NCR-2015.6.30-10Q
Table of Contents


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-Q
________________________
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015
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  þ   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  þ    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
þ
 
 
Accelerated filer
o
Non-accelerated filer
o
(Do not check if a smaller reporting company)
 
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o    No  þ
As of July 15, 2015, there were approximately 169.8 million shares of common stock issued and outstanding.
 


Table of Contents


TABLE OF CONTENTS
 
PART I. Financial Information
 
 
 
 
 
Description
Page
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
PART II. Other Information
 
 
 
 
 
Description
Page
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 



2
Table of Contents

Part I. Financial Information
 
Item 1.
FINANCIAL STATEMENTS

NCR Corporation
Condensed Consolidated Statements of Operations (Unaudited)
 
In millions, except per share amounts
Three months ended June 30
 
Six months ended June 30
2015
 
2014
 
2015
 
2014
Product revenue
$
703

 
$
722

 
$
1,307

 
$
1,356

Service revenue
901

 
936

 
1,773

 
1,820

Total revenue
1,604

 
1,658

 
3,080

 
3,176

Cost of products
544

 
531

 
1,027

 
1,007

Cost of services
914

 
647

 
1,517

 
1,273

Selling, general and administrative expenses
339

 
247

 
564

 
492

Research and development expenses
67

 
64

 
122

 
127

Restructuring-related charges
6

 
—

 
21

 
—

Total operating expenses
1,870

 
1,489

 
3,251

 
2,899

(Loss) income from operations
(266
)
 
169

 
(171
)
 
277

Interest expense
(45
)
 
(46
)
 
(89
)
 
(89
)
Other (expense), net
—

 
(3
)
 
(7
)
 
(10
)
(Loss) income from continuing operations before income taxes
(311
)
 
120

 
(267
)
 
178

Income tax expense
32

 
29

 
34

 
33

(Loss) income from continuing operations
(343
)
 
91

 
(301
)
 
145

Income from discontinued operations, net of tax
—

 
—

 
—

 
—

Net (loss) income
(343
)
 
91

 
(301
)
 
145

Net income attributable to noncontrolling interests
1

 
1

 
3

 
2

Net (loss) income attributable to NCR
$
(344
)
 
$
90

 
$
(304
)
 
$
143

Amounts attributable to NCR common stockholders:
 
 
 
 

 

(Loss) income from continuing operations
$
(344
)
 
$
90

 
$
(304
)
 
$
143

Income from discontinued operations, net of tax
—

 
—

 
—

 
—

Net (loss) income
$
(344
)
 
$
90

 
$
(304
)
 
$
143

(Loss) income per share attributable to NCR common stockholders:
 
 
 
 
 
 
 
(Loss) income per common share from continuing operations
 
 
 
 
 
 
 
Basic
$
(2.03
)
 
$
0.54

 
$
(1.80
)
 
$
0.85

Diluted
$
(2.03
)
 
$
0.53

 
$
(1.80
)
 
$
0.84

Net (loss) income per common share
 
 
 
 

 

Basic
$
(2.03
)
 
$
0.54

 
$
(1.80
)
 
$
0.85

Diluted
$
(2.03
)
 
$
0.53

 
$
(1.80
)
 
$
0.84

Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
169.6

 
167.9

 
169.3

 
167.5

Diluted
169.6

 
170.9

 
169.3

 
171.0

See Notes to Condensed Consolidated Financial Statements.

3
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NCR Corporation
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 

In millions
Three months ended June 30
 
Six months ended June 30
2015
 
2014
 
2015
 
2014
Net (loss) income
$
(343
)
 
$
91

 
$
(301
)
 
$
145

Other comprehensive income (loss):
 
 
 
 
 
 
 
Currency translation adjustments
 
 
 
 
 
 
 
Currency translation adjustments
26

 
23

 
(2
)
 
30

Derivatives
 
 
 
 
 
 
 
Unrealized gain (loss) on derivatives
(2
)
 
(1
)
 
7

 
(2
)
   (Gains) losses on derivatives arising during the period
(1
)
 
2

 
(2
)
 
3

        Less income tax benefit (expense)
1

 
(1
)
 
(1
)
 
(1
)
Employee benefit plans
 
 
 
 
 
 
 
   Amortization of prior service benefit
(5
)
 
(5
)
 
(11
)
 
(11
)
   Amortization of actuarial loss
—

 
—

 
1

 
1

        Less income tax benefit
2

 
2

 
4

 
4

Other comprehensive (loss) income
21

 
20

 
(4
)
 
24

Total comprehensive (loss) income
(322
)
 
111

 
(305
)
 
169

Less comprehensive income attributable to noncontrolling interests:
 
 
 
 
 
 
 
   Net income
1

 
1

 
3

 
2

   Currency translation adjustments
—

 
1

 
(3
)
 
—

Amounts attributable to noncontrolling interests
1

 
2

 
—

 
2

Comprehensive (loss) income attributable to NCR common stockholders
$
(323
)
 
$
109

 
$
(305
)
 
$
167


See Notes to Condensed Consolidated Financial Statements.

