Edgar Filing: NCR CORP

NCR-2012.9.30-10Q

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 September 30, 2012

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	£ (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 October 15, 2012, there were approximately 159.9 million shares of common stock issued and outstanding.

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TABLE OF CONTENTS



PART I. Financial Information

	Description	Page

Item 1.	Financial Statements	3

	Condensed Consolidated Statements of Operations (Unaudited) Three and Nine Months Ended September 30, 2012 and 2011	3

	Condensed Consolidated Statements of Comprehensive Income (Unaudited) Three and Nine Months Ended September 30, 2012 and 2011	4

	Condensed Consolidated Balance Sheets (Unaudited) September 30, 2012 and December 31, 2011	5

	Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2012 and 2011	6

	Notes to Condensed Consolidated Financial Statements (Unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	46

Item 4.	Controls and Procedures	47

PART II. Other Information

	Description	Page

Item 1.	Legal Proceedings	48

Item 1A.	Risk Factors	48

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50

Item 6.	Exhibits	51

	Signatures	52

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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 September 30						Nine months ended September 30
In millions, except per share amounts	2012			2011			2012			2011
Product revenue	$	712		$	677		$	1,988		$	1,747
Service revenue	723			683			2,100			1,943
Total revenue	1,435			1,360			4,088			3,690
Cost of products	536			533			1,515			1,371
Cost of services	541			528			1,560			1,522
Selling, general and administrative expenses	217			227			619			562
Research and development expenses	52			44			155			125
Total operating expenses	1,346			1,332			3,849			3,580
Income from operations	89			28			239			110
Interest expense	(7		)	(3		)	(24		)	(4		)
Other (expense) income, net	—			(1		)	(7		)	4
Income from continuing operations before income taxes	82			24			208			110
Income tax expense	23			2			43			21
Income from continuing operations	59			22			165			89
(Loss) income from discontinued operations, net of tax	(1		)	(7)			3			(25		)
Net income	58			15			168			64
Net income (loss) attributable to noncontrolling interests	1			(1)			2			2
Net income attributable to NCR	$	57		$	16		$	166		$	62
Amounts attributable to NCR common stockholders:
Income from continuing operations	$	58		$	23		$	163		$	87
(Loss) income from discontinued operations, net of tax	(1		)	(7)			3			(25		)
Net income	$	57		$	16		$	166		$	62
Income per share attributable to NCR common stockholders:
Income per common share from continuing operations
Basic	$	0.36		$	0.15		$	1.03		$	0.55
Diluted	$	0.35		$	0.14		$	0.99		$	0.54
Net income per common share
Basic	$	0.36		$	0.10		$	1.04		$	0.39
Diluted	$	0.35		$	0.10		$	1.01		$	0.39
Weighted average common shares outstanding
Basic	159.6			157.4			158.9			158.1
Diluted	164.8			160.2			164.0			160.9

See Notes to Condensed Consolidated Financial Statements.

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NCR Corporation

Condensed Consolidated Statements of Comprehensive Income (Unaudited)



In millions	Three months ended September 30						Nine months ended September 30
	2012			2011			2012			2011
Net income	$	58		$	15		$	168		$	64
Other comprehensive income (loss):
Currency translation adjustments	18			(20		)	5			(11		)
Unrealized (loss) gain on derivatives	(6		)	2			(10		)	(10		)
Reclassification of realized (gains) losses arising during the period	(2		)	2			(4		)	4
Less income tax benefit (expense)	2			(1		)	4			1
Unrealized loss on securities	—			—			—			(1		)
Employee benefit plans
Prior service benefit during year	—			2			—			2
Amortization of prior service benefit	(2		)	(4		)	(12		)	(10		)
Net (loss) income arising during the year	(98		)	20			(98		)	20
Actuarial loss included in benefits expense	35			61			98			162
Less income tax benefit (expense)	14			(27		)	2			(49		)
Total comprehensive income	19			50			153			172
Less comprehensive income attributable to noncontrolling interests:
Net income (loss)	1			(1		)	2			2
Currency translation adjustments	—			2			—			3
Amounts attributable to noncontrolling interests	1			1			2			5
Comprehensive income attributable to NCR common stockholders	$	18		$	49		$	151		$	167

See Notes to Condensed Consolidated Financial Statements.

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NCR Corporation

Condensed Consolidated Balance Sheets (Unaudited)



In millions, except per share amounts	September 30, 2012		December 31, 2011
Assets
Current assets
Cash and cash equivalents	$	581	$	398
Accounts receivable, net	1,124		1,032
Inventories, net	826		774
Other current assets	425		311
Total current assets	2,956		2,515
Property, plant and equipment, net	303		365
Goodwill	966		913
Intangibles	299		312
Prepaid pension cost	355		339
Deferred income taxes	717		714
Other assets	438		433
Total assets	$	6,034	$	5,591
Liabilities and stockholders’ equity
Current liabilities
Short-term borrowings	$	54	$	1
Accounts payable	612		525
Payroll and benefits liabilities	193		221
Deferred service revenue and customer deposits	477		418
Other current liabilities	394		400
Total current liabilities	1,730		1,565
Long-term debt	1,408		852
Pension and indemnity plan liabilities	1,194		1,662
Postretirement and postemployment benefits liabilities	255		256
Income tax accruals	161		148
Environmental liabilities	188		220
Other liabilities	62		53
Total liabilities	4,998		4,756
Commitments and Contingencies (Note 9)
Redeemable noncontrolling interest	14		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 September 30, 2012 and December 31, 2011	—		—
Common stock: par value $0.01 per share, 500.0 shares authorized, 159.8 and 157.6 shares issued and outstanding as of September 30, 2012 and December 31, 2011, respectively	2		2
Paid-in capital	337		287
Retained earnings	2,154		1,988
Accumulated other comprehensive loss	(1,507)		(1,492)
Total NCR stockholders’ equity	986		785
Noncontrolling interests in subsidiaries	36		35
Total stockholders’ equity	1,022		820
Total liabilities and stockholders’ equity	$	6,034	$	5,591

See Notes to Condensed Consolidated Financial Statements.

