated Balance Sheet | June 30, 2020 | December 31, 2019 | ||||||||||||||
| Current portion of contract assets | Other current assets | $ | $ | ||||||||||||||
| Current portion of contract liabilities | Contract liabilities | $ | $ | ||||||||||||||
| Non-current portion of contract liabilities | Other liabilities | $ | $ | ||||||||||||||
During the three months ended June 30, 2020, the Company recognized $303 million in revenue that was included in contract liabilities as of December 31, 2019.
Recent Accounting Pronouncements
Adopted
In June 2016, the Financial Accounting Standards Board ("FASB") issued an accounting standards update with new guidance on accounting for credit losses on financial instruments. The new guidance includes an impairment model for estimating credit losses that is based on expected losses, rather than incurred losses. This accounting standards update is effective prospectively for fiscal years and interim periods beginning after December 15, 2019, with early adoption permitted. The adoption of this accounting standards update did not have a material effect on the Company's net income, cash flows or financial condition.
In August 2018, the FASB issued an accounting standards update with new guidance on fair value measurement disclosure requirements that requires the disclosure of additions to and transfers into and out of Level 3 of the fair value hierarchy. This accounting standards update also requires disclosure about the uncertainty in measurement as of the reporting date. The new standard became effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 with early adoption permitted. The adoption of this accounting standards update did not have a material impact on our financial statement disclosures.
In August 2018, the FASB issued an accounting standards update related to accounting for implementation costs incurred in a cloud computing arrangement that is also a service contract. If a cloud computing arrangement also includes an internal-use software, an intangible asset is recognized, and a liability is recognized for any payments related to the software license. However, if a cloud computing arrangement does not include a software license, the entity should account for the arrangement as a service contract and any fees associated with the service are expensed as incurred. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The adoption of this accounting standards update did not have a material effect on the Company's net income, cash flows or financial condition.
In December 2019, the FASB issued an accounting standards update with new guidance that removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. This accounting standards update also adds guidance to reduce complexity in certain areas, including recognizing measures for the accounting for income taxes. This accounting standards update is effective for fiscal years and interim periods beginning after December 15, 2020, with early adoption permitted. The adoption of this accounting standards update did not have a material impact on the Company's net income, cash flows or financial condition.
11
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
2. REVISIONS OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
During 2020, the Company determined there were errors in its previously issued Consolidated Statements of Cash Flows related to the business activities that commenced upon the acquisition of JetPay Corporation (JetPay) in December 2018. As a result of these errors, the Company's cash, cash equivalents and restricted cash within the Consolidated Statement of Cash Flows for the years ended December 31, 2019 and 2018 and within the Condensed Consolidated Statement of Cash Flows for the interim periods in fiscal 2019 and for the three months ended March 31, 2020, were understated. This also resulted in misclassifications of activities between net cash from operations, investing, and financing activities in each of the periods noted above.
More specifically, the Company determined: (i) the funds held for clients represent cash balances that, based upon the Company's intent, are restricted solely for the purposes of satisfying the obligations to remit funds relating to the Company's payroll and payroll tax filing services, which are classified as client fund obligations; and (ii) there are restricted cash balances included within settlement processing assets that are not yet due to the merchants. Such funds are held in a fiduciary duty, and are not available for the Company to use to fund its cash requirements. As a result, (i) the business acquisition purchase price upon the acquisition of JetPay should have been reflected net of these cash balances and (ii) the restricted cash in all periods should have been presented within cash, cash equivalents and restricted cash within the Consolidated Statement of Cash Flows.
Additionally, the Company determined the presentation of the cash inflow or outflow from client fund obligations should be reflected within financing activities rather than within operating activities beginning in the third quarter of 2019 and through December 31, 2019. However, in analyzing the impact of the change to include funds held for clients within cash, cash equivalents and restricted cash, it was determined the cash inflow or outflow from client funds obligations was incorrect.
The Company assessed the materiality of these errors on the prior period financial statements in accordance with SEC Staff Bulletin No. 99, Materiality, codified in ASC Topic 250, Accounting Changes and Error Corrections. Based on this assessment, the Company determined the impact from these errors was not material to its previously filed annual or interim financial statements. The corrections had no impact on the Company's Consolidated Statements of Income, Consolidated Statements of Comprehensive Income or Consolidated Balance Sheets in previously issued annual or interim financial statements.
However, the Company has determined that it will revise its previously issued annual and interim financial statements to correct these errors within the Consolidated Statements of Cash Flows. The revision for the Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2019 is reflected within the accompanying Condensed Consolidated Financial Statements and the details for the revision for all periods are presented below. The Company will effect such revisions to its Consolidated Statements of Cash Flows for the years ended December 31, 2019 and 2018 in connection with the future filing of its 2020 Annual Report on Form 10-K, which contain these comparative periods and will effect the revisions for the three months ended March 31, 2020 and the nine months ended September 30, 2019 in connection with the future filings of its Form 10-Q which contain these comparative periods. In addition, in the previously issued unaudited interim financial statements for the three months ended March 31, 2020, the Company revised its beginning and ending cash, cash equivalents and restricted cash balances for the three months ended March 31, 2020 and 2019, which corrected for certain errors that were known at the time of such filing.
12
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
| For the year ended December 31, 2018 | |||||||||||||||||
| In millions | As Reported | Adjustment | As Revised | ||||||||||||||
| Business acquisitions, net | $ | ( | $ | $ | ( | ||||||||||||
| Net cash provided by (used in) investing activities | $ | ( | $ | $ | ( | ||||||||||||
| Net increase (decrease) in client obligations | $ | $ | $ | ||||||||||||||
| Net cash provided by (used in) financing activities | $ | ( | $ | $ | ( | ||||||||||||
| Increase (decrease) in cash, cash equivalents and restricted cash | $ | ( | $ | $ | ( | ||||||||||||
| Cash, cash equivalents and restricted cash at the end of the period | $ | $ | $ | ||||||||||||||
| For the three months ended March 31, 2019 | |||||||||||||||||||||||||||||
| In millions | As Reported in March 31, 2019 Form 10-Q | Adjustment | As Revised in March 31, 2020 Form 10-Q | Further Adjustment | As Revised | ||||||||||||||||||||||||
| Increase (decrease) in other assets and liabilities | $ | ( | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||
| Net cash provided by (used in) operating activities | $ | ( | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||
| Net increase (decrease) in client obligations | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Net cash provided by (used in) financing activities | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Increase (decrease) in cash, cash equivalents and restricted cash | $ | ( | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||
| Cash, cash equivalents and restricted cash at the beginning of the period | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Cash, cash equivalents and restricted cash at the end of the period | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| For the six months ended June 30, 2019 | |||||||||||||||||
| In millions | As Reported | Adjustment | As Revised | ||||||||||||||
| Cash, cash equivalents and restricted cash at the beginning of the period | $ | $ | $ | ||||||||||||||
| Cash, cash equivalents and restricted cash at the end of the period | $ | $ | $ | ||||||||||||||
| For the nine months ended September 30, 2019 | |||||||||||||||||
| In millions | As Reported | Adjustment | As Revised | ||||||||||||||
| Net increase (decrease) in client funds | $ | ( | $ | $ | |||||||||||||
| Net cash provided by (used in) investing activities | $ | ( | $ | $ | ( | ||||||||||||
| Net increase (decrease) in client obligations | $ | $ | ( | $ | ( | ||||||||||||
| Net cash provided by (used in) financing activities | $ | $ | ( | $ | |||||||||||||
| Increase (decrease) in Cash, cash equivalents and restricted cash | $ | ( | $ | ( | $ | ( | |||||||||||
| Cash, cash equivalents and restricted cash at the beginning of the period | $ | $ | $ | ||||||||||||||
| Cash, cash equivalents and restricted cash at the end of the period | $ | $ | $ | ||||||||||||||
13
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
| For the year ended December 31, 2019 | |||||||||||||||||
| In millions | As Reported | Adjustment | As Revised | ||||||||||||||
| Increase (decrease) in other assets and liabilities | $ | $ | $ | ||||||||||||||
| Net cash provided by (used in) operating activities | $ | $ | $ | ||||||||||||||
| Net increase (decrease) in client obligations | $ | ( | $ | $ | |||||||||||||
| Net cash provided by (used in) investing activities | $ | ( | $ | $ | ( | ||||||||||||
| Net increase (decrease) in client obligations | $ | $ | ( | $ | ( | ||||||||||||
| Net cash provided by (used in) financing activities | $ | ( | $ | ( | $ | ( | |||||||||||
| Increase (decrease) in Cash, cash equivalents and restricted cash | $ | $ | ( | $ | |||||||||||||
| Cash, cash equivalents and restricted cash at the beginning of the period | $ | $ | $ | ||||||||||||||
| Cash, cash equivalents and restricted cash at the end of the period | $ | $ | $ | ||||||||||||||
| For the three months ended March 31, 2020 | |||||||||||||||||
| In millions | As Reported | Adjustment | As Revised | ||||||||||||||
| Increase (decrease) in other assets and liabilities | $ | ( | $ | ( | $ | ( | |||||||||||
| Net cash provided by (used in) operating activities | $ | $ | ( | $ | |||||||||||||
| Increase (decrease) in Cash, cash equivalents and restricted cash | $ | $ | ( | $ | |||||||||||||
| Cash, cash equivalents and restricted cash at the beginning of the period | $ | $ | $ | ||||||||||||||
| Cash, cash equivalents and restricted cash at the end of the period | $ | $ | $ | ||||||||||||||
Consistent with the revision to the Consolidated Statement of Cash Flows described above, the Company has revised the reconciliation of cash, cash equivalents and restricted cash included in the Consolidated Statement of Cash Flows for all periods that include a revision. The appropriate changes are reflected in our Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2019, and the corrections, as reflected in the table below to include funds held for clients and cash included in settlement assets within cash, cash equivalents and restricted cash, will be revised in connection with the future Form 10-K and 10-Q filings discussed above.
| In millions | March 31, 2020 | December 31, 2019 | September 30, 2019 | June 30, 2019 | March 31, 2019 | December 31, 2018 | ||||||||||||||||||||||||||||||||
| Reconciliation of cash, cash equivalents and restricted cash as shown in the Condensed Consolidated Statements of Cash Flows | ||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Restricted cash included in other assets | ||||||||||||||||||||||||||||||||||||||
| Funds held for clients included in other current assets | ||||||||||||||||||||||||||||||||||||||
| Cash included in settlement processing assets included in other current assets | ||||||||||||||||||||||||||||||||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
3. BUSINESS COMBINATIONS
Acquisition of Origami
On June 6, 2019, our subsidiary, NCR Brasil Ltda. (NCR Brasil) entered into a definitive agreement with OKI Electric Industry Co., Ltd. and its Brazilian subsidiary, OKI Brasil Industria e Comércio de Produtos e Tecnologia em Automação S.A. (OKI
14
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
Brasil), to purchase OKI Brasil's IT services and select software assets for use in the financial, retail and other industries. Neither OKI Brasil's manufacturing operations nor its printing business in Brazil are included in the acquisition. On April 9, 2020, NCR Brasil completed this acquisition through the purchase of 100% of the quotas of Origami Brasil Tecnologia e Serviços em Automação Ltda. (Origami), which became a wholly owned subsidiary of NCR Brasil. The purchase price was approximately $5 million, of which $2 million is payable in cash within two years of the acquisition date, subject to certain conditions, and the remaining $3 million is payable in cash within six years of the acquisition date, subject to purchase price adjustments.
The fair value of consideration transferred to acquire Origami was allocated to the identifiable assets and liabilities assumed based upon their estimated fair values as of the date of acquisition as set forth below. The acquisition is expected to result in a bargain purchase gain based on the purchase price being limited mostly to the net assets of the business excluding cash and investments.
| In millions | Fair Value | ||||
| Cash acquired | $ | ||||
| Investments acquired | |||||
| Tangible assets acquired | |||||
| Deferred gain on business acquisition | ( | ||||
| Liabilities assumed | ( | ||||
| Total purchase consideration | $ | ||||
This allocation of the purchase price is provisional as of June 30, 2020 and the deferred gain recognized may be subject to future adjustments as the Company obtains additional information to finalize and reassess the accounting for the business combination. The estimated deferred gain on business acquisition of $10 million has been included within other current liabilities in the Condensed Consolidated Balance Sheet.
The operating results of Origami have been included within NCR's results as of the closing date of the acquisition. Supplemental pro forma information and actual revenue and earnings since the acquisition date have not been provided as this acquisition did not have a material impact on the Company's Condensed Consolidated Statements of Operations.
4. GOODWILL AND LONG-LIVED ASSETS
Hospitality Goodwill Assessment In addition to our annual goodwill impairment test performed in the fourth quarter, we perform interim impairment tests for long-lived and intangible assets, including goodwill, whenever events or changes in circumstances indicate that the carrying amount of the asset (group) may not be recoverable.
Late in the quarter ended March 31, 2020, there was significant market volatility driven by the COVID-19 pandemic that drove uncertainty around our full year revenue and operating income expectations. As a result, we withdrew our full year outlook for 2020 on March 31, 2020, which was previously provided during our fourth quarter 2019 earnings conference call on February 11, 2020. Given the rapidly changing environment, we considered if there was an indication that the carrying value of net assets were in excess of the fair value for each of our reporting units. This consideration included the expected impacts to the current year cash flows, and the potential impacts to future cash flows, as well as the excess of the fair value over the carrying value from the prior year annual assessment. As a result, we determined there was an indication that the carrying value of the net assets assigned to the Hospitality reporting unit may not be recoverable.
The fair value of the Hospitality reporting unit was estimated using a weighted methodology considering the output from both the income and market approaches. The income approach incorporates the use of discounted cash flow (DCF) analysis. A number of significant assumptions and estimates are involved in the application of the discounted cash flow model to forecast operating cash flows, including revenue growth, operating income margin and discount rate. The market approach is performed using the Guideline Public Companies (GPC) method, which is based on earnings multiple data of peer companies.
For the Hospitality reporting unit, the Company expects the COVID-19 pandemic to have a significant impact to our customers in the table service market, travel and entertainment market and small and medium business market in the near term. The Company expects the long term growth strategy to remain intact with previous growth expectations returning in 2021. Based on
15
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
these assumptions, the Company determined the fair value of the Hospitality segment continues to be greater than the carrying value and therefore, no impairment existed as of March 31, 2020. Additionally, as of June 30, 2020, the Company determined there was no indication the carrying value of the net assets assigned to the Hospitality segment may not be recoverable. However, if the actual results or the anticipated timing of the recovery from the COVID-19 pandemic differ from our expectations for the Hospitality, or any, reporting unit, there is a possibility we would have to perform another interim impairment test in 2020, which could lead to an impairment of goodwill or other assets.
Goodwill by Segment The carrying amounts of goodwill by segment as of June 30, 2020 and December 31, 2019 are included in the table below. Foreign currency fluctuations are included within other adjustments.
| December 31, 2019 | June 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| In millions | Goodwill | Accumulated Impairment Losses | Total | Additions | Impairment | Other | Goodwill | Accumulated Impairment Losses | Total | ||||||||||||||||||||||||||||||||||||||||||||
| Banking | $ | $ | ( | $ | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||
| Retail | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Hospitality | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Total goodwill | $ | $ | ( | $ | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||
Identifiable Intangible Assets NCR's purchased intangible assets, reported in intangibles, net in the Condensed Consolidated Balance Sheets, were specifically identified when acquired, and are deemed to have finite lives. The gross carrying amount and accumulated amortization for NCR’s identifiable intangible assets were as set forth in the table below.
| Amortization Period (in Years) | June 30, 2020 | December 31, 2019 | |||||||||||||||||||||||||||
| In millions | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||||||||||||||
| Identifiable intangible assets | |||||||||||||||||||||||||||||
| Reseller & customer relationships | 1 - 20 | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||
| Intellectual property | 2 - 8 | ( | ( | ||||||||||||||||||||||||||
| Customer contracts | 8 | ( | ( | ||||||||||||||||||||||||||
| Tradenames | 1 - 10 | ( | ( | ||||||||||||||||||||||||||
| Total identifiable intangible assets | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||
The aggregate amortization expense (actual and estimated) for identifiable intangible assets for the following periods is:
| In millions | Three months ended June 30, 2020 | Six months ended June 30, 2020 | Remainder of 2020 (estimated) | ||||||||||||||
| Amortization expense | $ | $ | $ | ||||||||||||||
| For the years ended December 31 (estimated) | ||||||||||||||||||||||||||||||||
| In millions | 2021 | 2022 | 2023 | 2024 | 2025 | |||||||||||||||||||||||||||
| Amortization expense | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
16
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
The following table summarizes the Company's short-term borrowings and long-term debt:
| June 30, 2020 | December 31, 2019 | |||||||||||||||||||||||||
| In millions, except percentages | Amount | Weighted-Average Interest Rate | Amount | Weighted-Average Interest Rate | ||||||||||||||||||||||
| Short-Term Borrowings | ||||||||||||||||||||||||||
Current portion of Senior Secured Credit Facility (1) | $ | $ | ||||||||||||||||||||||||
| Trade Receivables Securitization Facility | ||||||||||||||||||||||||||
Other (1) | ||||||||||||||||||||||||||
| Total short-term borrowings | $ | $ | ||||||||||||||||||||||||
| Long-Term Debt | ||||||||||||||||||||||||||
| Senior Secured Credit Facility: | ||||||||||||||||||||||||||
Term loan facility (1) | $ | $ | ||||||||||||||||||||||||
Revolving credit facility (1) | ||||||||||||||||||||||||||
| Senior notes: | ||||||||||||||||||||||||||
| 5.00% Senior Notes due 2022 | ||||||||||||||||||||||||||
| 6.375% Senior Notes due 2023 | ||||||||||||||||||||||||||
| 8.125% Senior Notes due 2025 | ||||||||||||||||||||||||||
| 5.750% Senior Notes due 2027 | ||||||||||||||||||||||||||
| 6.125% Senior Notes due 2029 | ||||||||||||||||||||||||||
| Deferred financing fees | ( | ( | ||||||||||||||||||||||||
Other (1) | ||||||||||||||||||||||||||
| Total long-term debt | $ | $ | ||||||||||||||||||||||||
Senior Secured Credit Facility On August 28, 2019, the Company entered into an amended and restated senior secured credit facility with and among certain subsidiaries of NCR (the Foreign Borrowers), the lenders party thereto and JPMorgan Chase Bank, NA (JPMCB) as the administrative agent, refinancing its term loan facility and revolving credit facility thereunder (the Senior Secured Credit Facility). The Senior Secured Credit Facility consists of a term loan facility with an aggregate principal commitment of $750 million, of which $744 million was outstanding as of June 30, 2020. Additionally, the Senior Secured Credit Facility provides for a five-year revolving credit facility with an aggregate principal amount of $1.1 billion, of which $1.07 billion was outstanding as of June 30, 2020. The revolving credit facility also allows a portion of the availability to be used for letters of credit, and as of June 30, 2020, there were $28 million of letters of credit outstanding.
Up to $400 million of the revolving credit facility is available to the Foreign Borrowers, as long as there is availability under the revolving credit facility. Term loans were made to the Company in U.S. Dollars, and loans under the revolving credit facility are available in U.S. Dollars, Euros and Pound Sterling.
The outstanding principal balance of the term loan facility is required to be repaid in equal quarterly installments of approximately 0.25 % of the aggregate principal amount that began with the fiscal quarter ending December 31, 2019, with the balance being due at maturity on August 28, 2026. Borrowings under the revolving portion of the credit facility are due August 28, 2024. Revolving loans outstanding under the Senior Secured Credit Facility denominated in U.S. Dollars bear interest at the Company's option at (a) London Inter-bank Offered Rate ("LIBOR"), plus a margin ranging from 1.25 % to 2.25 % or (b) a base rate equal to the highest of (i) the federal funds rate plus 0.50 %, (ii) the rate of interest last quoted by the Wall Street Journal as the “prime rate” and (iii) the one-month LIBOR rate plus 1.00 % (the Base Rate), plus, a margin ranging from 0.25 % to 1.25 %, in each case, depending on the Company’s consolidated leverage ratio. Revolving loans denominated in Euro bear interest at the EURIBOR, plus a margin ranging from 1.25 % to 2.25 % depending on the Company’s consolidated leverage ratio. The terms of the Senior Secured Credit Facility also require certain other fees and payments to be made by the Company, including a commitment fee on the undrawn portion of the revolving credit facility. Term loans outstanding under the Senior Secured Credit Facility bear interest, at NCR's option, at LIBOR plus 2.50 % per annum or the Base Rate plus a 1.50 % margin
17
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
per annum. In the event that LIBOR is no longer available or in certain other circumstances as described in the Senior Secured Credit Facility, the Senior Secured Credit Facility provides a mechanism for determining an alternative rate of interest. There is no assurance that any such alternative, successor or replacement reference rate will be similar to, or produce the same value or economic equivalence of, LIBOR.
The obligations of the Company and Foreign Borrowers under the Senior Secured Credit Facility are guaranteed by certain of the Company's wholly-owned domestic subsidiaries. The Senior Secured Credit Facility and these guarantees are secured by a first priority lien and security interest in certain equity interests owned by the Company and the guarantor subsidiaries in certain of their respective domestic and foreign subsidiaries, and a perfected first priority lien and security interest in substantially all of the Company's U.S. assets and the assets of the guarantor subsidiaries, subject to certain exclusions. These security interests would be released if the Company achieves an “investment grade” rating and will remain released so long as the Company maintains that rating.
The Senior Secured Credit Facility includes affirmative and negative covenants that restrict or limit the ability of the Company and its subsidiaries to, among other things, incur indebtedness; create liens on assets; engage in certain fundamental corporate changes or changes to the Company's business activities; make investments; sell or otherwise dispose of assets; engage in sale-leaseback or hedging transactions; repurchase stock, pay dividends or make similar distributions; repay other indebtedness; engage in certain affiliate transactions; or enter into agreements that restrict the Company's ability to create liens, pay dividends or make loan repayments. The Senior Secured Credit Facility also includes a financial covenant that requires the Company to maintain:
•a consolidated leverage ratio on the last day of any fiscal quarter, not to exceed (i) in the case of any fiscal quarter ending on or prior to March 31, 2021, (a) the sum of 4.50 and an amount (not to exceed 0.50 ) to reflect debt used to reduce NCR’s unfunded pension liabilities to (b) 1.00 , and (ii) in the case of any fiscal quarter ending after March 31, 2021 and on or prior to March 31, 2023, (a) the sum of 4.25 and an amount (not to exceed 0.50 ) to reflect debt used to reduce NCR’s unfunded pension liabilities to (b) 1.00 ; and (iii) in the case of any fiscal quarter ending after March 31, 2023, (a) the sum of 4.00 and an amount (not to exceed 0.50 ) to reflect debt used to reduce our unfunded pension liabilities to (b) 1.00 .
The Company has the option to elect to increase the maximum permitted leverage ratio by 0.25 in connection with the consummation of any material acquisition (as defined in the Senior Secured Credit Facility) for four fiscal quarters, but in no event will the maximum permitted leverage ratio, inclusive of all increases, exceed 4.75 to 1.00. At June 30, 2020, the maximum consolidated leverage ratio under the Senior Secured Credit Facility was 4.75 to 1.00.
The Senior Secured Credit Facility also includes provisions for events of default, which are customary for similar financings. Upon the occurrence of an event of default, the lenders may, among other things, terminate the loan commitments, accelerate all loans and require cash collateral deposits in respect of outstanding letters of credit. If the Company is unable to pay or repay the amounts due, the lenders could, among other things, proceed against the collateral granted to them to secure such indebtedness.
The Company may request, at any time and from time to time, but the lenders are not obligated to fund, the establishment of one or more incremental term loans and/or revolving credit facilities (subject to the agreement of existing lenders or additional financial institutions to provide such term loans and/or revolving credit facilities) with commitments in an aggregate amount not to exceed the greater of (i) $150 million, and (ii) such amount as would not cause the leverage ratio under the Senior Secured Credit Facility, calculated on a pro forma basis including the incremental facility and assuming that it and the revolver are fully drawn, to exceed 3.00 to 1.00, and the proceeds of which can be used for working capital requirements and other general corporate purposes.
Senior Unsecured Notes On September 17, 2012, the Company issued $600 million aggregate principal amount of 5.00 % senior unsecured notes due in 2022 (the 5.00 % Notes). The 5.00 % Notes were sold at 100 % of the principal amount and will mature on July 15, 2022. On December 19, 2013, the Company issued $700 million aggregate principal amount of 6.375 % senior unsecured notes due in 2023 (the 6.375 % Notes). The 6.375 % Notes were sold at 100 % of the principal amount and will mature on December 15, 2023. On August 21, 2019, the Company issued $500 million aggregate principal amount of 5.750 % senior unsecured notes due in 2027 (the 5.750 % Notes) and $500 million aggregate principal amount of 6.125 % senior unsecured notes due in 2029 (the 6.125 % Notes). The 5.750 % Notes were sold at 100 % of the principal amount and will mature on September 1, 2027. The 6.125 % Notes were sold at 100 % of the principal amount and will mature on September 1, 2029.
