10-Q 1 ncr-2013630x10q.htm 10-Q NCR-2013.6.30-10Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-Q
________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013
Commission File Number 001-00395
 ________________________
NCR CORPORATION
(Exact name of registrant as specified in its charter)
________________________
 
Maryland
 
31-0387920
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
3097 Satellite Boulevard
Duluth, GA 30096
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (937) 445-5000
________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
 
Accelerated filer
o
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o    No  x

As of July 15, 2013, there were approximately 166.0 million shares of 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
2013
 
2012
 
2013
 
2012
Product revenue
$
743

 
$
706

 
$
1,410

 
$
1,276

Service revenue
792

 
703

 
1,535

 
1,377

Total revenue
1,535

 
1,409

 
2,945

 
2,653

Cost of products
550

 
532

 
1,053

 
977

Cost of services
559

 
503

 
1,097

 
987

Selling, general and administrative expenses
232

 
195

 
461

 
386

Research and development expenses
55

 
49

 
110

 
95

Total operating expenses
1,396

 
1,279

 
2,721

 
2,445

Income from operations
139

 
130

 
224

 
208

Interest expense
(26
)
 
(8
)
 
(47
)
 
(17
)
Other (expense), net
(3
)
 
(5
)
 
(1
)
 
(7
)
Income from continuing operations before income taxes
110

 
117

 
176

 
184

Income tax expense
23

 
28

 
25

 
35

Income from continuing operations
87

 
89

 
151

 
149

Income (loss) from discontinued operations, net of tax

 
13

 
(1
)
 
4

Net income
87

 
102

 
150

 
153

Net income attributable to noncontrolling interests
1

 

 
3

 
1

Net income attributable to NCR
$
86

 
$
102

 
$
147

 
$
152

Amounts attributable to NCR common stockholders:
 
 
 
 

 

Income from continuing operations
$
86

 
$
89

 
$
148

 
$
148

Income (loss) from discontinued operations, net of tax

 
13

 
(1
)
 
4

Net income
$
86

 
$
102

 
$
147

 
$
152

Income per share attributable to NCR common stockholders:
 
 
 
 
 
 
 
Income per common share from continuing operations
 
 
 
 
 
 
 
Basic
$
0.52

 
$
0.56

 
$
0.90

 
$
0.93

Diluted
$
0.51

 
$
0.54

 
$
0.88

 
$
0.91

Net income per common share
 
 
 
 

 

Basic
$
0.52

 
$
0.64

 
$
0.89

 
$
0.96

Diluted
$
0.51

 
$
0.62

 
$
0.87

 
$
0.93

Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
165.2

 
159.0

 
164.5

 
158.6

Diluted
168.8

 
163.9

 
168.1

 
163.1

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
2013
 
2012
 
2013
 
2012
Net income
$
87

 
$
102

 
$
150

 
$
153

Other comprehensive income (loss):

 

 

 

Currency translation adjustments
(33
)
 
(13
)
 
(56
)
 
(14
)
Unrealized gain (loss) on derivatives
4

 

 
6

 
(6
)
   Losses (gains) on derivatives arising during the period
1

 
(1
)
 
3

 

        Less income tax benefit (expense)
(2
)
 
2

 
(3
)
 
2

Unrealized (loss) gain on securities

 
(1
)
 
3

 

Employee benefit plans

 

 

 

   Amortization of prior service benefit
(4
)
 
(5
)
 
(22
)
 
(10
)
   Net gain arising during the year

 

 
48

 

   Actuarial loss included in benefits expense
1

 
4

 
3

 
8

        Less income tax benefit (expense)
2

 
1

 
(10
)
 
2

Total comprehensive income
56

 
89

 
122

 
135

Less comprehensive income attributable to noncontrolling interests:

 

 

 

   Net income
1

 

 
3

 
1

   Currency translation adjustments
(2
)
 
1

 
(3
)
 
(1
)
Amounts attributable to noncontrolling interests
(1
)
 
1

 

 

Comprehensive income attributable to NCR common stockholders
$
57

 
$
88

 
$
122

 
$
135


See Notes to Condensed Consolidated Financial Statements.

4



NCR Corporation
Condensed Consolidated Balance Sheets (Unaudited)
In millions, except per share amounts
June 30,
2013
 
December 31,
2012
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
460

 
$
1,069

Accounts receivable, net
1,266

 
1,086

Inventories, net
825

 
797

Other current assets
525

 
454

Total current assets
3,076

 
3,406

Property, plant and equipment, net
327

 
308

Goodwill
1,455

 
1,003

Intangibles, net
490

 
304

Prepaid pension cost
394

 
368

Deferred income taxes
536

 
534

Other assets
428

 
448

Total assets
$
6,706

 
$
6,371

Liabilities and stockholders’ equity
 
 
 
Current liabilities
 
 
 
Short-term borrowings
$
85

 
$
72

Accounts payable
582

 
611

Payroll and benefits liabilities
208

 
197

Deferred service revenue and customer deposits
543

 
455

Other current liabilities
420

 
407

Total current liabilities
1,838

 
1,742

Long-term debt
2,079

 
1,891

Pension and indemnity plan liabilities
738

 
812

Postretirement and postemployment benefits liabilities
191

 
246

Income tax accruals
139

 
138

Environmental liabilities
137

 
171

Other liabilities
100

 
79

Total liabilities
5,222

 
5,079

Commitments and Contingencies (Note 10)

 

Redeemable noncontrolling interest
16

 
15

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, 2013 and December 31, 2012

 

Common stock: par value $0.01 per share, 500.0 shares authorized, 165.9 and 162.8 shares issued and outstanding as of June 30, 2013 and December 31, 2012, respectively
2

 
2

Paid-in capital
419

 
358

Retained earnings
1,231

 
1,084

Accumulated other comprehensive loss
(222)

 
(197)

Total NCR stockholders’ equity
1,430

 
1,247

Noncontrolling interests in subsidiaries
38

 
30

Total stockholders’ equity
1,468

 
1,277

Total liabilities and stockholders’ equity
$
6,706

 
$
6,371

See Notes to Condensed Consolidated Financial Statements.

5


NCR Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
In millions
Six months ended June 30
2013
 
2012
Operating activities
 
 
 
Net income
$
150

 
$
153

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 
 
 
Loss (income) from discontinued operations
1

 
(4
)
Depreciation and amortization
97

 
81

Stock-based compensation expense
22

 
22

Deferred income taxes
(10
)
 
23

Gain on sale of property, plant and equipment and other assets
(5
)
 
(7
)
Impairment of long-lived and other assets

 
7

Changes in operating assets and liabilities (net of effects of acquisitions and divestitures):
 
 
 
Receivables
(67
)
 
(47
)
Inventories
(25
)
 
(40
)
Current payables and accrued expenses
(34
)
 
(4
)
Deferred service revenue and customer deposits
56

 
50

Employee severance and pension
(132
)
 
(54
)
Other assets and liabilities
(64
)
 
(60
)
Net cash (used in) provided by operating activities
(11
)
 
120

Investing activities
 
 
 
Expenditures for property, plant and equipment
(44
)
 
(31
)
Proceeds from sales of property, plant and equipment
2

 
8

Additions to capitalized software
(45
)
 
(37
)
Business acquisitions, net
(696
)
 
(25
)
Other investing activities, net
6

 
8

Net cash used in investing activities
(777
)
 
(77
)
Financing activities
 
 
 
Tax withholding payments on behalf of employees
(27
)
 
(9
)
Short term borrowings, net
6

 
2

Payments on term credit facility
(35
)
 

Payments on revolving credit facility
(495
)
 
(305
)
Borrowings on revolving credit facility
725

 
190

Debt issuance costs
(3
)
 

Proceeds from employee stock plans
45

 
13

Net cash provided by (used in) financing activities
216

 
(109
)
Cash flows from discontinued operations
 
 
 
Net cash used in operating activities
(24
)
 
(44
)
Net cash provided by investing activities

 
98

Net cash (used in) provided by discontinued operations
(24
)
 
54

Effect of exchange rate changes on cash and cash equivalents
(13
)
 
(9
)
Decrease in cash and cash equivalents
(609
)
 
(21
)
Cash and cash equivalents at beginning of period
1,069

 
398

Cash and cash equivalents at end of period
$
460

 
$
377

See Notes to Condensed Consolidated Financial Statements.

6


NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying Condensed Consolidated Financial Statements have been prepared by NCR Corporation (NCR, the Company, we or us) without audit pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC) and, in the opinion of management, include all adjustments (consisting of normal, recurring adjustments, unless otherwise disclosed) necessary for a fair statement of the consolidated results of operations, financial position, and cash flows for each period presented. The consolidated results for the interim periods are not necessarily indicative of results to be expected for the full year. The 2012 year-end Condensed Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States (GAAP). These financial statements should be read in conjunction with NCR’s Form 10-K for the year ended December 31, 2012.

On February 6, 2013, the Company completed the acquisition of Retalix Ltd. (Retalix). As a result of the acquisition, the results of Retalix are included for the period from February 6, 2013 to June 30, 2013. See Note 4, "Acquisitions," for additional information.
 
Use of Estimates The preparation of financial statements in accordance with GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. Actual results could differ from those estimates.

Evaluation of Subsequent Events The Company evaluated subsequent events through the date that our Condensed Consolidated Financial Statements were issued. Except as described in Note 18, "Subsequent Events," no matters were identified that required adjustment of the Condensed Consolidated Financial Statements or additional disclosure.