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NCR Corporation

Condensed Consolidated Statements of Cash Flows (Unaudited)



In millions	Nine months ended September 30
	2012			2011
Operating activities
Net income	$	168		$	64
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
(Income) loss from discontinued operations	(3		)	25
Depreciation and amortization	123			88
Stock-based compensation expense	36			24
Excess tax benefit from stock-based compensation	—			(1		)
Deferred income taxes	2			(17		)
Gain on sale of property, plant and equipment	(8		)	(3		)
Impairment of long-lived and other assets	7			—
Changes in operating assets and liabilities (net of effects of acquisitions and divestitures):
Receivables	(94		)	(145		)
Inventories	(74		)	(67		)
Current payables and accrued expenses	64			72
Deferred service revenue and customer deposits	56			34
Employee severance and pension	(489		)	100
Other assets and liabilities	(68		)	(60		)
Net cash (used in) provided by operating activities	(280		)	114
Investing activities
Expenditures for property, plant and equipment	(53		)	(43		)
Proceeds from sales of property, plant and equipment	8			2
Additions to capitalized software	(58		)	(45		)
Business acquisitions, net	(58		)	(1,087		)
Other investing activities, net	4			—
Net cash used in investing activities	(157		)	(1,173		)
Financing activities
Repurchases of Company common stock	—			(70		)
Tax withholding payments on behalf of employees	(12		)	—
Excess tax benefit from stock-based compensation	—			1
Borrowings on term credit facility	150			700
Payments on revolving credit facility	(860		)	(50		)
Borrowings on revolving credit facility	720			400
Proceeds from bond offering	600			—
Debt issuance costs	(11		)	(28		)
Proceeds from employee stock plans	23			15
Dividend distribution to minority shareholder	(1		)	—
Net cash provided by financing activities	609			968
Cash flows from discontinued operations
Net cash used in operating activities	(85		)	(27		)
Net cash provided by (used in) investing activities	98			(40		)
Net cash provided by (used in) discontinued operations	13			(67		)
Effect of exchange rate changes on cash and cash equivalents	(2		)	3
Increase (decrease) in cash and cash equivalents	183			(155		)
Cash and cash equivalents at beginning of period	398			496
Cash and cash equivalents at end of period	$	581		$	341

See Notes to Condensed Consolidated Financial Statements.

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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 2011 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, 2011.

The Company has reported its Entertainment business as a discontinued operation as described further in Note 3, "Acquisitions and Divestitures." Accordingly, the results for all periods presented have been reclassified to reflect the business as a discontinued operation.

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 15, "Subsequent Events," no matters were identified that required adjustment of the Condensed Consolidated Financial Statements or additional disclosure.

Out of Period Adjustment During the third quarter of 2012, the Company recorded a $5 million income tax benefit related to an error in the calculation of the interest portion included in income tax expense. The Company determined the impact of this error was not material to the annual or interim financial statements of previous periods and the effect of correcting this error in the nine months ended September 30, 2012 was not material to the 2012 annual or interim financial statements.

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

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 $40 million and $95 million during the three and nine months ended September 30, 2012, respectively, and as of September 30, 2012, we had $9 million in receivables outstanding from Bradesco.

Recent Accounting Pronouncements In May 2011, the FASB issued updated guidance related to fair value measurements and disclosures, including (a) the application of the highest and best use valuation premise concepts, (b) measuring the fair value of an instrument classified in a reporting entity's stockholders' equity, and (c) quantitative information required for fair value measurements categorized within Level 3. Additionally, disclosure requirements have been expanded to include additional disclosure for Level 3 measurements regarding the sensitivity of fair value to changes in unobservable inputs and any interrelationships between those inputs. The guidance applies prospectively, and was effective for the Company beginning January 1, 2012. Other than the change in disclosure, the Company has determined that the adoption of these changes did not have an impact on the Condensed Consolidated Financial Statements.

In June 2011, the FASB issued updated guidance related to the presentation of other comprehensive income, offering two alternatives for presentation: (a) a single continuous statement of comprehensive income; or (b) two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. The guidance applies retrospectively, and was effective for the Company beginning January 1, 2012. Other than the change in presentation, these changes did not have an impact on the Condensed Consolidated Financial Statements.

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NCR Corporation

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

2. SUPPLEMENTAL FINANCIAL INFORMATION

The following table provides a reconciliation of total stockholders’ equity, stockholders’ equity attributable to NCR, and noncontrolling interests in subsidiaries for the nine months ended September 30, 2012 and 2011:



In millions	Redeemable Noncontrolling Interests in Subsidiaries	Total Stockholders’ Equity	Stockholders’ Equity Attributable to NCR	Noncontrolling Interests in Subsidiaries
December 31, 2010	$—	$916	$883	$33
Net income	—	64	62	2
Other comprehensive income, net of tax:
Currency translation adjustments	—	(11)	(14)	3
Unrealized loss on securities	—	(1)	(1)	—
Unrealized loss on derivatives	—	(4)	(4)	—
Benefit plans, net	—	125	125	—
Comprehensive income	—	173	168	5
Employee stock purchase and stock compensation plans	—	41	41	—
Repurchase of Company common stock	—	(70)	(70)	—
September 30, 2011	$—	$1,060	$1,022	$38

December 31, 2011	$15	$820	$785	$35
Net income	—	168	166	2
Other comprehensive income, net of tax:
Currency translation adjustments	(1)	5	5	—
Unrealized loss on derivatives	—	(10)	(10)	—
Benefit plans, net	—	(10)	(10)	—
Comprehensive (loss) income	(1)	153	151	2
Dividend paid to minority shareholder	—	(1)	—	(1)
Employee stock purchase and stock compensation plans	—	50	50	—
September 30, 2012	$14	$1,022	$986	$36

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NCR Corporation

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

The components of accumulated other comprehensive loss (AOCI), net of tax, are summarized as follows:



In millions	September 30, 2012	December 31, 2011
Unrealized gain on securities	$1	$1
Unrealized loss on derivatives	(10)	—
Unamortized costs associated with pension, postemployment and postretirement benefits	(1,421)	(1,411)
Currency translation adjustments	(77)	(82)
Accumulated other comprehensive loss	$(1,507)	$(1,492)

The components of accounts receivable are summarized as follows:



In millions	September 30, 2012	December 31, 2011
Accounts receivable
Trade	$1,087	$1,002
Other	54	46
Accounts receivable, gross	1,141	1,048
Less: allowance for doubtful accounts	(17)	(16)
Total accounts receivable, net	$1,124	$1,032

The components of inventory are summarized as follows:



In millions	September 30, 2012	December 31, 2011
Inventories, net
Work in process and raw materials	$188	$167
Finished goods	202	177
Service parts	436	430
Total inventories, net	$826	$774

3. ACQUISITIONS AND DIVESTITURES

2012 Acquisitions

Acquisition of POS and RDS On February 7, 2012, the Company acquired all of the outstanding capital stock of POS Integrated Solutions Do Brasil Comercio E Servicos De Informatica S.A. ("POS") and RDS South America Comercio E Servicos De Informatica S.A. ("RDS") in exchange for approximately $1 million in cash, plus related acquisition costs. POS and RDS were resellers of certain of the Company's hardware and software, and their results have been reported within our Hospitality segment since the date of the acquisitions.

Acquisition of Wyse Sistemas de Informatica Ltda. On May 31, 2012, the Company acquired all of the outstanding units of membership interest of Wyse Sistemas de Informatica Ltda. ("Wyse") in exchange for approximately $13 million in cash, plus related acquisition costs. Wyse was a developer and provider of point of sale software specifically designed for the hospitality market in Brazil, and their results have been reported within our Hospitality segment since the date of the acquisition.

Acquisition of Retail Automation Products On June 14, 2012, the Company acquired certain assets of Retail Automation Products in exchange for approximately $10 million in cash, plus related acquisition costs. Retail Automation Products was a reseller of certain of the Company's hardware and software, and their results have been reported within our Hospitality segment since the date of the acquisition.