18
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
On April 13, 2020, the Company issued $400 million aggregate principal amount of 8.125 % senior unsecured notes due in 2025 (the 8.125 % Notes). The 8.125 % Notes were sold at 100 % of the principal amount, which resulted in total gross proceeds of $400 million. Interest is payable on the 8.125 % Notes semi-annually in arrears at an annual rate of 8.125 %, on April 15 and October 15, beginning on October 15, 2020. The 8.125 % Notes will mature on April 15, 2025.
The 8.125 % Notes are unsecured senior obligations of the Company and are guaranteed by the Company's wholly-owned subsidiary, NCR International, Inc. (Guarantor Subsidiary), which is 100 % owned by the Company and has guaranteed fully and unconditionally the obligations to pay principal and interest for these senior unsecured notes.
The Company has the option to redeem the 8.125 % Notes, in whole or in part, at any time on or after April 15, 2022, at a redemption price of 104.063 %, 102.031 %, and 100 % during the 12-month periods commencing on April 15, 2022, 2023 and 2024 and thereafter, respectively, plus accrued and unpaid interest to the redemption date. Prior to April 15, 2022, the Company may redeem some or all of the 8.125 % Notes by paying a redemption price equal to 100 % of the principal amount of the Notes to be redeemed plus the Applicable Premium, as defined in the Indenture, as of, and accrued and unpaid interest to, but excluding, the redemption date (subject to the right of holders of record of the Notes on the relevant record date to receive interest due on the relevant interest payment date).
The terms of the indentures for these notes limit the ability of the Company and certain of its subsidiaries to, among other things, incur additional debt or issue redeemable preferred stock; pay dividends or make certain other restricted payments or investments; incur liens; sell assets; incur restrictions on the ability of the Company's subsidiaries to pay dividends to the Company; enter into affiliate transactions; engage in sale and leaseback transactions; and consolidate, merge, sell or otherwise dispose of all or substantially all of the Company's or such subsidiaries' assets. These covenants are subject to significant exceptions and qualifications. For example, if these notes are assigned an "investment grade" rating by Moody's or S&P and no default has occurred or is continuing, certain covenants will be terminated.
Trade Receivables Securitization Facility In November 2014, the Company established a revolving trade receivables securitization facility (the A/R Facility) with PNC Bank, National Association (PNC) as the administrative agent, and various lenders. In November 2019, the Company amended the A/R Facility to increase the maximum commitment made available under the Facility and extended the maturity date to November 2021. The amendment also included other modifications including the scope of receivables subject to the facility and related eligibility requirements, the adoption of a new benchmark for determining overnight funding rates and the fees and interest payable to the agent and lenders party thereto. The A/R Facility now provides for up to $300 million in funding based on the availability of eligible receivables and other customary factors and conditions, of which $200 million was outstanding as of June 30, 2020.
Under the A/R Facility, NCR sells and/or contributes certain of its U.S. trade receivables to a wholly-owned, bankruptcy-remote subsidiary as they are originated, and advances by the lenders to that subsidiary are secured by those trade receivables. The assets of this financing subsidiary are restricted as collateral for the payment of its obligations under the A/R Facility, and its assets and credit are not available to satisfy the debts and obligations owed to the creditors of the Company. The Company includes the assets, liabilities and results of operations of this financing subsidiary in its consolidated financial statements. The financing subsidiary owned $524 million and $603 million of outstanding accounts receivable as of June 30, 2020 and December 31, 2019, respectively, and these amounts are included in accounts receivable, net in the Company’s Condensed Consolidated Balance Sheets.
The financing subsidiary will pay annual commitments and other customary fees to the lenders, and advances by a lender under the A/R Facility will accrue interest (i) at a reserve-adjusted LIBOR rate or a base rate equal to the highest of (a) the applicable lender’s prime rate or (b) the federal funds rate plus 0.50 %, if the lender is funding as a committed lender under the terms of the A/R Facility, or (ii) based on commercial paper interest rates if the lender is funding as a commercial paper conduit lender. Advances may be prepaid at any time without premium or penalty.
The A/R Facility contains various customary affirmative and negative covenants and default and termination provisions, which provide for the acceleration of the advances under the A/R Facility in circumstances including, but not limited to, failure to pay interest or principal when due, breach of representation, warranty or covenant, certain insolvency events or failure to maintain the security interest in the trade receivables, and defaults under other material indebtedness.
Fair Value of Debt The Company utilized Level 2 inputs, as defined in the fair value hierarchy, to measure the fair value of the long-term debt, which, as of June 30, 2020 and December 31, 2019 was $4.79 billion and $3.70 billion, respectively.
19
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
6. INCOME TAXES
Income tax provisions for interim (quarterly) periods are based on an estimated annual effective income tax rate calculated separately from the effect of significant, infrequent or unusual items. Income tax benefit was $34 million for the three months ended June 30, 2020 compared to income tax expense of $15 million for the three months ended June 30, 2019. The change was primarily driven by an increase in discrete tax benefits as well as lower income before taxes in the three months ended June 30, 2020. The increase in discrete tax benefits primarily resulted from a $48 million benefit recorded for the release of a valuation allowance against U.S. foreign tax credits and the re-establishment of expected foreign tax credit offsets to unrecognized tax benefits.
Income tax benefit was $33 million for the six months ended June 30, 2020 compared to income tax expense of $24 million for the six months ended June 30, 2019. The change was primarily driven by an increase in discrete tax benefits as well as lower income before taxes in the six months ended June 30, 2020. The increase in discrete tax benefits primarily resulted from a $48 million benefit recorded for the release of a valuation allowance against U.S. foreign tax credits and the re-establishment of expected foreign tax credit offsets to unrecognized tax benefits.
Additionally, in connection with preparing the financial statements for the six months ended June 30, 2020, the Company identified and recorded income tax benefits of $2 million related to an error in the calculation of the permanent differences on executive stock compensation and $3 million for the write-off of income tax payables incorrectly recorded in prior periods. The Company determined the impact of these errors was not material to the annual or interim financial statements of previous periods and the effect of correcting these errors was not material to the Condensed Consolidated Financial Statements for the six months ended June 30, 2020 and is not expected to be material to the 2020 annual financial statements.
The Company engages in continuous discussions and negotiations with taxing authorities regarding tax matters, and the Company has determined that over the next 12 months it expects to resolve certain tax matters related to U.S. and foreign jurisdictions. As a result, as of June 30, 2020, we estimate that it is reasonably possible that gross unrecognized tax benefits may decrease by $30 million to $37 million in the next 12 months.
7. STOCK COMPENSATION PLANS
As of June 30, 2020, the Company’s primary type of stock-based compensation was restricted stock units and stock options. Stock-based compensation expense for the following periods were:
| In millions | Three months ended June 30 | Six months ended June 30 | |||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Restricted stock units | $ | $ | $ | $ | |||||||||||||||||||
| Stock options | |||||||||||||||||||||||
| Employee stock purchase plan | |||||||||||||||||||||||
| Stock-based compensation expense | |||||||||||||||||||||||
| Tax benefit | ( | ( | ( | ( | |||||||||||||||||||
| Stock-based compensation expense (net of tax) | $ | $ | $ | $ | |||||||||||||||||||
Stock-based compensation expense is recognized in the financial statements based upon grant date fair value.
In the six months ended June 30, 2020, the stock options granted were premium-priced stock options, in which the exercise price is equal to 115 % of the closing stock price on the date of the grant. The exercise price of the stock options granted in the six months ended June 30, 2020 was $37.97 . The weighted average fair value of the option grants was $7.80 for the six months ended June 30, 2020 based on using a Monte-Carlo simulation model and will be recognized over the requisite service period. These option grants have a seven year contractual term that vest at the end of 36 months. For the six months ended June 30,
20
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
2019, the weighted average fair value of option grants was $8.07 with a seven year contractual term that vest ratably over four years . The table below details the assumptions used in determining the fair value of the option grants.
| Six months ended June 30 | |||||||||||
| 2020 | 2019 | ||||||||||
| Dividend yield | $ | $ | |||||||||
| Risk-free interest rate | % | % | |||||||||
| Expected volatility | % | % | |||||||||
| Expected holding period (years) | |||||||||||
Expected volatility is calculated as the historical volatility of the Company’s stock over a period equal to the expected term of the options, as management believes this is the best representation of prospective trends. The Company uses historical data to estimate option exercise and employee terminations within the valuation model. The expected holding period represents the period of time that options are expected to be outstanding. For options granted during the six months ended June 30, 2020, the seven-year U.S. Treasury yield curve was used to determine the risk-free interest rate. For options granted during the six months ended June 30, 2019, the risk-free interest rate was determined based on a blend of the three and five-year U.S. Treasury yield curves in effect at the time of the grant.
As of June 30, 2020, the total unrecognized compensation cost of $84 million related to unvested restricted stock grants is expected to be recognized over a weighted average period of approximately 1.0 year. As of June 30, 2020, the total unrecognized compensation cost of $57 million related to unvested stock option grants is expected to be recognized over a weighted average period of approximately 1.3 years.
Employee Stock Purchase Plan The Company's Employee Stock Purchase Plan ("ESPP") provides employees a 15 % discount on stock purchases using a three-month look-back feature where the discount is applied to the stock price that represents the lower of NCR’s closing stock price on either the first day or the last day of each calendar quarter. Participants can contribute between 1 % and 10 % of their compensation.
8. EMPLOYEE BENEFIT PLANS
Components of net periodic benefit cost (income) of the pension plans for the three months ended June 30 were as follows:
| In millions | U.S. Pension Benefits | International Pension Benefits | Total Pension Benefits | ||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||
| Net service cost | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Interest cost | |||||||||||||||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||
| Net periodic benefit cost (income) | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||
Components of net periodic benefit cost (income) of the pension plans for the six months ended June 30 were as follows:
| In millions | U.S. Pension Benefits | International Pension Benefits | Total Pension Benefits | ||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||
| Net service cost | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Interest cost | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Expected return on plan assets | ( | $ | ( | ( | $ | ( | ( | $ | ( | ||||||||||||||||||||||||||
| Net periodic benefit cost (income) | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||
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NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
| In millions | Three months ended June 30 | Six months ended June 30 | |||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Interest cost | $ | $ | $ | $ | |||||||||||||||||||
| Amortization of: | |||||||||||||||||||||||
| Prior service benefit | ( | ( | $ | ( | |||||||||||||||||||
| Net postretirement benefit | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||
The net cost of the postemployment plan for the following periods were:
| Three months ended June 30 | Six months ended June 30 | ||||||||||||||||||||||
| In millions | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| Net service cost | $ | $ | $ | $ | |||||||||||||||||||
| Interest cost | |||||||||||||||||||||||
| Amortization of: | |||||||||||||||||||||||
| Prior service benefit | ( | ( | ( | ( | |||||||||||||||||||
| Actuarial gain | ( | ( | ( | ||||||||||||||||||||
| Net benefit cost | $ | $ | $ | $ | |||||||||||||||||||
Employer Contributions
Pension For the three and six months ended June 30, 2020, NCR contributed $4 million and $9 million, respectively, to its international pension plans. NCR anticipates contributing an additional $12 million to its international pension plans for a total of $21 million in 2020.
Postretirement For the three and six months ended June 30, 2020, NCR made $1 million of contributions to its U.S. postretirement plan. NCR anticipates contributing an additional $1 million to its U.S. postretirement plan for a total of $2 million in 2020.
Postemployment For the three and six months ended June 30, 2020, NCR contributed $3 million and $7 million, respectively, to its postemployment plan. NCR anticipates contributing an additional $23 million to its postemployment plan for a total of $30 million in 2020.
9. COMMITMENTS AND CONTINGENCIES
In the normal course of business, NCR is subject to various proceedings, lawsuits, claims and other matters, including, for example, those that relate to the environment and health and safety, labor and employment, employee benefits, import/export compliance, intellectual property, data privacy and security, product liability, commercial disputes and regulatory compliance, among others. Additionally, NCR is subject to diverse and complex laws and regulations, including those relating to corporate governance, public disclosure and reporting, environmental safety and the discharge of materials into the environment, product safety, import and export compliance, data privacy and security, antitrust and competition, government contracting, anti-corruption, and labor and human resources, which are rapidly changing and subject to many possible changes in the future. Compliance with these laws and regulations, including changes in accounting standards, taxation requirements, and federal securities laws among others, may create a substantial burden on, and substantially increase costs to NCR or could have an impact on NCR's future operating results. The Company has reflected all liabilities when a loss is considered probable and reasonably estimable in the Condensed Consolidated Financial Statements. We do not believe there is a reasonable possibility that losses exceeding amounts already recognized have been incurred, but there can be no assurances that the amounts required to satisfy alleged liabilities from such matters will not impact future operating results. Other than as stated below, the Company does not currently expect to incur material capital expenditures related to such matters. However, there can be no assurances that the actual amounts required to satisfy alleged liabilities from various lawsuits, claims, legal proceedings and other matters, including, but not limited to the Fox River and Kalamazoo River environmental matters and other matters discussed below, and to comply with applicable laws and regulations, will not exceed the amounts reflected in NCR’s Condensed Consolidated Financial Statements or will not have a material adverse effect on its consolidated results of operations, capital expenditures, competitive position, financial condition or cash flows.
22
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
Nashville Tornado On March 3, 2020, one of our Global Fulfillment Centers, operated with a third-party logistics partner in Mount Juliet, Tennessee, was severely impacted by tornadoes in the greater Nashville area. We maintain substantial property damage insurance coverage for this Global Fulfillment Center and have worked, and continue to work, closely with our insurance carrier and claims adjusters to ascertain the property damage, which mainly consisted of raw materials and finished goods inventory. The Company determined approximately $105 million of the inventory to be a total loss as of June 30, 2020 and as such, was written-off with an offsetting insurance receivable recorded, which was included within other current assets in the Condensed Consolidated Balance Sheet with no net impact on cost of sales. The insurance receivable was based on the amount probable of recovery based on the terms of the insurance policy. The remaining $45 million of inventory requires further assessment to determine recoverability, which remains ongoing as of June 30, 2020. As of June 30, 2020, we received a total of $91 million as an advance from the insurance carrier with $14 million remaining as an insurance receivable. Additionally, our insurance policy also provides for business interruption coverage, including lost profits, and reimbursement for other expenses and costs that have been incurred relating to the damages and losses suffered. As of June 30, 2020, the Company has incurred $9 million of other expenses, mainly related to expedite freight, professional services and contractor charges. The Company has received a $4 million insurance payment related to these expenses. The Company has recorded an insurance receivable for the remainder based on the amount probable of recovery based on the terms of the insurance policy.
Boston Consulting Group On November 6, 2019, Boston Consulting Group, Inc., a former consultant for the Company, commenced a lawsuit against the Company in the United States District Court for the District of New York. The Complaint in the matter alleges the Company breached two consulting agreements and seeks in excess of $80 million and other compensatory damages and equitable relief. While the Company at this time is unable to make any predictions about the outcome of this case or estimate any possible liability, the Company believes the allegations of money owed are grossly overstated, and the Company intends to vigorously defend this lawsuit.
Environmental Matters NCR's facilities and operations are subject to a wide range of environmental protection laws, and NCR has investigatory and remedial activities underway at a number of facilities that it currently owns or operates, or formerly owned or operated, to comply, or to determine compliance, with such laws. Also, NCR has been identified, either by a government agency or by a private party seeking contribution to site clean-up costs, as a potentially responsible party (PRP) at a number of sites pursuant to various state and federal laws, including the Federal Water Pollution Control Act, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and comparable state statutes. Other than the Fox River matter, the Kalamazoo River matter and the Ebina matter discussed below, we currently do not anticipate material expenses and liabilities from these environmental matters.
Fox River NCR is one of eight entities that were formally notified by governmental and other entities, such as local Native American tribes, that they are PRPs for environmental claims (under CERCLA and other statutes) arising out of the presence of polychlorinated biphenyls (PCBs) in sediments in the lower Fox River and in the Bay of Green Bay in Wisconsin. The other Fox River PRPs that received notices include Appleton Papers Inc. (API; now known as Appvion, Inc.), P.H. Glatfelter Company ("Glatfelter"), Georgia-Pacific Consumer Products LP (GP, successor to Fort James Operating Company), and others. NCR was identified as a PRP because of alleged PCB discharges from two carbonless copy paper manufacturing facilities it previously owned, which were located along the Fox River. NCR sold its facilities in 1978 to API. The parties have also contended that NCR is responsible for PCB discharges from paper mills owned by other companies because NCR carbonless copy paper "broke" was allegedly purchased by those other mills as a raw material.
The United States Environmental Protection Agency (USEPA) and Wisconsin Department of Natural Resources (together, the Governments) developed clean-up plans for the upper and lower parts of the Fox River and for portions of the Bay of Green Bay. On November 13, 2007, the Governments issued a unilateral administrative order (the 2007 Order) under CERCLA to the eight original PRPs, requiring them to perform remedial work under the Governments’ clean-up plan for the lower parts of the river (operable units 2 through 5). In April 2009, NCR and API formed a limited liability company (the LLC), which entered into an agreement with an environmental remediation contractor to perform the work at the Fox River site. In-water dredging and remediation under the clean-up plan commenced shortly thereafter.
NCR and API, along with B.A.T Industries p.l.c. (BAT), share among themselves a portion of the cost of the Fox River clean-up and natural resource damages (NRD) based upon a 1998 agreement (the Cost Sharing Agreement), a 2005 arbitration award (subsequently confirmed as a judgment), and a September 30, 2014 Funding Agreement (the Funding Agreement). The Cost Sharing Agreement and the arbitration resolved disputes that arose out of the Company's 1978 sale of its Fox River facilities to API. The Cost Sharing Agreement and arbitration award resulted in a 45 % share for NCR of the first $75 million of such costs (a threshold that was reached in 2008), and a 40 % share for amounts in excess of $75 million. The Funding Agreement arose out of a 2012 to 2014 arbitration dispute between NCR and API, and provides for regular, ongoing funding of NCR-incurred Fox River remediation costs via contributions, made to a new limited liability corporation created by the Funding Agreement, by BAT, API and, for 2014, API's indemnitor, Windward Prospects. The Funding Agreement creates an obligation on BAT and
23
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
API to fund 50 % of NCR’s Fox River remediation costs from October 1, 2014 forward; (API’s Fox River-related obligations under the Funding Agreement were fully satisfied in 2016); the Funding Agreement also provides NCR contractual avenues for payment of, via direct and third-party sources, (1) the difference between BAT’s and API’s 60 % obligation under the Cost Sharing Agreement and arbitration award on the one hand and their ongoing (since September 2014) 50 % payments under the Funding Agreement on the other, as well as (2) the difference between the amount NCR received under the Funding Agreement and the amount owed to it under the Cost Sharing Agreement and arbitration award for the period from April 2012 through September 2014. As of June 30, 2020 and December 31, 2019, the receivable under the Funding Agreement was approximately $53 million, respectively, and was included in other assets in the Condensed Consolidated Balance Sheet. The Company anticipates that it will collect sums related to the receivable in 2020 or later, likely after the remediation efforts related to the Fox River matter, described below, are complete. This receivable is not taken into account in calculating the Company’s Fox River net reserve.
The Company's litigations relating to contribution and enforcement claims concerning the Fox River have been concluded. A proposed consent decree settlement (the CD settlement) with respect to the contribution action (a case originally filed by NCR and API) and the government enforcement action (a case originally filed by the federal and state governments against several PRPs, including the Company) was successfully negotiated by NCR and the federal and state governments and was approved on August 22, 2017 by the federal district court in Wisconsin that had been presiding over those cases. A final order of dismissal as to the Company in the contribution and government enforcement actions was subsequently entered; one party, Glatfelter, had appealed the approval of the CD settlement. On January 3, 2019, the United States lodged a proposed consent decree with the Wisconsin court, reflecting a settlement reached by the United States, Wisconsin and Glatfelter with respect to Glatfelter’s Fox River liability under the government enforcement action; a component of that settlement was withdrawal of Glatfelter’s appeal opposing the Company’s CD settlement. On March 14, 2019, the Wisconsin court approved the Glatfelter consent decree, and on April 3, 2019, Glatfelter's appeal was dismissed.
The CD settlement has now resolved the remaining Fox River-related contribution and enforcement claims against the Company. The key components of the approved CD settlement include (1) the Company’s commitment to complete the remediation of the Fox River, which is now expected to be completed in July 2020; (2) the Company’s conditional agreement to waive its contribution claims against the two remaining defendants in the case, GP and Glatfelter; (3) the Company’s agreement not to appeal the trial court’s decision on divisibility of harm; (4) the Governments’ agreement to include in the settlement so-called “contribution protection” in the Company’s favor as to GP’s and Glatfelter’s contribution claims against the Company, the effect of which will be to extinguish those claims; (5) the Governments’ agreement not to pursue the Company for the Governments’ past oversight costs; and (6) the Governments’ agreement to exercise prosecutorial discretion in pursuing other parties for future oversight costs and long-term monitoring and maintenance, with the Company retaining so-called “backstop” liability in the event that the other parties fail to pay future oversight costs or to perform long-term monitoring and maintenance. Additionally, although certain state law claims by GP and Glatfelter against the Company may not be affected directly by the CD settlement, the CD settlement provides that the Company’s contribution claims against those two parties will revive if those parties attempt to assert any claims against the Company relating to the Fox River, including any state law claims.
In the quarter ending September 30, 2017, the remediation general contractor commenced an arbitration against the LLC, in a dispute over contract interpretation. The hearing on this matter was completed in June 2019, and the parties submitted post-trial briefs in August 2019. The amounts claimed by the contractor range from approximately $46 million to approximately $53 million; the Company disputed the claims and contested them vigorously during the hearing. In November 2019, having rejected substantial portions of the claims, the arbitration panel awarded the contractor $10 million. The Company’s indemnitors and co-obligors, described below, were responsible for the majority of the award, with the Company’s share being approximately one-fourth of the award.
With respect to the Company’s prior dispute with API, which was generally superseded by the Funding Agreement, the Company received timely payments as they came due under the Funding Agreement. Although API filed for bankruptcy protection in October 2017, it had made all of the payments to the Company in connection with the Fox River that are required of it by the Funding Agreement.
NCR's eventual remediation liability, followed by long-term monitoring expected to be performed by others, will depend on a number of factors. In establishing the reserve, NCR attempts to estimate a range of reasonably possible outcomes for each of these factors, although each range is itself uncertain. NCR uses its best estimate within the range, if that is possible. Where there is a range of equally possible outcomes, and there is no amount within that range that is considered to be a better estimate than any other amount, NCR uses the low end of the range. The significant factors include: (1) the total remaining clean-up costs, including the costs associated with decommissioning the site, the expected cost impact of which is expected to be neutral or non-material to the Company, including long-term monitoring following completion of the clean-up, and what parties are
24
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
assigned to discharge the post-clean-up tasks (as noted, the Company no longer expects to bear long-term monitoring costs); (2) total NRD for the site and the share that NCR will bear (which is now resolved as to the Company); (3) the share of clean-up costs that NCR will bear (which is resolved under the CD settlement); (4) NCR's transaction and litigation costs to defend itself to the extent additional litigation is required with respect to claims brought by the general contractor; and (5) the share of NCR's payments that BAT will bear (which is governed by the Cost Sharing Agreement and the Funding Agreement, BAT has made all of the payments requested of it, and as discussed above; API is in bankruptcy and is not presumed likely to bear further shares of NCR’s payments). With respect to NRD, in connection with a certain settlement entered into by other PRPs in 2015, the Government withdrew the NRD claims it had prosecuted on behalf of NRD trustees, including those NRD claims asserted against the Company.
Calculation of the Company's Fox River reserve is subject to several complexities, and it is possible there could be additional changes to some elements of the reserve over upcoming periods, although the Company is unable to predict or estimate such changes at this time. There can be no assurance that the clean-up and related expenditures and liabilities will not have a material effect on NCR's capital expenditures, earnings, financial condition, cash flows, or competitive position. As of June 30, 2020, the gross reserve for the Fox River matter was approximately $4 million, compared to $5 million as of December 31, 2019. As of June 30, 2020, the net reserve for the Fox River matter was approximately $26 million, compared to $16 million as of December 31, 2019. NCR contributes to the LLC to fund remediation activities and generally, by contract, has funded certain amounts of remediation expenses in advance. As of June 30, 2020 and December 31, 2019, approximately zero remained from this funding. NCR's reserve for the Fox River matter is reduced as the LLC makes payments to the remediation contractor and other vendors with respect to remediation activities.
Under a 1996 agreement, AT&T Corp. (AT&T) and Nokia (as the successor to Lucent Technologies and Alcatel-Lucent USA) are responsible severally (not jointly) for indemnifying NCR for certain portions of the amounts paid by NCR for the Fox River matter over a defined threshold and subject to certain offsets. (The agreement governs certain aspects of AT&T's divestiture of NCR and of what was then known as Lucent Technologies.) Those companies have made the payments requested of them by the Company on an ongoing basis.