Reclassifications Certain prior-period amounts have been reclassified in the accompanying Condensed Consolidated Financial Statements and Notes thereto in order to conform to the current period presentation.

Related Party Transactions In 2011, concurrent with the sale of a noncontrolling interest in our subsidiary, NCR Brasil - Indústria de Equipamentos para Automação S.A., to Scopus Tecnologia Ltda. (Scopus), we entered into a Master Purchase Agreement (MPA) with Banco Bradesco SA (Bradesco), the parent of Scopus. Through the MPA, Bradesco agreed to purchase up to 30,000 ATMs from us over the 5-year term of the agreement. Pricing of the ATMs will adjust over the term of the MPA using certain formulas which are based on prevailing market pricing. We recognized revenue related to Bradesco totaling $36 million and $77 million during the three and six months ended June 30, 2013 as compared to $28 million and $55 million during the three and six months ended June 30, 2012. As of June 30, 2013 and December 31, 2012, we had $15 million and $9 million, respectively, in receivables outstanding from Bradesco.

Recent Accounting Pronouncements

Adopted

In February 2013, the Financial Accounting Standards Board (FASB) issued an accounting standards update requiring new disclosures about reclassifications from accumulated other comprehensive loss to net income. These disclosures may be presented on the face of the consolidated financial statements or in the notes thereto. The standards update is effective for fiscal years beginning after December 15, 2012. We adopted this standards update and included the additional disclosure, as required, in the first quarter of 2013. See Note 16, "Accumulated Other Comprehensive Income (Loss)," for additional information.

Issued

In February 2013, the FASB issued changes to the accounting for obligations resulting from joint and several liability arrangements. These changes require an entity to measure those joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. The total amount of the obligations is determined as the sum of (i) the amount the reporting entity agreed to pay on the basis of its arrangement with its co-obligors, and (ii) any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. Examples of obligations subject to these requirements include debt arrangements, settled litigation and judicial rulings. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, with early adoption permitted. The implementation of the amended accounting guidance on January 1, 2014 is not expected to have a material impact on our consolidated financial statements.

7

NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)


In March 2013, the FASB issued amendments to address the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. The amendments are effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013, with early adoption permitted. The initial adoption on January 1, 2014 is not expected to have a material impact our consolidated financial statements.


2. PENSION BENEFIT PLAN ACCOUNTING METHODOLOGY CHANGES

Effective in the first quarter of 2013, we elected to change our accounting methodology for recognizing costs for all of our company-sponsored U.S. and international pension benefit plans. Previously, net actuarial gains or losses (except those differences not yet reflected in the market-related value) were only amortized to the extent that they exceeded 10% of the higher of the market-related value or the projected benefit obligation of each respective plan. Beginning in 2012, the losses associated with the U.S. qualified pension plan and our largest UK pension plan were amortized over the expected remaining lifetime of plan participants instead of the expected service period of active plan participants, because almost all of the participants were inactive. For our other U.S. and international plans, the gains or losses were amortized over the expected service period of the active plan participants. Further, the expected return on plan assets component of pension expense for our U.S. pension plan was previously determined using the expected rate of return and a calculated value of assets, referred to as the “market-related value.” Differences between the assumed and actual returns were reflected in market-related value on a straight-line basis over a 5-year period. Differences in excess of 10% of the market value were recognized immediately. Similar approaches were employed in determining expense for NCR's international plans.

Under our new accounting methods, we will recognize changes in the fair value of plan assets and net actuarial gains or losses upon remeasurement, which is at least annually in the fourth quarter of each year. These new accounting methods will result in changes in the fair value of plan assets and net actuarial gains and losses being recognized in expense faster than under our previous amortization method. The remaining components of pension expense, primarily net service cost, interest cost, and the expected return on plan assets, will be recorded on a quarterly basis as ongoing pension expense. While our previous policy of recognizing pension expense was acceptable, we believe that these new policies are preferable as they accelerate the recognition in our operating results of changes in the fair value of plan assets and actuarial gains and losses.

These changes have been reported through retrospective application of the new policies to all periods presented. We recorded a cumulative reduction of retained earnings as of December 31, 2012 (the most recent measurement date prior to the change) of $1,050 million related to these changes in accounting methodology. The impact of all adjustments made to the financial statements presented is summarized below (amounts in millions, except per share data):


8

NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 
Three months ended June 30
 
Six months ended June 30
In millions, except per share amounts
2013

2012
 
2013

2012
Previous Accounting Method
 
As Reported
 
Previously Reported
 
Adjusted
 
Previous Accounting Method
 
As Reported
 
Previously Reported
 
Adjusted
Condensed Consolidated Statements of Operations (Unaudited):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of products
$
553

 
$
550

 
$
533

 
$
532

 
$
1,058

 
$
1,053

 
$
979

 
$
977

Cost of services
591

 
559

 
519

 
503

 
1,153

 
1,097

 
1,019

 
987

Selling, general and administrative expenses
248

 
232

 
203

 
195

 
489

 
461

 
402

 
386

Research and development expenses
61

 
55

 
53

 
49

 
120

 
110

 
103

 
95

Total operating expenses
1,453

 
1,396

 
1,308

 
1,279

 
2,820

 
2,721

 
2,503

 
2,445

Income from operations
82

 
139

 
101

 
130

 
125

 
224

 
150

 
208

Income from continuing operations before income taxes
53

 
110

 
88

 
117

 
77

 
176

 
126

 
184

Income tax expense
10

 
23

 
21

 
28

 

 
25

 
20

 
35

Income from continuing operations
43

 
87

 
67

 
89

 
77

 
151

 
106

 
149

Net income
43

 
87

 
80

 
102

 
76

 
150

 
110

 
153

Net income attributable to NCR
$
42

 
$
86

 
$
80

 
$
102

 
$
73

 
$
147

 
$
109

 
$
152

Amounts attributable to NCR common stockholders:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations
42

 
86

 
67

 
89

 
74

 
148

 
105

 
148

Income per share attributable to NCR common stockholders:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income per common share from continuing operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.25

 
$
0.52

 
$
0.42

 
$
0.56

 
$
0.45

 
$
0.90

 
$
0.66

 
$
0.93

Diluted
$
0.25

 
$
0.51

 
$
0.41

 
$
0.54

 
$
0.44

 
$
0.88

 
$
0.64

 
$
0.91

Net income per common share
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.25

 
$
0.52

 
$
0.50

 
$
0.64

 
$
0.44

 
$
0.89

 
$
0.69

 
$
0.96

Diluted
$
0.25

 
$
0.51

 
$
0.49

 
$
0.62

 
$
0.43

 
$
0.87

 
$
0.67

 
$
0.93

Condensed Consolidated Statements of Comprehensive Income (Unaudited):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
$
43

 
$
87

 
$
80

 
$
102

 
$
76

 
$
150

 
$
110

 
$
153

Employee benefit plans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gain arising during the year
22

 

 

 

 
80

 
48

 

 

Actuarial loss included in benefits expense
33

 
1

 
32

 
4

 
64

 
3

 
63

 
8

Less income tax effect
(14
)
 
2

 
(6
)
 
1

 
(36
)
 
(10
)
 
(12
)
 
2

Total comprehensive income
50

 
56

 
89

 
89

 
116

 
122

 
134

 
135

Comprehensive income attributable to NCR common stockholders
$
51

 
$
57

 
$
89

 
$
88

 
$
116

 
$
122

 
$
135

 
$
135


9

NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 
June 30, 2013
Condensed Consolidated Balance Sheets (Unaudited):
Previous Accounting Method
 
As Reported
Prepaid pension cost
391

 
394

Total assets
6,703

 
6,706

Other current liabilities
425

 
420

Total current liabilities
1,843

 
1,838

Total liabilities
5,227

 
5,222

Retained earnings
1,987

 
1,231

Accumulated other comprehensive loss
(986
)
 
(222
)
Total NCR stockholders' equity
1,422

 
1,430

Total stockholders' equity
1,460

 
1,468

Total liabilities and stockholders' equity
6,703

 
6,706


 
 
December 31, 2012
Condensed Consolidated Balance Sheets (Unaudited):
 
Previously Reported
 
Adjusted
Retained earnings
 
2,134

 
1,084

Accumulated other comprehensive loss
 
(1,247
)
 
(197
)

 
Six months ended June 30
Condensed Consolidated Statements of Cash Flows (Unaudited):
2013
 
2012
Previous Accounting Method
 
As Reported
 
Previously Reported
 
Adjusted
Net income
76

 
150

 
110

 
153

Deferred income taxes
(35
)
 
(10
)
 
8

 
23

Employee severance and pension
(33
)
 
(132
)
 
4

 
(54
)



3. SUPPLEMENTAL FINANCIAL INFORMATION
The components of accounts receivable are summarized as follows:
In millions
June 30, 2013
 
December 31, 2012
Accounts receivable
 

 
Trade
$1,244

$1,056
Other
42
 
46
Accounts receivable, gross
1,286
 
1,102
Less: allowance for doubtful accounts
(20)
 
(16)
Total accounts receivable, net
$1,266
 
$1,086

10

NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

The components of inventory are summarized as follows:
In millions
June 30, 2013
 
December 31, 2012
Inventories, net
 
 
 
Work in process and raw materials
$162
 
$187
Finished goods
208
 
167
Service parts
455
 
443
Total inventories, net
$825
 
$797


4. ACQUISITIONS

Acquisition of Retalix Ltd. On February 6, 2013, NCR completed its acquisition of Retalix. In the acquisition, NCR paid an aggregate cash purchase price of $791 million which includes $3 million to be recognized as compensation expense within selling, general and administrative expenses over a period of approximately three years from the acquisition date. The purchase price was paid from the net proceeds from the December 2012 offer and sale of NCR's 4.625% senior unsecured notes and borrowing under NCR's senior secured credit facility. As a result of the acquisition, Retalix is now an indirect wholly owned subsidiary of NCR.