Acquisition of Transoft, Inc. On September 7, 2012, the Company acquired substantially all of the assets of Transoft, Inc. in exchange for approximately $40 million in cash, plus related acquisition costs, of which the Company will recognize $7 million as compensation expense included within selling, general and administrative expenses over a period of two years from the acquisition date. Transoft, Inc. was a global leader in cash management software for financial institutions, and their results have

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NCR Corporation

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

been reported within our Financial Services segment since the date of the acquisition.

Goodwill recognized in the Company's 2012 acquisitions was $46 million, of which it is expected that $16 million of the goodwill will be deductible for tax purposes. Supplemental pro forma information has not been provided as the acquisitions did not have a material impact, individually or in the aggregate, on the Company's Condensed Consolidated Statements of Operations.

2011 Acquisition

Radiant Systems, Inc. The following unaudited pro forma information presents the consolidated results of NCR and Radiant Systems, Inc. for the three and nine months ended September 30, 2011, with adjustments to give effect to pro forma events that are directly attributable to the acquisition and have a continuing impact, as well as to exclude the impact of pro forma events that are directly attributable to the acquisition and are one-time in nature. 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 remaining integration 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, 2010, are as follows:



In millions	Three months ended September 30, 2011		Nine months ended September 30, 2011
Revenue	$	1,463	$	4,057
Net income attributable to NCR	35		78

Divestitures

On February 3, 2012, NCR entered into an Asset Purchase Agreement (the “Agreement”) with Redbox Automated Retail, LLC (“Purchaser”) pursuant to which NCR would sell certain assets of its Entertainment business (the "Entertainment Business"), including, but not limited to, substantially all of NCR's DVD kiosks, certain retailer contracts, select DVD inventory and certain intellectual property to Purchaser (the “Transaction”). Pursuant to the terms of the Agreement, as amended on June 22, 2012, and upon the terms and conditions thereof, on June 22, 2012, NCR completed the disposition of the assets of its Entertainment Business to Purchaser for cash consideration of $100 million. As of the date of the sale, total assets sold of $67 million included $51 million of property, plant and equipment, $15 million of inventory, and $1 million of intangible assets.

NCR agreed to provide Purchaser with certain short-term support services following the closing under a transition services agreement. The Agreement also contemplates that, for a period of five years following the closing, Purchaser and its affiliates may procure certain hardware, software and services from NCR under a manufacturing and services agreement. If, at the end of such five-year period, Purchaser and its affiliates have not procured hardware, software and services that have yielded $25 million in margin to NCR, Purchaser will pay the difference to NCR.

We determined that the cash inflows under the transition services agreement and the manufacturing and services agreement will not constitute significant continuing involvement with the operations of the Entertainment Business after the sale. In addition, the ongoing cash inflows related to the Entertainment Business under the manufacturing and services agreement are substantially unrelated to the business sold. Therefore, we have reclassified the operating results of the Entertainment Business, for all historical periods, to income (loss) from discontinued operations, net of tax in the accompanying Condensed Consolidated Statements of Operations. During the year ended December 31, 2011, we determined that disposal of the Entertainment business was probable, and we assessed the assets of the business for impairment, which resulted in charges which reduced the carrying values of goodwill, long-lived assets and certain inventories. As of March 31, 2012, we applied held-for-sale accounting treatment to the assets of the Entertainment Business included in the sale, and, accordingly, included those assets in assets held for sale on our Condensed Consolidated Balance Sheets as of March 31, 2012 and June 30, 2012. We have not revised prior year balance sheets for comparative purposes. However, as of December 31, 2011, total assets held for sale would have been $72 million which included $64 million of property, plant and equipment, $6 million of inventory, and $2 million of intangible assets.

The following table includes the results of the Entertainment Business, which we historically included in our Entertainment segment:

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NCR Corporation

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



In millions	Three months ended September 30						Nine months ended September 30
In millions	2012			2011			2012			2011
Revenue	$	1		$	41		$	62		$	115
Operating expenses	3			51			104			150
Loss from operations	(2		)	(10		)	(42		)	(35		)
Gain from divestiture of the business	—			—			33			—
Loss before income taxes	(2		)	(10		)	(9		)	(35		)
Income tax benefit	(1		)	(3		)	(4		)	(11		)
Loss from discontinued operations, net of tax	$	(1	)	$	(7	)	$	(5	)	$	(24	)

4. GOODWILL AND PURCHASED INTANGIBLE ASSETS

Goodwill

The carrying amounts of goodwill by segment as of September 30, 2012 and December 31, 2011 are included in the table below. Foreign currency fluctuations are included within other adjustments.



	December 31, 2011									Impairment				September 30, 2012
In millions	Goodwill		Accumulated Impairment Losses			Total		Additions		Impairment		Other		Goodwill		Accumulated Impairment Losses			Total
Financial Services	$	152	$	—		$	152	$	22	$	—	$	2	$	176	$	—		$	176
Retail Solutions	120		(3		)	117		—		—		—		120		(3		)	117
Hospitality	619		—			619		24		—		5		648		—			648
Entertainment	5		(5		)	—		—		—		—		5		(5		)	—
Emerging Industries	25		—			25		—		—		—		25		—			25
Total	$	921	$	(8	)	$	913	$	46	$	—	$	7	$	974	$	(8	)	$	966

Purchased Intangible Assets

NCR’s purchased intangible assets, reported in intangibles 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 follows. The increase in the gross carrying amount is primarily due to the acquisitions detailed in Note 3, "Acquisitions and Divestitures."



	September 30, 2012					December 31, 2011
In millions	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Identifiable intangible assets
Reseller & customer relationships	$	174	$	(14	)	$	167	$	(8	)
Intellectual property	170		(75		)	164		(59		)
Tradenames	49		(7		)	49		(3		)
Non-compete arrangements	8		(6		)	7		(5		)
Total identifiable intangible assets	$	401	$	(102	)	$	387	$	(75	)

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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	Nine months ended September 30, 2012		Three months ended December 31, 2012 (estimated)
Amortization expense	$	30	$	11



	For the years ended December 31 (estimated)
In millions	2013		2014		2015		2016		2017
Amortization expense	$	42	$	40	$	39	$	34	$	25

5. DEBT OBLIGATIONS

As of September 30, 2012, the Company’s total debt was $1.46 billion, with $54 million included in short-term borrowings and $1.41 billion included in long-term debt, as follows:



In millions		September 30, 2012		December 31, 2011
Secured Credit Facility:
	Term loan facility	$	850	$	700
	Revolving credit facility	—		140
Senior Unsecured Notes		600		—
Other		12		13
Total debt		$	1,462	$	853

Secured Credit Facility In August 2011, the Company entered into a five-year secured credit facility (the "Secured Credit Facility") with JPMorgan Chase Bank, N.A. ("JPMCB"), as administrative agent, and a syndicate of lenders to borrow up to $1.4 billion. The Secured Credit Facility consists 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. On August 22, 2012, we entered into an Incremental Facility Agreement with and among the lenders party thereto and JPMorgan Chase Bank, N.A. ("JPMCB"), as administrative agent. The Incremental Facility Agreement relates to, and was entered into pursuant to, the Secured Credit Facility, amended as of December 21, 2011 and as amended and restated as of August 22, 2012, with and among the lenders party thereto and JPMCB, as the administrative agent (the "Second Amendment"). The Incremental Facility Agreement supplements the 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 Second Amendment and the Incremental Facility Agreement to $1.7 billion.