Kalamazoo River In November 2010, USEPA issued a "general notice letter" to NCR with respect to the Allied Paper, Inc./Portage Creek/Kalamazoo River Superfund Site (Kalamazoo River site) in Michigan. Three other companies - International Paper, Mead Corporation, and Consumers Energy - also received general notice letters at or about the same time. USEPA asserts that the site is contaminated by various substances, primarily PCBs, as a result of discharges by various paper mills located along the river. USEPA does not claim that the Company made direct discharges into the Kalamazoo River, and NCR never had facilities at or near the Kalamazoo River site, but USEPA indicated that "NCR may be liable under Section 107 of CERCLA ... as an arranger, who by contract or agreement, arranged for the disposal, treatment and/or transportation of hazardous substances at the Site." USEPA stated that it "may issue special notice letters to [NCR] and other PRPs for future RI/FS [remedial investigation / feasibility studies] and RD/RA [remedial design / remedial action] negotiations."
In connection with the Kalamazoo River site, in December 2010 the Company, along with two other defendants, was sued in federal court by three Georgia-Pacific (GP) affiliate corporations in a private-party contribution and cost recovery action for alleged pollution. The suit, pending in Michigan, asks that the Company and other defendants pay a "fair portion" of these companies’ costs. Various removal and remedial actions remain to be decided upon and performed at the Kalamazoo River site, the total costs for which generally remain undetermined; in 2017 Records of Decisions were issued for two parts of the river, and in 2018 such a decision was issued for another part of the river, but such decisions for the majority of the work are expected to be made only over the next several years. The suit alleges that the Company is liable to the GP entities as an "arranger" under CERCLA. The initial phase of the case was tried in a Michigan federal court in February 2013; on September 26, 2013 the court issued a decision that held NCR was liable as an “arranger” as of at least March 1969. (PCB-containing carbonless copy paper was produced from approximately 1954 to April 1971, and the majority of contamination at the Kalamazoo River site had occurred prior to 1969). NCR preserved its right to appeal the September 2013 decision.
In the 2013 decision, the Court did not determine NCR’s share of the overall liability. Relative shares of liability for the four companies were tried to the court in a subsequent phase of the case in December 2015. In a ruling issued on March 29, 2018, the court addressed responsibility for the costs that GP had incurred in the past, totaling to approximately $50 million (GP had sought approximately $105 million, but $55 million of those claims were removed by the court upon motions filed by the Company and other parties); NCR and GP were each assigned a 40 % share of those costs, and the other two companies were assigned 15 % and 5 % as their allocations. The court entered a judgment in the case on June 19, 2018, in which it indicated that it would not allocate future costs, but would enter a declaratory judgment that the four companies together had responsibility for future costs, in amounts and shares to be determined. Cross-proceedings have been commenced to obtain recoveries from the other parties pursuant to the judgment; those proceedings are stayed pending the appeal referenced below.
25
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
In July 2018, the Company appealed to the United States Court of Appeals for the Sixth Circuit both the 2013 court decision, which it believes is in conflict with a decision from the Fox River trial court as to Operable Unit 1 of that site and an affirmance of that decision from the Court of Appeals for the Seventh Circuit, and the 2018 court decision, on various legal grounds. The Company filed a bond to stay any execution of the judgment pending the appeal, and its application for a stay was approved by the court and remains stayed as of June 2020.
During the pendency of the Sixth Circuit stay, the Company negotiated a settlement of the Kalamazoo River matter with the USEPA and other government agencies having oversight over the river. On December 5, 2019, the Company entered into a Consent Decree, filed with the District Court on December 11, 2019, which will resolve all litigation associated with the river clean-up, including the Sixth Circuit appeal when approved. Upon approval, the Consent Decree will require the Company to pay GP its 40% share of past costs, to pay the USEPA and state agencies their past and future administrative costs, to dismiss its Sixth Circuit appeal, and to take responsibility for the remediation of a portion, but not all, of the Kalamazoo River. The Consent Decree further provides the Company protection from other PRPs, including GP, seeking contribution for their costs associated with the clean-up anywhere on the river, thereby resolving the allocation of future costs left unresolved by the June 19, 2019 judgment.
The Consent Decree was subject to a public comment period, which ended February 18, 2020, and the Company is still awaiting approval of the Consent Decree. In May 2020, the US and state agencies filed motions supporting entry of the Consent Decree, and in June 2020, the court permitted GP and the other two Kalamazoo defendants to intervene to file motions in opposition to the Consent Decree. A decision on approval of the Consent Decree is not expected until completion of all briefing in August 2020.
NCR expects to have claims against BAT and API under the Funding Agreement, discussed above for the Kalamazoo River remediation expenses. API filed for bankruptcy protection in October 2017, and thus payment of its potential share under the Funding Agreement for so-called “future sites,” which would include the Kalamazoo River site, may be at risk, but as liability under the Cost Sharing Agreement and the Funding Agreement is joint and several, the bankruptcy is not anticipated to affect the Company’s ability to seek that amount from BAT. The Company will also have indemnity or reimbursement claims against AT&T and Nokia under the arrangement discussed above in connection with the Fox River matter after expenses have met a contractual threshold set out in the 1996 agreement referenced above in the Fox River discussion.
As of June 30, 2020 and December 31, 2019, the total reserve for Kalamazoo was $80 million and $81 million, respectively. That figure is reported on a basis that is net of expected contributions from the Company's co-obligors and indemnitors, subject to when the applicable threshold is reached. As many aspects of the costs of remediation will not be determined for several years (and thus the high end of a range of possible costs for many areas of the site cannot be quantified at this time), the Company has made what it considers to be reasonable estimates of the low end of a range for such costs where remedies are identified, and/or of the costs of investigations and studies for areas of the river where remedies have not yet been determined, and the reserve is informed by those estimates. The extent of NCR’s potential liability remains subject to many uncertainties, notwithstanding the settlement of this matter and related Consent Decree noted above, particularly inasmuch as remedy decisions and cost estimates will not be generated until times in the future and as most of the work to be performed will take place through the 2030s. Under other assumptions or estimates for possible costs of remediation, which the Company does not at this point consider to be reasonably estimable or verifiable, it is possible that the reserve the Company has taken to discontinued operations reflected in this paragraph could more than approximately double the reflected reserve.
Ebina The Company is engaged in cooperative regulatory compliance activities with the government of Japan in connection with certain environmental contaminants generated in its past operations in that country. The Company has quantities of PCB and other wastes primarily from its former plant at Oiso, Japan, including capsulated undiluted solutions manufactured in the past, capacitors, light ballasts and PCB-affected soil from the Oiso plant that was excavated and placed in steel drums. These wastes are stored in a facility at Ebina, Japan in accordance with Japanese regulations governing such materials. Over the past several years Japan has enacted and amended legislation governing such wastes, and has set a current deadline for treating and disposing of (at government-constructed disposal facilities) the highest-concentration wastes by 2027. Lower-concentration wastes can be and have been disposed of via private contractors, and as of the period ended June 30, 2020, NCR had disposed of more than a third of its lower-concentration wastes.
The Company and its consultants have met and communicated regularly with the Japanese agency charged with administration of the law, and are working with that agency on a program to manage disposal of the high-concentration wastes, including tests of technologies to make the disposal more efficient. Based on communications with the agency, the earliest that high-concentration wastes can be disposed of will be in early 2021, with final deadlines for various of the government-constructed disposal sites currently set for 2022, 2023 and later. Low-concentration wastes are required to be contracted for disposal by
26
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
2027, a timetable that the Company expects to meet. In September 2019, the Company’s environmental consultants, following a series of communications and meetings with the Japanese agency, at the Company’s request prepared an estimate of remaining disposal costs over the coming several years. While the estimate is subject to a range of assumptions and uncertainties, including prospects of cost reduction in coordination with the agency as certain field testing to separate high-concentration and low-concentration waste progresses over the coming years, the Company has adjusted its existing reserve for the matter to take into account this cost estimate, and that reserve as of June 30, 2020 is $20 million compared to $19 million at December 31, 2019. The Japan environmental waste issue is treated as a compliance matter and not as litigation or enforcement, and the Company has received no threats of litigation or enforcement.
Environmental-Related Insurance Recoveries In connection with the Fox River and other environmental sites, through June 30, 2020, NCR has received a combined gross total of approximately $202 million in settlements reached with various of its insurance carriers. Portions of many of these settlements agreed in the 2010 through 2013 timeframe are payable to a law firm that litigated the claims on the Company's behalf. Some of the settlements cover not only the Fox River but also other environmental sites; some are limited to either the Fox River or the Kalamazoo River site. Some of the settlements are directed to defense costs and some are directed to indemnity; some settlements cover both defense costs and indemnity. The Company does not anticipate that further material insurance recoveries specific to Kalamazoo River remediation costs will be available to it, owing to considerations under applicable Michigan law. Claims with respect to Kalamazoo River defense costs have now been settled, with the amounts of those settlements included in the sum reported above.
Environmental Remediation Estimates It is difficult to estimate the future financial impact of environmental laws, including potential liabilities. NCR records environmental provisions when it is probable that a liability has been incurred and the amount or range of the liability is reasonably estimable in accordance with accounting guidance, where liabilities are not expected to be quantifiable or estimable for a period of years, the estimated costs of investigating those liabilities are recorded as a component of the reserve for that particular site. Provisions for estimated losses from environmental restoration and remediation are, depending on the site, based generally on internal and third-party environmental studies, estimates as to the number and participation level of other PRPs, the extent of contamination, estimated amounts for attorney and other fees, and the nature of required clean-up and restoration actions. Reserves are adjusted as further information develops or circumstances change. Management expects that the amounts reserved from time to time will be paid out over the period of investigation, negotiation, remediation and restoration for the applicable sites. The amounts provided for environmental matters in NCR's Condensed Consolidated Financial Statements are the estimated gross undiscounted amounts of such liabilities, without deductions for indemnity insurance, third-party indemnity claims or recoveries from other PRPs, except as qualified in the following sentences. In those cases where insurance carriers or third-party indemnitors have agreed to pay any amounts and management believes that collectability of such amounts is probable, the amounts are recorded in the Condensed Consolidated Financial Statements. For the Fox River and Kalamazoo River sites, as described above, assets relating to the AT&T and Nokia indemnities and to the BAT obligations are recorded as payment is supported by contractual agreements, public filings and/or payment history.
Guarantees and Product Warranties In the ordinary course of business, NCR may issue performance guarantees on behalf of its subsidiaries to certain of its customers and other parties. Some of those guarantees may be backed by standby letters of credit, surety bonds, or similar instruments. In general, under the guarantees, NCR would be obligated to perform, or cause performance, over the term of the underlying contract in the event of an unexcused, uncured breach by its subsidiary, or some other specified triggering event, in each case as defined by the applicable guarantee. NCR believes the likelihood of having to perform under any such guarantee is remote. As of June 30, 2020 and December 31, 2019, NCR had no material obligations related to such guarantees, and therefore its Condensed Consolidated Financial Statements do not have any associated liability balance.
NCR provides its customers a standard manufacturer’s warranty and records, at the time of the sale, a corresponding estimated liability for potential warranty costs. Estimated future obligations due to warranty claims are based upon historical factors, such as labor rates, average repair time, travel time, number of service calls per machine and cost of replacement parts. When a sale is consummated, the total customer revenue is recognized, provided that all revenue recognition criteria are otherwise satisfied, and the associated warranty liability is recorded using pre-established warranty percentages for the respective product classes.
From time to time, product design or quality corrections are accomplished through modification programs. When identified, associated costs of labor and parts for such programs are estimated and accrued as part of the warranty reserve.
27
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
| In millions | 2020 | 2019 | |||||||||
| Warranty reserve liability | |||||||||||
| Beginning balance as of January 1 | $ | $ | |||||||||
| Accruals for warranties issued | |||||||||||
| Settlements (in cash or in kind) | ( | ( | |||||||||
| Ending balance as of June 30 | $ | $ | |||||||||
In addition, NCR provides its customers with certain indemnification rights. In general, NCR agrees to indemnify the customer if a third party asserts patent or other infringement on the part of its customers for its use of the Company’s products subject to certain conditions that are generally standard within the Company’s industries. On limited occasions the Company will undertake additional indemnification obligations for business reasons. From time to time, NCR also enters into agreements in connection with its acquisition and divestiture activities that include indemnification obligations by the Company. The fair value of these indemnification obligations is not readily determinable due to the conditional nature of the Company’s potential obligations and the specific facts and circumstances involved with each particular agreement. The Company has not recorded a liability in connection with these indemnifications, and no current indemnification instance is material to the Company’s financial position. Historically, payments made by the Company under these types of agreements have not had a material effect on the Company’s consolidated financial condition, results of operations or cash flows.
Lessee We lease property, vehicles and equipment under operating and financing leases. For leases with terms greater than 12 months, we record the related asset and obligation at the present value of lease payments over the term. We determine the lease term by assuming the exercise of renewal options that are reasonably certain. Leases with a lease term 12 months or less at inception are not recorded on our Condensed Consolidated Balance Sheet and are expensed on a straight-line basis over the lease term in our Condensed Consolidated Statement of Operations. Our leases may include rental escalation clauses, renewal options and/or termination options that are factored into our determination of lease payments when appropriate. When available, we use the rate implicit in the lease to discount lease payments to present value; however, most of our leases do not provide a readily determinable implicit rate. Therefore, we must estimate our incremental borrowing rate to discount the lease payments based on information available at lease commencement. Our incremental borrowing rate is based on a credit-adjusted risk-free rate at commencement date, which best approximates a secured rate over a similar term of lease. Additionally, we do not separate lease and non-lease components for any asset classes, except for those leases embedded in certain service arrangements. Fixed and in-substance fixed payments are included in the recognition of the operating and financing assets and lease liabilities, however, variable lease payments, other than those based on a rate or index, are recognized in the Condensed Consolidated Statements of Operations in the period in which the obligation for those payments is incurred. The Company’s variable lease payments generally relate to payments tied to various indices, non-lease components and payments above a contractual minimum fixed payment.
28
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
| In millions | Location in the Condensed Consolidated Balance Sheet | June 30, 2020 | December 31, 2019 | ||||||||||||||
| Assets | |||||||||||||||||
| Operating lease assets | Operating lease assets | $ | $ | ||||||||||||||
| Finance lease assets | Property, plant and equipment, net | ||||||||||||||||
| Accumulated Amortization of Finance lease assets | Property, plant and equipment, net | ( | ( | ||||||||||||||
| Total leased assets | $ | $ | |||||||||||||||
| Liabilities | |||||||||||||||||
| Current | |||||||||||||||||
| Operating lease liabilities | Other current liabilities | $ | $ | ||||||||||||||
| Finance lease liabilities | Other current liabilities | ||||||||||||||||
| Noncurrent | |||||||||||||||||
| Operating lease liabilities | Operating lease liabilities | ||||||||||||||||
| Finance lease liabilities | Other liabilities | ||||||||||||||||
| Total lease liabilities | $ | $ | |||||||||||||||
The following tables present our lease costs for operating and finance leases:
| In millions | Three months ended June 30, 2020 | Six months ended June 30, 2020 | ||||||||||||
| Operating lease cost | $ | $ | ||||||||||||
| Finance lease cost | ||||||||||||||
| Amortization of leased assets | ||||||||||||||
| Interest on lease liabilities | ||||||||||||||
| Short-Term lease cost | ||||||||||||||
| Variable lease cost | ||||||||||||||
| Total lease cost | $ | $ | ||||||||||||
| In millions | For the three months ended June 30, 2019 | For the six months ended June 30, 2019 | ||||||||||||
| Operating lease cost | $ | $ | ||||||||||||
| Finance lease cost | ||||||||||||||
| Amortization of leased assets | ||||||||||||||
| Interest on lease liabilities | ||||||||||||||
| Short-Term lease cost | ||||||||||||||
| Variable lease cost | ||||||||||||||
| Total lease cost | $ | $ | ||||||||||||
The following tables present the supplemental cash flow information:
29
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
| In millions | Three months ended June 30, 2020 | Six months ended June 30, 2020 | ||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||
| Operating cash flows from operating leases | $ | $ | ||||||||||||
| Operating cash flows from finance leases | $ | $ | ||||||||||||
| Financing cash flows from finance leases | $ | $ | ||||||||||||
| Lease Assets Obtained in Exchange for Lease Obligations | ||||||||||||||
| Operating Leases | $ | $ | ||||||||||||
| Finance Leases | $ | $ | ||||||||||||
| In millions | For the three months ended June 30, 2019 | For the six months ended June 30, 2019 | ||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||
| Operating cash flows from operating leases | $ | $ | ||||||||||||
| Operating cash flows from finance leases | $ | $ | ||||||||||||
| Financing cash flows from finance leases | $ | $ | ||||||||||||
| Lease Assets Obtained in Exchange for Lease Obligations | ||||||||||||||
| Operating Leases | $ | $ | ||||||||||||
| Finance Leases | $ | $ | ||||||||||||
The following table reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the finance lease liabilities and operating lease liabilities recorded on the Condensed Consolidated Balance Sheet as of June 30, 2020:
| In millions | Operating Leases | Finance Leases | ||||||||||||
| Remainder of 2020 | $ | $ | ||||||||||||
| 2021 | ||||||||||||||
| 2022 | ||||||||||||||
| 2023 | ||||||||||||||
| 2024 | ||||||||||||||
| Thereafter | ||||||||||||||
| Total lease payments | ||||||||||||||
| Less: Amount representing interest | ( | ( | ||||||||||||
| Present value of lease liabilities | $ | $ | ||||||||||||
As of June 30, 2020, we have additional operating leases of $69 million, primarily for a real estate lease in Europe, that have not yet commenced. This operating lease is expected to commence in 2021 with a lease term of 10 years.
The following table presents the weighted average remaining lease term and interest rates:
| June 30, 2020 | December 31, 2019 | ||||||||||
| Weighted average lease term: | |||||||||||
| Operating leases | |||||||||||
| Finance leases | |||||||||||
| Weighted average interest rates: | |||||||||||
| Operating leases | % | % | |||||||||
| Finance leases | % | % | |||||||||
30
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
11. SERIES A CONVERTIBLE PREFERRED STOCK
On December 4, 2015, NCR issued 820,000 shares of Series A Convertible Preferred Stock to certain entities affiliated with the Blackstone Group L.P. (collectively, Blackstone) for an aggregate purchase price of $820 million, or $1,000 per share, pursuant to an Investment Agreement between the Company and Blackstone, dated November 11, 2015. In connection with the issuance of the Series A Convertible Preferred Stock, the Company incurred direct and incremental expenses of $26 million, including financial advisory fees, closing costs, legal expenses and other offering-related expenses. These direct and incremental expenses originally reduced the Series A Convertible Preferred Stock, and will be accreted through retained earnings as a deemed dividend from the date of issuance through the first possible known redemption date, March 16, 2024. Holders of Series A Convertible Preferred Stock are entitled to a cumulative dividend at the rate of 5.5 % per annum, payable quarterly in arrears. The Series A Convertible Preferred Stock is convertible at the option of the holders at any time into shares of common stock at a conversion price of $30.00 per share, or a conversion rate of 33.333 shares of common stock per share of Series A Convertible Preferred Stock.
Under the Investment Agreement, Blackstone agreed not to sell or otherwise transfer its shares of Series A Convertible Preferred Stock (or any shares of common stock issued upon conversion thereof) without the Company’s consent until June 4, 2017. In March 2017, we provided Blackstone with an early release from this lock-up, allowing Blackstone to sell approximately 49% of its shares of Series A Convertible Preferred Stock, and in return, Blackstone agreed to amend the Investment Agreement to extend the lock-up on the remaining 51% of its shares of Series A Convertible Preferred Stock for six months until December 1, 2017.
In connection with the early release of the lock-up, Blackstone offered for sale 342,000 shares of Series A Convertible Preferred Stock in an underwritten public offering. In addition, Blackstone converted 90,000 shares of Series A Convertible Preferred Stock into shares of our common stock and we repurchased those shares of common stock for $48.47 per share. The underwritten offering and the stock repurchase were consummated on March 17, 2017.
On September 18, 2019, NCR entered into an agreement to repurchase and convert the outstanding 512,221 shares of Series A Convertible Preferred Stock owned by Blackstone. NCR repurchased 237,673 shares of Series A Convertible Preferred Stock for total cash consideration of $302 million. The remaining shares of Blackstone's Series A Convertible Preferred Stock, including accrued dividends, were converted to approximately 9.16 million shares of common stock at a conversion price of $30.00 per share.
Beginning in the first quarter of 2020, dividends are payable in cash or in-kind at the option of the Company. During the three months ended June 30, 2020 and 2019, the Company paid dividends-in-kind of $7 million and $12 million, respectively. During the six months ended June 30, 2020, the Company paid total dividends of $13 million of which $7 million were dividends-in-kind and $6 million were paid in cash. During the six months ended June 30, 2019, the Company paid dividends-in-kind of $24 million. As of June 30, 2020 and December 31, 2019, the Company had accrued dividends of $1 million, respectively, associated with the Series A Convertible Preferred Stock.
12. EARNINGS PER SHARE
Basic earnings per share (EPS) is calculated by dividing net income or loss attributable to NCR, less any dividends (declared or cumulative undeclared), deemed dividends, accretion or decretion, redemption or induced conversion on our Series A Convertible Preferred Stock, by the weighted average number of shares outstanding during the period.
31
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
In computing diluted EPS, we adjust the numerator used in the basic EPS computation, subject to anti-dilution requirements, to add back the dividends (declared or cumulative undeclared), deemed dividends, accretion or decretion, redemption or induced conversion on our Series A Convertible Preferred Stock. We adjust the denominator used in the basic EPS computation, subject to anti-dilution requirements, to include the dilution from potential shares related to the Series A Convertible Preferred Stock and stock-based compensation plans.
The holders of Series A Convertible Preferred Stock, unvested restricted stock units and stock options do not have nonforfeitable rights to common stock dividends or common stock dividend equivalents. Accordingly, the Series A Convertible Preferred Stock, unvested restricted stock units and stock options do not qualify as participating securities. See Note 7, Stock Compensation Plans for share information on NCR’s stock compensation plans.
The components of basic earnings per share are as follows:
| In millions, except per share amounts | Three months ended June 30 | Six months ended June 30 | ||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
| Numerator: | ||||||||||||||||||||||||||
| Income from continuing operations | $ | $ | $ | $ | ||||||||||||||||||||||
| Dividends on Series A Convertible Preferred Stock | ( | ( | ( | ( | ||||||||||||||||||||||
| Income from continuing operations attributable to NCR common stockholders | ||||||||||||||||||||||||||
| Loss from discontinued operations, net of tax | ||||||||||||||||||||||||||
| Net income attributable to NCR common stockholders | $ | $ | $ | $ | ||||||||||||||||||||||
| Denominator: | ||||||||||||||||||||||||||
| Basic weighted average number of shares outstanding | ||||||||||||||||||||||||||
| Basic earnings per share: | ||||||||||||||||||||||||||
| From continuing operations | $ | $ | $ | $ | ||||||||||||||||||||||
| From discontinued operations | ||||||||||||||||||||||||||
| Total basic earnings per share | $ | $ | $ | $ | ||||||||||||||||||||||
32
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
The components of diluted earnings per share are as follows:
| In millions, except per share amounts | Three months ended June 30 | Six months ended June 30 | ||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
| Numerator: | ||||||||||||||||||||||||||
| Income from continuing operations | $ | $ | $ | $ | ||||||||||||||||||||||
| Dividends on Series A Convertible Preferred Stock | ( | ( | ( | |||||||||||||||||||||||
| Income from continuing operations attributable to NCR common stockholders | ||||||||||||||||||||||||||
| Loss from discontinued operations, net of tax | ||||||||||||||||||||||||||
| Net income attributable to NCR common stockholders | $ | $ | $ | $ | ||||||||||||||||||||||
Denominator: | ||||||||||||||||||||||||||
| Basic weighted average number of shares outstanding | ||||||||||||||||||||||||||
| Dilutive effect of as-if converted Series A Convertible Preferred Stock | ||||||||||||||||||||||||||
| Dilutive effect of restricted stock units and stock options | ||||||||||||||||||||||||||
| Weighted average diluted shares | ||||||||||||||||||||||||||
| Diluted earnings per share: | ||||||||||||||||||||||||||
| From continuing operations | $ | $ | $ | $ | ||||||||||||||||||||||
| From discontinued operations | ||||||||||||||||||||||||||
| Total diluted earnings per share | $ | $ | $ | $ | ||||||||||||||||||||||
For the three months ended June 30, 2020, shares related to the as-if converted Series A Convertible Preferred Stock of 13.4 million were excluded from the diluted share count because their effect would have been anti-dilutive. For the three months ended June 30, 2020, weighted average restricted stock units and stock options of 11.4 million were excluded from the diluted share count because their effect would have been anti-dilutive.
For the three months ended June 30, 2019, it was more dilutive to assume the Series A Convertible Preferred Stock was converted to common stock and therefore the weighted average outstanding shares of common stock were adjusted by the as-if converted Series A Convertible Preferred Stock. For the three months ended June 30, 2019, weighted average restricted stock units and stock options of 4.7 million were excluded from the diluted share count because their effect would have been anti-dilutive.
For the six months ended June 30, 2020, shares related to the as-if converted Series A Convertible Preferred Stock of 13.3 million were excluded from the diluted share count because their effect would have been anti-dilutive. For the six months ended June 30, 2020, weighted average restricted stock units and stock options of 9.9 million were excluded from the diluted share count because their effect would have been anti-dilutive.