Retalix is a leading global provider of innovative retail software and services that transact billions of dollars in annual retail sales across its platform. The acquisition is consistent with NCR's continued transformation to a hardware-enabled, software-driven business model. Retalix's strength with blue-chip retailers is highly complementary and provides additional sales opportunities across the combined installed base.

Recording of Assets Acquired and Liabilities Assumed

The fair value of consideration transferred to acquire Retalix was allocated to the identifiable assets acquired and liabilities assumed based upon their estimated fair market values as of the date of the acquisition as set forth below. The Company's purchase price allocation for Retalix is preliminary and subject to revision as additional information about fair value of the assets and liabilities becomes available. Additional information that existed as of the acquisition date but at that time was unknown to the Company, may become known to the Company during the remainder of the measurement period, a period not to exceed 12 months from the acquisition date. Adjustments in the purchase price allocation may require a recasting of the amounts allocated to goodwill retroactive to the period in which the acquisition occurred.

The adjusted preliminary allocation of the purchase price for Retalix is as follows:

In millions
Fair Value
Cash and cash equivalents
$
127

Accounts receivable
109

Other tangible assets
56

Acquired goodwill
437

Acquired intangible assets other than goodwill
205

Deferred tax liabilities
(30
)
Liabilities assumed
(116
)
Total purchase consideration
$
788


Goodwill represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising from the acquisition consists of the margin and cost synergies expected from combining the operations of NCR and Retalix. It is expected that approximately $33 million of the goodwill recognized in connection with the acquisition will be deductible for tax purposes. The goodwill arising from the acquisition has been allocated to the Retail Solutions segment. Refer to Note 5, "Goodwill and Purchased Intangible Assets" for the carrying amounts of goodwill by segment as of June 30, 2013.


11

NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

The intangible assets acquired in the acquisition include the following:
 
 
Estimated
Fair Value
 
Weighted Average Amortization Period(1)
 
(In millions)
  
(years)
Direct customer relationships
 
$
121

 
20
Technology - Software
 
74

 
5
Trademarks
 
10

 
6
Total acquired intangible assets
 
$
205

 
14

(1)
Determination of the weighted average amortization period of the individual categories of intangible assets was based on the nature of the applicable intangible asset and the expected future cash flows to be derived from the intangible asset. Amortization of intangible assets with definite lives is recognized over the period of time the assets are expected to contribute to future cash flows.
The Company has incurred a total of $9 million of transaction expenses to date relating to the acquisition, of which $6 million are included in selling, general and administrative expenses in the Company's Condensed Consolidated Statement of Operations for the six months ended June 30, 2013.

Unaudited Pro forma Information

The following unaudited pro forma information presents the consolidated results of NCR and Retalix for the three and six months ended June 30, 2013 and 2012. The unaudited pro forma information is presented for illustrative purposes only. It is not necessarily indicative of the results of operations of future periods, or the results of operations that actually would have been realized had the entities been a single company during the periods presented or the results that the combined company will experience after the acquisition. The unaudited pro forma information does not give effect to the potential impact of current financial conditions, regulatory matters or any anticipated synergies, operating efficiencies or cost savings that may be associated with the acquisition. The unaudited pro forma information also does not include any integration costs or remaining future transaction costs that the companies may incur related to the acquisition as part of combining the operations of the companies.

The unaudited pro forma consolidated results of operations, assuming the acquisition had occurred on January 1, 2012, are as follows:

 
 
Three months ended June 30
 
Six months ended June 30
In millions
 
2013
 
2012
 
2013
 
2012
Revenue
 
$
1,539

 
$
1,473

 
$
2,973

 
$
2,776

Net income attributable to NCR
 
$
88

 
$
95

 
$
149

 
$
131


The unaudited pro forma results for the three and six months ended June 30, 2013 include:
$4 million and $8 million, respectively, in additional revenue associated with deferred revenue acquired, assuming the deferred revenue was acquired on January 1, 2012,
$2 million, net of tax, in additional amortization expense for acquired intangible assets in the six months ended June 30, 2013, and
$5 million, net of tax, in eliminated transaction costs for the six months ended June 30, 2013 as if those costs had been recognized in the prior-year period.

12

NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

The unaudited pro forma results for the three and six months ended June 30, 2012 include:
$4 million and $11 million, respectively, in reduced revenue associated with deferred revenue acquired,
$3 million and $7 million, respectively, net of tax, in additional amortization expense for acquired intangible assets,
$5 million and $10 million, respectively, net of tax, in interest expense from the 4.625% senior unsecured notes and senior secured credit facility, and
$5 million, net of tax, in transaction costs for the six months ended June 30, 2012.
Other Acquisitions During the six months ended June 30, 2013, the Company completed five additional acquisitions for aggregate cash consideration of approximately $31 million, plus related acquisition costs. Goodwill recognized related to these acquisitions was $23 million, of which it is expected that $19 million will be deductible for tax purposes. The goodwill arising from these acquisitions has been allocated to the Hospitality segment. Supplemental pro forma information and actual revenue and earnings since the acquisition dates have not been provided as these acquisitions did not have a material impact, individually or in the aggregate, on the Company's Condensed Consolidated Statements of Operations.



5. GOODWILL AND PURCHASED INTANGIBLE ASSETS

Goodwill

The carrying amounts of goodwill by segment as of June 30, 2013 and December 31, 2012 are included in the table below. Foreign currency fluctuations are included within other adjustments.

 
December 31, 2012
 
 
 
 
 
 
 
June 30, 2013
In millions
Goodwill
 
Accumulated Impairment Losses
 
Total
 
Additions
 
Impairment
 
Other
 
Goodwill
 
Accumulated Impairment Losses
 
Total
Financial Services
$
202

 
$

 
$
202

 
$

 
$

 
$
(2
)
 
$
200

 
$

 
$
200

Retail Solutions
120

 
(3
)
 
117

 
437

 

 

 
557

 
(3
)
 
554

Hospitality
659

 

 
659

 
23

 

 
(5
)
 
677

 

 
677

Entertainment
5

 
(5
)
 

 

 

 

 
5

 
(5
)
 

Emerging Industries
25

 

 
25

 

 

 
(1
)
 
24

 

 
24

Total goodwill
$
1,011

 
$
(8
)
 
$
1,003

 
$
460

 
$

 
$
(8
)
 
$
1,463

 
$
(8
)
 
$
1,455


Purchased 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. The increase in the gross carrying amount is primarily due to the acquisitions detailed in Note 4, "Acquisitions."
 
Amortization
Period
(in Years)
 
June 30, 2013
 
December 31, 2012
In millions
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
Identifiable intangible assets
 
 
 
 
 
 
 
 
 
Reseller & customer relationships
1 - 20
 
$
311

 
$
(27
)
 
$
179

 
$
(17
)
Intellectual property
2 - 7
 
255

 
(98
)
 
180

 
(80
)
Tradenames
4 - 9
 
59

 
(11
)
 
49

 
(8
)
Non-compete arrangements
2 - 5
 
8

 
(7
)
 
8

 
(7
)
Total identifiable intangible assets
 
 
$
633

 
$
(143
)
 
$
416

 
$
(112
)

13

NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)



The aggregate amortization expense (actual and estimated) for identifiable intangible assets for the following periods is:

In millions
 
Three Months Ended
June 30, 2013
 
Six Months Ended
June 30, 2013
 
Remainder of 2013 (estimated)
Amortization expense
 
$
18

 
$
32

 
$
34


 
 
For the years ended December 31 (estimated)
In millions
 
2014
 
2015
 
2016
 
2017
 
2018
Amortization expense
 
$
68

 
$
68

 
$
63

 
$
53

 
$
37




6. DEBT OBLIGATIONS

As of June 30, 2013, the Company’s total debt was $2.16 billion, with $85 million included in short-term borrowings and $2.079 billion included in long-term debt, as follows:

In millions
June 30, 2013
 
December 31, 2012
Senior Secured Credit Facility:
 
 
 
Term loan facility
$
815

 
$
850

Revolving credit facility
230

 

5.00% Senior Notes due July 15, 2022
600

 
600

4.625% Senior Notes due February 15, 2021
500

 
500

Other
19

 
13

Total debt
$
2,164

 
$
1,963


Senior Secured Credit Facility In August 2011, the Company entered into a $1.4 billion five-year senior secured credit facility with JPMorgan Chase Bank, N.A. (JPMCB), as administrative agent, and a syndicate of lenders, consisting of a term loan facility in an aggregate principal amount of $700 million and a revolving credit facility in an aggregate principal amount of $700 million. The senior secured credit facility was amended and restated on August 22, 2012, and was further amended on February 5, 2013 (as amended, the Senior Secured Credit Facility).