As of September 30, 2012, the outstanding balance under the term loan facility, was $850 million, with $53 million included in short term borrowings and $797 million included in long term debt, and the outstanding balance under the revolving credit facility was zero. The revolving credit facility also allows a portion of the availability to be used for outstanding letters of credit, and as of September 30, 2012, outstanding letters of credit totaled approximately $19 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 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 Secured Credit Facility also require certain other fees and payments to be made by the Company.

The Company's obligations under the Secured Credit Facility are guaranteed by certain of its wholly-owned domestic subsidiaries.

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The 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 will be released when the Company achieves an “investment grade” rating, and will remain released so long as the Company maintains that rating.

The Secured Credit Facility includes affirmative, negative and financial 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. These covenants, which were amended in August 2012, also require the Company to maintain:

•

a consolidated leverage ratio on the last day of any fiscal quarter, not to exceed (i) in the case of any fiscal quarter ending 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 to 1.00, in the case of any four consecutive fiscal quarters ending on or after December 31, 2013.

The 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 incremental term loans and/or revolving credit facilities with commitments in an aggregate amount not to exceed $500 million, the proceeds of which can be used for working capital requirements and other general corporate purposes. As discussed above, the Incremental Facility Agreement included $300 million of such commitments. Therefore, there is a remaining capacity for $200 million of additional incremental term loans and/or incremental revolving commitment under the Secured Credit Facility, subject to receipt of lender commitments.

In connection with the Secured Credit Facility, the Company deferred approximately $29 million of debt issuance costs, which are being amortized to interest expense over the life of the debt. The Second Amendment 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 Second Amendment and Incremental Facility Agreement, the Company deferred an additional $3 million of debt issuance costs, which are being amortized to interest expense over the life of the new debt.

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 "Senior Unsecured Notes"). These notes were sold at 100% of the principal amount and will mature on July 15, 2022. These 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 Secured Credit Facility.

We have the option to redeem these 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 these notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a make-whole premium and accrued and unpaid interest to the redemption date.

The terms of the indenture 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.

In connection with the Senior Unsecured Notes, the Company deferred approximately $10 million of debt issuance costs, which

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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 September 30, 2012 and December 31, 2011, the fair value of debt was $1.48 billion and $855 million, respectively.

6. 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 expense of $23 million for the three months ended September 30, 2012 compared to expense of $2 million for the three months ended September 30, 2011. The increase in income tax expense is primarily driven by tax on increased income from continuing operations and an unfavorable mix of earnings, partially offset by the $5 million adjustment described in Note 1, “Basis of Presentation and Summary of Significant Accounting Policies.” Income tax represented expense of $43 million for the nine months ended September 30, 2012 compared to expense of $21 million for the nine months ended September 30, 2011. The increase in income tax expense is primarily driven by tax on increased income from continuing operations and an unfavorable mix of earnings, offset by 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 and by other favorable changes in uncertain tax positions.

7. STOCK COMPENSATION PLANS

As of September 30, 2012, 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 September 30		Nine months ended September 30
In millions	2012	2011	2012	2011
Restricted stock	$13	$7	$33	$19
Stock options	1	2	3	5
Total stock-based compensation (pre-tax)	14	9	36	24
Tax benefit	(4)	(2)	(11)	(7)
Total stock-based compensation (net of tax)	$10	$7	$25	$17

Stock-based compensation expense is recognized in the financial statements based upon fair value. Stock-based compensation expense was higher in the three and nine months ended September 30, 2012, as compared to the three and nine months ended September 30, 2011, due to an increase in the quantity and value of awards granted.

The weighted average fair value of option grants was estimated based on the below weighted average assumptions and was $8.24 and $7.38 for the nine months ended September 30, 2012 and 2011.



	Three months ended September 30		Nine months ended September 30
	2012	2011	2012	2011
Dividend yield	—	—	—	—
Risk-free interest rate	0.64%	—%	0.78%	2.04%
Expected volatility	40.6%	—%	40.1%	40.4%
Expected holding period (years)	5.0	—	5.0	5.1

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 September 30, 2012, the total unrecognized compensation cost of $54 million related to unvested restricted stock grants is expected to be recognized over a weighted average period of approximately 1.4 years. As of September 30, 2012, the total unrecognized compensation cost of $3 million related to unvested stock option grants is expected to be recognized over a weighted

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average period of approximately 1.1 years.

8. EMPLOYEE BENEFIT PLANS

Components of net periodic benefit cost for the three months ended September 30 were as follows:



In millions	U.S. Pension Benefits		International Pension Benefits		Total Pension Benefits
In millions	2012	2011	2012	2011	2012	2011
Net service cost	$—	$—	$3	$3	$3	$3
Interest cost	41	45	23	24	64	69
Expected return on plan assets	(30)	(39)	(24)	(28)	(54)	(67)
Settlement charge	—	—	1	1	1	1
Amortization of:
Prior service cost	—	—	4	2	4	2
Actuarial loss	16	34	16	20	32	54
Net benefit cost	$27	$40	$23	$22	$50	$62

Components of net periodic benefit cost for the nine months ended September 30 were as follows:



In millions	U.S. Pension Benefits		International Pension Benefits		Total Pension Benefits
In millions	2012	2011	2012	2011	2012	2011
Net service cost	$—	$—	$10	$11	$10	$11
Interest cost	119	136	62	69	181	205
Expected return on plan assets	(86)	(117)	(72)	(83)	(158)	(200)
Settlement charge	—	—	1	2	1	2
Amortization of:
Prior service cost	—	—	6	4	6	4
Actuarial loss	42	92	46	52	88	144
Net benefit cost	$75	$111	$53	$55	$128	$166

The decrease in pension expense was primarily due to a reduction in amortization of the actuarial losses for plans which have less than 10% active participants where, as of January 1, 2012, the amortization is now being calculated based on average remaining life expectancy rather than remaining service period. This change reflects our ongoing accounting policy for the evolving demographics of our pension plans, and was effective for the U.S. qualified pension plan and our largest U.K. plan beginning in the first quarter of 2012.

On July 31, 2012, the Company announced phase two of its pension strategy. This phase consists of making a contribution to the Company's U.S. qualified pension plan with funds raised through a capital market borrowing, and offering a voluntary lump sum payment option to certain former employees who are deferred vested participants of the U.S. pension plan who have not yet started monthly payments of their pension benefit. During the third quarter of 2012, the Company completed the offering of its senior unsecured notes and a portion of the proceeds were used to fund a $500 million discretionary contribution. The voluntary lump sum payment offer is expected to close during the fourth quarter of 2012.