13. DERIVATIVES AND HEDGING INSTRUMENTS
NCR is exposed to risks associated with changes in foreign currency exchange rates and interest rates. NCR utilizes a variety of measures to monitor and manage these risks, including the use of derivative financial instruments. NCR has exposure to approximately 50 functional currencies. Since a substantial portion of our operations and revenue occur outside the U.S., and in currencies other than the U.S. Dollar, our results can be significantly impacted, both positively and negatively, by changes in foreign currency exchange rates.
33
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
Foreign Currency Exchange Risk
The accounting guidance for derivatives and hedging requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the Condensed Consolidated Balance Sheets. The Company designates foreign exchange contracts as cash flow hedges of forecasted transactions when they are determined to be highly effective at inception.
Our risk management strategy includes hedging, on behalf of certain subsidiaries, a portion of our forecasted, non-functional currency denominated cash flows for a period of up to 15 months. As a result, some of the impact of currency fluctuations on non-functional currency denominated transactions (and hence on subsidiary operating income, as stated in the functional currency), is mitigated in the near term. The amount we hedge and the duration of hedge contracts may vary significantly. In the longer term (greater than 15 months), the subsidiaries are still subject to the effect of translating the functional currency results to U.S. Dollars. To manage our exposures and mitigate the impact of currency fluctuations on the operations of our foreign subsidiaries, we hedge our main transactional exposures through the use of foreign exchange forward and option contracts. This is primarily done through the hedging of foreign currency denominated inter-company inventory purchases by NCR’s marketing units and the foreign currency denominated inputs to our manufacturing units. The related foreign exchange contracts are designated as highly effective cash flow hedges. The gains or losses on these hedges are deferred in accumulated other comprehensive income (AOCI) and reclassified to income when the underlying hedged transaction is recorded in earnings. As of June 30, 2020, the balance in AOCI related to foreign exchange derivative transactions was zero , net of tax. The gains or losses from derivative contracts related to inventory purchases are recorded in cost of products when the inventory is sold to an unrelated third party.
We also utilize foreign exchange contracts to hedge our exposure of assets and liabilities denominated in non-functional currencies. We recognize the gains and losses on these types of hedges in earnings as exchange rates change. We do not enter into hedges for speculative purposes.
34
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
| Fair Values of Derivative Instruments | |||||||||||||||||||||||||||||||||||
| June 30, 2020 | |||||||||||||||||||||||||||||||||||
| In millions | Balance Sheet Location | Notional Amount | Fair Value | Balance Sheet Location | Notional Amount | Fair Value | |||||||||||||||||||||||||||||
| Derivatives designated as hedging instruments | |||||||||||||||||||||||||||||||||||
| Foreign exchange contracts | Other current assets | $ | $ | Other current liabilities | $ | $ | |||||||||||||||||||||||||||||
| Total derivatives designated as hedging instruments | $ | $ | |||||||||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments | |||||||||||||||||||||||||||||||||||
| Foreign exchange contracts | Other current assets | $ | $ | Other current liabilities | $ | $ | |||||||||||||||||||||||||||||
| Total derivatives not designated as hedging instruments | $ | $ | |||||||||||||||||||||||||||||||||
| Total derivatives | $ | $ | |||||||||||||||||||||||||||||||||
| Fair Values of Derivative Instruments | |||||||||||||||||||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||||||||||||||
| In millions | Balance Sheet Location | Notional Amount | Fair Value | Balance Sheet Location | Notional Amount | Fair Value | |||||||||||||||||||||||||||||
| Derivatives designated as hedging instruments | |||||||||||||||||||||||||||||||||||
| Foreign exchange contracts | Other current assets | $ | $ | Other current liabilities | $ | $ | |||||||||||||||||||||||||||||
| Total derivatives designated as hedging instruments | $ | $ | |||||||||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments | |||||||||||||||||||||||||||||||||||
| Foreign exchange contracts | Other current assets | $ | $ | Other current liabilities | $ | $ | |||||||||||||||||||||||||||||
| Total derivatives not designated as hedging instruments | $ | $ | |||||||||||||||||||||||||||||||||
| Total derivatives | $ | $ | |||||||||||||||||||||||||||||||||
35
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
The effects of derivative instruments on the Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2020 and 2019 were as follows:
| In millions | Amount of Gain (Loss) Recognized in Other Comprehensive Income (OCI) on Derivative | Amount of (Gain) Loss Reclassified from AOCI into the Condensed Consolidated Statement of Operations | |||||||||||||||||||||||||||
| Derivatives in Cash Flow Hedging Relationships | For the three months ended June 30, 2020 | For the three months ended June 30, 2019 | Location of (Gain) Loss Reclassified from AOCI into the Condensed Consolidated Statement of Operations | For the three months ended June 30, 2020 | For the three months ended June 30, 2019 | ||||||||||||||||||||||||
| Foreign exchange contracts | $ | ( | $ | Cost of products | $ | $ | ( | ||||||||||||||||||||||
| In millions | Amount of Gain (Loss) Recognized in Other Comprehensive Income (OCI) on Derivative | Amount of (Gain) Loss Reclassified from AOCI into the Condensed Consolidated Statement of Operations | |||||||||||||||||||||||||||
| Derivatives in Cash Flow Hedging Relationships | For the six months ended June 30, 2020 | For the six months ended June 30, 2019 | Location of (Gain) Loss Reclassified from AOCI into the Condensed Consolidated Statement of Operations | For the six months ended June 30, 2020 | For the six months ended June 30, 2019 | ||||||||||||||||||||||||
| Foreign exchange contracts | $ | $ | Cost of products | $ | ( | $ | ( | ||||||||||||||||||||||
| In millions | Amount of Gain (Loss) Recognized in the Condensed Consolidated Statement of Operations | |||||||||||||||||||||||||
| Three months ended June 30 | Six months ended June 30 | |||||||||||||||||||||||||
| Derivatives not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in the Condensed Consolidated Statement of Operations | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||
| Foreign exchange contracts | Other (expense), net | $ | $ | ( | $ | $ | ( | |||||||||||||||||||
Refer to Note 13. Derivatives and Hedging Instruments, for further information on derivative assets and liabilities recorded at fair value on a recurring basis.
Concentration of Credit Risk
NCR is potentially subject to concentrations of credit risk on accounts receivable and financial instruments such as hedging instruments and cash and cash equivalents. Credit risk includes the risk of nonperformance by counterparties. The maximum potential loss may exceed the amount recognized on the Condensed Consolidated Balance Sheets. Exposure to credit risk is managed through credit approvals, credit limits, selecting major international financial institutions (as counterparties to hedging transactions) and monitoring procedures. NCR’s business often involves large transactions with customers, and if one or more of those customers were to default on its obligations under applicable contractual arrangements, the Company could be exposed to potentially significant losses. However, management believes that the reserves for expected losses are adequate. As of June 30, 2020, we did not have any significant concentration of credit risk related to financial instruments.
14. FAIR VALUE OF ASSETS AND LIABILITIES
Assets and Liabilities Measured at Fair Value on a Recurring Basis
36
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
| June 30, 2020 | |||||||||||||||||||||||
| In millions | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||
| Assets: | |||||||||||||||||||||||
Deposits held in money market mutual funds (1) | $ | $ | $ | $ | |||||||||||||||||||
Foreign investments(2) | |||||||||||||||||||||||
Foreign exchange contracts (2) | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
Foreign exchange contracts (3) | $ | $ | $ | $ | |||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||
| In millions | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||
| Assets: | |||||||||||||||||||||||
Deposits held in money market mutual funds (1) | $ | $ | $ | $ | |||||||||||||||||||
Foreign exchange contracts (2) | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
Foreign exchange contracts (3) | $ | $ | $ | $ | |||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
(1) Included in Cash and cash equivalents in the Condensed Consolidated Balance Sheets.
(2) Included in Other current assets in the Condensed Consolidated Balance Sheets.
Deposits Held in Money Market Mutual Funds A portion of the Company’s excess cash is held in money market mutual funds that generate interest income based on prevailing market rates. Money market mutual fund holdings are measured at fair value using quoted market prices and are classified within Level 1 of the valuation hierarchy.
Foreign Investments As a result of our acquisition of Origami, as noted within Note 3, Business Combinations, we acquired investments held in Brazil. The investments include an investment fund similar to a mutual fund as well as certificates of deposit. The investments are valued using observable, either directly or indirectly, inputs for substantially the full term of the assets and are classified within Level 2 of the valuation hierarchy.
Foreign Exchange Contracts As a result of our global operating activities, we are exposed to risks from changes in foreign currency exchange rates, which may adversely affect our financial condition. To manage our exposures and mitigate the impact of currency fluctuations on our financial results, we hedge our primary transactional exposures through the use of foreign exchange forward and option contracts. The foreign exchange contracts are valued using the market approach based on observable market transactions of forward rates and are classified with in Level 2 of the valuation hierarchy.
Assets Measured at Fair Value on a Non-recurring Basis
From time to time, certain assets are measured at fair value on a nonrecurring basis using significant unobservable inputs (Level 3). NCR reviews the carrying values of investments when events and circumstances warrant and considers all available evidence in evaluating when declines in fair value are other-than-temporary declines. There were no material impairment charges or non-recurring fair value adjustments recorded during the three months ended June 30, 2020 and 2019.
37
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
Changes in AOCI by Component
| In millions | Currency Translation Adjustments | Changes in Employee Benefit Plans | Changes in Fair Value of Effective Cash Flow Hedges | Total | ||||||||||
| Balance as of December 31, 2019 | $ | ( | $ | ( | $ | $ | ( | |||||||
| Other comprehensive income (loss) before reclassifications | ( | ( | ||||||||||||
| Amounts reclassified from AOCI | ( | ( | ( | |||||||||||
| Net current period other comprehensive (loss) income | ( | ( | ( | ( | ||||||||||
| Balance as of June 30, 2020 | $ | ( | $ | ( | $ | $ | ( | |||||||
Reclassifications Out of AOCI
| For the three months ended June 30, 2020 | ||||||||||||||||||||
| Employee Benefit Plans | ||||||||||||||||||||
| In millions | Amortization of Actuarial Loss (Gain) | Amortization of Prior Service Benefit | Effective Cash Flow Hedge Loss (Gain) | Total | ||||||||||||||||
| Affected line in Condensed Consolidated Statement of Operations: | ||||||||||||||||||||
| Cost of products | $ | $ | $ | $ | ||||||||||||||||
| Cost of services | ( | ( | ||||||||||||||||||
| Selling, general and administrative expenses | ( | ( | ||||||||||||||||||
| Total before tax | $ | ( | $ | ( | $ | $ | ( | |||||||||||||
| Tax expense | ||||||||||||||||||||
| Total reclassifications, net of tax | $ | ( | ||||||||||||||||||
| For the three months ended June 30, 2019 | ||||||||||||||||||||
| Employee Benefit Plans | ||||||||||||||||||||
| In millions | Amortization of Actuarial Loss (Gain) | Amortization of Prior Service Benefit | Effective Cash Flow Hedge Loss (Gain) | Total | ||||||||||||||||
| Affected line in Condensed Consolidated Statement of Operations: | ||||||||||||||||||||
| Cost of products | $ | $ | $ | ( | $ | ( | ||||||||||||||
| Cost of services | ||||||||||||||||||||
| Selling, general and administrative expenses | ( | ( | ||||||||||||||||||
| Total before tax | $ | $ | ( | $ | ( | $ | ( | |||||||||||||
| Tax expense | ||||||||||||||||||||
| Total reclassifications, net of tax | $ | ( | ||||||||||||||||||
38
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
| For the six months ended June 30, 2020 | ||||||||||||||||||||
| Employee Benefit Plans | ||||||||||||||||||||
| In millions | Amortization of Actuarial Loss (Gain) | Amortization of Prior Service Benefit | Effective Cash Flow Hedge Loss (Gain) | Total | ||||||||||||||||
| Affected line in Condensed Consolidated Statement of Operations: | ||||||||||||||||||||
| Cost of products | $ | $ | $ | ( | $ | ( | ||||||||||||||
| Cost of services | ( | ( | ( | |||||||||||||||||
| Selling, general and administrative expenses | ( | ( | ||||||||||||||||||
| Total before tax | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||
| Tax expense | ||||||||||||||||||||
| Total reclassifications, net of tax | $ | ( | ||||||||||||||||||
| For the six months ended June 30, 2019 | ||||||||||||||||||||
| Employee Benefit Plans | ||||||||||||||||||||
| In millions | Amortization of Actuarial Loss (Gain) | Amortization of Prior Service Benefit | Effective Cash Flow Hedge Loss (Gain) | Total | ||||||||||||||||
| Affected line in Condensed Consolidated Statement of Operations: | ||||||||||||||||||||
| Cost of products | $ | $ | $ | ( | $ | ( | ||||||||||||||
| Cost of services | ( | ( | $ | ( | ||||||||||||||||
| Selling, general and administrative expenses | ( | $ | ( | |||||||||||||||||
| Total before tax | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||
| Tax expense | ||||||||||||||||||||
| Total reclassifications, net of tax | $ | ( | ||||||||||||||||||
The Company manages and reports the following segments:
•Banking - We offer solutions to enable customers in the financial services industry to reduce costs, generate new revenue streams and enhance customer loyalty. These solutions include a comprehensive line of ATM and payment processing hardware and software; cash management and video banking software and customer-facing digital banking services; and related installation, maintenance, and managed and professional services.
•Retail - We offer solutions to customers in the retail industry designed to improve selling productivity and checkout processes as well as increase service levels. The solutions offered serve the following customer markets in the retail industry: food, drug and mass merchandisers; department and specialty retailers; convenience and fuel retailers, and small and medium retailers. These solutions primarily include retail-oriented technologies, such as point of sale terminals and point of sale software; a retail software platform with a comprehensive suite of retail software applications; innovative self-service kiosks, such as self-checkout; as well as bar-code scanners. We also offer installation, maintenance, managed and professional services as well as payment processing solutions.
•Hospitality - We offer solutions to customers in the hospitality industry, serving businesses in the following markets: quick service restaurants, table service restaurants, small and medium restaurants and travel and entertainment venues. Our solutions include point of sale hardware and software solutions, installation, maintenance, managed and professional services as well as payment processing solutions.
•Other - This category includes telecommunications and technology solutions where we offer maintenance as well as managed and professional services for third-party hardware provided to select manufacturers who value and leverage our global service capability.
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NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
These segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the chief operating decision maker in assessing segment performance and in allocating the Company's resources. Management evaluates the performance of the segments based on revenue and segment operating income. Assets are not allocated to segments, and thus are not included in the assessment of segment performance. Consequently, we do not disclose total assets by reportable segment.
The accounting policies used to determine the results of the operating segments are the same as those utilized for the consolidated financial statements as a whole. Intersegment sales and transfers are not material.
To maintain operating focus on business performance, non-operational items are excluded from the segment operating results utilized by our chief operating decision maker in evaluating segment performance and are separately delineated to reconcile back to total reported income from operations.
The following table presents revenue and operating income by segment:
| In millions | Three months ended June 30 | Six months ended June 30 | |||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Revenue by segment | |||||||||||||||||||||||
| Banking | $ | $ | $ | $ | |||||||||||||||||||
| Retail | |||||||||||||||||||||||
| Hospitality | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Consolidated revenue | $ | $ | $ | $ | |||||||||||||||||||
| Operating income by segment | |||||||||||||||||||||||
| Banking | $ | $ | $ | $ | |||||||||||||||||||
| Retail | |||||||||||||||||||||||
| Hospitality | ( | ||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Subtotal - segment operating income | |||||||||||||||||||||||
Other adjustments (1) | |||||||||||||||||||||||
| Income from operations | $ | $ | $ | $ | |||||||||||||||||||
(1)The following table presents the other adjustments for NCR:
| In millions | Three months ended June 30 | Six months ended June 30 | |||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Transformation and restructuring costs | $ | $ | $ | $ | |||||||||||||||||||
| Acquisition-related amortization of intangible assets | |||||||||||||||||||||||
| Total other adjustments | $ | $ | $ | $ | |||||||||||||||||||
The following table presents revenue by geography for NCR:
| In millions | Three months ended June 30 | Six months ended June 30 | |||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Americas | $ | $ | $ | $ | |||||||||||||||||||
| Europe, Middle East and Africa (EMEA) | |||||||||||||||||||||||
| Asia Pacific (APJ) | |||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
40
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
| In millions | Three months ended June 30 | Six months ended June 30 | |||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Product revenue | $ | $ | $ | $ | |||||||||||||||||||
| Professional services and installation services revenue | |||||||||||||||||||||||
| Recurring revenue, including maintenance, cloud revenue and payments | |||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
| In millions | Three months ended June 30 | Six months ended June 30 | |||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Software | $ | $ | $ | $ | |||||||||||||||||||
| Services | |||||||||||||||||||||||
| Hardware | |||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
i
17. SUPPLEMENTAL FINANCIAL INFORMATION
The components of accounts receivable are summarized as follows:
| In millions | June 30, 2020 | December 31, 2019 | |||||||||
| Accounts receivable | |||||||||||
| Trade | $ | $ | |||||||||
| Other | |||||||||||
| Accounts receivable, gross | |||||||||||
| Less: allowance for credit losses | ( | ( | |||||||||
| Total accounts receivable, net | $ | $ | |||||||||
Accounts receivable, net includes amounts billed and currently due from customers, as well as amounts unbilled that typically result from sales under contracts where revenue recognized exceeds the amount billed to the customer and where the Company has an unconditional right to consideration. The amounts due are stated at their net estimated realizable value.
Allowances for credit losses on accounts receivable are recognized when reasonable and supportable forecasts affect the expected collectability. This requires us to make our best estimate of the current expected losses inherent in our accounts receivable at each balance sheet date. These estimates require consideration of historical loss experience, adjusted for current conditions, forward looking indicators, trends in customer payment frequency and judgments about the probable effects of relevant observable data, including present and future economic conditions and the financial health of specific customers and market sectors. This policy is applied consistently among all of our operating segments.
Our allowance for credit losses as of June 30, 2020 and December 31, 2019 was $54 million and $44 million, respectively. Our allowance for credit losses charged to expense for the three and six months ended June 30, 2020 was $9 million and $19 million, respectively. We increased our allowance for credit losses for the three and six months ended June 30, 2020 by $3 million and $6 million, respectively, based upon current forecasts that reflect increased economic uncertainty resulting from the COVID-19 pandemic. The Company recorded write-offs against the reserve for the three and six months ended June 30, 2020 of $4 million and $6 million, respectively.
The components of inventory are summarized as follows:.
| In millions | June 30, 2020 | December 31, 2019 | |||||||||
| Inventories | |||||||||||
| Work in process and raw materials | $ | $ | |||||||||
| Finished goods | |||||||||||
| Service parts | |||||||||||
| Total inventories | $ | $ | |||||||||
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)
Second Quarter Overview
The following were the significant events for the second quarter of 2020, each of which is discussed more fully in later sections of this MD&A:
•Revenue decreased approximately 13% from the prior year period and 12% excluding unfavorable foreign currency impacts;
•Segment results continue to be negatively impacted by the COVID-19 pandemic;
•Cash and cash equivalents as of June 30, 2020 of $1.68 billion, improved liquidity to help manage through the COVID-19 pandemic; and
•Task force continues to pro-actively manage the global impact of the COVID-19 pandemic on our employees, customers and business.
Strategic Overview
Today's consumers expect, including as the world navigates in a COVID-19 pandemic environment, businesses to provide a rich, integrated and personalized experience across all commerce channels, including online, mobile and, as consumers are able to return to a more normal operating environment, in-store. NCR is at the forefront of this shift, assisting businesses of every size in their digital transformation journeys including a shift to contactless commerce. Our mission is to be the leading software- and services-led enterprise provider in the financial, retail and hospitality industries. We have developed a long-term growth strategy built on taking care of our customers, improving execution of new product introductions, accelerating software and services revenue growth and executing spend optimization programs. This long-term mission and our strategy to execute it are designed to position NCR to continue to drive -- in the long-term -- growth, sustainable revenue, profit and cash flow, and to improve value for all of our stakeholders. As we manage our business through the COVID-19 pandemic with a focus on prioritizing the health and safety of our employees and customers, and being positioned to capitalize on market opportunities when we return to a more normal operating environment, we have also remained focused on our long-term mission and executed at a high level to advance our strategy.
To deliver on our short-term and long-term mission and strategy, we are focused on the following main initiatives in 2020:
•Customer Care - Support our customers to continue operations in a safe manner and enable them to transform their operations rapidly to meet consumer needs and emerging industry or government programs in the COVID-19 environment; improve the customer experience and execution of new product introductions;
•Business Continuity Plans - Manage our business through the COVID-19 pandemic by focusing on business continuity plans, reducing our planned capital expenditures, improving our liquidity and increasing our financial flexibility to position our business, in the long-term, to accelerate profitable top-line revenue growth by investing in and shifting our revenue mix to recurring software and services revenue streams we identify as strategic growth platforms, while improving the Company’s cost structure;
•Strategic Growth Platforms and Targeted Acquisitions - Increase capital expenditures in strategic growth platforms and targeted acquisitions to gain solutions that drive the highest growth and return on investment and accelerate our NCR-as-a-Service vision;
•Talent and Employee Care - Implement actions to protect the health and safety of our employees and protect as many jobs as possible to enable us to retain talent, and, in the long term, to continue to develop, reward and retain talent with competitive recruiting, training and effective incentive-based compensation programs; and
•Sales Enablement - Provide our sales force with flexibility in services and operations to meet customer needs through the COVID-19 pandemic; and provide top-performing and secure products packaged to target our desired revenue mix and drive customer delight, as well as invest in appropriate training programs to enable success.
Potentially significant risks to the execution of our initiatives and achievement of our strategy include the impact of the COVID-19 pandemic on our workforce, operations and financial results, including the impact on our customer’s businesses and their ability to pay; manufacturing disruptions, including those caused by or related to outsourced manufacturing or disruptions in our supply chain due to the COVID-19 pandemic; strength of demand for the products we offer or will offer in the future consistent with our strategy and its effect on our businesses; domestic and global economic and credit conditions including, in
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particular, those resulting from the imposition or threat of protectionist trade policies or import or export tariffs, global and regional market conditions and spending trends in the financial services and retail industries, new tax legislation across multiple jurisdictions, modified or new global or regional trade agreements, execution of the United Kingdom's exit from the European Union, uncertainty over further potential changes in Eurozone participation and fluctuations in oil and commodity prices; the transformation of our business and shift to increased software and services revenue, as well as recurring revenue; our ability to improve execution in our sales and services organizations; our ability to successfully introduce new solutions and compete in the technology industry; cybersecurity risks and compliance with data privacy and protection requirements; the possibility of disruptions in or problems with our data center hosting facilities; the impact of the March 2020 tornadoes in the greater Nashville area on an NCR Global Fulfillment Center in Mt. Juliet, Tennessee operated by a third party, including the sufficiency and effectiveness of our or our third-party logistics partner’s business continuity plans, the adequacy of our property damage and business interruption insurance coverage and our ability to recover under the applicable policies; defects or errors in our products; the impact of our indebtedness and its terms on our financial and operating activities; the historical seasonality of our sales; tax rates and tax legislation; foreign currency fluctuations; the success of our restructuring plans and cost reduction savings initiatives; the availability and success of acquisitions, divestitures and alliances; our pension strategy and underfunded pension obligations; reliance on third party suppliers; the impact of the terms of our Series A Convertible Preferred Stock; our multinational operations, including in new and emerging markets; collectability difficulties in subcontracting relationships in certain geographical markets; development and protection of intellectual property; workforce turnover and the ability to attract and retain skilled employees; uncertainties or delays associated with the transition of key business leaders; environmental exposures from our historical and ongoing manufacturing activities; and uncertainties with regard to regulations, lawsuits, claims, and other matters across various jurisdictions.
Impacts from the COVID-19 pandemic
The impact of COVID-19 has grown throughout the world, including in the United States. Governmental authorities have implemented numerous measures attempting to contain and mitigate the effects of COVID-19, including travel bans and restrictions, quarantines, shelter in place orders and shutdowns.
We continue to actively monitor the global outbreak and spread of COVID-19 and take steps to mitigate the potential risks to us posed by its spread and related circumstances and impacts. We continue to assess and update our business continuity plan in the context of this pandemic. We have taken precautions to help keep our workforce healthy and safe, including establishing a coronavirus task force in January 2020, thermal screening procedures at our manufacturing plants and call centers and remote working arrangements for the vast majority of our back-office employees. We expect the pandemic to create headwinds to our customers and our business until COVID-19 is contained, consumer confidence improves and the economic conditions rebound. Although it is difficult to project how deep and how long the COVID-19 pandemic will last, we do expect it will negatively impact our business for the remainder of 2020 and into 2021.
With respect to our Banking segment, we are working with local governments to make sure that these businesses are designated as essential critical infrastructure businesses. Although we experienced installation delays, we have not experienced any significant impact to our recurring services revenue stream. We believe our ATM break-fix services, which represented the largest percentage of Banking segment revenue, has remained strong, although there can be no assurance that such operations will not be impacted in the future with higher costs or labor availability.