On August 22, 2012, we entered into an Incremental Facility Agreement with and among the lenders party thereto and JPMCB, as administrative agent. The Incremental Facility Agreement relates to, and was entered into pursuant to, the Senior Secured Credit Facility. The Incremental Facility Agreement supplemented amounts available to us by $300 million by establishing a $150 million new tranche of term loan commitments and a $150 million new tranche of revolving loan commitments, bringing the total sum available under the Senior Secured Credit Facility and the Incremental Facility Agreement to $1.7 billion. The revolving credit facility also allows a portion of the availability to be used for outstanding letters of credit, and as of June 30, 2013, outstanding letters of credit totaled approximately $17 million.
Of the outstanding principal balance of the term loan facility, $700 million is required to be repaid in quarterly installments of $17.5 million beginning March 31, 2013, with the balance of $455 million being due in August 2016, and $150 million is required to be repaid in quarterly installments of $3.75 million beginning March 31, 2014, with the balance of $97.5 million being due in August 2017. Borrowings under the revolving portion of the credit facility are due in August 2016 or, in the case of the Incremental Facility, in August 2017. Amounts outstanding under the Senior Secured Credit Facility bear interest, at the Company's option, at a base rate equal to the highest of (i) the federal funds rate plus 0.50%, (ii) the administrative agent's “prime rate” and (iii) the one-month LIBOR rate plus 1.00% (the Base Rate) or LIBOR, plus a margin ranging from 0.25% to 1.50% for Base Rate-based loans that are either term loans or revolving loans and ranging from 1.25% to 2.50% for LIBOR-based loans that are either term loans or revolving loans, 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.

14

NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

The Company's obligations under the Senior Secured Credit Facility are guaranteed by certain of its 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. These security interests would be released if the Company achieves an “investment grade” rating, and will remain released so long as the Company maintains that rating.
The Senior Secured Credit Facility includes affirmative and negative covenants that restrict or limit the ability of the Company and its subsidiaries to, among other things, incur indebtedness; create liens on assets; engage in certain fundamental corporate changes or changes to the Company's business activities; make investments; sell or otherwise dispose of assets; engage in sale-leaseback or hedging transactions; repurchase stock, pay dividends or make similar distributions; repay other indebtedness; engage in certain affiliate transactions; or enter into agreements that restrict the Company's ability to create liens, pay dividends or make loan repayments. The Senior Secured Credit Facility also includes financial covenants that require us 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 prior to December 31, 2013, (a) the sum of (x) 3.50 and (y) an amount (not to exceed 1.00) to reflect new debt used to reduce NCR's unfunded pension liabilities, to (b) 1.00, (ii) in the case of any fiscal quarter ending on or after December 31, 2013 and prior to December 31, 2015, (a) the sum of (x) 3.25 and (y) an amount (not to exceed 1.00) to reflect new debt used to reduce NCR's unfunded pension liabilities, to (b) 1.00, and (iii) in the case of any fiscal quarter ending on or after December 31, 2015 3.50 to 1.00; and
an interest coverage ratio of at least (i) 3.50 to 1.00, in the case of any four consecutive fiscal quarters ending prior to December 31, 2013, and (ii) 4.00 to1.00, in the case of any four consecutive fiscal quarters ending on or after December 31, 2013.
Taking into account new debt used to reduce the Company's unfunded pension liabilities, at June 30, 2013, the maximum consolidated leverage ratio under the Senior Secured Credit Facility was 4.50 to 1.00.

The Senior Secured Credit Facility also contains 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.

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 term loans and/or revolving credit facilities, the proceeds of which can be used for working capital requirements and other general corporate purposes. The aggregate capacity for additional incremental term loans and/or incremental revolving commitments under the Senior Secured Credit Facility is:

prior to the date that the Company obtains an investment grade rating, the greater of (i) the remaining existing incremental facility capacity (currently $200 million), and (ii) an aggregate amount that would not cause the secured 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 2.75 to 1.00;
and after the date that the Company obtains an investment grade rating, an aggregate amount that 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 a level that is 0.50 less than the then-applicable leverage ratio covenant.
In connection with the Senior Secured Credit Facility, the Company deferred approximately $29 million of debt issuance costs in 2011, which are being amortized to interest expense over the life of the debt. The August 22, 2012 amendment and restatement and Incremental Facility Agreement were considered modifications, not extinguishments of our credit facility, and therefore the unamortized debt issuance costs continue to be deferred. In connection with the August 22, 2012 amendment and restatement and Incremental Facility Agreement and the February 5, 2013 amendment, the Company deferred an additional $3 million and $1 million, respectively, of debt issuance costs, which are being amortized to interest expense over the life of the new debt.
On July 25, 2013, the Company amended and restated the Senior Secured Credit Facility and refinanced its term loan facility and revolving credit facility thereunder. The Senior Secured Credit Facility now consists of a term loan facility in an aggregate principal amount of $1.115 billion, and a revolving credit facility in an aggregate principal amount of $850 million. See Note 18, "Subsequent Events," for additional information.

15

NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

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 18, 2012, the Company issued $500 million aggregate principal amount of 4.625% senior unsecured notes due in 2021 (the 4.625% Notes). The 4.625% Notes were sold at 100% of the principal amount and will mature on February 15, 2021. The 5.00% and 4.625% Notes are unsecured senior obligations of the Company and are guaranteed, on an unsecured senior basis, by our subsidiaries, NCR International, Inc. and Radiant Systems, Inc., which also guarantee our obligations under the Senior Secured Credit Facility.
We have the option to redeem the 5.00% Notes, in whole or in part, at any time on or after July 15, 2017, at a redemption price of 102.5%, 101.667%, 100.833% and 100% during the 12-month periods commencing on July 15, 2017, 2018, 2019 and 2020 and thereafter, respectively, plus accrued and unpaid interest to the redemption date. Prior to July 15, 2017, we may redeem the 5.00% Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a make-whole premium and accrued and unpaid interest to the redemption date. Prior to July 15, 2015, we may redeem the 5.00% Notes in an aggregate principal amount not to exceed 35% of the aggregate principal amount of the notes originally issued at a redemption price of 105% plus accrued and unpaid interest to the redemption date, with the net cash proceeds from one or more qualified equity offerings under certain further requirements.
We have the option to redeem the 4.625% Notes, in whole or in part, at any time on or after February 15, 2017, at a redemption price of 102.313%, 101.156% and 100% during the 12-month periods commencing on February15, 2017, 2018 and 2019 and thereafter, respectively, plus accrued and unpaid interest to the redemption date. Prior to February 15, 2017, we may redeem the 4.625% Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a make-whole premium and accrued and unpaid interest to the redemption date. Prior to February 15, 2016, we may redeem the 4.625% Notes in an aggregate principal amount not to exceed 35% of the aggregate principal amount of the notes originally issued at a redemption price of 104.625% plus accrued and unpaid interest to the redemption date, with the net cash proceeds from one or more qualified equity offerings under certain further requirements.
The terms of the indentures for these notes, among other things, limit the ability of the Company and certain of its subsidiaries to 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 our subsidiaries to pay dividends to us; enter into affliliate transactions; engage in sale and leaseback transactions; and consolidate, merge, sell or otherwise dispose of all or substantially all of our 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.
On March 26, 2013 the Company filed registration statements on Forms S-4 with the SEC with respect to registered offers to exchange the 5.00% Notes and the 4.625% Notes in accordance with the requirements of the applicable registration rights agreements. The registration statements, as amended, were each declared effective on April 29, 2013, and the exchange offer closed on May 30, 2013.

Additionally, in connection with the 5.00% Notes and the 4.625% Notes, the Company deferred approximately $11 million and $7 million of debt issuance costs, respectively, which are being amortized to interest expense over the life of the debt.

Fair Value of Debt The fair value of debt is based on a discounted cash flow model that incorporates a market yield curve based on the Company’s credit rating with adjustments for duration. As of June 30, 2013 and December 31, 2012, the fair value of debt was $2.11 billion and $1.97 billion, respectively, and has been measured using significant other observable inputs (Level 2).
   


16

NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

7. INCOME TAXES

Income tax provisions for interim (quarterly) periods are based on estimated annual income taxes calculated separately from the effect of significant, infrequent or unusual items. Income tax represented an expense of $23 million for the three months ended June 30, 2013 compared to an expense of $28 million for the three months ended June 30, 2012. The decrease in income tax expense was primarily driven by tax on a favorable mix of earnings offset by a less favorable change in uncertain tax positions. The three months ended June 30, 2012 included a favorable settlement with Japan for the 2001 through 2006 tax years which resulted in a $13 million tax benefit.
Income tax represented expense of $25 million for the six months ended June 30, 2013 compared to expense of $35 million for the six months ended June 30, 2012. The change in income tax is primarily driven by tax on a favorable mix of earnings and favorable tax legislation offset by a less favorable change in uncertain tax positions. The six months ended June 30, 2013 included a one-time benefit of approximately $16 million in connection with the American Taxpayer Relief Act of 2012 that was signed into law in January 2013 and the related retroactive tax relief for certain law provisions that expired in 2012. The six months ended June 30, 2012 included a $13 million favorable settlement with Japan for the 2001 through 2006 tax years and a $14 million favorable settlement with the Canada Revenue Agency for the 2003 tax year.

8. STOCK COMPENSATION PLANS
As of June 30, 2013, the Company’s primary types of stock-based compensation were restricted stock and stock options. Stock-based compensation expense for the following periods was:
In millions
Three months ended June 30
 
Six months ended June 30
2013
 
2012
 
2013
 
2012
Restricted stock
$12
 
$10
 
$21
 
$20
Stock options
 
1
 
1
 
2
Total stock-based compensation (pre-tax)
12
 
11
 
22
 
22
Tax benefit
(4)
 
(4)
 
(7)
 
(7)
Total stock-based compensation (net of tax)
$8
 
$7
 
$15
 
$15

Stock-based compensation expense is recognized in the financial statements based upon fair value. During the three and six months ended June 30, 2013 the Company did not grant any stock options. During the three and six months ended June 30, 2012 the Company granted stock options and the weighted average fair value of option grants was estimated based on the below weighted average assumptions, which was $8.17 for the three and six months ended June 30, 2012.