The income from the postretirement plan for the three and nine months ended September 30 was:



In millions	Three months ended September 30		Nine months ended September 30
In millions	2012	2011	2012	2011
Interest cost	$—	$—	$1	$1
Amortization of:
Prior service benefit	(4)	(4)	(13)	(13)
Actuarial loss	—	—	2	2
Net postretirement income	$(4)	$(4)	$(10)	$(10)

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The cost of the postemployment plan for the three and nine months ended September 30 was:



In millions	Three months ended September 30		Nine months ended September 30
In millions	2012	2011	2012	2011
Net service cost	$5	$5	$16	$18
Interest cost	3	3	8	8
Amortization of:
Prior service cost	(2)	(1)	(5)	(8)
Actuarial loss	2	4	8	11
Net benefit cost	$8	$11	$27	$29
Restructuring severance cost	—	6	(1)	6
Total postemployment cost	$8	$17	$26	$35

During the third quarter of 2011, NCR recorded approximately $6 million of severance costs related to the acquisition of Radiant.

During the second quarter of 2011, NCR announced a change in the long term disability benefits provided to former employees, effective July 1, 2011. This action reduced the actuarial liability associated with the benefits by approximately $6 million in the second quarter of 2011.

Employer Contributions

Pension For the three months ended September 30, 2012, NCR contributed approximately $17 million to its international pension plans, $515 million to its U.S. qualified pension plan and $2 million to its executive pension plan. For the nine months ended September 30, 2012, NCR contributed approximately $56 million to its international plans, $542 million to its U.S. qualified pension plan and $6 million to its executive pension plan. In 2012, NCR anticipates contributing a total of $542 million to the U.S. qualified pension plan; an additional $64 million to its international pension plans for a total of $120 million; and an additional $4 million to its executive pension plan for a total of $10 million.

Postretirement For the three and nine months ended September 30, 2012, NCR contributed $1 million and $4 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 $7 million in 2012.

Postemployment For the three and nine months ended September 30, 2012, NCR contributed approximately $12 million and $25 million, respectively, to its postemployment plans. NCR anticipates contributing an additional $35 million to its postemployment plans for a total of $60 million in 2012.

9. COMMITMENTS AND CONTINGENCIES

In the normal course of business, NCR is subject to various proceedings, lawsuits, claims and other matters, including, for example, those that relate to the environment and health and safety, employee benefits, import/export compliance, intellectual property, data privacy and security, product liability, commercial disputes and regulatory compliance, among others. Additionally, NCR is subject to diverse and complex laws and regulations, including those relating to corporate governance, public disclosure and reporting, environmental safety and the discharge of materials into the environment, product safety, import and export compliance, data privacy and security, antitrust and competition, government contracting, anti-corruption, and labor and human resources, which are rapidly changing and subject to many possible changes in the future. Compliance with these laws and regulations, including changes in accounting standards, taxation requirements, and federal securities laws among others, may create a substantial burden on, and substantially increase costs to NCR or could have an impact on NCR's future operating results. 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 environmental matter 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 September 30, 2012 cannot currently be

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reasonably determined, or are not currently considered probable.

As previously disclosed in the Company's Current Report on Form 8-K filed on August 14, 2012 (the "August 14 Form 8-K"), NCR has 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 relate to the Company's compliance with the Foreign Corrupt Practices Act and federal regulations that prohibit companies from engaging in certain activities in Syria. NCR takes all allegations of this sort seriously and promptly retained experienced outside counsel and began an internal investigation that is underway. The goal of the investigation is to refute those allegations that are untrue and to take appropriate remedial action with respect to allegations that may be true. NCR has ceased operations in Syria, which were commercially insignificant, notified the U.S. Treasury Department, Office of Foreign Assets Control ("OFAC") of potential apparent violations and is taking other measures consistent with OFAC guidelines. The Securities and Exchange Commission is conducting an investigation and issued a subpoena to the Company related to the Foreign Corrupt Practices Act, including matters related to the whistleblower allegations reported in the August 14 Form 8-K. The Company has also, upon request, voluntarily provided copies of the whistleblower allegations to the United States Attorney's Office for the Northern District of Georgia, where the Company is headquartered. The Company is cooperating fully with the authorities with respect to all of these matters.

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 has formed a Special Committee to investigate these matters, and that Special Committee has also separately retained experienced outside counsel.

The United States Department of Justice is conducting an investigation regarding the propriety of the Company's former Teradata Data Warehousing business's arrangements and understandings with others in connection with certain federal contracts. In connection with the spin-off of Teradata on September 30, 2007, the responsibility for this matter, together with the related reserve, was distributed to Teradata Corporation. While the Company may be subject to ostensible exposure inasmuch as it was the contracting party in the matter at issue, Teradata Corporation is generally obligated to indemnify the Company for any losses arising out of this matter.

A separate portion of the government's investigation relates to the adequacy of pricing disclosures made to the government in connection with negotiation of the Company's General Services Administration Federal Supply Schedule and to whether certain subsequent price reductions were properly passed on to the government. Both Teradata Corporation and the Company are participating in this aspect of the investigation, with respect to certain products and services of each of them, and each will assume financial responsibility for its own exposures, if any, without indemnification from the other. At this time, the Company is unable to determine whether it has probable liability with respect to this aspect of the investigation.

In relation to a patent infringement case filed by a company known as Automated Transactions, Limited (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 sought appellate review of that ruling; that appeal was decided in favor of 7-Eleven and Cardtronics in 2012, and ATL's motion for reconsideration of that decision was denied in the third quarter of 2012. (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 have now been fully adjudicated.) ATL contended 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

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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 carbonless paper manufactured at the facilities NCR previously owned 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), which was also identified as a PRP. 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.

In the October 2010 Government enforcement action discussed below, the federal and state governments assert certain claims against the eight parties referenced above as well as four other entities. These claims, filed under CERCLA and other statutes, relate to the presence of PCBs at the Fox River site, and as a result the four newly named parties are also properly viewed as PRPs with respect to the site. Those entities are NewPage Wisconsin Systems, Inc., Neenah-Menasha Sewerage Commission, Kimberly-Clark Corporation, and the City of Appleton, Wisconsin.

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, 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). 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-water work began on schedule in April 2009, following construction of a facility to house the remediation operations in Green Bay, Wisconsin.

In April 2009, the NCR Board of Directors approved the terms of a contract with Tetra Tech, an environmental remediation contractor, to perform the remediation work at the Fox River consistent with the requirements of the Amended ROD. Also in April 2009, the Board of Directors approved the formation of a limited liability company (LLC), which NCR and API formed on April 27, 2009. The LLC entered into a remediation contract with Tetra Tech on April 27, 2009, and 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 $15 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.

NCR and API share a portion of the cost of the Fox River clean-up and natural resource damages based upon an agreement and an arbitration award, which was 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.