With respect to our Retail segment, the food, drug and mass merchandising market, which includes grocery stores, drug stores and big box retailers, and which represented the majority of our Retail segment revenue, is currently designated as an essential critical infrastructure business in many jurisdictions. We have realigned our resources to support our customers as they respond to changing consumer demand, particularly with regard to self-checkout and contactless checkout. However, customers in our department and specialty retail market and in our small and medium business market, which is approximately 20% of our Retail segment revenue, have encountered significant adverse impacts in connection with COVID-19 as a result of temporary closures of physical stores and reduced consumer spending.
With respect to our Hospitality segment, the quick service restaurants, which are large chains and represent the majority of the Hospitality segment revenue, have remained busy with respect to drive-through and pick up services being in demand as many in-restaurant dining options are limited by social distancing and governmental orders. However, we do expect this market to be negatively impacted from lower new stores and less remodeling activity. For table service restaurants, which are sit-down restaurants with more than 50 locations, we expect negative impacts as a result of shelter-in-place orders. Although many of these businesses have experienced an increase in online and takeout ordering, we expect this market to be negatively impacted until consumer confidence improves once COVID-19 is contained. Customers in our small and medium business market have experienced significant working capital and adverse cash flow impacts as a result of the COVID-19 pandemic, which, similar to table service restaurants, is expected to continue until COVID-19 is contained and the economy begins to rebound.
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In order to build a stronger liquidity position, we have taken steps to improve working capital and are addressing certain business impacts with spending cuts. We have taken several steps to build our cash reserve to improve our financial liquidity and flexibility and provide a cushion to help weather the impacts of the pandemic. These steps include suspending our share repurchase programs, limiting our mergers and acquisition activity, reducing salary for members of our leadership team and certain salaried employees, reducing our planned capital expenditures, eliminating most contractors, curtailing travel, freezing merit increases and hiring. Additionally, on March 24, 2020, we drew the remaining available funds of $630 million on our five-year, $1.1 billion revolving credit facility and on April 13, 2020, we issued $400 million senior unsecured notes.
The degree to which COVID-19 affects our financial results and operations will depend on future developments, which are highly uncertain and cannot be predicted with certainty, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume.
Results from Operations
For the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019
The following table shows our results for the three and six months ended June 30:
| Three months ended June 30 | Six months ended June 30 | ||||||||||||||||||||||
| In millions | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| Revenue | $ | 1,484 | $ | 1,710 | $ | 2,987 | $ | 3,246 | |||||||||||||||
| Gross margin | 372 | 471 | 769 | 882 | |||||||||||||||||||
| Gross margin as a percentage of revenue | 25.1 | % | 27.5 | % | 25.7 | % | 27.2 | % | |||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Selling, general and administrative expenses | $ | 234 | $ | 252 | $ | 489 | $ | 504 | |||||||||||||||
| Research and development expenses | 49 | 62 | 114 | 121 | |||||||||||||||||||
| Income from operations | $ | 89 | $ | 157 | $ | 166 | $ | 257 | |||||||||||||||
The following table shows our revenue by geography for the three months ended June 30:
| In millions | 2020 | % of Total | 2019 | % of Total | % Increase (Decrease) | % Increase (Decrease) Constant Currency (1) | ||||||||||||||||||||
| Americas | $ | 886 | 60% | $ | 1,029 | 60% | (14)% | (13)% | ||||||||||||||||||
| Europe, Middle East and Africa (EMEA) | 407 | 27% | 452 | 27% | (10)% | (8)% | ||||||||||||||||||||
| Asia Pacific (APJ) | 191 | 13% | 229 | 13% | (17)% | (15)% | ||||||||||||||||||||
| Consolidated revenue | $ | 1,484 | 100% | $ | 1,710 | 100% | (13)% | (12)% | ||||||||||||||||||
The following table shows our revenue by geography for the six months ended June 30:
| In millions | 2020 | % of Total | 2019 | % of Total | % Increase (Decrease) | % Increase (Decrease) Constant Currency (1) | ||||||||||||||||||||
| Americas | $ | 1,778 | 60% | $ | 1,949 | 60% | (9)% | (8)% | ||||||||||||||||||
| Europe, Middle East and Africa (EMEA) | 810 | 27% | 871 | 27% | (7)% | (5)% | ||||||||||||||||||||
| Asia Pacific (APJ) | 399 | 13% | 426 | 13% | (6)% | (4)% | ||||||||||||||||||||
| Consolidated revenue | $ | 2,987 | 100% | $ | 3,246 | 100% | (8)% | (7)% | ||||||||||||||||||
The following table shows our revenue by segment for the three months ended June 30:
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| In millions | 2020 | % of Total | 2019 | % of Total | % Increase (Decrease) | % Increase (Decrease) Constant Currency (1) | ||||||||||||||||||||
| Banking | $ | 763 | 51% | $ | 868 | 51% | (12)% | (11)% | ||||||||||||||||||
| Retail | 483 | 33% | 558 | 32% | (13)% | (13)% | ||||||||||||||||||||
| Hospitality | 160 | 11% | 202 | 12% | (21)% | (20)% | ||||||||||||||||||||
| Other | 78 | 5% | 82 | 5% | (5)% | (2)% | ||||||||||||||||||||
| Consolidated revenue | $ | 1,484 | 100% | $ | 1,710 | 100% | (13)% | (12)% | ||||||||||||||||||
The following table shows our revenue by segment for the six months ended June 30:
| In millions | 2020 | % of Total | 2019 | % of Total | % Increase (Decrease) | % Increase (Decrease) Constant Currency (1) | ||||||||||||||||||||
| Banking | $ | 1,526 | 51% | $ | 1,626 | 50% | (6)% | (5)% | ||||||||||||||||||
| Retail | 955 | 32% | 1,069 | 33% | (11)% | (10)% | ||||||||||||||||||||
| Hospitality | 329 | 11% | 395 | 12% | (17)% | (16)% | ||||||||||||||||||||
| Other | 177 | 6% | 156 | 5% | 13% | 15% | ||||||||||||||||||||
| Consolidated revenue | $ | 2,987 | 100% | $ | 3,246 | 100% | (8)% | (7)% | ||||||||||||||||||
(1) The tables above for the three and six months ended June 30 are presented with period-over-period revenue growth or declines on a constant currency basis. Constant currency is a non-GAAP measure that excludes the effects of foreign currency fluctuations. We calculate this information by translating prior period revenue growth at current period monthly average exchange rates. We believe that examining period-over-period revenue growth or decline excluding foreign currency fluctuations is useful for assessing the underlying performance of our business, and our management uses revenue growth adjusted for constant currency to evaluate period-over-period operating performance. This non-GAAP measure should not be considered a substitute for, or superior to, period-over-period revenue growth under GAAP.
The following table provides a reconciliation of geographic revenue percentage growth (GAAP) to revenue percentage growth constant currency (non-GAAP) for the three months ended June 30, 2020:
| Revenue % Growth (GAAP) | Favorable (unfavorable) FX impact | Revenue % Growth Constant Currency (non-GAAP) | |||||||||
| Americas | (14)% | (1)% | (13)% | ||||||||
| EMEA | (10)% | (2)% | (8)% | ||||||||
| APJ | (17)% | (2)% | (15)% | ||||||||
| Consolidated revenue | (13)% | (1)% | (12)% | ||||||||
The following table provides a reconciliation of geographic revenue percentage growth (GAAP) to revenue percentage growth constant currency (non-GAAP) for the six months ended June 30, 2020:
| Revenue % Growth (GAAP) | Favorable (unfavorable) FX impact | Revenue % Growth Constant Currency (non-GAAP) | |||||||||
| Americas | (9)% | (1)% | (8)% | ||||||||
| EMEA | (7)% | (2)% | (5)% | ||||||||
| APJ | (6)% | (2)% | (4)% | ||||||||
| Consolidated revenue | (8)% | (1)% | (7)% | ||||||||
The following table provides a reconciliation of segment revenue percentage growth (GAAP) to revenue percentage growth constant currency (non-GAAP) for the three months ended June 30, 2020:
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| Revenue % Growth (GAAP) | Favorable (unfavorable) FX impact | Revenue % Growth Constant Currency (non-GAAP) | |||||||||
| Banking | (12)% | (1)% | (11)% | ||||||||
| Retail | (13)% | —% | (13)% | ||||||||
| Hospitality | (21)% | (1)% | (20)% | ||||||||
| Other | (5)% | (3)% | (2)% | ||||||||
| Consolidated revenue | (13)% | (1)% | (12)% | ||||||||
The following table provides a reconciliation of segment revenue percentage growth (GAAP) to revenue percentage growth constant currency (non-GAAP) for the six months ended June 30, 2020:
| Revenue % Growth (GAAP) | Favorable (unfavorable) FX impact | Revenue % Growth Constant Currency (non-GAAP) | |||||||||
| Banking | (6)% | (1)% | (5)% | ||||||||
| Retail | (11)% | (1)% | (10)% | ||||||||
| Hospitality | (17)% | (1)% | (16)% | ||||||||
| Other | 13% | (2)% | 15% | ||||||||
| Consolidated revenue | (8)% | (1)% | (7)% | ||||||||
Revenue
For the three months ended June 30, 2020 compared to the three months ended June 30, 2019, revenue decreased 13% year-over-year. The COVID-19 pandemic had a material impact to revenue while the shift from selling perpetual software licenses to recurring revenue lowered revenue by $22 million. Foreign currency fluctuations had an unfavorable impact of 1% on the revenue comparison.
Banking revenue decreased 12% due to the continued impact of the COVID-19 pandemic driven by a 25% decline in ATM hardware revenue. An accelerated shift from selling perpetual software licenses to recurring revenue also impacted the year-over-year revenue comparison. Foreign currency fluctuations had an unfavorable impact of 1% on the revenue comparison. Retail revenue decreased 13% driven by a large customer hardware roll-out in the prior year as well as the continued impact from the COVID-19 pandemic. Foreign currency fluctuations had no impact on the revenue comparison. Hospitality revenue decreased 21% due to the continued impact from the COVID-19 pandemic. Foreign currency fluctuations had an unfavorable impact of 1% on the revenue comparison.
For the six months ended June 30, 2020 compared to the six months ended June 30, 2019, revenue decreased 8% due to a combination of the impact of the COVID-19 pandemic and the accelerated shift from perpetual software licenses to recurring revenue. Foreign currency fluctuations had an unfavorable impact of 1% on the revenue comparison.
Banking revenue decreased 6% due to the impact of the COVID-19 pandemic, driven by an 18% decline in ATM hardware revenue. The decline in revenue was also driven by the shift from selling perpetual software licenses to recurring revenue. Foreign currency fluctuations had an unfavorable impact of 1% on the revenue comparison. Retail revenue decreased 11% driven by a large customer hardware roll-out in the prior year as well as the impact from the COVID-19 pandemic. Foreign currency fluctuations had an unfavorable impact of 1% on the revenue comparison. Hospitality revenue decreased 17% mainly driven by the impact from the COVID-19 pandemic. Foreign currency fluctuations had an unfavorable impact of 1% on the revenue comparison.
The changes to segment revenue and the drivers thereof are discussed in further detail under "Revenue and Operating Income by Segment" below.
Gross Margin
Gross margin as a percentage of revenue in the three months ended June 30, 2020 was 25.1% compared to 27.5% in the three months ended June 30, 2019. Gross margin in the three months ended June 30, 2020 included $5 million of costs related to
46
transformation initiatives and $4 million of acquisition-related amortization of intangibles. Gross margin in the three months ended June 30, 2019 included $10 million of costs related to restructuring and transformation initiatives and $6 million related to acquisition-related amortization of intangibles. Excluding these items, gross margin as a percentage of revenue decreased from 28.5% to 25.7% due to the overall decline in revenue as well as from the shift to recurring revenue with lower software license revenue.
Gross margin as a percentage of revenue in the six months ended June 30, 2020 was 25.7% compared to 27.2% in the six months ended June 30, 2019. Gross margin in the six months ended June 30, 2020 included $5 million of costs related to transformation initiatives and $11 million of acquisition-related amortization of intangibles. Gross margin in the six months ended June 30, 2019 included $18 million of costs related to restructuring and transformation initiatives and $12 million related to acquisition-related amortization of intangibles. Excluding these items, gross margin as a percentage of revenue decreased from 28.1% to 26.3% due to the overall decline in revenue as well as from the shift to recurring revenue with lower software license revenue.
Operating Expenses
Selling, general and administrative expenses were $234 million, or 15.8% as a percentage of revenue, as compared to $252 million, or 14.7% as a percentage of revenue, in the three months ended June 30, 2020 and 2019, respectively. Selling, general and administrative expenses in the three months ended June 30, 2020 included $15 million of acquisition-related amortization of intangibles and $3 million of costs related to transformation initiatives. Selling, general, and administrative expenses in the three months ended June 30, 2019 included $15 million of acquisition-related amortization of intangibles and $4 million of costs related to restructuring and transformation initiatives. Excluding these items, selling, general and administrative expenses increased from 13.6% as a percentage of revenue in the three months ended June 30, 2019 to 14.6% as a percentage of revenue in the three months ended June 30, 2020. The decrease in selling, general and administrative expenses was primarily due to the initiatives implemented in the first quarter to address the business impacts from the COVID-19 pandemic, including among others, salary reductions, elimination of certain contractors and curtailing travel, partially offset by an increase in account receivable reserves.
Selling, general and administrative expenses were $489 million, or 16.4% as a percentage of revenue, as compared to $504 million, or 15.5% as a percentage of revenue, in the six months ended June 30, 2020 and 2019, respectively. Selling, general and administrative expenses in the six months ended June 30, 2020 included $30 million of acquisition-related amortization of intangibles and $8 million of costs related to transformation initiatives. Selling, general, and administrative expenses in the six months ended June 30, 2019 included $30 million of acquisition-related amortization of intangibles and $19 million of costs related to restructuring and transformation initiatives. Excluding these items, selling, general and administrative expenses increased from 14.0% as a percentage of revenue in the six months ended June 30, 2019 to 15.1% as a percentage of revenue in the six months ended June 30, 2020. The decrease in selling, general and administrative expenses was primarily due to a the initiatives implemented in the first quarter to address the business impacts from the COVID-19 pandemic, including among others, salary reductions, elimination of certain contractors and curtailing travel, partially offset by an increase in account receivable reserves.
Research and development expenses were $49 million, or 3.3% as a percentage of revenue, in the three months ended June 30, 2020 as compared to $62 million, or 3.6% as a percentage of revenue, in the three months ended June 30, 2019. The decrease in research and development expenses was due to the initiatives implemented in the first quarter to address the business impacts from the COVID-19 pandemic, including among others, salary reductions, elimination of certain contractors and curtailing travel as well as increased investment in our strategic growth platforms.
Research and development expenses were $114 million, or 3.8% as a percentage of revenue, in the six months ended June 30, 2020 as compared to $121 million, or 3.7% as a percentage of revenue, in the six months ended June 30, 2019. Research and development expenses in the six months ended June 30, 2019 included $3 million of costs related to our restructuring and transformation initiatives. Excluding these costs, research and development expenses as a percentage of revenue increased from 3.6% in the six months ended June 30, 2019 to 3.8% in the six months ended June 30, 2020 due to the initiatives implemented in the first quarter to address the business impacts from the COVID-19 pandemic, including among others, salary reductions, elimination of certain contractors and curtailing travel as well as increased investment in our strategic growth platforms.
Interest Expense
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Interest expense was $57 million in the three months ended June 30, 2020 compared to $45 million in the three months ended June 30, 2019. The increase was due to higher average outstanding principal debt balances as well as higher interest rates on the Company's senior unsecured notes.
Interest expense was $107 million in the six months ended June 30, 2020 compared to $90 million in the six months ended June 30, 2019. The increase was due to higher average outstanding principal debt balances as well as higher interest rates on the Company's senior unsecured notes.
Other Expense, net
Other expense, net of $2 million in the three months ended June 30, 2020 compared to $9 million in the three months ended June 30, 2019. Other expense, net of $4 million in the six months ended June 30, 2020 compared to $17 million in the six months ended June 30, 2019. The components of which are reflected in the table below:
| Three months ended June 30 | Six months ended June 30 | ||||||||||||||||
| In millions | 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Interest income | $ | 1 | $ | 1 | $ | 2 | $ | 2 | |||||||||
| Foreign currency fluctuations and foreign exchange contracts | (3) | (6) | (5) | (12) | |||||||||||||
| Bank-related fees | (1) | (2) | (3) | (4) | |||||||||||||
| Employee benefit plans | 1 | (2) | 2 | (4) | |||||||||||||
| Other, net | — | — | — | 1 | |||||||||||||
| Other expense, net | $ | (2) | $ | (9) | $ | (4) | $ | (17) | |||||||||
Provision for Income Taxes
Income tax provisions for interim (quarterly) periods are based on an estimated annual effective income tax rate calculated separately from the effect of significant, infrequent or unusual items. Income tax benefit was $34 million for the three months ended June 30, 2020 compared to income tax expense of $15 million for the three months ended June 30, 2019. The change was primarily driven by an increase in discrete tax benefits as well as lower income before taxes in the three months ended June 30, 2020. The increase in discrete tax benefits primarily resulted from a $48 million benefit recorded for the release of a valuation allowance against U.S. foreign tax credits and the re-establishment of expected foreign tax credit offsets to unrecognized tax benefits.
Income tax benefit was $33 million for the six months ended June 30, 2020 compared to income tax expense of $24 million for the six months ended June 30, 2019. The change was primarily driven by an increase in discrete tax benefits as well as lower income before taxes in the six months ended June 30, 2020. The increase in discrete tax benefits primarily resulted from a $48 million benefit recorded for the release of a valuation allowance against U.S. foreign tax credits and the re-establishment of expected foreign tax credit offsets to unrecognized tax benefits.
NCR is subject to numerous federal, state and foreign tax audits. While NCR believes that appropriate reserves exist for issues that might arise from these audits, should these audits be settled, the resulting tax effect could impact the tax provision and cash flows in 2020 or future periods.
Revenue and Operating Income by Segment
The Company manages and reports the following segments:
•Banking - We offer solutions to enable customers in the financial services industry to reduce costs, generate new revenue streams and enhance customer loyalty. These solutions include a comprehensive line of ATM and payment processing hardware and software; cash management and video banking software and customer-facing digital banking services; and related installation, maintenance, and managed and professional services.
•Retail - We offer solutions to customers in the retail industry designed to improve selling productivity and checkout processes as well as increase service levels. The solutions offered serve the following customer markets in the retail industry: Food, Drug and Mass Merchandisers; Department and Specialty Retailers; Convenience and Fuel Retailers,
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and Small and Medium Retailers. These solutions primarily include retail-oriented technologies, such as point of sale terminals and point of sale software; a retail software platform with a comprehensive suite of retail software applications; innovative self-service kiosks, such as self-checkout; as well as bar-code scanners. We also offer installation, maintenance, managed and professional services as well as payment processing solutions.
•Hospitality - We offer solutions to customers in the hospitality industry, serving businesses in the following markets: Quick Service Restaurants, Table Service Restaurants, Small and Medium Restaurants and Travel and Entertainment venues. Our solutions include point of sale hardware and software solutions, installation, maintenance, managed and professional services as well as payment processing solutions.
•Other - This category includes telecommunications and technology solutions where we offer maintenance as well as managed and professional services for third-party hardware provided to select manufacturers who value and leverage our global service capability.
Each of these segments derives its revenue by selling in the geographies in which NCR operates. Segments are measured for profitability by the Company’s chief operating decision maker based on revenue and segment operating income. For purposes of discussing our operating results by segment, we exclude the impact of certain non-operational items from segment operating income, consistent with the manner by which management reviews each segment, evaluates performance, and reports our segment results under GAAP. This format is useful to investors because it allows analysis and comparability of operating trends. It also includes the same information that is used by NCR management to make decisions regarding the segments and to assess our financial performance. Our segment results are reconciled to total Company results reported under GAAP in Note 16, Segment Information and Concentrations of the Notes to the Condensed Consolidated Financial Statements.
In the segment discussions below, we have disclosed the impact of foreign currency fluctuations as it relates to our segment revenue.
Banking
The following table shows the Banking revenue and operating income for the three and six months ended June 30:
| Three months ended June 30 | Six months ended June 30 | ||||||||||||||||||||||
| In millions | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| Revenue | $ | 763 | $ | 868 | $ | 1,526 | $ | 1,626 | |||||||||||||||
| Operating income | $ | 92 | $ | 129 | $ | 195 | $ | 224 | |||||||||||||||
| Operating income as a percentage of revenue | 12.1 | % | 14.9 | % | 12.8 | % | 13.8 | % | |||||||||||||||
In the three months ended June 30, 2020 compared to the three months ended June 30, 2019, revenue decreased 12% due to the continued impact of the COVID-19 pandemic driven by a 25% decline in ATM hardware revenue. An accelerated shift from selling perpetual software licenses to recurring revenue also impacted the revenue comparison. Additionally, the revenue decrease was mainly driven by declines in the Americas and Europe. Foreign currency fluctuations had an unfavorable impact of 1% on the revenue comparison.
In the six months ended June 30, 2020 compared to the six months ended June 30, 2019, revenue decreased 6% due to the impact of the COVID-19 pandemic driven by a 18% decline in ATM hardware revenue. An accelerated shift from selling perpetual software licenses to recurring revenue also impacted the revenue comparison. Additionally, the revenue decrease was mainly driven by declines in the Americas and Europe. Foreign currency fluctuations had an unfavorable impact of 1% on the revenue comparison.
Operating income decreased in the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019. The decrease in operating income was primarily due to a decline in revenue partially offset by a reduction in operating expenses from the initiatives put in place to address business impacts expected from the COVID-19 pandemic.
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Retail
The following table shows the Retail revenue and operating income for the three and six months ended June 30:
| Three months ended June 30 | Six months ended June 30 | ||||||||||||||||||||||
| In millions | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| Revenue | $ | 483 | $ | 558 | $ | 955 | $ | 1,069 | |||||||||||||||
| Operating income | $ | 17 | $ | 40 | $ | 22 | $ | 66 | |||||||||||||||
| Operating income as a percentage of revenue | 3.5 | % | 7.2 | % | 2.3 | % | 6.2 | % | |||||||||||||||
In the three months ended June 30, 2020 compared to the three months ended June 30, 2019, revenue decreased 13% due to a decline in hardware revenue driven by a large customer roll-out in the prior year as well as the continued impact from the COVID-19 pandemic. Additionally, the revenue decrease was mainly driven by declines in the Americas. Foreign currency fluctuations had no impact on the revenue comparison.
In the six months ended June 30, 2020 compared to the six months ended June 30, 2019, revenue decreased 11% due to a decline in hardware revenue driven by a large customer roll-out in the prior year as well as the impact from the COVID-19 pandemic. Additionally, the revenue decrease was mainly driven by declines in the Americas. Foreign currency fluctuations had an unfavorable impact of 1% on the revenue comparison.
Operating income decreased in the three months ended June 30, 2020 compared to the three months ended June 30, 2019 primarily due to the decline in hardware volume partially offset by lower operating expenses from the initiatives put in place to address business impacts expected from the COVID-19 pandemic.
Operating income decreased in the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily due to the decline in revenue.
Hospitality
The following table shows the Hospitality revenue and operating loss for the three and six months ended June 30:
| Three months ended June 30 | Six months ended June 30 | ||||||||||||||||||||||
| In millions | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| Revenue | $ | 160 | $ | 202 | $ | 329 | $ | 395 | |||||||||||||||
| Operating income (loss) | $ | — | $ | 13 | $ | (9) | $ | 29 | |||||||||||||||
| Operating income as a percentage of revenue | — | % | 6.4 | % | (2.7) | % | 7.3 | % | |||||||||||||||
In the three months ended June 30, 2020 compared to the three months ended June 30, 2019, revenue decreased 21% mainly due to the continued impact from the COVID-19 pandemic. The revenue decrease was mainly driven by North America. Foreign currency fluctuations had an unfavorable impact of 1% on the revenue comparison.
In the six months ended June 30, 2020 compared to the six months ended June 30, 2019, revenue decreased 17% mainly due to the impact from the COVID-19 pandemic. The revenue decrease was mainly driven by North America. Foreign currency fluctuations had an unfavorable impact of 1% on the revenue comparison.
Operating income decreased in the three months ended June 30, 2020 compared to the three months ended June 30, 2019 driven by the reduction in revenue and higher accounts receivable reserves due to increased risk from COVID-19 uncertainties partially offset by lower operating expenses from the initiatives put in place to address business impacts expected from the COVID-19 pandemic.
Operating income decreased in the six months ended June 30, 2020 compared to the six months ended June 30, 2019 driven by the reduction in revenue, higher planned expenses from strategic acquisitions completed in 2019 as well as higher accounts receivable reserves due to increased risk from COVID-19 uncertainties.
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Other
The following table shows the Other revenue and operating income for the three and six months ended June 30:
| Three months ended June 30 | Six months ended June 30 | ||||||||||||||||||||||
| In millions | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| Revenue | $ | 78 | $ | 82 | $ | 177 | $ | 156 | |||||||||||||||
| Operating income | $ | 7 | $ | 10 | $ | 12 | $ | 20 | |||||||||||||||
| Operating income as a percentage of revenue | 9.0 | % | 12.2 | % | 6.8 | % | 12.8 | % | |||||||||||||||
In the three months ended June 30, 2020 compared to June 30, 2019, revenue decreased 5% due to declines in Europe partially offset by growth in the Americas. Foreign currency fluctuations had an unfavorable impact of 3% on the revenue comparison.