 
For the three and six months ended June 30, 2012
Dividend yield
Risk-free interest rate
0.80%
Expected volatility
40.1%
Expected holding period (years)
5.0

Expected volatility incorporates a blend of both historical volatility of the Company’s stock over a period equal to the expected term of the options and implied volatility from traded options on the Company’s stock, as management believes this is more representative of prospective trends. The Company uses historical data to estimate option exercise and employee terminations within the valuation model. The expected holding period represents the period of time that options are expected to be outstanding. The risk-free interest rate for periods within the contractual life of the option is based on the five-year U.S. Treasury yield curve in effect at the time of grant.

As of June 30, 2013, the total unrecognized compensation cost of $71 million related to unvested restricted stock grants is expected to be recognized over a weighted average period of approximately 1.9 years. As of June 30, 2013, the total unrecognized compensation cost of $1 million related to unvested stock option grants is expected to be recognized over a weighted average period of approximately 0.8 years.



17

NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

9. EMPLOYEE BENEFIT PLANS
Components of net periodic benefit cost for the three months ended June 30 were as follows:
In millions
U.S. Pension Benefits
 
International Pension Benefits
 
Total Pension Benefits
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Net service cost
$—
 
$—
 
$3
 
$3
 
$3
 
$3
Interest cost
31
 
39
 
19
 
20
 
50
 
59
Expected return on plan assets
(27)
 
(31)
 
(24)
 
(22)
 
(51)
 
(53)
Amortization of prior service cost
 
 
1
 
1
 
1
 
1
Special termination benefit cost
11
 
 
 
 
11
 
Settlement benefit
(5)
 
 
 
 
(5)
 
Net benefit cost
$10
 
$8
 
$(1)
 
$2
 
$9
 
$10

Components of net periodic benefit cost for the six months ended June 30 were as follows:

In millions
U.S. Pension Benefits
 
International Pension Benefits
 
Total Pension Benefits
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Net service cost
$—
 
$—
 
$7
 
$7
 
$7
 
$7
Interest cost
62
 
78
 
39
 
39
 
101
 
117
Expected return on plan assets
(54)
 
(62)
 
(49)
 
(44)
 
(103)
 
(106)
Amortization of prior service cost
 
 
2
 
2
 
2
 
2
Special termination benefit cost
24
 
 
 
 
24
 
Curtailment gain
(10)
 
 
 
 
(10)
 
Settlement benefit
(5)
 
 
 
 
(5)
 
Net benefit cost
$17
 
$16
 
$(1)
 
$4
 
$16
 
$20

In February 2013, the Compensation and Human Resource Committee of NCR's Board of Directors approved the termination of NCR's U.S. non-qualified pension plans, resulting in a curtailment of those plans. As a result, during the first quarter of 2013, the liability associated with the U.S. non-qualified pension plans was reduced and a curtailment gain was recognized totaling $10 million. During the second quarter of 2013, a settlement gain of $5 million was recognized associated with the settlement of a portion of the U.S. non-qualified pension plans.

During the first quarter of 2013, a select group of U.S. employees were offered the option to participate in a voluntary early retirement opportunity, which included incremental benefits for each employee who elected to participate. During the three and six months ended June 30, 2013, special termination benefit charges of $11 million and $24 million, respectively, were recognized for those employees who irrevocably accepted the offer during such periods.

The income from the postretirement plan for the three and six months ended June 30 was:
In millions
Three months ended June 30
 
Six months ended June 30
2013
 
2012
 
2013
 
2012
Interest cost
$—
 
$1
 
$—
 
$1
Amortization of:
 
 
 
 
 
 
 
   Prior service benefit
(4)
 
(5)
 
(9)
 
(9)
   Actuarial loss
1
 
1
 
2
 
2
Net postretirement income
$(3)
 
$(3)
 
$(7)
 
$(6)


18

NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

The cost of the postemployment plan for the three and six months ended June 30 was:
In millions
Three months ended June 30
 
Six months ended June 30
2013
 
2012
 
2013
 
2012
Net service cost
$5
 
$5
 
$9
 
$11
Interest cost
2
 
3
 
4
 
5
Amortization of:

 
 
 
 
 
 
   Prior service cost
(1)
 
(1)
 
(2)
 
(3)
   Actuarial loss
 
3
 
1
 
6
Net benefit cost
$6
 
$10
 
$12

$19
Ongoing severance cost
3
 
 
3
 
(1)
Curtailment gain
 
 
(13)
 
Total postemployment cost
$9
 
$10
 
$2
 
$18

During the first quarter of 2013, NCR amended its U.S. separation plan to eliminate the accumulation of postemployment benefits, resulting in a $48 million reduction of the postemployment liability and a curtailment benefit of $13 million.

Employer Contributions

Pension For the three months ended June 30, 2013, NCR contributed approximately $18 million to its international pension plans and $84 million to its executive pension plan. For the six months ended June 30, 2013, NCR contributed approximately $36 million to its international pension plans and $86 million to its executive pension plan. In 2013, NCR anticipates contributing an additional $89 million to its international pension plans for a total of $125 million; and an additional $1 million to its executive pension plan for a total of $87 million. NCR may, in connection with the previously announced third phase of its pension strategy, make one or more discretionary contributions to the U.S. qualified plan over the next two years but no such contributions are scheduled.

Postretirement For the three and six months ended June 30, 2013, NCR contributed $1 million and $2 million, respectively, to its U.S. postretirement plan. NCR anticipates contributing an additional $3 million to its U.S. postretirement plan for a total of $5 million in 2013.

Postemployment For the three and six months ended June 30, 2013, NCR contributed approximately $10 million and $19 million, respectively, to its postemployment plans. NCR anticipates contributing an additional $23 million to its postemployment plans for a total of $42 million in 2013.



19

NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

10. COMMITMENTS AND CONTINGENCIES

In the normal course of business, NCR is subject to various proceedings, lawsuits, claims and other matters, including, for example, those that relate to the environment and health and safety, labor and employment, employee benefits, import/export compliance, intellectual property, data privacy and security, product liability, commercial disputes and regulatory compliance, among others. Additionally, NCR is subject to diverse and complex laws and regulations, including those relating to corporate governance, public disclosure and reporting, environmental safety and the discharge of materials into the environment, product safety, import and export compliance, data privacy and security, antitrust and competition, government contracting, anti-corruption, and labor and employment, 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. NCR believes the amounts provided in its Condensed Consolidated Financial Statements, as prescribed by GAAP, are currently adequate in light of the probable and estimable liabilities with respect to such matters, 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. Any costs that may be incurred in excess of those amounts provided as of June 30, 2013 cannot currently be reasonably determined, or are not currently considered probable.

In 2012, NCR received anonymous allegations from a purported whistleblower regarding certain aspects of the Company's business practices in China, the Middle East and Africa. The principal allegations received in 2012 relate to the Company's compliance with the Foreign Corrupt Practices Act (FCPA) and federal regulations that prohibit U.S. persons from engaging in certain activities in Syria.  NCR promptly retained experienced outside counsel and began an internal investigation of those allegations that was completed in January 2013.  On August 31, 2012, the Board of Directors received a demand letter from an individual shareholder demanding that the Board investigate and take action in connection with certain of the whistleblower allegations.  The Board formed a Special Committee to investigate those matters, and that Special Committee also separately retained experienced outside counsel, and completed an investigation in January 2013. On January 23, 2013, upon the recommendation of the Special Committee following its review, the Board of Directors adopted a resolution rejecting the shareholder demand. As part of its resolution, the Board determined, among other things, that the officers and directors named in the demand had not breached their fiduciary duties and that the Company will not commence litigation against the named officers and directors. The Board further resolved to review measures proposed and implemented by management to strengthen the Company's compliance with trade embargos, export control laws and anti-bribery laws. In March 2013, the shareholder who sent the demand filed a derivative action in a Georgia state court, naming as defendants three Company officers, five members of the Board of Directors, and the Company as a nominal defendant. The Company and the officers and directors removed the case to federal court in Georgia and are vigorously contesting the allegations. In July 2013, the Board of Directors received a demand letter from another shareholder with respect to allegations similar to those contained in the prior demand letter.
With respect to Syria, in 2012 NCR voluntarily notified the U.S. Treasury Department, Office of Foreign Assets Control (OFAC) of potential violations and ceased operations in Syria, which were commercially insignificant. The notification related to confusion stemming from the Company's failure to register in Syria the transfer of the Company's Syrian branch to a foreign subsidiary and to deregister the Company's legacy Syrian branch, which was a branch of NCR Corporation. The Company received a license from OFAC on January 3, 2013, and subsequent licenses on April 29, 2013 and July 12, 2013, that permit the Company to take measures required to wind down its past operations in Syria. The Company also submitted a detailed report to OFAC regarding this matter, including a description of the Company's comprehensive export control program and related remedial measures.
With respect to the FCPA, the Company made a presentation in 2012 to the staff of the Securities and Exchange Commission (SEC) and the U.S. Department of Justice (DOJ) providing the facts known to the Company related to the whistleblower's FCPA allegations, and advising the government that many of these allegations were unsubstantiated. The Company is responding to subpoenas of the SEC and requests of the DOJ for documents and information related to the FCPA, including matters related to the whistleblower's FCPA allegations. The Company's investigations of the whistleblower's FCPA allegations identified a few opportunities to strengthen the Company's comprehensive FCPA compliance program, and remediation measures were proposed and are being implemented.
The Company is fully cooperating with the authorities with respect to all of these matters. There can be no assurance that the Company will not be subject to fines or other remedial measures as a result of OFAC's, the SEC's or the DOJ's investigations.