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 (the “allocation litigation”). A number of counterclaims seeking contribution under CERCLA and under various state law theories were filed against NCR and API. On September 23, 2008, the court issued a Case Management Decision and Scheduling Order setting a “Phase I trial” limited to the questions of (i) when each party knew or should have known that recycling NCR-brand carbonless copy paper would result in the discharge of PCBs to a waterbody, thereby risking environmental damage; and (ii) what, if any, actions each party took upon acquiring such knowledge to avoid the risk of further PCB contamination. The court's order also limited initial discovery proceedings to the same questions.

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On December 16, 2009, the court issued a ruling canceling the Phase I trial and granting motions for summary judgment filed by certain of the defendants with respect to NCR's and API's claims. The court held that NCR and API could not recover from these defendants any costs that NCR and API have incurred in the Fox River cleanup (the ruling does not affect the Governments' potential claims against such parties). In a further ruling dated February 28, 2011, the court granted partial summary judgment to the defendants on certain of their contribution counterclaims against NCR and API, with respect to certain Fox River response costs incurred by them. The Company intends to appeal both rulings to the United States Court of Appeals for the Seventh Circuit, after the remaining claims in the litigation are resolved. A trial in that case took place in February 2012 to address the primary remaining issues in the case, including whether the Company has so-called "arranger" liability in the portion of the Fox River that is upriver of the area where the Company's former facilities were located, the amount of certain insurance setoffs to be applied to the counterclaims, and the amount of recoverable counterclaim damages. The trial was to the court, without a jury.

On July 3, 2012, the Wisconsin federal court issued its ruling on the issues that were the subject of the February 2012 trial. The court ruled in NCR's favor on the issue of “arranger” liability as applied to Operable Unit 1 of the Fox River, and held, among other things, that the Company's predecessor companies at the Fox River did not, in the sale of carbonless copy paper “broke,” intend to arrange for the disposal of hazardous substances. The court issued other rulings regarding insurance offsets and certain aspects of counterclaim damages. The ruling required no additions to the Company's Fox River reserve. There remain certain issues to be resolved in the federal district court before a final judgment can be issued, including the treatment of certain claims under state law and other matters not resolved in the July 3, 2012 order. When a final judgment is entered, the Company will pursue an appeal to 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 February 2011. See Note 15, "Subsequent Events," for additional information related to this matter.

On October 14, 2010, the Governments filed a lawsuit (the "Government enforcement action") in federal court in Wisconsin against twelve parties, including the companies named in the 2007 Order mandating the cleanup (i.e., the eight original PRPs), and NewPage Wisconsin Systems, Inc., Neenah-Menasha Sewerage Commission, Kimberly-Clark Corporation, and the City of Appleton, Wisconsin (the four additional PRPs), with respect to the presence of PCBs at the Fox River. The Government enforcement action seeks payment of the Governments' unreimbursed response costs in connection with the Fox River matter as well as compensation for natural resource damages. The Governments also request a judicial declaration that the eight 2007 Order recipients are required to comply with its provisions. With respect to NCR, there are no claims asserted against the Company in the Government enforcement action that were not previously contemplated in the Company's Fox River reserve, as discussed herein. In May 2012 the federal court set a trial date of December 3, 2012 for the first phase of the Government enforcement action, in which the parties will litigate the Governments' request for a declaration that all recipients of the 2007 Order must comply with its terms (other than the terms relating to reimbursement of Government response costs, which will be deferred to a subsequent phase).

In March 2012, API, by virtue of its majority voting interest in the LLC, caused the LLC to decline to execute the 2012 remedial action work plan that the Company had submitted to the Governments. The Company had prepared the work plan with the remediation contractor after API, through the LLC, had caused that task to be removed from the contractor's agreed scope of work. Later in March 2012, the federal government filed a motion requesting that the Wisconsin federal court issue a preliminary injunction to compel, in 2012, both API and the Company to perform a greater amount of remediation work than was called for by that plan. Following both the April 10, 2012 decision discussed below and an evidentiary hearing on the federal government's motion, the court issued an injunction against the Company on April 27, 2012, requiring remediation to be conducted in 2012, and to be conducted at the level of work requested by the Governments. The Company appealed that decision to the United States Court of Appeals for the Seventh Circuit and argued the appeal on June 4, 2012. That court affirmed the district court's decision on August 3, 2012.

On April 10, 2012, the court granted API's motion for reconsideration in connection with its motion for summary judgment in the Government enforcement action, and ruled that API did not have direct liability to the Governments under CERCLA, without disturbing API's continuing obligation to pay under the above-referenced agreement, arbitration award and judgment. Accordingly, the court dismissed the Governments' claims against API. API has 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. Notwithstanding that disagreement, the Company is complying with the injunction referenced above, and is funding the full cost of 2012 remediation activity through the LLC, while seeking payment from API under the referenced agreement and award. Demands for such payment were made to API in the second and third quarters of 2012, with a total amount due, as of September 30, 2012, of approximately $29 million; the Company expects to make further demands of API as future obligations become due. The Company asked the Wisconsin federal court to enforce the prior arbitration award with respect to this issue and to order that API make these payments, and in a ruling in September 2012 the court declined to do so, observing that while “the arbitration award set in stone the 60% figure” (referring to API's 60% payment obligation discussed herein), the amount to which the 60% obligation would apply “must be determined through agreement of the parties or some other means.” As a

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result, the Company has commenced formal dispute resolution procedures against API under the 1998 agreement referenced above. In connection with the dispute, the Company notes that in public filings in July 2012, 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 and a 2006 [sic] arbitration determination . . .” Appleton also reports in the same filing that “[t]he current carrying amount of Appleton's liability under the [a]rbitration is $42.5 million which represents Appleton's best estimate of amounts to be paid during the next twelve months.” 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 the quarter ended December 31, 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). The settlement with Brown County, the City of Green Bay and the United States, if approved, would release those entities and provide contribution protection for all claims relating to the Fox River site.

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 natural resource damages for the site; (3) the share NCR (and, whether directly or indirectly, API) will bear of future clean-up costs and natural resource damages; (4) the share of NCR's payments for such clean-up costs and natural resource damages that API or another co-obligor, B.A.T Industries (discussed below), will bear; and (5) NCR's transaction and litigation costs to defend itself in this matter, including participation in the allocation litigation and the Government enforcement actions. 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 $852 million as the total of the clean-up costs for the segments of the river. The estimated total cost amount of $852 million includes estimates for the Operable Unit (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 15% 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 natural resource damages. There can be no assurances that this estimated total cost amount will not be significantly higher as remediation work progresses. A range of reasonably possible outcomes with respect to total cost is difficult to state, but if the portion of the cost estimate relating to the contingency for cost overruns and unexpected expenses were twice our estimate, the total cost would increase to approximately $898 million.

Second, for total natural resource damages (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 2013 or 2014, when that phase of the Government enforcement action is reached.