In the six months ended June 30, 2020 compared to June 30, 2019, revenue increased 13% due to growth in the Americas partially offset by declines in Europe. Foreign currency fluctuations had an unfavorable impact of 2% on the revenue comparison.
Operating income decreased in the three and six months ended June 30, 2020 compared to June 30, 2019 driven by the mix of revenue.
Continuing Impacts of COVID-19
While it is difficult to project how deep the pandemic will be and how long it will last, we do expect it will negatively impact our business for the remainder of 2020. We expect our Hospitality and Retail segments to be the most impacted by the COVID-19 pandemic, but do expect our Banking segment will also experience negative impacts. We expect our hardware revenues to be most impacted while our recurring revenue stream is expected to be more resilient.
Financial Condition, Liquidity, and Capital Resources
Cash provided by operating activities was $283 million in the six months ended June 30, 2020 compared to cash provided by operating activities of $71 million in the six months ended June 30, 2019. The increase in cash provided by operating activities was due to working capital improvements.
NCR’s management uses a non-GAAP measure called “free cash flow” to assess the financial performance of the Company. We define free cash flow as net cash provided by (used in) operating activities and cash provided by (used in) discontinued operations, less capital expenditures for property, plant and equipment, less additions to capitalized software, plus discretionary pension contributions and settlements. We believe free cash flow information is useful for investors because it relates the operating cash flows from the Company’s continuing and discontinued operations to the capital that is spent to continue and improve business operations. In particular, free cash flow indicates the amount of cash available after capital expenditures for, among other things, investments in the Company’s existing businesses, strategic acquisitions, repurchases of NCR stock and repayment of debt obligations. Free cash flow does not represent the residual cash flow available for discretionary expenditures, since there may be other non-discretionary expenditures that are not deducted from the measure. Free cash flow does not have a uniform definition under GAAP, and therefore NCR’s definition may differ from other companies’ definitions of this measure. This non-GAAP measure should not be considered a substitute for, or superior to, cash flows from operating activities under GAAP.
The table below reconciles net cash provided by operating activities to NCR’s non-GAAP measure of free cash flow for the six months ended June 30:
| Six months ended June 30 | |||||||||||
| In millions | 2020 | 2019 | |||||||||
| Net cash provided by operating activities | $ | 283 | $ | 71 | |||||||
| Expenditures for property, plant and equipment | (18) | (35) | |||||||||
| Additions to capitalized software | (122) | (103) | |||||||||
| Net cash used in discontinued operations | 6 | (11) | |||||||||
| Free cash flow (use) (non-GAAP) | $ | 149 | $ | (78) | |||||||
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The decrease in expenditures for property, plant and equipment is primarily due to the strategic focus to reduce spending in order to increase investment in our capitalized software for the investment in our strategic growth platforms. Additionally, cash provided by operating activities included $95 million of insurance proceeds as an advance for the Nashville Global Fulfillment Center outage. There was no impact to the six months ended June 30, 2019 cash provided by operating activities and free cash flow from the revision discussed in Note 2, Revisions of Previously Issued Financial Statements of the Notes to the Condensed Consolidated Financial Statements.
Financing activities and certain other investing activities are not included in our calculation of free cash flow. Other investing activities primarily include business acquisitions, divestitures and investments as well as proceeds from the sale of property, plant and equipment. During the six months ended June 30, 2020, the payments for business combinations was $25 million, mainly for the remaining consideration paid related to the acquisition of Zynstra Ltd. completed in 2019.
Our financing activities include borrowings and repayments of credit facilities and notes. During the six months ended June 30, 2020, we issued new senior unsecured notes for an aggregate principal amount of $400 million and paid $7 million of deferred financing fees related to this issuance.
Financing activities during the six months ended June 30, 2020 also included the repurchase of our common stock for $41 million, dividends paid on the Series A preferred stock of $6 million, proceeds from stock employee plans of $9 million as well as tax withholding payments on behalf of employees for stock based awards that vested of $25 million. Financing activities during the six months ended June 30, 2019 included proceeds from stock employee plans of $10 million and tax withholding payments on behalf of employees for stock based awards that vested of $16 million. Additionally, there were no repurchases of our common stock completed during the six months ended June 30, 2019.
Long Term Borrowings On August 28, 2019, we amended and restated our senior secured credit facility and refinanced the term loan facility and revolving credit facility thereunder. The senior secured credit facility consists of a term loan facility in an aggregate principal amount of $750 million, of which $744 million was outstanding as of June 30, 2020. Additionally, the senior secured credit facility provides for a revolving credit facility with an aggregate principal amount of $1.1 billion, of which $1.07 billion was outstanding as of June 30, 2020, subject to certain covenant limitations. Additionally, the revolving credit facility has up to $400 million available to certain foreign subsidiaries, as long as there is availability under the revolving credit facility. Loans under the revolving credit facility are available in U.S. Dollars, Euros and Pound Sterling. The revolving credit facility also allows a portion of the availability to be used for letters of credit, and as of June 30, 2020, there were $28 million letters of credit outstanding. As of December 31, 2019, the outstanding principal balance of the term loan facility was $748 million and the outstanding balance on the revolving facility was $265 million.
On April 13, 2020, the Company issued $400 million aggregate principal amount of 8.125% senior unsecured notes due in 2025 (the 8.125% Notes). The 8.125% Notes were sold at 100% of the principal amount, which resulted in total gross proceeds of $400 million.
As of June 30, 2020, we had outstanding $400 million in aggregate principal balance of 8.125% senior unsecured noted due in 2025, $500 million in aggregate principal balance of 5.750% senior unsecured notes due in 2027, $500 million in aggregate principal balance of 6.125% senior unsecured notes due in 2029, $700 million in aggregate principal balance of 6.375% senior unsecured notes due in 2023, $600 million in aggregate principal balance of 5.00% senior unsecured notes due in 2022.
Our revolving trade receivables securitization facility provides the Company with up to $300 million in funding based on the availability of eligible receivables and other customary factors and conditions. As of June 30, 2020 and December 31, 2019, the Company had $200 million and $270 million, respectively, outstanding under the facility.
Series A Convertible Preferred Stock On December 4, 2015, NCR issued 820,000 shares of Series A Convertible Preferred Stock to certain entities affiliated with the Blackstone Group L.P. for an aggregate purchase price of $820 million, or $1,000 per share, pursuant to an Investment Agreement between the Company and Blackstone, dated November 11, 2015. In connection with the issuance of the Series A Convertible Preferred Stock, the Company incurred direct and incremental expenses of $26 million. These direct and incremental expenses reduced the Series A Convertible Preferred Stock, and will be accreted through retained earnings as a deemed dividend from the date of issuance through the first possible known redemption date, March 16, 2024. Holders of Series A Convertible Preferred Stock are entitled to a cumulative dividend at the rate of 5.5% per annum, payable quarterly in arrears.
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Under the Investment Agreement, Blackstone agreed not to sell or otherwise transfer its shares of Series A Convertible Preferred Stock (or any shares of common stock issued upon conversion thereof) without the Company’s consent until June 4, 2017. In March 2017, we provided Blackstone with an early release from this lock-up, allowing Blackstone to sell approximately 49% of its shares of Series A Convertible Preferred Stock, and in return, Blackstone agreed to amend the Investment Agreement to extend the lock-up on the remaining 51% of its shares of Series A Convertible Preferred Stock for six months until December 1, 2017.
In connection with the early release of the lock-up, Blackstone offered for sale 342,000 shares of Series A Convertible Preferred Stock in an underwritten public offering. In addition, Blackstone converted 90,000 shares of Series A Convertible Preferred Stock into shares of our common stock and we repurchased those shares of common stock for $48.47 per share. The underwritten offering and the stock repurchase were consummated on March 17, 2017.
On September 18, 2019, NCR entered into an agreement to repurchase and convert the outstanding Series A Convertible Preferred Stock owned by Blackstone, which was 512,221 shares as of the date of the transaction. NCR repurchased 237,673 shares of Series A Convertible Preferred Stock for total cash consideration of $302 million. The remaining shares of Blackstone's Series A Convertible Preferred Stock, including accrued dividends, were converted to approximately 9.16 million shares of common stock at a conversion price of $30.00 per share. This transaction retired all of the Series A Convertible Preferred Stock owned by Blackstone.
Beginning in the first quarter of 2020, dividends are payable in cash or in-kind at the option of the Company. During the three months ended June 30, 2020 and 2019, the Company paid dividends-in-kind of $7 million and $12 million, respectively. During the six months ended June 30, 2020, the Company paid total dividends of $13 million of which $7 million were dividends-in-kind and $6 million were paid in cash. During the six months ended June 30, 2019, the Company paid dividends-in-kind of $24 million. As of June 30, 2020 and December 31, 2019, the Company had accrued dividends of $1 million, respectively, associated with the Series A Convertible Preferred Stock.
The remaining Series A Convertible Preferred Stock is convertible at the option of the holders at any time into shares of common stock at a conversion price of $30.00 per share, or a conversion rate of 33.333 shares of common stock per share of Series A Convertible Preferred Stock.
As of June 30, 2020 and December 31, 2019, the maximum number of common shares that could be required to be issued upon conversion of the outstanding shares of the Series A Convertible Preferred Stock was 13.5 million and 13.3 million, respectively.
Employee Benefit Plans In 2020, we expect to make contributions of $21 million to our international pension plans, $30 million to our postemployment plan and $2 million to our postretirement plan. For additional information, refer to Note 8, Employee Benefit Plans of the Notes to the Condensed Consolidated Financial Statements.
Cash and Cash Equivalents Held by Foreign Subsidiaries Cash and cash equivalents held by the Company's foreign subsidiaries at June 30, 2020 and December 31, 2019 were $317 million and $475 million, respectively. Under current tax laws and regulations, if cash and cash equivalents and short-term investments held outside the U.S. are distributed to the U.S. in the form of dividends or otherwise, we may be subject to additional U.S. income taxes and foreign withholding taxes, which could be significant.
Summary As of June 30, 2020, our cash and cash equivalents totaled $1.68 billion and our total debt was $4.73 billion.
In order to build a stronger liquidity position, we have taken steps to improve working capital and are addressing certain business impacts with spending cuts. We have taken several steps to build our cash reserve to improve our financial liquidity and flexibility and provide a cushion to help weather the impacts of the pandemic. These steps include suspending our share repurchase programs, limiting our mergers and acquisition activity, reducing salary for members of our leadership team and certain salaried employees, reducing our planned capital expenditures, eliminating most contractors, curtailing travel, freezing merit increases and hiring. Additionally, on March 24, 2020, we drew the remaining available funds of $630 million on our five-year, $1.1 billion revolving credit facility and on April 13, 2020, we issued $400 million senior unsecured notes. The COVID-19 pandemic is complex and rapidly evolving, and the ultimate impact on our overall financial condition and operating results will depend on the currently unknowable duration and severity of the pandemic as well as any additional governmental and public actions taken in response. There can be no assurance that the measures we have taken will offset the negative impact of COVID-19.
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We believe that we have sufficient liquidity based on our current cash position, cash flows from operations and existing financing to meet our required pension, postemployment, and postretirement plan contributions, remediation and other payments related to the environmental matters, debt servicing obligations, and our operating requirements for the next twelve months.
Contractual and Other Commercial Commitments
There have been no significant changes in our contractual and other commercial obligations as described in our Form 10-K for the year ended December 31, 2019.
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements as defined by SEC Regulation S-K Item 303 (a) (4) (ii).
Critical Accounting Policies and Estimates
Management reassessed the critical accounting policies as disclosed in our 2019 Annual Report on Form 10-K and determined that there were no changes to our critical accounting policies or our estimates associated with those policies in the six months ended June 30, 2020.
New Accounting Pronouncements
See discussion in Note 1, Basis of Presentation and Summary of Significant Accounting Policies of the Notes to the Condensed Consolidated Financial Statements for new accounting pronouncements.
Forward-Looking Statements
This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the “Act”), including statements containing the words “expect,” “anticipate,” “outlook,” “intend,” “plan,” “believe,” “will,” “should,” “would,” “could,” “designed,” and words of similar meaning, as well as other words or expressions referencing future events, conditions or circumstances. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Act. Statements that describe or relate to NCR’s plans, goals, intentions, strategies, or financial outlook, and statements that do not relate to historical or current fact, are examples of forward-looking statements. Forward-looking statements are based on our current beliefs, expectations and assumptions, which may not prove to be accurate, and involve a number of known and unknown risks and uncertainties, many of which are out of NCR’s control. Forward-looking statements are not guarantees of future performance, and there are a number of important factors that could cause actual outcomes and results to differ materially from the results contemplated by such forward-looking statements, including those factors relating to: the impact of the novel strain of the coronavirus identified in late 2019 (“COVID-19”) pandemic on our workforce, operations and financial results, including the impact on our customer’s businesses and their ability to pay; manufacturing disruptions, including those caused by or related to outsourced manufacturing or disruptions in our supply chain due to the COVID-19 pandemic; strength of demand for the products we offer or will offer in the future consistent with our strategy and its effect on our businesses; domestic and global economic and credit conditions including, in particular, those resulting from the imposition or threat of protectionist trade policies or import or export tariffs, global and regional market conditions and spending trends in the financial services and retail industries, new tax legislation across multiple jurisdictions, modified or new global or regional trade agreements, execution of the United Kingdom's exit from the European Union, uncertainty over further potential changes in Eurozone participation and fluctuations in oil and commodity prices; the transformation of our business and shift to increased software and services revenue, as well as recurring revenue; our ability to improve execution in our sales and services organizations; our ability to successfully introduce new solutions and compete in the technology industry; cybersecurity risks and compliance with data privacy and protection requirements; the possibility of disruptions in or problems with our data center hosting facilities; the impact of the March 2020 tornadoes in the greater Nashville area on an NCR Global Fulfillment Center in Mt. Juliet, Tennessee operated by a third party, including the sufficiency and effectiveness of our or our third-party logistics partner’s business continuity plans, the adequacy of our property damage and business interruption insurance coverage and our ability to recover under the applicable policies; defects or errors in our products; the impact of our indebtedness and its terms on our financial and operating activities; the historical seasonality of our sales; tax rates and tax legislation; foreign currency fluctuations; the success of our restructuring plans and cost reduction savings initiatives; the availability and success of acquisitions, divestitures and alliances; our pension strategy and underfunded pension obligations; reliance on third party suppliers; the impact of the terms of our Series A Convertible Preferred Stock; our multinational operations, including in new and emerging markets; collectability difficulties in subcontracting relationships in certain geographical markets; development
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and protection of intellectual property; workforce turnover and the ability to attract and retain skilled employees; uncertainties or delays associated with the transition of key business leaders; environmental exposures from our historical and ongoing manufacturing activities; and uncertainties with regard to regulations, lawsuits, claims, and other matters across various jurisdictions. Additional information concerning these and other factors can be found in the Company’s filings with the U.S. Securities and Exchange Commission, including the Company’s most recent annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Any forward-looking statement speaks only as of the date on which it is made. The Company does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Information About NCR
NCR encourages investors to visit its web site (http://www.ncr.com), which is updated regularly with financial and other important information about NCR. The contents of the Company’s web site are not incorporated into this quarterly report or the Company’s other filings with the U.S. Securities and Exchange Commission.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
We are exposed to market risks primarily from changes in foreign currency exchange rates and interest rates. It is our policy to manage our foreign exchange exposure and debt structure in order to manage capital costs, control financial risks and maintain financial flexibility over the long term. In managing market risks, we employ derivatives according to documented policies and procedures, including foreign currency contracts and interest rate swaps. We do not use derivatives for trading or speculative purposes.
Foreign Exchange Risk
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. We have exposure to approximately 50 functional currencies and are exposed to foreign currency exchange risk with respect to our sales, profits and assets and liabilities denominated in currencies other than the U.S. Dollar. Although we use financial instruments to hedge certain foreign currency risks, we are not fully protected against foreign currency fluctuations and our reported results of operations could be affected by changes in foreign currency exchange rates. To manage our exposures and mitigate the impact of currency fluctuations on the operations of our foreign subsidiaries, we hedge our main transactional exposures through the use of foreign exchange forward and option contracts. These foreign exchange contracts are designated as highly effective cash flow hedges. This is primarily done through the hedging of foreign currency denominated inter-company inventory purchases by the marketing units. All of these transactions are forecasted. We also use derivatives not designated as hedging instruments consisting primarily of forward contracts to hedge foreign currency denominated balance sheet exposures. For these derivatives we recognize gains and losses in the same period as the remeasurement losses and gains of the related foreign currency-denominated exposures.
We utilize non-exchange traded financial instruments, such as foreign exchange forward and option contracts, that we purchase exclusively from highly rated financial institutions. We record these contracts on our balance sheet at fair market value based upon market price quotations from the financial institutions. We do not enter into non-exchange traded contracts that require the use of fair value estimation techniques, but if we did, they could have a material impact on our financial results.
For purposes of analyzing potential risk, we use sensitivity analysis to quantify potential impacts that market rate changes may have on the fair values of our hedge portfolio related to firmly committed or forecasted 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. A 10% appreciation or depreciation in the value of the U.S. Dollar against foreign currencies from the prevailing market rates would have resulted in a corresponding increase or decrease of $6 million as of June 30, 2020 in the fair value of the hedge portfolio. The Company expects that any increase or decrease in the fair value of the portfolio would be substantially offset by increases or decreases in the underlying exposures being hedged.
The U.S. Dollar was slightly stronger in the second quarter of 2020 compared to the second quarter of 2019 based on comparable weighted averages for our functional currencies. This had an unfavorable impact of 1% on second quarter 2020 revenue versus second quarter 2019 revenue. This excludes the effects of our hedging activities and, therefore, does not reflect the actual impact of fluctuations in exchange rates on our operating income.
Interest Rate Risk
We are subject to interest rate risk principally in relation to variable-rate debt. Approximately 57% of our borrowings were on a fixed rate basis as of June 30, 2020. The increase in pre-tax interest expense for the six months ended June 30, 2020 from a hypothetical 100 basis point increase in variable interest rates would be approximately $5 million.
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Concentrations of Credit Risk
We are potentially subject to concentrations of credit risk on accounts receivable and financial instruments, such as hedging instruments and cash and cash equivalents. Credit risk includes the risk of nonperformance by counterparties. The maximum potential loss may exceed the amount recognized on the 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 for which we do not require collateral. If one or more of those customers were to default in its obligations under applicable contractual arrangements, we could be exposed to potentially significant losses. Moreover, a prolonged downturn in the global economy could have an adverse impact on the ability of our customers to pay their obligations on a timely basis. We believe that the reserves for potential losses are adequate. As of June 30, 2020, we did not have any significant concentration of credit risk related to financial instruments.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
NCR has established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the Exchange Act)) to provide reasonable assurance that information required to be disclosed by NCR in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by NCR in the reports that it files or submits under the Exchange Act is accumulated and communicated to NCR’s management, including its Chief Executive and Chief Financial Officers, as appropriate to allow timely decisions regarding required disclosure. Based on their evaluation as of the end of the second quarter of 2020, conducted under their supervision and with the participation of management, the Company’s Chief Executive and Chief Financial Officers have concluded that NCR’s disclosure controls and procedures are effective to meet such objectives and that NCR’s disclosure controls and procedures adequately alert them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in NCR’s Exchange Act filings.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the three months ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Part II. Other Information
Item 1. LEGAL PROCEEDINGS
The information required by this item is included in Note 9, Commitments and Contingencies of the Notes to the Condensed Consolidated Financial Statements in this quarterly report and is incorporated herein by reference.
Item 1A. RISK FACTORS
Part I, Item 1A ("Risk Factors") of the Company’s 2019 Annual Report on Form 10-K (the 2019 Annual Report) includes a discussion of the risks and uncertainties related to our business. The information presented below updates, and should be read in conjunction with, the risk factors and information disclosed in the 2019 Annual Report. Except as presented below, there have been no material changes from the risk factors described in the 2019 Annual Report.
The recent novel coronavirus (COVID-19) outbreak could materially adversely affect our business, financial condition and results of operations.
The impact of COVID-19 has grown throughout the world, including in the United States. Governmental authorities have implemented numerous measures attempting to contain and mitigate the effects of the virus, including travel bans and restrictions, quarantines, shelter in place orders and shutdowns. While we have implemented programs to mitigate the impact of these measures on our results of operations, there can be no assurance that these programs will be successful. There is significant uncertainty regarding such measures and potential future measures.
Our manufacturing and distribution facilities are located in areas that have been affected by the pandemic and have taken measures to try to contain it. Restrictions on our access to our manufacturing facilities or on our support operations or workforce, or similar limitations for our distributors and suppliers, could limit customer demand and/or our capacity to meet customer demand and have a material adverse effect on our business, financial condition and results of operations.
The continued spread of COVID-19 could cause delay, or limit the ability of, customers to continue to operate and perform, including in making timely payments to us, or cause a decrease in customer demand or a slowdown in customer expansion. Local governmental restrictions and public perceptions of the risks associated with the COVID-19 pandemic have caused, and may continue to cause, consumers to avoid or limit gatherings in public places or social interactions, which could adversely impact the businesses of our customers. For example, customers in our small and medium business market have experienced significant near-term working capital and adverse cash flow impacts as a result of the COVID-19 pandemic. Similarly, customers in our department and specialty retail market have encountered significant adverse impacts as a result of temporary closures of physical stores in connection with COVID-19. Furthermore, negative economic conditions related to the COVID-19 pandemic may impact the willingness of our customers to make capital expenditures or pay accounts receivable, the ability of our customers to obtain financing for the purchase of our products, or the amount of disposable income available to consumers, which may adversely impact the businesses of our customers. Any of these effects could have a material adverse effect on our business, financial condition and results of operations.
In addition, the spread of COVID-19 has caused us to modify our business practices, such as employee work locations, and we may take further actions as may be required by government authorities or that we determine is in the best interests of our employees, customers, distributors, suppliers and contractors. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus, and our ability to perform critical functions could be harmed. These measures, and similar measures at our customers, have resulted in and may result in further installation delays.
COVID-19 or any other adverse public health development could inhibit our ability to execute our strategic initiatives including, without limitation, expanding our customer base by increasing our use of indirect sales channels and by developing, marketing and selling solutions aimed at the small and medium business market, improving the experience of our customers, investing in growing identified strategic growth platforms and shifting the mix of revenue in our business to software and services revenue as well as recurring revenue.
The degree to which COVID-19 affects our financial results and operations will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume.
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To the extent the COVID-19 pandemic materially adversely affects our business and financial results, it may also have the effect of significantly heightening many of the other risks associated with our business and substantial indebtedness, including those described in our most recent Annual Report on Form 10-K for the year ended December 31, 2019.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On October 19, 2016, the Board approved a share repurchase program, with no expiration from the date of authorization, for the systematic repurchase of the Company’s common stock to offset the dilutive effects of the Company’s employee stock purchase plan, equity awards and in-kind dividends on the Company’s Series A Convertible Preferred Stock. Availability under this program accrues quarterly based on the average value of dilutive issuances during the quarter.
On March 12, 2017, the Board approved a second share repurchase program, with no expiration from the date of authorization, that provides for the repurchase of up to $300 million of the Company’s common stock. On July 25, 2018, the Board authorized an incremental $200 million of share repurchases under this program.
As of June 30, 2020, $508 million was available for repurchases under the March 2017 program, and approximately $153 million was available for repurchases under the October 2016 dilution offset program. The timing and amount of repurchases under these programs depend upon market conditions and may be made from time to time in open market purchases, privately negotiated transactions, accelerated stock repurchase programs, issuer self-tender offers or otherwise. The repurchases will be made in compliance with applicable securities laws and may be discontinued at any time.
The Company occasionally purchases vested restricted stock or exercised stock options at the current market price to cover withholding taxes. For the three months ended June 30, 2020, 0.1 million shares were purchased at an average price of $17.78 per share.
The Company’s ability to repurchase its common stock is restricted under the Company’s senior secured credit facility and terms of the indentures for the Company’s senior unsecured notes, which prohibit certain share repurchases, including during the occurrence of an event of default, and establish limits on the amount that the Company is permitted to allocate to share repurchases and other restricted payments. The limitations are calculated using formulas based generally on 50% of the Company’s consolidated net income for the period beginning in the third quarter of 2012 through the end of the most recently ended fiscal quarter, subject to certain other adjustments and deductions, with certain prescribed minimums. These formulas are described in greater detail in the Company’s senior secured credit facility and the indentures for the Company’s senior unsecured notes, each of which is filed with the SEC.