20

NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

In relation to a patent infringement case filed by a company known as Automated Transactions LLC (ATL) the Company agreed to defend and indemnify its customers, 7-Eleven and Cardtronics. On behalf of those customers, the Company won summary judgment in the case in March 2011. ATL's appeal of that ruling was decided in favor of 7-Eleven and Cardtronics in 2012, and its petition for review by the United States Supreme Court was denied in January 2013. (There are further proceedings to occur in the trial court on the indemnified companies' counterclaims against ATL, such that the case is not fully resolved, although ATL's claims of infringement in that case have now been fully adjudicated.) ATL contends that Vcom terminals sold by the Company to 7-Eleven (Cardtronics ultimately purchased the business from 7-Eleven) infringed certain ATL patents that purport to relate to the combination of an ATM with an Internet kiosk, in which a retail transaction can be realized over an Internet connection provided by the kiosk. Independent of the litigation, the U.S. Patent and Trademark Office (USPTO) rejected the parent patent as invalid in view of certain prior art, although related continuation patents were not reexamined by the USPTO. ATL filed a second suit against the same companies with respect to a broader range of ATMs, based on the same patents plus a more recently issued patent; that suit has been consolidated with the first case.

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 and the litigation expenses in the Kalamazoo River matter detailed below, we currently do not anticipate material expenses and liabilities from these environmental matters.

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. 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. Some parties contend that NCR is also responsible for PCB discharges from paper mills owned by other companies because NCR carbonless copy paper "broke" was allegedly purchased by those mills as a raw material for their paper making processes. NCR sold its facilities in 1978 to Appleton Papers Inc. (API; now known as Appvion, Inc.). The other Fox River PRPs that received notices are P.H. Glatfelter Company, Georgia-Pacific Consumer Products LP (GP, successor to Fort James Operating Company), WTM I Co. (formerly Wisconsin Tissue Mills, now owned by Canal Corporation, formerly known as Chesapeake Corporation), CBC Corporation (formerly Riverside Paper Corporation), U.S. Paper Mills Corp. (owned by Sonoco Products Company), and Menasha Corporation.
During the past several years, the United States Environmental Protection Agency (USEPA) and Wisconsin Department of Natural Resources (WDNR) (together, the Governments) assessed and developed clean-up plans for the upper and lower parts of the Fox River and for portions of the Bay of Green Bay. These are contained in various Records of Decisions (RODs) issued in January 2003, July 2003 and June 2007 (the last is referred to as the Amended ROD), which divide the lower Fox River site into five "operable units" (OUs). In general, the clean-up plan or remedy calls for a combination of dredging and capping to remediate the sediments in the river, and for monitored natural attenuation in the Bay of Green Bay. Since 2004, the Company has been involved in certain aspects of the clean-up project, including performance, with GP, of engineering design work for the clean-up under an Administrative Order on Consent (AOC) entered into with the Governments. In addition, the Company, with U.S. Paper Mills, performed specific remedial action involving an area of elevated PCB incidence downriver of the De Pere Dam (Phase 1 work), pursuant to a consent decree with the Governments that was approved in November 2006.
On November 13, 2007, the Governments issued a unilateral administrative order (the 2007 Order) under Section 106 of CERCLA to all eight of the original PRPs identified above. The 2007 Order required these PRPs to implement the remedial work in the lower river in accordance with the requirements of the Amended ROD. NCR and, until April 2012, API has worked with the Governments to implement certain provisions of the 2007 Order.
In April 2009, NCR and API formed a limited liability company (the LLC), which entered into a remediation contract with Tetra Tech, an environmental remediation contractor, to perform the remediation work at the Fox River site consistent with the requirements of the RODs. In-water dredging and remediation by Tetra Tech commenced thereafter. The Company has funded the LLC's operations on a regular basis tied to the remediation schedule, consistent with the Company's Fox River reserve, discussed below. The Tetra Tech contract also requires that the LLC members provide promissory notes to provide Tetra Tech financial assurance against the prospect that the LLC will terminate the contract before completion of the remediation for reasons other than “cause.” The current maximum obligation under the Company's note, originally $20 million, is now approximately $13 million; the amount will vary based on a formula tied to conditions set forth in the contract, and generally is expected to decrease over time.

21

NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)


NCR and API, along with B.A.T Industries p.l.c. (BAT), share 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) and a 2005 arbitration award (subsequently confirmed as a judgment), both arising out of the previously referenced 1978 sale of certain facilities located on the Fox River. The agreement and award result 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 balance is shared jointly and severally by API and BAT.
In 2008, NCR and API filed a lawsuit in federal court in Green Bay, Wisconsin, seeking a judicial ruling determining the allocable responsibility of several PRPs for the cost of performing the remedial work at the Fox River, and seeking contribution from them for costs previously incurred (the allocation litigation). A number of counterclaims seeking contribution under CERCLA and under various state law theories were filed against NCR and API.
In December 2009, the court in the allocation litigation held, on summary judgment and based on a limited discovery record, that NCR and API are not entitled to contribution from any of the defendants. In March 2011, the court granted partial summary judgment to the defendants on certain of their contribution counterclaims. The court held that the counterclaim defendants are entitled to contribution from NCR and API for response costs relating to OUs 2-5 of the site, except to the extent that any such costs or damages were covered by insurance.
In February 2012, a seven-day bench trial was held to address, among other issues, whether NCR and API were liable as "arrangers" with respect to PCB discharges in OU 1, which is upriver of the area where the former NCR facilities sold to API are located. On July 3, 2012, the court held, among other things, that NCR, API and their predecessors did not intend to "arrange" for the disposal of a hazardous substance when CCP broke was sold to paper mills for use as a raw material for papermaking processes, and that NCR thus has no liability under CERCLA for OU 1.
Final judgment in the allocation litigation was entered by the court on June 27, 2013. On June 28, 2013, NCR filed an appeal in the United States Court of Appeals for the Seventh Circuit with respect to certain of the court's orders, including the orders of December 2009 and March 2011. Other parties have also appealed.
On October 14, 2010, the Governments filed a lawsuit (the Government enforcement action) in federal court in Wisconsin against the companies named in the 2007 Order mandating the cleanup, and certain other companies and municipalities. The Governments sought a declaration requiring the 2007 Order recipients to complete the response actions required by the order, and an injunction to mandate compliance with the order (the Phase 1 claims). The Governments also seek to recover unreimbursed past response costs, future response costs, and compensation for NRD (to be addressed in a later phase of the case).
In December 2012, the court held an eleven-day bench trial to address the Governments' Phase 1 claims, including NCR's affirmative defense that the harm at the site is divisible and that NCR has already paid more than its divisible share of costs. On May 1, 2013, the court held, among other things, that the harm at the site is not divisible. The court entered a declaratory judgment against seven defendants (including NCR), finding them jointly and severally liable to comply with the applicable provisions of the 2007 Order. The court also issued the requested injunction against four companies (including NCR), ordering them to comply with the applicable provisions of the 2007 Order. To date the other enjoined companies have failed to comply with the injunction and have not contributed to the costs of the remediation work. On June 28, 2013, NCR filed an appeal to the United States Court of Appeals for the Seventh Circuit with respect to the May 2013 Order and other decisions. Other parties have also appealed.
On April 10, 2012, the court ruled in the Government enforcement action that API did not have direct liability to the Governments under CERCLA, without disturbing API's continuing obligation to pay under the Cost Sharing Agreement, arbitration award and judgment. Accordingly, the court dismissed the Governments' claims against API. API sought to withdraw from the LLC as a result of this decision. API and the Company disagree whether the court's decision allows API to withdraw from the LLC. Following the court's decision and API's unilateral withdrawal from the LLC, the Company has funded the full cost of remediation activity ordered by the court and has sought payment from API. The payment demands made upon API by NCR as of June 30, 2013 total to approximately $53 million; the Company expects to make further demands of API as future obligations become due.