The NCR share of remaining clean-up costs is expected to be determined in the allocation litigation (including appeals) or possibly in or as a result of the Government enforcement action filed in October 2010. NCR has modified the basis previously used for this component of the reserve (in the past, the Company used the low end of a range of outcomes, based primarily on the proximity of areas to be remediated to the locations at which PCBs were released into the river). In light of the Wisconsin federal court's December 16, 2009, February 28, 2011,April 10, 2012, and July 3, 2012 rulings described above, NCR's reserve at September 30, 2012 assumed that NCR (subject to the obligations of its co-obligors and indemnitors discussed below) will be responsible for

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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.

The reserve may be further adjusted, to reflect either any offsets that the court determines to apply to the defendants' counterclaims to account for insurance recoveries they have received or agreements among the parties with respect to that topic; the court's ruling left this issue undecided. The Company and GP had settled and stipulated to the amount of insurance offset applicable to GP's counterclaims. The Company will seek to overturn the trial court's prior summary judgment rulings on appeal and believes that the NCR 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. Until such time, if any, that such a result is achieved, the Company assumes in its reserve that NCR (and, indirectly, API) will pay for the full extent of the remaining cleanup. NCR's reserve does not at present assume any payments or reduction of exposure based either on the forthcoming appeal or on Government enforcement against the other 2007 Order recipients or defendants.

Fourth, for the payment by API of its share of payments made by NCR, as discussed above relative percentage shares were established by a 1998 agreement between NCR and API and by a subsequent award in a 2005 allocation arbitration, which was subsequently confirmed as a judgment. (The 1998 agreement and the 2005 arbitration award 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.) 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 a third party, B.A.T Industries p.l.c., 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 same 1998 agreement and the subsequent arbitration award to which API is a party. This analysis also assumes that B.A.T Industries p.l.c. would be financially viable and willing to pay the joint and several obligation if API does not. As a result of unrelated prior corporate transactions, API itself is indemnified by another company, Windward Prospects Limited, which has funded and managed API's liability to date.

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. 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 2008-2013 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, and the allocation litigation and the Government enforcement actions 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 for clean-up of the lower river; the pending allocation litigation and the prospective appeals; whether there will be judicial recognition of allocable harm at the Fox River site and thus of divisible shares of liability among the various parties; the extent to which the Governments press claims against the parties in the Government enforcement actions or otherwise for NRD, government oversight costs and remediation liability; change orders or cost overruns 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 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 September 30, 2012, the net reserve for the Fox River matter was approximately $133 million, compared to $160 million as of December 31, 2011. The decrease in the reserve is due to payments for clean-up activities. 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 September 30, 2012 and December 31, 2011, approximately $7 million and $1 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.

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. (The agreement governs certain aspects

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

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 pay under the indemnity is recorded as a long-term asset of approximately $79 million as of September 30, 2012 and December 31, 2011, and is deducted in determining the net reserve discussed above. The asset balance can fluctuate not only with respect to total clean-up and other costs, but also with respect to insurance recoveries and certain tax impacts as measured by a contractual formula using prior-year effective tax rates. Such insurance recoveries and tax impacts are netted against the asset in proportions specified under the indemnity agreement (i.e., they typically decrease its amount). Insurance recoveries, whether by judgment or settlement, are the subjects of ongoing litigation, which is now nearly concluded, and have the effect of reducing the Company's expected receipts under the indemnity, and therefore further insurance recoveries are not expected to materially reduce the Company's aggregate expenditures for the Fox River matter. The tax impact within the indemnity calculation is subject to substantial volatility regarding the Company's effective tax rate from year to year, rendering the future tax impacts highly uncertain. When actual payments, net of insurance recoveries and tax impacts, reach the indemnity threshold, the Company expects to commence collection of the related portions of the asset. The Company believes it may achieve this threshold in late 2012.

In connection with the Fox River and other matters, through September 30, 2012, 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 September 30, 2012, NCR had reached settlement with all but one of the insurance companies against which it had advanced claims with respect to the Fox River. That remaining company entered into certain stipulations which obviated the need for a trial and caused judgment to be entered against it in the amount of $5 million; the insurance company appealed, and a decision in that appeal was issued in September 2012. The decision clarified, generally in the Company's favor, certain legal questions regarding applicable state law and its interpretation, and remanded the matter for trial. 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.

Also in connection with the Kalamazoo River Site, in December 2010 the Company was sued in Wisconsin federal court by three GP entities in a contribution and cost recovery action for alleged pollution at the site. The suit 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 site. The suit alleges that the Company is liable as an "arranger" under CERCLA and under other theories. The suit does not allege that the Company has made direct discharges into the Kalamazoo River. Substantial litigation over the Kalamazoo River Site took place several years ago in federal courts in Michigan. The Company was not a party to that litigation, and filed a motion to transfer the December 2010 case to the Michigan federal court; that motion was granted in the quarter ended June 30, 2011, and the Michigan federal court has set the case for trial in February 2013. The Company expects to contest the allegations in the GP suit vigorously. As of September 30, 2012, there are a total of three defendants in the case; the other two defendants have asserted cross-claims against the Company.

The July 3, 2012 decision by the Wisconsin federal court in NCR's favor with respect to the Company's purported “arranger” liability at the Fox River may have a bearing on the claims and potential claims against the Company at the Kalamazoo River. The Kalamazoo River litigation claims include claims based on alleged “arranger” liability arising from alleged shipments of “broke” claimed to have come from Fox River locations. Certain aspects of broke transactions involving the Fox River locations were the primary focus of the February 2012 trial in the Fox River matter. On July 27, 2012 the Company moved for summary judgment in the Kalamazoo River case based, in part, on the July 3, 2012 ruling in the Fox River matter.

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

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 natural resource damages 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.

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 September 30, 2012 and December 31, 2011, NCR had no material obligations related to such guarantees, and therefore its Condensed Consolidated Financial Statements do not have any associated liability balance.

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

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

The Company recorded the activity related to the warranty reserve for the nine months ended September 30 as follows:



In millions	2012		2011
Warranty reserve liability
Beginning balance as of January 1	$	23	$	24
Accruals for warranties issued	32		28
Settlements (in cash or in kind)	(31)		(32)
Ending balance as of September 30	$	24	$	20

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.

10. 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.

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

The components of basic and diluted earnings per share are as follows:



In millions, except per share amounts	Three months ended September 30						Nine months ended September 30
In millions, except per share amounts	2012			2011			2012		2011
Amounts attributable to NCR common stockholders:
Income from continuing operations	$	58		$	23		$	163	$	87
(Loss) income from discontinued operations, net of tax	(1		)	(7		)	3		(25)
Net income applicable to common shares	$	57		$	16		$	166	$	62
Weighted average outstanding shares of common stock	159.6			157.4			158.9		158.1
Dilutive effect of employee stock options and restricted stock	5.2			2.8			5.1		2.8
Common stock and common stock equivalents	164.8			160.2			164.0		160.9
Earnings per share attributable to NCR common stockholders:
Basic earnings per share:
From continuing operations	$	0.36		$	0.15		$	1.03	$	0.55
From discontinued operations	$	—		$	(0.05	)	$	0.01	$	(0.16	)
Net earnings per share (Basic)	$	0.36		$	0.10		$	1.04	$	0.39
Diluted earnings per share:
From continuing operations	$	0.35		$	0.14		$	0.99	$	0.54
From discontinued operations	$	—		$	(0.04	)	$	0.02	$	(0.15	)
Net earnings per share (Diluted)	$	0.35		$	0.10		$	1.01	$	0.39

Options to purchase approximately 0.3 million and 3.0 million shares of common stock for the three months ended September 30, 2012 and 2011, respectively, as well as 1.2 million and 2.5 million for the nine months ended September 30, 2012 and 2011, respectively, were outstanding but 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.