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Item 6. EXHIBITS
| Indenture relating to the Notes, dated April 13, 2020, among NCR Corporation, NCR International, Inc. and Wells Fargo Bank, National Association (Exhibit 4.1 to Current Report on Form 8-K of NCR Corporation dated April 13, 2020). | |||||
| Form of 2020 Director Restricted Stock Unit Grant Statement under the NCR Corporation 2017 Stock Incentive Plan. * | |||||
| First Amendment to the NCR Corporation 2017 Stock Incentive Plan (Appendix A to the NCR Corporation Proxy Statement on Schedule 14A for the NCR Corporation 2020 Annual Meetings of Stockholders). * | |||||
| Second Amendment, dated as of April 7, 2020, by and among NCR Corporation, the Lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent, relating to the Credit Agreement, dated as of August 22, 2011 as amended and restated as of July 25, 2013, as further amended and restated as of March 31, 2016, as further amended and restated as of August 28, 2019, and as further amended October 7, 2019. | |||||
| Employment Agreement, dated June 15, 2020, between Timothy Oliver and NCR Corporation. * | |||||
| Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934. | |||||
| Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934. | |||||
| Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||||
| 101 | The following materials from NCR Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) our condensed consolidated statements of operations for the three months ended June 30, 2020 and 2019; (ii) our condensed consolidated statements of comprehensive income for the three months ended June 30, 2020 and 2019; (iii) our condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019; (iv) our condensed consolidated statements of cash flows for the three months ended June 30, 2020 and 2019; (v) our condensed consolidated statements of changes in stockholder's equity for the three months ended June 30, 2020 and 2019; and (vi) the notes to our condensed consolidated financial statements. | ||||
| 104 | Cover Page Interactive Data File, formatted in Inline XBRL and contained in Exhibit 101. | ||||
* Management contracts or compensatory plans/arrangements.
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SIGNATURES
Pursuant to the requirements 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: | July 31, 2020 | By: | /s/ Timothy C. Oliver | |||||||||||
| Timothy C. Oliver Executive Vice President and Chief Financial Officer | ||||||||||||||
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2020 Director Restricted Stock Unit Grant Statement
Name of Grantee | Grant Date | No. of Restricted Stock Units | ||||||
You have been awarded the above number of NCR Corporation (“NCR”) restricted stock units (the “Stock Units”) under the NCR Corporation 2017 Stock Incentive Plan (the “Plan”), subject to the terms and conditions of this 2020 Director Restricted Stock Unit Grant Statement (this “Statement”), the Plan and the NCR Director Compensation Program (the "Program").
1.The Stock Units will vest during the one (1) year period beginning on the date upon which you were granted the Stock Units (the “Grant Date”), in four (4) equal quarterly installments commencing three (3) months after the Grant Date, provided that you continuously serve as a Director of NCR until each quarterly vesting date. Notwithstanding the foregoing, if the Grant Date of your Stock Units is the date of an Annual Meeting of Stockholders, then, the fourth quarterly vesting will occur only if you continue to serve as a Director until the earlier of (a) the next Annual Meeting of Stockholders following the Grant Date, or (b) the first (1st) anniversary of the Grant Date.
2.The Stock Units will become fully vested if, prior to the one (1) year anniversary of the Grant Date, you die at a time while serving as a Director of NCR.
3.The vesting schedule will accelerate and the Stock Units will become fully vested if (1) a Change in Control (as defined in Section 10.02 of the Plan) occurs, and (2) you cease to serve as a Director of NCR within twenty-four (24) months of the effective date of the Change in Control for any reason other than your engaging willfully in illegal conduct or gross misconduct, as determined by the affirmative vote of a majority of the entire membership of the Board of Directors of NCR. In the event that Stock Units become vested due to your cessation of service as a Director of NCR pursuant to this Section 3, to the extent required to comply with Section 409A of the Internal Revenue Code of 1986, as amended (the "Code"), such Stock Units shall be paid upon your "separation from service" within the meaning of Section 409A of the Code; provided, however, that if you are a "specified employee" as determined under NCR's policy for determining specified employees on the date of separation from service, such Stock Units shall be paid, to the extent required to comply with Section 409A of the Code, on the first business day after the date that is six months following your "separation from service" within the meaning of Section 409A of the Code.
4.Except as otherwise provided pursuant to (1) a deferral election in effect under Article IV of the Program or (2) Section 3 of this Statement, when vested, the Stock Units will be paid to you in shares of NCR common stock, such that one Stock Unit equals one share of NCR common stock.
5.Any cash dividends declared before the vesting dates on the shares underlying the Stock Units shall not be paid currently, but shall be converted to additional Stock Units, based on the fair market value of NCR common stock on the date the dividend is declared. Any Stock Units resulting from such conversion will be considered Stock Units for purposes of this Statement and will be subject to all of the terms, conditions and restrictions set forth herein.
6.You may designate one or more beneficiaries to receive all or part of any shares underlying the Stock Units to be distributed in case of your death, and you may change or revoke such designation at any time. In the event of your death, any shares underlying the Stock Units distributable hereunder that are subject to such a designation will be distributed to such beneficiary or beneficiaries in accordance with this Statement. Any other shares underlying the Stock Units not designated by you will be distributable to your estate. If there shall be any question as to the legal right of any beneficiary to receive a distribution hereunder, the shares underlying the Stock Units in question may be transferred to your estate, in which event NCR will have no further liability to anyone with respect to such shares.
7.The terms of this award of Stock Units as evidenced by this Statement may be amended by the NCR Board of Directors or the Compensation and Human Resource Committee of the NCR Board of Directors, provided that no such amendment shall impair your rights hereunder without your consent.
8.In the event of a conflict between the terms and conditions of this Statement and the terms and conditions of the Plan, the terms and conditions of the Plan shall prevail.
EXECUTION VERSION
SECOND AMENDMENT dated as of April 7, 2020 (this “Amendment”) to the CREDIT Agreement dated as of August 22, 2011, as amended and restated as of July 25, 2013, as further amended and restated as of March 31, 2016, and as further amended and restated as of August 28, 2019, among NCR CORPORATION (the “Borrower”), the LENDERS party thereto and JPMORGAN CHASE BANK, N.A., as Administrative Agent (the “Administrative Agent”) (as amended and in effect prior to the effectiveness of this Amendment, the “Credit Agreement”).
WHEREAS, the Borrower has requested that the Lenders amend the Credit Agreement in the manner set forth below, and the Lenders whose signatures appear below, constituting the Required Lenders, are willing to amend the Credit Agreement, on the terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual agreements herein contained and other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, the parties hereto hereby agree as follows:
SECTION 1. Defined Terms. Capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Credit Agreement (as amended hereby).
SECTION 2. Amendment of the Credit Agreement. Effective as of the Second Amendment Effective Date (as defined below), clause (ii) of the definition of “Permitted Additional Indebtedness” in Section 1.01 of the Credit Agreement is amended and restated as follows:
“(ii) except with respect to up to $750,000,000 in the aggregate of Permitted Additional Indebtedness, does not mature earlier than, and has a weighted average life to maturity (determined without giving effect to any prepayments that reduce amortization) no earlier than, 91 days after the Term Maturity Date,”
SECTION 3. Representations and Warranties. To induce the other parties hereto to enter into this Amendment, the Borrower hereby represents and warrants to the Administrative Agent and the Lenders that:
(a) This Amendment has been duly executed and delivered by the Borrower and constitutes a legal, valid and binding obligation of the Borrower, enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors’ rights generally, and to general principles of equity, regardless of whether considered in a proceeding in equity or at law.
(b) On the Second Amendment Effective Date, and after giving effect to this Amendment, the representations and warranties of each Loan Party set forth in the Credit Agreement and in each other Loan Document are true and correct (i) in the case of the representations and warranties qualified as to materiality, in all respects and (ii) otherwise, in all
[Signature Page to Second Amendment]
2
material respects, in each case as though made on and as of the Second Amendment Effective Date, except in the case of any such representation and warranty that expressly relates to a prior date, in which case such representation and warranty is so true and correct on and as of such prior date.
(c)On and as of the Second Amendment Effective Date, no Default or Event of Default has occurred and is continuing.
SECTION 4. Effectiveness. This Amendment shall become effective on the date (the “Second Amendment Effective Date”) on which the Administrative Agent (or its counsel) shall have received duly executed counterparts (which may include telecopy, emailed .pdf or any other electronic means that reproduces an image of the actual executed signature page of a signed counterpart of this Amendment) hereof that, when taken together, bear the authorized signatures of the Administrative Agent, the Borrower and Lenders constituting the Required Lenders. The Administrative Agent shall notify the Borrower and the Lenders of the Second Amendment Effective Date, and such notice shall be conclusive and binding.
SECTION 5. Expenses. The Borrower agrees to reimburse the Administrative Agent for its reasonable out-of-pocket expenses in connection with this Amendment and the transactions contemplated hereby, including the reasonable fees, charges and disbursements of counsel to the Administrative Agent.
SECTION 6. Effect of Amendment. (a) Except as expressly set forth herein, this Amendment shall not by implication or otherwise limit, impair, constitute a waiver of or otherwise affect the rights and remedies of the Administrative Agent, the Issuing Banks or the Lenders under the Credit Agreement or any of the other Loan Documents, and shall not alter, modify, amend or in any way affect any of the terms, conditions, obligations, covenants or agreements contained in the Credit Agreement or any of the other Loan Documents, all of which are ratified and affirmed in all respects and shall continue in full force and effect. Nothing herein shall be deemed to entitle the Borrower to a consent to, or a waiver, amendment, modification or other change of, any of the terms, conditions, obligations, covenants or agreements contained in the Credit Agreement or any of the other Loan Documents in similar or different circumstances.
(b) On and after the Second Amendment Effective Date, any reference to the Credit Agreement in any Loan Document shall be deemed to be a reference to the Credit Agreement as amended by this Amendment.
(c)This Amendment shall constitute a Loan Document for all purposes of the Credit Agreement and each other Loan Document.
SECTION 7. Applicable Law. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.
SECTION 8. Counterparts. This Amendment may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. Delivery of an executed counterpart of a signature page of this Amendment by telecopy, emailed .pdf or any
[Signature Page to Second Amendment]
3
other electronic means that reproduces an image of the actual executed signature page shall be effective as delivery of a manually executed counterpart of this Amendment.
SECTION 9. Headings. The Section headings used herein are for convenience of reference only, are not part of this Amendment and are not to affect the construction of, or to be taken into consideration in interpreting, this Amendment.
SECTION 10. Incorporation by Reference. The submission to jurisdiction, service of process, venue, judgment currency, waiver of immunity, waiver of jury trial and electronic signature provisions set forth in the Credit Agreement are hereby incorporated by reference, mutatis mutandis.
[Remainder of page intentionally left blank]
[Signature Page to Second Amendment]
IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment as of the day and year first above written.
| NCR CORPORATION, | |||||
by /s/ Andre J. Fernandez | |||||
| Name: Andre J. Fernandez | |||||
| Title: Executive Vice President and Chief Financial Officer | |||||
[SIGNATURE PAGE TO SECOND AMENDMENT]
| JPMORGAN CHASE BANK, N.A., as Lender and as Administrative Agent, | |||||||||||
by /s/ Matthew Cheung | |||||||||||
| Name: Matthew Cheung | |||||||||||
| Title: Vice President | |||||||||||
[SIGNATURE PAGE TO SECOND AMENDMENT]
| BANK OF AMERICA, N.A., as Lender, | |||||||||||
by /s/ Kyle Oberkrom | |||||||||||
| Name: Kyle Oberkrom | |||||||||||
| Title: Vice President | |||||||||||
[SIGNATURE PAGE TO SECOND AMENDMENT]
SIGNATURE PAGE TO THE SECOND
AMENDMENT TO THE NCR CORPORATION
CREDIT AGREEMENT
Name of Lender: Wells Fargo Bank, National Association
by /s/ Evan Waschitz | |||||||||||
| Name: Evan Waschitz | |||||||||||
| Title: Director | |||||||||||
SIGNATURE PAGE TO THE SECOND
AMENDMENT TO THE NCR CORPORATION
CREDIT AGREEMENT
Name of Lender: MUFG Bank, Ltd.
by /s/ Joseph Siri | |||||||||||
| Name: Joseph Siri | |||||||||||
| Title: Vice President | |||||||||||
For any Lender requiring a second signature block:
by | |||||||||||
| Name: | |||||||||||
| Title: | |||||||||||
SIGNATURE PAGE TO THE SECOND
AMENDMENT TO THE NCR CORPORATION
CREDIT AGREEMENT
Name of Lender: PNC Bank, National Association
| by /s/ Andrew Fraser | |||||||||||
| Name: Andrew Fraser | |||||||||||
| Title: Vice President | |||||||||||
SIGNATURE PAGE TO THE SECOND
AMENDMENT TO THE NCR CORPORATION
CREDIT AGREEMENT
Name of Lender: ROYAL BANK OF CANADA
by /s/ Kamran Khan | |||||||||||
| Name: Kamran Khan | |||||||||||
| Title: Authorized Signatory | |||||||||||
For any Lender requiring a second signature block:
by | |||||||||||
| Name: | |||||||||||
| Title: | |||||||||||
SIGNATURE PAGE TO THE SECOND
AMENDMENT TO THE NCR CORPORATION
CREDIT AGREEMENT
Name of Lender: Truist Bank
by /s/ Paige Scheper | |||||||||||
| Name: Paige Scheper | |||||||||||
| Title: Vice President | |||||||||||
SIGNATURE PAGE TO THE SECOND
AMENDMENT TO THE NCR CORPORATION
CREDIT AGREEMENT
Name of Lender: CAPITAL ONE, NATIONAL ASSOCIATION
by /s/ Elizabeth Masciopinto | |||||
| Name: Elizabeth Masciopinto | |||||
| Title: Duly Authorized Signatory | |||||
For any Lender requiring a second signature block:
by | |||||
| Name: | |||||
| Title: | |||||
SIGNATURE PAGE TO THE SECOND
AMENDMENT TO THE NCR CORPORATION
CREDIT AGREEMENT
Name of Lender:
| Fifth Third Bank, National Association | |||||
by /s/ Dan Komitor | |||||
| Name: Dan Komitor | |||||
| Title: Managing Director | |||||
SIGNATURE PAGE TO THE SECOND
AMENDMENT TO THE NCR CORPORATION
CREDIT AGREEMENT
Name of Lender: CITIBANK, N.A.
| by /s/ James M. Walsh | |||||
| Name: James M. Walsh | |||||
Title: Managing Director | |||||
[Signature Page to Second Amendment]
SIGNATURE PAGE TO THE SECOND
AMENDMENT TO THE NCR CORPORATION
CREDIT AGREEMENT
Name of Lender:
| td bank, n.a. | |||||
by /s/ Vijay Prasad | |||||
| Name: Vijay Prasad | |||||
Title: Senior Vice President | |||||
For any Lender requiring a second signature block:
by | |||||
| Name: | |||||
| Title: | |||||
SIGNATURE PAGE TO THE SECOND
AMENDMENT TO THE NCR CORPORATION
CREDIT AGREEMENT
Name of Lender: Santander Bank, N.A.
| by /s/ Patrick McMullan | |||||
| Name: Patrick McMullan | |||||
Title: Vice President | |||||
For any Lender requiring a second signature block:
by | |||||
| Name: | |||||
| Title: | |||||
SIGNATURE PAGE TO THE SECOND
AMENDMENT TO THE NCR CORPORATION
CREDIT AGREEMENT
Name of Lender: THE NORTHERN TRUST COMPANY
| by /s/ Kimberly A. Crotty | |||||
| Name: Kimberly A. Crotty | |||||
Title: Vice President | |||||
For any Lender requiring a second signature block:
| by | |||||
| Name: | |||||
Title: | |||||
SIGNATURE PAGE TO THE SECOND
AMENDMENT TO THE NCR CORPORATION
CREDIT AGREEMENT
Name of Lender: HSBC BANK USA, National Association
| by /s/ Devin Moore | |||||||||||
| Name: Devin Moore | |||||||||||
| Title: Senior Vice President | |||||||||||
For any Lender requiring a second signature block:
| by | |||||||||||
| Name: | |||||||||||
| Title: | |||||||||||
SIGNATURE PAGE TO THE SECOND
AMENDMENT TO THE NCR CORPORATION
CREDIT AGREEMENT
Name of Lender: KeyBanc Capital Markets Inc.
| by /s/ Eric Peiffer | |||||||||||
| Name: Eric Peiffer | |||||||||||
| Title: Managing Director | |||||||||||
For any Lender requiring a second signature block:
| by | |||||||||||
| Name: | |||||||||||
| Title: | |||||||||||
SIGNATURE PAGE TO THE SECOND
AMENDMENT TO THE NCR CORPORATION
CREDIT AGREEMENT
Name of Lender:
| STANDARD CHARTERED BANK | |||||||||||
| by /s/ James Beck | |||||||||||
| Name: James Beck | |||||||||||
| Title: Associate Director | |||||||||||
SIGNATURE PAGE TO THE SECOND
AMENDMENT TO THE NCR CORPORATION
CREDIT AGREEMENT
Name of Lender: People’s United Bank, N.A.
| by /s/ Darci Buchanan | |||||||||||
| Name: Darci Buchanan | |||||||||||
| Title: Senior Vice President | |||||||||||
For any Lender requiring a second signature block:
| by | |||||||||||
| Name: | |||||||||||
| Title: | |||||||||||
SIGNATURE PAGE TO THE SECOND
AMENDMENT TO THE NCR CORPORATION
CREDIT AGREEMENT
Name of Lender: Synovus Bank
| by /s/ Chandra Cockrell | |||||||||||
| Name: Chandra Cockrell | |||||||||||
| Title: Relationship Manager | |||||||||||
SIGNATURE PAGE TO THE SECOND
AMENDMENT TO THE NCR CORPORATION
CREDIT AGREEMENT
Name of Lender: First Horizon Bank
| by /s/ Terence Dolch | |||||||||||
| Name: Terence Dolch | |||||||||||
| Title: Senior Vice President | |||||||||||
June 15, 2020
Mr. Timothy Oliver
[***]
Dear Tim:
Welcome to NCR, a global technology company that runs the everyday transactions that make your life easier.
With a global presence in 180 countries, our employees around the world offer a broad perspective and range of skills that enable our customers to make every customer interaction with their business an exceptional experience.
We are pleased to present you with this offer of employment at NCR. I am certain you will be a key contributor to this organization. On behalf of my team, we look forward to you joining us.
Employer (Legal Entity):
NCR Corp (the ‘Company’)
Position:
Chief Financial Officer
Job Grade:
This position is a Grade E6.
Reporting To:
Michael Hayford, President & Chief Executive Officer
Location:
Atlanta, GA
Start Date:
Your employment shall commence on July 13, 2020
Base Salary:
Your annual base salary will be $625,000.00 per year, commencing as of your Start Date. The Company operates on a bi-weekly pay schedule. Payday is scheduled five days following the close of each pay period. Your annual base salary will be reviewed from time to time by the CEO to determine appropriate increases, if any, and are subject to approval by the Compensation and Human Resources Committee (the “Committee”) of the NCR Board of Directors.
Any decreases in base salary, other than as part of a base salary reduction taken by a majority of the members of the Executive Leadership team, will permit you to exercise the “good reason” clause as outlined below.
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Management Incentive Plan:
Effective upon your start date you will participate in NCR’s Management Incentive Plan (“MIP”), subject to the terms of the MIP. The MIP is an annual bonus program with a payout that varies based on NCR’s results, your organization’s results, and your individual performance; it is payable in the first calendar quarter following the plan year.
Your MIP target incentive opportunity will be not less than 150% of your annual base salary (with a maximum potential payout equal to 2 times your target incentive opportunity), where the payout will be based on performance goals established by the CEO and approved by the Committee of the NCR Board of Directors.
Your MIP payout for the 2020 plan year will be subject to pro-ration for the partial service year and will be payable to you in or about March 2021. Please note that the MIP guidelines are subject to change from time to time, which will be determined at the discretion of the Committee. You must be employed by NCR at the time of payment in order to be eligible to receive any bonus or incentive payout from NCR.
Long Term Incentive (“LTI”) Equity Awards:
Subject to your acceptance of this offer by execution of this letter agreement, the Committee will grant to you the following equity awards effective August 1, 2020:
•an option to purchase NCR shares with a grant date value equal to $2,000,000, vesting in equal annual installments over three years (subject to your employment with NCR through the applicable vesting date), having a seven-year term and a strike price set at a 10% premium to the closing price (110% of closing price) of NCR shares on the grant date, and such other terms as set forth in NCR’s form of option award agreement (“Sign-On Option”); and
•Time-based Restricted stock units corresponding to NCR shares with a grant date value equal to $2,000,000, vesting in equal installments over three years, subject to your employment with NCR through the applicable vesting dates and such other terms as set forth in NCR’s form of restricted stock unit award agreement (“Sign-On RSU”);
You must electronically accept the award agreement associated with the award in order to be eligible to receive its benefits. Upon a termination of employment without Cause or for Good Reason (each as defined below), (x) the unvested portion of each of the Sign-On Option, and the Sign-On RSU immediately shall vest and (y) the Sign-On Option will remain exercisable until the earlier of the first anniversary of the date that your employment terminates and the option expiration date. Solely for purposes of the immediately preceding sentence:
•“Cause” means (1) your conviction for committing a felony under U.S. federal law or the law of the state or country in which such action occurred, (2) your willful and continued failure to perform substantially your duties with NCR or any of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness) for a period of at least thirty (30) days after a written demand for substantial performance is delivered to you by the NCR Board of Directors, specifically identifying the manner in which the NCR Board of Directors believes that you have not substantially performed your duties; (3) your willful engaging in illegal conduct or gross misconduct which is
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materially and demonstrably injurious to NCR or (4) your material violation of NCR’s Code of Conduct. For purposes of this provision, no act or failure to act, on your part, shall be considered “willful” unless it is done, or omitted to be done, by you in bad faith or without reasonable belief that your action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by you in good faith and in the best interests of the Company.
•“Good Reason” means any of the following events without your prior written consent:
(1) the assignment to you of any duties inconsistent in any respect with your position (including offices, titles and reporting requirements), authority, duties or responsibilities or any other diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by NCR promptly after receipt of notice thereof given by you;
(2) NCR requiring you to be based at any office or location that is more than forty (40) miles distant from the location of your principal place of employment set forth herein; or (3) a material breach of this letter agreement or the grant agreements with respect to the Sign-On Options, or the Sign-On RSU’s; provided, however, that your termination of employment shall not be deemed to be for Good Reason unless (x) you have notified NCR in writing describing the occurrence of one or more Good Reason events within ninety (90) days of such occurrence, (y) NCR fails to cure such Good Reason event within thirty (30) days after its receipt of such written notice and (z) the termination of employment occurs within 180 days after the occurrence of the applicable Good Reason event.
Effective for 2021 and beyond you will also be eligible to participate in NCR’s Annual LTI Equity Award Program that typically occurs in February each year. The annual equity award is expected to have a similar value to the initial equity value and be comprised of grants of the same type and in the same proportion as are awarded to other senior executives of NCR.
You must be a current employee of NCR on the applicable grant date in order to be eligible to receive any NCR LTI equity award. Other award terms are set forth in the plan governing these awards, and you must electronically accept the award agreement each time one is made in order to be eligible to receive its benefits.
Executive Severance and Change-in-Control Benefits:
You will participate in and be subject to the terms of NCR’s Executive Severance Plan and its Change-in-Control Severance Plan. You are accorded under the Change-In-Control plan a “Tier I” benefit level upon joining NCR. For purposes of the Executive Severance Plan, “Cash Severance” shall equal the sum of 1.5 times your base salary plus your target bonus, as set forth therein. To receive any severance benefits you are required to execute NCR's standard form of general release of all claims in a form reasonably acceptable to NCR, as set out in the plans. Each plan is subject to amendment or termination by the Committee.
Employee Benefits:
You will be eligible for employee benefits on the terms generally provided by NCR to its senior executives from time to time, including NCR’s annual Executive Medical Exam Program, which currently provides up to $5,000 on an annual basis for progressive, diagnostic analysis by NCR’s provider of choice, and the annual Executive Financial Planning Program, which currently provides an annual taxable reimbursement in an amount up to $12,000 for actual services
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incurred with respect to your tax and financial planning needs. Each of these programs is subject to amendment or termination by the Committee.
Executive Relocation - Full Plan:
You will be eligible for Relocation plan category USA/Canada Domestic Package E Homeowner
relocation benefits as outlined on the attached ‘Relocation Plan Summary’ document.
During the period before your relocation to the Atlanta area, NCR will provide you with a transitional temporary living allowance not to exceed $5,000 per month (before tax assistance; and not to exceed a period of twelve months) to cover your duplicate housing costs incurred in Atlanta. This temporary living allowance will be in addition to “relocation plan summary” benefits as described below. Please note that under NCR’s Executive Relocation Program, any relocation expenses paid or reimbursed by NCR will be subject to your full repayment in the unlikely event of your voluntary resignation from NCR during the one-year period following the last disbursement of relocation monies to you or paid on your behalf.
Your acceptance of this offer will initiate your relocation process and a Graebel Relocation Counselor will be in contact with you to discuss your personal relocation needs. Meanwhile, please do not incur any relocation expenses or initiate any relocation plans until you have discussed your situation with your assigned Relocation Counselor. Further details of Relocation Assistance are detailed in the ‘Repayment Plan Summary’ document.