22

NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

The court observed that “the arbitration award set in stone the 60% figure” (referring to API's 60% payment obligation discussed herein), but stated that the amount to which the 60% obligation applies “must be determined through agreement of the parties or some other means.” As a result, the Company and API are engaged in formal dispute resolution procedures under the Cost Sharing Agreement, including the Company's March 2013 initiation of arbitration proceedings against API and API's subsequent arbitration counterclaim against NCR. In connection with the dispute, the Company notes that in public filings in May 2013, API stated that the Wisconsin federal court's rulings “do not affect Appleton's rights or obligations to share defense and liability costs with NCR in accordance with the terms of a 1998 agreement [the Cost Sharing Agreement] and a 2005 arbitration determination . . .” Appleton also reports in the same filing that “[t]he current carrying amount of Appleton's liability under the [a]rbitration is $63.0 million, which represents Appleton's best estimate of amounts to be paid for 2012 and 2013.” The Company believes that the court's decision dismissing the Governments' claims against API has no effect on API's independent contractual and judgment-based obligations to NCR with respect to the Fox River.
In late 2010, the Governments publicly announced proposed monetary settlements of Fox River-related claims with four entities: GP, Brown County (Wisconsin), the City of Green Bay, and the United States itself (with respect to potential liabilities asserted against the Army Corps of Engineers for certain dredging and disposal activities, and against other federal agencies for certain carbonless copy paper recycling activities). All of those entities are defendants in the allocation litigation case described above. The GP settlement, which has received court approval, releases GP from liability for, and provides contribution protection for, claims relating to government oversight costs and certain claims relating to clean-up actions upriver of GP's facilities (it does not affect claims for clean-up actions in that portion of the river near those facilities). In exchange GP stipulated to liability for performance of the required cleanup of a designated portion of the site, waived any objections to the cleanup remedy selected by the Governments and paid $7 million toward the Governments' unreimbursed past costs and expected future costs. The settlement with Brown County, the City of Green Bay and the United States was approved in June 2013, and, releases those entities and provides contribution protection for all claims relating to the Fox River site. In exchange the settling parties waived any claims relating to the site (subject to specified conditions) and collectively paid $5 million.
The extent of NCR's potential liability remains subject to many uncertainties. NCR's eventual remediation liability, which is expected to be paid out over a period extending through approximately 2017, followed by long-term monitoring for several decades, will depend on a number of factors. In general, the most significant factors include: (1) the total clean-up costs for the remaining segments of the river; (2) the total NRD for the site; (3) the share NCR (and, whether directly or indirectly, API) will bear of future clean-up costs and NRD; (4) the share of NCR's payments for such clean-up costs and NRD that API or BAT will bear; and (5) NCR's transaction and litigation costs to defend itself in this matter, including participation in the allocation litigation, the Government enforcement actions, and the arbitration against API. In establishing the reserve, NCR attempts to estimate a range of reasonably possible outcomes for each of these factors, although each range is itself highly 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. These factors are discussed below.
For the first factor described above, NCR utilizes a best estimate of $827 million as the total of the clean-up costs for the segments of the river. The estimated total cost amount of $827 million includes estimates for the OU 1 through OU 5 work, including the remaining amount of work to be performed under the April 2009 Tetra Tech remediation contract, the Phase 1 work and the remedial design work. It adds to these estimates a 5% contingency for probable cost overruns based on historical experience; an estimate for the Governments' future oversight costs; an amount for the Governments' past oversight costs; an estimate for long-term monitoring extending over several decades; an estimate for value engineering savings (potential projects intended to reduce the cost of the remediation) and the Company's share of estimated NRD. There can be no assurances that this estimated total cost amount will not be significantly higher as remediation work progresses.
Second, for total NRD, NCR uses a best estimate of $76 million. NCR believes the range of reasonably possible outcomes for NRD, if it were to be litigated, is between zero and $246 million. The federal government indicated, in a 2009 filing in a PRP's bankruptcy proceeding, that claims for NRD could be as high as $382 million. The Government enforcement action filed in October 2010 does not set forth a particular amount for the NRD claim.
Third, for the NCR share of NRD, which is discussed above, NCR uses a best estimate. In a ruling dated September 30, 2011, the Wisconsin federal court ruled that the defendants in the allocation litigation could seek recovery against NCR and API for overpayments of NRD. Whether the federal government is entitled to NRD recovery on behalf of NRD trustees is an issue that is not expected to be determined before later in 2013 or 2014, when that phase of the Government enforcement action is reached.

23

NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

The NCR share of remaining clean-up costs is expected to be determined in the allocation litigation (including appeals). In light of the Wisconsin federal court's rulings described above, NCR's reserve at June 30, 2013 assumed that NCR (subject to the obligations of its co-obligors and indemnitors discussed below) will be responsible for the full extent of the cleanup activities in OUs 2 through 5, which the Company considers a best estimate, and for the counterclaim damages determined in the February 2012 trial.
As discussed above, NCR filed an appeal in the allocation litigation on June 28, 2013, seeking to overturn the trial court's prior summary judgment rulings. NCR believes that its allocable share of total site costs is less than 100%, based on equitable factors, principles of divisibility as developed under applicable law, and/or an apportionment of the claimed harm. NCR's reserve does not at present assume any payments or reduction of exposure based either on the appeals or on the Government enforcement action.

Fourth, for the payment by API of its share of payments made by NCR, as discussed above relative percentage shares were established by the Cost Sharing Agreement and by a subsequent award in a 2005 allocation arbitration, which was later confirmed as a judgment. (The Cost Sharing Agreement and the arbitration resolved disputes that arose out of certain agreements entered into in connection with the Company's 1978 sale of the facilities on the Fox River to API.) As a result of unrelated transactions, API is itself indemnified by Windward Prospects Limited, which has funded and managed most of API's liability to date. NCR's analysis of this factor assumes that API is financially viable and pays its percentage share. As noted above, in April 2012 the court ruled that API has no direct CERCLA liability to the Governments. The Company believes that the court's ruling on this point has no effect on API's contractual and judgment-based obligations to contribute to NCR's funding for the remediation, nor on the Company's Fox River reserve. API's obligation to NCR is shared on a joint and several basis by BAT, which, by virtue of various prior corporate transactions and other agreements not specifically directed to the Fox River matter, is a co-party to the Cost Sharing Agreement and the arbitration award to which API is a party. This analysis also assumes that BAT would be financially viable and willing to pay the joint and several obligation if API does not.
Finally, NCR estimated the transaction costs it is likely to incur to defend this matter through approximately 2017, the time period NCR's engineering consultants believe it will take to implement the remedy for the river (exclusive of long-term monitoring). This estimate is based on an analysis of NCR's costs since this matter first arose in 1995 and estimates of what NCR's defense and transaction costs will be in the future. NCR expects that the bulk of these transaction costs have been and will be incurred in the 2008-2014 time period. The costs incurred and expected to be incurred during that period include, in particular, transaction costs and fees related to completion of the design work, equipment purchases, commencement and continuation of clean-up activities in the river, the allocation litigation, the Government enforcement action, the API arbitration, and other legal matters discussed above.
In light of several factors, among them the remedial design work conducted by NCR and GP; settlement possibilities; the efforts to implement the 2007 Order; the pending allocation litigation and appeals; whether there will be judicial recognition of divisible harm at the Fox River site and thus of allocable shares of liability among the various parties; the extent to which the Governments press claims against the parties in the Government enforcement action or otherwise for NRD, oversight costs and remediation liability; change orders, cost overruns or contractor disputes that may result from the ongoing remediation efforts; the continued viability and willingness to pay of NCR's various indemnitors and co-obligors, and the outcome of any related disputes; and the subsequent value engineering efforts designed to make the cleanup more efficient and less costly, calculation of the Company's Fox River reserve has become subject to added layers of complexities, and it is possible there could be additional changes to some elements of the reserve over upcoming periods, although we are unable to predict or estimate such changes at this time. There can be no assurance that the clean-up and related expenditures will not have a material effect on NCR's capital expenditures, earnings, financial condition, cash flows, or competitive position.
As of June 30, 2013, the net reserve for the Fox River matter was approximately $109 million, compared to $115 million as of December 31, 2012. The decrease in the reserve is due to payments for clean-up activities and litigation costs. NCR regularly re-evaluates the assumptions used in determining the appropriate reserve for the Fox River matter as additional information becomes available and, when warranted, makes appropriate adjustments. NCR contributes to the LLC in order to fund remediation activities and generally, by contract, funds three months' worth of remediation activities in advance. As of June 30, 2013 and December 31, 2012, approximately $5 million and $3 million, respectively, remained from this funding and was recorded in other current assets in the Condensed Consolidated Balance Sheets. NCR's reserve for the Fox River matter is reduced as the LLC makes payments to Tetra Tech and other vendors with respect to remediation activities.

24

NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

Under a 1996 agreement, AT&T and Alcatel-Lucent 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 Corp.'s divestiture of NCR, then known as AT&T Global Information Solutions Company, and of what was formerly known as Lucent Technologies, and specifically relates to contingent gains and liabilities of the former constituent companies within AT&T.) NCR's estimate of what AT&T and Alcatel-Lucent will be obligated to pay under the indemnity totaled approximately $71 million as of June 30, 2013 and $84 million as of December 31, 2012, and is deducted in determining the net reserve discussed above. The Company reached the indemnity threshold in the quarter ended December 31, 2012 and invoiced AT&T and Alcatel-Lucent. Payment was timely received on those and on subsequent invoices issued in 2013. The Company expects to continue such invoicing on a regular basis as expenses are incurred.
In connection with the Fox River and other matters, through June 30, 2013, NCR has received a combined total of approximately $162 million in connection with settlements reached with its principal insurance carriers. Portions of most of these settlements 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. Of the total amount collected to date, $9 million is subject to competing claims by API, and NCR and API have agreed that these funds will be used for Fox River costs and will be shared on an agreed-upon basis (subject to reallocation at a later date). NCR's agreed-upon share of the $9 million is estimated to be $4 million.
As of June 30, 2013, NCR had reached settlement with all but one of the insurance companies against which it had advanced claims with respect to the Fox River. The Company will pursue its claim against this remaining insurance company vigorously.
In November 2010, the United States Environmental Protection Agency (EPA) 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 parties - International Paper, Mead Corporation, and Consumers Energy - also received general notice letters at or about the same time. The EPA asserts that the site is contaminated by various substances, primarily PCBs as a result of discharges by various paper mills located along the river. The EPA does not claim that the Company made direct discharges into the Kalamazoo River, but 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." The EPA 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." The Company disagrees that it may have liability at the Kalamazoo River Site, and will dispute such claims if formally asserted by the EPA. If the Company were to be found liable with respect to the Kalamazoo River, it would have claims against API and BAT under the Cost Sharing Agreement, arbitration award and judgment discussed above in connection with the Fox River matter.
Also in connection with the Kalamazoo River Site, in December 2010 the Company was sued in federal court by three GP entities in a contribution and cost recovery action for alleged pollution at the site. The suit, pending in Michigan, asks that the Company pay a "fair portion" of the GP entities' costs, which are represented as $79 million to date; various removal and remedial actions remain to be performed at the Kalamazoo River Site. The suit alleges that the Company is liable as an "arranger" under CERCLA and under other theories. The Company is contesting the allegations in the GP suit vigorously. The case was tried in a Michigan federal court in February 2013; a decision is expected in 2013. As of June 30, 2013, there are a total of three defendants in the case; the other two defendants have asserted cross-claims against the Company.
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. Provisions for estimated losses from environmental restoration and remediation are, depending on the site, based primarily on internal and third-party environmental studies (except for the Fox River site, where the estimated costs and NRD are estimated as described above), estimates as to the number and participation level of any other PRPs, the extent of the 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 insurance, third-party indemnity claims or recoveries from the other PRPs, except as qualified in the following sentences. Except for the sharing agreement with API described above with respect to a particular insurance settlement, in those cases where insurance carriers or third-party indemnitors have agreed to pay any amounts and management believes that collectibility of such amounts is probable, the amounts are recorded in the Condensed Consolidated Financial Statements. For the Fox River site, as described above, assets relating to the AT&T and Alcatel-Lucent indemnity and to the API/BAT joint and several obligation, are recorded because payment is considered probable and is supported by contractual agreements and/or public filings.