For the three and nine months ended September 30, 2012 and for the three months ended September 30, 2011, the Company did not repurchase any shares of its common stock. For the nine months ended September 30, 2011, the Company repurchased approximately 3.6 million shares of its common stock for $70 million. Upon repurchase, shares are retired.

11. 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 inter-company inventory purchases 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. As these transactions are forecasted, the related foreign exchange contracts

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

are designated as highly effective cash flow hedges. The gains or losses on these hedges are deferred in AOCI and reclassified to income when the underlying hedged transaction has been completed and is recorded in earnings. As of September 30, 2012, the balance in AOCI related to foreign exchange derivative transactions was zero. 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 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 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 has been completed and is recorded in earnings. As of September 30, 2012, the balance in AOCI related to the interest rate swap agreement was a loss of $10 million, net of tax.

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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
	September 30, 2012					September 30, 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	$	560	$	17
Foreign exchange forward and option contracts	Other current assets	102		1		Other current liabilities	26		1
Total derivatives designated as hedging instruments				$	1				$	18
Derivatives not designated as hedging instruments
Foreign exchange forward and option contracts	Other current assets	$	334	$	5	Other current liabilities	$	254	$	5
Total derivatives not designated as hedging instruments				5					5
Total derivatives				$	6				$	23

	Fair Values of Derivative Instruments
	December 31, 2011					December 31, 2011
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	$560		$9
Foreign exchange forward and option contracts	Other current assets	166		6		Other current liabilities	58		—
Total derivatives designated as hedging instruments				$6					$9
Derivatives not designated as hedging instruments
Foreign exchange forward and option contracts	Other current assets	$114		$—		Other current liabilities	$148		$3
Total derivatives not designated as hedging instruments				—					3
Total derivatives				$6					$12

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

The effect of derivative instruments on the Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2012 and September 30, 2011 were as follows:

In millions

Amount of Gain (Loss) Recognized in Other Comprehensive Income (OCI) on Derivative (Effective Portion)

Amount of Gain (Loss) Reclassified from AOCI into the Condensed Consolidated Statement of Operations (Effective Portion)

Amount of Gain (Loss) Recognized in the Condensed Consolidated Statement of Operations (Ineffective Portion and Amount Excluded from Effectiveness Testing)

Derivatives in Cash Flow Hedging Relationships

For the three months ended September 30, 2012

For the three months ended September 30, 2011

Location of Gain (Loss) Reclassified from AOCI into the Condensed Consolidated Statement of Operations (Effective Portion)

For the three months ended September 30, 2012

For the three months ended September 30, 2011

Location of Gain (Loss) Recognized in the Condensed Consolidated Statement of Operations (Ineffective Portion and Amount Excluded from Effectiveness Testing)

For the three months ended September 30, 2012

For the three months ended September 30, 2011

Interest rate swap

$(4)

$—

Interest expense

$—

Interest expense

$—

Foreign exchange forward and option contracts

$(2)

Cost of products

$(2)

Other (expense) income, net

$—

$(1)



In millions	Amount of Gain (Loss) Recognized in Other Comprehensive Income (OCI) on Derivative (Effective Portion)							Amount of Gain (Loss) Reclassified from AOCI into the Condensed Consolidated Statement of Operations (Effective Portion)						Amount of Gain (Loss) Recognized in the Condensed Consolidated Statement of Operations (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Derivatives in Cash Flow Hedging Relationships	For the nine months ended September 30, 2012			For the nine months ended September 30, 2011			Location of Gain (Loss) Reclassified from AOCI into the Condensed Consolidated Statement of Operations (Effective Portion)	For the nine months ended September 30, 2012		For the nine months ended September 30, 2011			Location of Gain (Loss) Recognized in the Condensed Consolidated Statement of Operations (Ineffective Portion and Amount Excluded from Effectiveness Testing)	For the nine months ended September 30, 2012		For the nine months ended September 30, 2011
Interest rate swap	$	(8	)	$	—		Interest expense	$	—	$	—		Interest expense	$	—	$	—
Foreign exchange forward and option contracts	$	(2	)	$	(10	)	Cost of Products	$	4	$	(4	)	Other (expense) income, net	$	—	$	(1	)



In millions		Amount of Gain (Loss) Recognized in the Condensed Consolidated Statement of Operations
Derivatives not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in the Condensed Consolidated Statement of Operations	For the three months ended September 30, 2012	For the three months ended September 30, 2011	For the nine months ended September 30, 2012	For the nine months ended September 30, 2011
Foreign exchange forward contracts	Other (expense) income, net	$—	$—	$2	$(1)
Foreign exchange forward contracts	Cost of products	$(1)	$2	$(6)	$1

Table of Contents

NCR Corporation

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

Concentration of Credit Risk

NCR is potentially subject to concentrations of credit risk on accounts receivable and financial instruments such as hedging instruments and cash and cash equivalents. Credit risk includes the risk of nonperformance by counterparties. The maximum potential loss may exceed the amount recognized on the Condensed Consolidated Balance Sheets. Exposure to credit risk is managed through credit approvals, credit limits, selecting major international financial institutions (as counterparties to hedging transactions) and monitoring procedures. NCR’s business often involves large transactions with customers, and if one or more of those customers were to default on its obligations under applicable contractual arrangements, the Company could be exposed to potentially significant losses. However, management believes that the reserves for potential losses are adequate. As of September 30, 2012, NCR did not have any major concentration of credit risk related to financial instruments.

12. FAIR VALUE OF ASSETS AND LIABILITIES

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities recorded at fair value on a recurring basis as of September 30, 2012 and December 31, 2011 are set forth as follows:



			Fair Value Measurements at Reporting Date Using
In millions	September 30, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Deposits held in money market funds*	$	232	$	232	$	—	$	—
Available for sale securities**	10		10		—		—
Foreign exchange forward and option contracts ***	6		—		6		—
Total	$	248	$	242	$	6	$	—
Liabilities:
Interest rate swap****	$	17	$	—	$	17	$	—
Foreign exchange forward and option contracts****	6		—		6		—
Total	$	23	$	—	$	23	$	—



			Fair Value Measurements at Reporting Date Using
In millions	December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Deposits held in money market funds*	$	33	$	33	$	—	$	—
Available for sale securities**	10		10		—		—