Relocations represent a significant financial investment for the Company. In recognition of this investment, under certain circumstances relocation expenses are recoverable by the Company in accordance with the attached Relocation Repayment Agreement. Please read the Relocation Repayment Agreement for detailed provisions. It’s your responsibility to contact your manager to arrange for repayment of the relocation funds within 30 days of your resignation, if you resign within the repayment period. You will be required to sign and return the Relocation Repayment Agreement before any relocation funds will be released or paid on your behalf.
Vacation/Holidays:
Under the Company's vacation policy, you are entitled to receive twenty-five (25) paid vacation days and six (6) federal holidays. Eligible vacation is pro-rated your first year of service and is based on grade level or years of NCR service, whichever provides the greater benefit.
The Company also provides six (6) Floating Holidays, which can be used at any time during the year while recognizing customer and business needs. In the first year of hire, the number of available floating holidays is prorated.
Additionally, the Company recognizes the following as paid holidays:
New Year's Day, Martin Luther King Jr. Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Legal Expenses:
The Company will reimburse you for up to $15,000 of reasonable, documented legal fees you incur in connection with your review and acceptance of this letter agreement and its attachments.
Other Terms and Conditions of Employment:
Your offer of employment described in this letter agreement is contingent upon your acceptance of the terms and conditions of employment outlined in this letter agreement (including
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Attachments A, B and C, each incorporated herein by reference and made a constituent part of this letter agreement), and your passing of a background check. Please note that the letter agreement, through Attachment C, contains certain restrictive covenants concerning non-competition, non-customer-solicitation and non-recruitment/hiring, where such provisions are enforceable by law.
If you are in agreement with the terms of this letter agreement, including its attachments, please sign in the space provided below.
This letter agreement supersedes and completely replaces any prior oral or written communication concerning the subject matters addressed in this letter. This letter agreement should not be construed or interpreted as containing any guarantee of continued employment or employment for a specific term.
* * * * * *
Tim, we are very excited about the contributions, experience and knowledge you can bring to NCR.
Sincerely,
NCR Corporation
By: /s/ Michael D. Hayford
Name: Michael D Hayford
Title: CEO & President
Date: June 17, 2020
Accepting this Offer of Employment:
By accepting and signing NCR’s offer of employment you certify to NCR that you are not subject to a non-competition agreement with any company, person or entity, nor to any other post-employment restrictive covenants, that would preclude or restrict you from performing the NCR position being offered in this letter. We also advise you of NCR’s strong policy of respecting the intellectual property rights of other companies. You should not bring with you to your NCR position any documents or materials designated as, or that you know to be, confidential, proprietary or trade secret information of another company, nor in any other way disclose confidential, proprietary or trade secret information while employed by NCR.
You further acknowledge that this letter agreement, including its Attachments A, B and C, sets forth the terms and conditions of your employment with NCR. The employment relationship with NCR is by mutual consent (“Employment at Will”). This means either you or NCR has the right to discontinue the employment relationship with or without cause at any time and for any reason.
You acknowledge that you have read the foregoing information relative to NCR’s conditions of
employment and understand that your employment offer is conditioned upon their satisfaction.
Acknowledged and Agreed:
Timothy Oliver
/s/ Timothy Oliver Date: June 15, 2020
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Attachment A
NCR Corporation Employment Terms & Conditions
By accepting NCR’s offer of employment, I indicate my understanding of, and agreement to, each of the following Employment Terms and Conditions (the “Agreement”):
1.Conflicts of Interest. I will diligently perform and devote my entire working time, abilities and efforts to performing my NCR job responsibilities. I will refrain from performing work and providing services that (a) interfere or conflict with my exercise of good business judgment in the best interests of NCR when conducting NCR business, (b) occupy my attention to interfere with my NCR job performance, or (c) otherwise violate NCR’s current and future conflict of interest policies and requirements, including those set forth in NCR’s Code of Conduct. Before engaging in any activity that may present a conflict of interest, I understand that it is my responsibility to seek NCR’s approval.
2.Non-Disclosure of Confidential Information. Except as necessary for the performance of my NCR job responsibilities or otherwise provided for in writing by NCR (or “the Company”), I will not disclose, access, use, share, publish, or in any other manner reproduce, in whole or in part, NCR’s Confidential Information. “Confidential Information,” which includes trade secrets, means any information not generally known or readily ascertainable by NCR’s competitors and/or the public. Confidential Information includes, but is not limited to, the proprietary information of NCR, its subsidiaries, business affiliates, vendors, customers and clients, such as their financial records and projections, inventions, company strategies, employee information, research, technology, intellectual property rights, and information about pricing and customer preferences. Information may constitute Confidential Information regardless of whether it is written or unwritten, in hard copy or electronic form, and regardless of whether it is specifically identified or labeled as “confidential” (or with a similar term). Confidential Information does not include information already in the public domain or information which has been dedicated to or released to the public by NCR.
a) I acknowledge that unauthorized use or disclosure of NCR’s Confidential Information can have a materially detrimental effect upon the Company and cause irreparable harm, the monetary loss from which would be difficult, if not impossible, to measure. Therefore, in addition to any other remedies available to NCR, I agree that a grant of injunctive or other equitable relief for any actual or threatened breach would be appropriate without the securing or posting of any bond.
b) I understand that, notwithstanding my non-disclosure of Confidential Information obligation, I am not prohibited from reporting possible violations of the law to government agencies or from making disclosures to government agencies that are protected by law (such as providing testimony and information during a government investigation); and, I am not required to notify the Company that I have made any such reports or disclosures. In response to a valid subpoena, I may provide testimony or information about NCR, but I agree to provide NCR notice in advance so that the Company may seek to quash the subpoena or limit the disclosure, if appropriate. I also understand that this non-disclosure provision does not interfere with, restrain, or prevent employee communications with each other regarding wages, hours, or other employment terms and conditions.
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3.Intellectual Property. “NCR Intellectual Property” or “NCR IP” means any and all creations, inventions, methods or processes, designs, works of authorship, information or materials, improvements, developments, or any other innovations or technology that I, at any time during my employment at NCR (whether alone or with any other person), discover, conceive, create, reduce to practice, produce, make, or develop: (a) (i) with the use of or based on any NCR Confidential Information or any supplies, equipment, property, or systems, or at any facilities or on any property, of NCR, or (ii) that arises or results from my employment or work at or for NCR or relates to any of its business, operations, methods or processes, products (including software), services, or solutions (collectively, “Technology”), and (b) all Intellectual property rights arising or resulting therefrom (“IPR”). I agree and acknowledge that all Technology shall be considered a “work made for hire” as provided under the United States Copyright Act, 17 U.S.C. Section 101, et seq., and together with the IPR, is exclusively owned by and the sole and exclusive property of NCR. I hereby irrevocably assign to NCR all NCR IP. I will immediately disclose all Technology to NCR in writing. I agree to provide NCR with all assistance reasonably required to perfect and support NCR’s ownership and rights in, and to maintain, protect, and enforce, its rights, title and interests in and to the NCR IP, including signing any related documentation. I agree and acknowledge that, except as provided by law, no remuneration, compensation, any other right or obligation is or may become due to me in respect to my compliance with the terms of this Paragraph.
4.Personal Information. I understand that NCR must collect, process and retain certain personal data about me and my dependents, such as my home address, personal contact information and social security number. Only to the extent permitted by applicable law, NCR uses this information, and some cases discloses it to third parties, to manage its business operations and carry out my work relationship, including for purposes of providing compensation and employee benefits, complying with government agency and legal requirements, responding in the event of emergencies, and maintaining NCR systems and employee directory.
5.Prior Employment. I will not use during my NCR employment, disclose to NCR, bring onto NCR’s premises, or access using NCR systems or equipment any trade secret or other information that I am required to keep confidential relating to my former employer(s).
6.Deduction, Withholding, and Repayment. NCR may deduct and withhold from my compensation the value of any payroll overpayment and indebtedness owed by me to the Company, to the extent permitted by law, or require that I repay any such amounts; and, I agree to execute any documents that may be required by law to authorize or memorialize NCR’s right to withhold, deduct or seek repayment for any such indebtedness owed.
7.Background Verification. I understand that NCR’s offer of employment is conditioned upon a completion of a background check (which may include a criminal history check, confirmation of prior employment, credit check, and confirmation of educational background), the results of which must be satisfactory to the Company in its sole discretion. I agree to execute all documentation and take all actions necessary for completion of the background check. I understand that my offer of employment can be rescinded, or my employment can be terminated, based on my background check results.
8.U.S. Employment Authorization. Verification of my authorization to work in the United States is required for my position, and I understand that I must complete a Form I-9, Employee Eligibility Verification, within the first three days of my employment.
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9.NCR’s Code of Conduct. Ongoing compliance with NCR’s Code of Conduct, including its provisions prohibiting conflicts of interest, is required. The Company requires annual Code of Conduct training and that new hires complete Code of Conduct training within the first 30 days of employment.
10.Agreement to Arbitrate All Employment-Related Claims. I acknowledge and agree to abide by the terms of the Arbitration Agreement, and Class, Collective, and Representative Action Waiver (Appendix A to this Agreement), the terms of which are incorporated into this Agreement.
11.Non-Compete, Non-Solicit, Non-Hire/Recruit Agreement (“Post-Employment Restrictive Covenants”). I acknowledge and agree to abide by the Post-Employment Restrictive Covenants set forth in the Non-Compete, Non-Solicit and Non-Recruit/Hire Agreement (Appendix B to this Agreement), the terms of which are incorporated into this Agreement.
12.At-Will Employment. My NCR employment is terminable at will, which means that NCR or I may end it at any time and without notice, cause or reason. Neither this Agreement, nor any Company policy or statement (oral or written), confers or will confer any express or implied contractual right to remain in NCR’s employ. I understand that the Company can change the terms, conditions and benefits of my employment without notice and that there is no guarantee of any fixed term, condition or benefit of NCR employment.
13.No Prior Understandings or Oral Modifications. This Agreement supersedes and replaces any prior statements or representations between the Parties relating to its subject matter, and it may not be modified, changed, or waived, without the Parties’ written consent.
14.Ongoing Obligations. Termination of the employment relationship, regardless of reason or circumstances, does not terminate any of my ongoing obligations to NCR including, without limitation, my promises regarding NCR Confidential Information and NCR Intellectual Property.
15.Defend Trade Secrets Act. Pursuant to the Defend Trade Secrets Act of 2016, I acknowledge that an individual will not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that (a) is made (i) in confidence to a federal, state or local government official, either directly or indirectly, or to an attorney, and (ii) solely for the purpose of reporting or investigating a suspected violation of the law; or (b) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.
16.Severability. If any provision of this Agreement is to any extent illegal, otherwise invalid, or incapable of being enforced, such term will be excluded to the extent of such invalidity or unenforceability; all other terms of this Agreement will remain in full force in effect; and, to the extent permitted and possible, the invalid or unenforceable term will be deemed replaced by a term that is valid and enforceable and that comes closest to expressing the intention of such invalid or unenforceable term.
17.Waiver. No waiver of satisfaction of a condition or nonperformance of an obligation under this Agreement will be effective unless it is in writing and signed by the party granting the waiver.
18.Choice of Law. This Agreement is governed by the laws of the State of Georgia in the United States, without regard to its conflict-of-laws principles, except for California employees, to whom California law applies.
19.Electronic Acceptance. This Agreement may be executed electronically or by personal signature and is immediately binding upon electronic acceptance.
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ATTACHMENT B
Arbitration Agreement, and Class, Collective, and Representative Action Waiver
Addendum to Employment Agreement
You and NCR (collectively, the “Parties”) agree that any controversy or claim arising out of or with respect to your employment with NCR will be resolved by binding arbitration; the obligation to arbitrate will also extend to and encompass any claims that you may have or assert against any NCR employees, officers, directors, stockholders, or agents, its divisions, subsidiaries, affiliated corporations, limited partnerships, predecessors, successors and assigns (collectively, “NCR”). Notwithstanding the foregoing, the following disputes and claims are not covered by this Arbitration provision and will therefore be resolved in any appropriate forum as required by the laws then in effect: claims for workers’ compensation benefits, unemployment insurance, or state or federal disability insurance; claims for temporary or preliminary injunctive relief (including a temporary restraining order) in aid of arbitration or to maintain the status quo pending arbitration; and any other dispute or claim that has been expressly excluded from arbitration by statute. The Parties further agree that, in the event of a breach of this Agreement, NCR or you may, in addition to any other available remedies, bring an action in a Court of competent jurisdiction for equitable relief pending appointment of an arbitrator and completion of an arbitration; and, in such instance, will not be required to post a bond. If any portion of this Arbitration provision is held unenforceable, it will be severed and will not affect the duty to arbitrate nor any other part of this Agreement. In addition:
A.The Parties agree that any demand for arbitration will be filed within the statute of limitations applicable to the claim or claims upon which arbitration is sought or required, or the claim will be barred. Arbitration will be conducted in accordance with the Employment Arbitration Rules and Mediation Procedures of the American Arbitration Association (available at www.ADR.org) to the extent not inconsistent with the terms of this Agreement. The arbitrator will allow discovery in the form of: (1) the mutual exchange of documents (as defined under the Federal Rules of Civil Procedure) pertaining to the claim being arbitrated and for which there is a direct and demonstrable need; and (2) up to three depositions by each party. Upon good cause shown, in a personal or telephonic hearing, the arbitrator may allow additional, non-burdensome discovery. The arbitrator will balance the likely importance of the requested materials with the cost and burden of the discovery sought, and when disproportionate, the arbitrator may deny the request(s) or require that the requesting party advance the reasonable cost of production to the other side. Issues of arbitrability will be determined in accordance with the U.S. federal substantive and procedural laws relating to arbitration; in all other respects, this Agreement will be governed by the laws of the State of Georgia in the United States, without regard to its conflict-of-laws principles, and the arbitration will be held in the metropolitan Atlanta, Georgia area, with the exception of employees who primarily reside and work in California, for whom arbitration will be held in California, and with respect to controversies arising in California, to which California law will apply. The arbitration will be held before a single arbitrator who is an attorney having at least five years of experience in employment law. The arbitrator’s decision and award will be written, final and binding and may be entered in any court having jurisdiction. The Parties agree that nothing in this Agreement relieves them from any obligation they may have to exhaust certain administrative remedies before arbitrating any claims or disputes under this Agreement. Each party will bear its own attorney fees associated with the arbitration; other costs, and the expenses of the arbitration, will be borne as provided by the rules of the American Arbitration Association.
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B. Class, Collective and/or Representative Action Waiver. To the maximum extent permitted by law: (i) all claims under this Agreement must be brought in each Party’s individual capacity, and not as a plaintiff or class member in any purported class, collective or representative proceeding; (ii) no claims may be brought or maintained on a class, collective or representative basis either in Court or in arbitration, notwithstanding the rules of the arbitral body; (iii) such claims will be decided on an individual basis in arbitration pursuant to this Agreement; and (iv) the Parties expressly waive any right with respect to any covered claims to submit, initiate, or participate as a plaintiff, claimant or member in a class action or collective action, regardless of whether the action is filed in arbitration or in court. Claims may not be joined or consolidated in arbitration with disputes brought by or against other individual(s), unless agreed to in writing by the Parties (you, NCR, and the other individual(s) or entities). Any issue concerning the validity of this class, collective or representative action waiver, and whether an action may proceed as a class, collective or representative action, must be decided by a Court, and an arbitrator will not have authority to consider the issue of the validity of this waiver or whether the action may proceed as a class, collective or representative action. If, for any reason, this class, collective and/or representative action waiver is determined to be unenforceable, then the class, collective or representative claim may proceed only in a Court of competent jurisdiction and may not be arbitrated. No arbitration award or decision will have any preclusive or estoppel effect as to issues or claims in any future dispute.
THE PARTIES ACKNOWLEDGE THEY ARE KNOWINGLY AND VOLUNTARILY WAIVING ANY RIGHT THAT THEY MAY HAVE TO A JURY TRIAL.
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ATTACHMENT C
Non-Compete, Non-Solicit, and Non-Recruit/Hire Agreement
Addendum to Employment Agreement
A.Acknowledgement. Pursuant to your employment with NCR (or “the Company”), you will have access to, and knowledge of, certain NCR confidential information (including, without limitation, trade secrets and information about NCR’s business, operations, customers, employees, and industry relationships) not known to, or readily ascertainable by, the public and NCR’s competitors and that gives the Company a competitive advantage (“Confidential Information”). You acknowledge that, whether for your own benefit or the benefit of others, any unauthorized use, transfer, or disclosure of NCR’s Confidential Information can place NCR at a competitive disadvantage and cause damage, financial and otherwise, to its business. You further acknowledge that, because of your access to and knowledge of NCR’s Confidential Information, you will be in a position to compete unfairly with the Company following the termination of your employment.
B.Post-Employment Restrictive Covenants. For the purpose of protecting NCR’s business interests, including the Confidential Information, goodwill and stable trained workforce of the Company, you agree that, for a 12-month period after the termination of your NCR employment (the “Restricted Period”), regardless of the reason for termination, you will not, without the prior written consent of NCR’s Chief Executive Officer:
1.Non-Recruit/Hire — Directly or indirectly (including, without limitation, assisting third parties) recruit, hire or solicit, or attempt to recruit, hire or solicit any employee of NCR to terminate his or her employment with NCR, or refer any such employee to anyone outside of the Company for the purpose of that employee’s seeking, obtaining, or entering into an employment relationship or an agreement to provide services;
2.Non-Solicitation — Directly or indirectly (including, without limitation, assisting third parties) solicit or attempt to solicit the business of any NCR customers or prospective customers with which you had Material Contact (as defined below) during the last 2 years of your NCR employment for purposes of providing Competing Products/Services (as defined below).
3.Non-Competition —Perform services, directly or indirectly, in any capacity (including, without limitation, as an employee, consultant, contractor, owner or member of a board of directors) (i) of the type conducted, authorized, offered, or provided by you on behalf of NCR during the 2 years prior to termination of your NCR employment; (ii) in connection with Competing Products/Services (as defined below) that are similar to or serve substantially the same functions as those with respect to which you worked during the 2 years prior to termination of your NCR employment or about which you obtained trade secret or other Confidential Information; and (iii) on behalf of (A) a Competing Organization (as defined below) named in NCR’s Competing Organization List, or (B) for entities or individuals not on the Competing Organization List, within the geographic territories (including countries and regions, if applicable, or types, classes or tiers of customers if no geographic territory was assigned to you) where or for which you performed, were assigned, or had responsibilities for such services during the 2 years preceding your termination; in view of your executive and global responsibilities, your territory for purposes of this Agreement is deemed to be the world.
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C. Definitions. The following definitions apply to your Post-Employment Restrictive Covenants:
1.“Material Contact” means the contact between you and each customer or prospective customer (a) with which you dealt on behalf of NCR, (b) whose dealings with NCR were coordinated or supervised by you, (c) about whom you obtained confidential information in the ordinary course of business as a result of your association with NCR, and/or (d) who receives products or services authorized by NCR, the sale or provision of which, with regard to prospective customers, results, resulted, or would have resulted in compensation, commissions, or earnings for you within the 2 years prior to the date of your termination;
2.“Competing Products/Services” are any products, services, solutions, platforms, or activities that compete, directly or indirectly, in whole or in part, with one or more of the products, services or activities produced, provided or engaged in by NCR (including, without limitation, products, services or activities in the planning or development stage during your NCR employment) at the time of your separation from NCR and during the 2 years prior to termination of your NCR employment; and
3.“Competing Organization” is any person, business or organization that sells, researches, develops, manufactures, markets, consults with respect to, distributes and/or provides referrals regarding one or more Competing Products/Services.
4.The NCR “Competing Organization List,” which the Company updates from time to time and which is available on the NCR HR intranet, or from the NCR Law or Human Resources Departments upon request, provides examples of companies that, as of the date of the List’s publication, meet the definition of Competing Organization in the subparagraph directly above. However, the Competing Organization List is not intended to be exhaustive and persons, businesses or organizations not listed there may constitute Competing Organizations for purposes of this Agreement. Any changes to the Competing Organization List during the twelve months following your termination (or such longer time if the tolling provision below takes effect) shall be deemed to be a part of this Agreement and incorporated herein.
5.All references to “NCR employment” refer to your employment by NCR (or, if different, to an affiliate or subsidiary of NCR) and will also be deemed to include your employment, if any, by any company the stock or substantially all the assets of which NCR has acquired. As a non-limiting example, a reference to the “2 years prior to the termination of your NCR employment” may include both time as an NCR employee and time as a Retalix Ltd or Digital Insight employment.
D. Consideration. You acknowledge that you would not received the benefits and consideration provided under this Agreement but for your consent to abide by the Post-Employment Restricted Covenants, and your agreement to the same is a material component of the consideration for this Agreement and your NCR employment.
E. Remedies. You agree that, if you breach any of the provisions of the Post-Employment Restricted Covenants: (i) NCR will be entitled to all of its remedies at law or in equity, including but not limited to money damages and injunctive relief; and (ii) NCR will also be entitled to an accounting and repayment from you of all profits, compensation, commissions, remuneration or benefits that you (and/or the applicable Competing Organization) directly or indirectly have realized or may realize as a result of or in connection with any breach of these covenants, and such remedy will be in addition to and not in limitation of any injunctive relief or other rights or remedies to which NCR may be entitled at law or in equity.
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F. Subsequent Employment. You agree that, while employed by NCR and for 1 year thereafter, you will communicate the contents of this Non-Compete, Non-Solicit, and Non-Recruit/Hire Agreement to any person, firm, association, partnership, corporation or other entity which you intend to become employed by, contract for, associated with or represent, prior to accepting and engaging in such employment, contract, association and/or representation.
G. Tolling. You agree that the Restricted Period will be tolled and suspended during and for the pendency of any violation of its terms and for the pendency of any legal proceedings to enforce any of the covenants set forth in this Agreement and that all time that is part of or subject to such tolling and suspension will not be counted toward the 12-month duration of the Restricted Period.
H. Reasonable and Necessary. You agree that the Post-Employment Restrictive Covenants set forth in this Agreement are reasonable and necessary for the protection of NCR’s legitimate business interests, that they do not impose a greater restraint than is necessary to protect the goodwill or other business interests of NCR, that they contain reasonable limitations as to time and scope of activity to be restrained, that they do not unduly restrict your ability to earn a living, and that they are not unduly burdensome to you.
I. Severability. Each clause of this Agreement constitutes an entirely separate and independent restriction and the duration, extent and application of each of the restrictions are no greater than is necessary for the protection of NCR’s interests. If any part or clause of this Agreement is held unenforceable, it shall be severed and shall not affect any other part of this Agreement, which will be enforced as permitted by law; provided, however, that to the extent such invalid provision can be rendered valid by modification, you agree that the court or tribunal shall so modify such provision to render it valid and enforceable to the fullest extent permitted by law.
J. Choice of Law. This Agreement is governed by the laws of the State of Georgia in the United States, without regard to its conflict-of-laws principles.
K. For California Employees Only. This Agreement’s Non-Competition, Non-Solicitation, and Non-Recruit/Hire restrictions do not apply to you if, following the termination of your NCR employment, you reside or work in California. Notwithstanding the foregoing, you are and will continue to be prohibited from any unauthorized use, transfer, or disclosure of the Company’s Confidential Information, including trade secrets, pursuant to the California Trade Secrets Act, the U.S. Defend Trade Secrets Act of 2016, your confidentiality and non-disclosure agreements with NCR, and any other applicable federal, state and common law protections afforded proprietary business and trade secret information.
NOTE: Please print or save a copy for your files.
[***executive relocation program summary redacted]
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Exhibit 31.1
CERTIFICATION
I, Michael D. Hayford, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of NCR Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | July 31, 2020 | /s/ Michael D. Hayford | |||||||||
| Michael D. Hayford | |||||||||||
| President and Chief Executive Officer | |||||||||||
Exhibit 31.2
CERTIFICATION
I, Timothy C. Oliver, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of NCR Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | July 31, 2020 | /s/ Timothy C. Oliver | |||||||||
| Timothy C. Oliver | |||||||||||
| Executive Vice President and Chief Financial Officer | |||||||||||
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of NCR Corporation (the “Company”) for the period ending June 30, 2020 as filed with the U.S. Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company does hereby certify, pursuant to 18 U.S.C. § 1350 (section 906 of the Sarbanes-Oxley Act of 2002), that:
(1)the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
The foregoing certification (i) is given to such officers’ knowledge, based upon such officers’ investigation as such officers reasonably deem appropriate; and (ii) is being furnished solely pursuant to 18 U.S.C. § 1350 (section 906 of the Sarbanes-Oxley Act of 2002) and is not being filed as part of the Report or as a separate disclosure document.
| Dated: | July 31, 2020 | /s/ Michael D. Hayford | |||||||||
| Michael D. Hayford | |||||||||||
| President and Chief Executive Officer | |||||||||||
| Dated: | July 31, 2020 | /s/ Timothy C. Oliver | |||||||||
| Timothy C. Oliver | |||||||||||
| Executive Vice President and Chief Financial Officer | |||||||||||
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signatures that appear in typed form within the electronic version of this written statement required by Section 906, has been provided to NCR Corporation and will be retained by NCR Corporation and furnished to the United States Securities and Exchange Commission or its staff upon request.