25

NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

Guarantees and Product Warranties Guarantees associated with NCR’s business activities are reviewed for appropriateness and impact to the Company’s Condensed Consolidated Financial Statements. As of June 30, 2013 and December 31, 2012, NCR had no material obligations related to such guarantees, and therefore its Condensed Consolidated Financial Statements do not have any associated liability balance.

NCR provides its customers a standard manufacturer’s warranty and records, at the time of the sale, a corresponding estimated liability for potential warranty costs. Estimated future obligations due to warranty claims are based upon historical factors, such as labor rates, average repair time, travel time, number of service calls per machine and cost of replacement parts. When a sale is consummated, the total customer revenue is recognized, provided that all revenue recognition criteria are otherwise satisfied, and the associated warranty liability is recorded using pre-established warranty percentages for the respective product classes.

From time to time, product design or quality corrections are accomplished through modification programs. When identified, associated costs of labor and parts for such programs are estimated and accrued as part of the warranty reserve.

The Company recorded the activity related to the warranty reserve for the six months ended June 30 as follows:
In millions
2013
 
2012
Warranty reserve liability
 
 
 
Beginning balance as of January 1
$
26

 
$
23

Accruals for warranties issued
17
 
21

Settlements (in cash or in kind)
(20)
 
(20)

Ending balance as of June 30
$
23

 
$
24

 
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 condensed consolidated financial condition, results of operations or cash flows.



26

NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

11. EARNINGS PER SHARE AND SHARE REPURCHASES
Basic earnings per share is calculated by dividing net income or loss attributable to NCR by the weighted average number of shares outstanding during the reported period. The calculation of diluted earnings per share is similar to basic earnings per share, except that the weighted average number of shares outstanding includes the dilution from potential shares added from unvested restricted stock awards and stock options. The holders of unvested restricted stock awards do not have nonforfeitable rights to dividends or dividend equivalents and therefore, such unvested awards do not qualify as participating securities.
The components of basic and diluted earnings per share are as follows:
In millions, except per share amounts
Three months ended June 30
 
Six months ended June 30
2013
 
2012
 
2013
 
2012
Amounts attributable to NCR common stockholders:
 
 
 
 
 
 
 
Income from continuing operations
$
86

 
$
89

 
$
148

 
$
148

Income (loss) from discontinued operations, net of tax

 
13

 
(1)

 
4

Net income applicable to common shares
$
86

 
$
102

 
$
147

 
$
152

Weighted average outstanding shares of common stock
165.2

 
159.0

 
164.5

 
158.6

Dilutive effect of employee stock options and restricted stock
3.6

 
4.9

 
3.6

 
4.5

Common stock and common stock equivalents
168.8

 
163.9

 
168.1

 
163.1

Earnings per share attributable to NCR common stockholders:
 
 
 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
From continuing operations
$
0.52

 
$
0.56

 
$
0.90

 
$
0.93

From discontinued operations
$

 
$
0.08

 
$
(0.01
)
 
$
0.03

Net earnings per share (Basic)
$
0.52

 
$
0.64

 
$
0.89

 
$
0.96

Diluted earnings per share:
 
 
 
 
 
 
 
From continuing operations
$
0.51

 
$
0.54

 
$
0.88

 
$
0.91

From discontinued operations
$

 
$
0.08

 
$
(0.01
)
 
$
0.02

Net earnings per share (Diluted)
$
0.51

 
$
0.62

 
$
0.87

 
$
0.93

For the three and six months ended June 30, 2012, outstanding options to purchase approximately 1.3 million and 2.1 million shares of common stock, respectively, were not included in the diluted share count because the options’ exercise prices were greater than the average market price of the underlying common shares and, therefore, the effect would have been anti-dilutive. During the three and six months ended June 30, 2013 there were no anti-dilutive options.
For the three and six months ended June 30, 2013 and 2012, the Company did not repurchase any shares of its common stock.



27

NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

12. 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 revenues occur outside the United States (U.S.), and in currencies other than the U.S. Dollar, our results can be significantly impacted, both positively and negatively, by changes in foreign currency exchange rates.

Foreign Currency Exchange Risk

The accounting guidance for derivatives and hedging requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the Condensed Consolidated Balance Sheets. The Company designates foreign exchange contracts as cash flow hedges of forecasted transactions when they are determined to be highly effective at inception.

Our risk management strategy includes hedging, on behalf of certain subsidiaries, a portion of our forecasted, non-functional currency denominated cash flows for a period of up to 15 months. As a result, some of the impact of currency fluctuations on non-functional currency denominated transactions (and hence on subsidiary operating income, as stated in the functional currency), is mitigated in the near term. The amount we hedge and the duration of hedge contracts may vary significantly. In the longer term (greater than 15 months), the subsidiaries are still subject to the effect of translating the functional currency results to U.S. Dollars. To manage our exposures and mitigate the impact of currency fluctuations on the operations of our foreign subsidiaries, we hedge our main transactional exposures through the use of foreign exchange forward and option contracts. This is primarily done through the hedging of foreign currency denominated inter-company inventory purchases by NCR’s marketing units and the foreign currency denominated inputs to our manufacturing units. The related foreign exchange contracts are designated as highly effective cash flow hedges. The gains or losses on these hedges are deferred in accumulated other comprehensive income (AOCI) and reclassified to income when the underlying hedged transaction is recorded in earnings. As of June 30, 2013, the balance in AOCI related to foreign exchange derivative transactions was a gain of $2 million. 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.
 
Interest Rate Risk

The Company is party to an interest rate swap agreement that fixes the interest rate on a portion of the Company's LIBOR indexed floating rate borrowings under its Senior Secured Credit Facility through August 22, 2016. The notional amount of the interest rate swap starts at $560 million and amortizes to $341 million over the term. The Company designates the interest rate swap as a cash flow hedge of forecasted quarterly interest payments made on three-month LIBOR indexed borrowings under the Senior Secured Credit Facility. The interest rate swap was determined to be highly effective at inception.

Our risk management strategy includes hedging a portion of our forecasted interest payments. These transactions are forecasted and the related interest rate swap agreement is designated as a highly effective cash flow hedge. The gains or losses on this hedge are deferred in AOCI and reclassified to income when the underlying hedged transaction is recorded in earnings. As of June 30, 2013, the balance in AOCI related to the interest rate swap agreement was a loss of $6 million, net of tax.

28

NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

The following tables provide information on the location and amounts of derivative fair values in the Condensed Consolidated Balance Sheets:
 
Fair Values of Derivative Instruments
 
June 30, 2013
In millions
Balance Sheet
Location
 
Notional
Amount
 
Fair
Value
 
Balance Sheet
Location
 
Notional
Amount
 
Fair
Value
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
Other current assets
 
$—
 
$—
 
Other current liabilities and other liabilities *
 
$546
 
$10
Foreign exchange contracts
Other current assets
 
77
 
2
 
Other current liabilities
 
35
 
Total derivatives designated as hedging instruments
 
 
 
 
$2
 
 
 
 
 
$10
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Other current assets
 
$234
 
$2
 
Other current liabilities
 
$292
 
$3
Total derivatives not designated as hedging instruments
 
 
 
 
2
 
 
 
 
 
3
Total derivatives
 
 
 
 
$4
 
 
 
 
 
$13
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Values of Derivative Instruments
 
December 31, 2012
In millions
Balance Sheet
Location
 
Notional
Amount
 
Fair
Value
 
Balance Sheet
Location
 
Notional
Amount
 
Fair
Value
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
Other current assets
 
$—
 
$—
 
Other current liabilities and other liabilities *
 
$560
 
$16
Foreign exchange contracts
Other current assets
 
28
 
 
Other current liabilities
 
72
 
1
Total derivatives designated as hedging instruments
 
 
 
 
$—
 
 
 
 
 
$17