4
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NCR Corporation
Condensed Consolidated Balance Sheets (Unaudited)
In millions, except per share amounts
June 30, 2015
 
December 31, 2014
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
425

 
$
511

Accounts receivable, net
1,425

 
1,404

Inventories
709

 
669

Other current assets
481

 
504

Total current assets
3,040

 
3,088

Property, plant and equipment, net
348

 
396

Goodwill
2,758

 
2,760

Intangibles, net
863

 
926

Prepaid pension cost
137

 
551

Deferred income taxes
375

 
349

Other assets
545

 
537

Total assets
$
8,066

 
$
8,607

Liabilities and stockholders’ equity
 
 
 
Current liabilities
 
 
 
Short-term borrowings
$
59

 
$
187

Accounts payable
695

 
712

Payroll and benefits liabilities
178

 
196

Deferred service revenue and customer deposits
567

 
494

Other current liabilities
411

 
481

Total current liabilities
1,910

 
2,070

Long-term debt
3,415

 
3,472

Pension and indemnity plan liabilities
686

 
705

Postretirement and postemployment benefits liabilities
177

 
170

Income tax accruals
181

 
181

Other liabilities
83

 
111

Total liabilities
6,452

 
6,709

Commitments and Contingencies (Note 9)

 

Redeemable noncontrolling interest
16

 
15

Stockholders’ equity
 
 
 
NCR stockholders’ equity
 
 
 
Preferred stock: par value $0.01 per share, 100.0 shares authorized, no shares issued and outstanding as of June 30, 2015 and December 31, 2014
—

 
—

Common stock: par value $0.01 per share, 500.0 shares authorized, 169.7 and 168.6 shares issued and outstanding as of June 30, 2015 and December 31, 2014, respectively
2

 
2

Paid-in capital
470

 
442

Retained earnings
1,259

 
1,563

Accumulated other comprehensive loss
(137)

 
(136)

Total NCR stockholders’ equity
1,594

 
1,871

Noncontrolling interests in subsidiaries
4

 
12

Total stockholders’ equity
1,598

 
1,883

Total liabilities and stockholders’ equity
$
8,066

 
$
8,607

See Notes to Condensed Consolidated Financial Statements.

5
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NCR Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
In millions
Six months ended June 30
2015
 
2014
Operating activities
 
 
 
Net (loss) income
$
(301
)
 
$
145

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Loss from discontinued operations
—

 
—

Depreciation and amortization
152

 
142

Stock-based compensation expense
20

 
19

Deferred income taxes
15

 
10

Gain on sale of property, plant and equipment and other assets
(1
)
 
(2
)
Impairment of long-lived and other assets
16

 
—

Changes in assets and liabilities:
 
 
 
Receivables
(51
)
 
(88
)
Inventories
(54
)
 
(27
)
Current payables and accrued expenses
(25
)
 
2

Deferred service revenue and customer deposits
89

 
35

Employee benefit plans
386

 
(59
)
Other assets and liabilities
—

 
(66
)
Net cash provided by operating activities
246

 
111

Investing activities
 
 
 
Expenditures for property, plant and equipment
(31
)
 
(66
)
Additions to capitalized software
(79
)
 
(73
)
Business acquisitions, net
—

 
(1,642
)
Changes in restricted cash
—

 
1,114

Other investing activities, net
(3
)
 
4

Net cash used in investing activities
(113
)
 
(663
)
Financing activities
 
 
 
Tax withholding payments on behalf of employees
(10
)
 
(24
)
Short term borrowings, net
28

 
9

Payments on term credit facilities
(116
)
 
(3
)
Borrowings on term credit facility
—

 
250

Payments on revolving credit facilities
(608
)
 
(255
)
Borrowings on revolving credit facilities
512

 
570

Debt issuance costs
—

 
(3
)
Proceeds from employee stock plans
11

 
7

Other financing activities
—

 
(3
)
Net cash (used in) provided by financing activities
(183
)
 
548

Cash flows from discontinued operations
 
 
 
Net cash used in operating activities
(17
)
 
(38
)
Effect of exchange rate changes on cash and cash equivalents
(19
)
 
(3
)
Decrease in cash and cash equivalents
(86
)
 
(45
)
Cash and cash equivalents at beginning of period
511

 
528

Cash and cash equivalents at end of period
$
425

 
$
483

See Notes to Condensed Consolidated Financial Statements.

6
Table of Contents

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 2014 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, 2014.

Use of Estimates The preparation of financial statements in accordance with GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and revenue and expenses during the period reported. Actual results could differ from those estimates.

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., (NCR Manaus) 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 $4 million and $22 million during the three and six months ended June 30, 2015, respectively, as compared to $14 million and $32 million during the three and six months ended June 30, 2014, respectively. As of June 30, 2015 and December 31, 2014, we had zero and $15 million, respectively, in receivables outstanding from Bradesco.

Recent Accounting Pronouncements

Adopted

In April 2014, the Financial Accounting Standards Board (FASB) issued changes to the criteria for determining which disposals are required to be presented as discontinued operations. The changes require a disposal of a component of an entity or a group of components of an entity to be reported in discontinued operations if the disposal represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results when any of the following occurs: (i) the component of an entity or group of components of an entity meets the criteria to be classified as held for sale, (ii) the component of an entity or group or components of an entity is disposed of by sale, or (iii) the component of an entity or group of components of an entity is disposed of other than by sale. The amendments apply on a prospective basis to disposals of components of an entity that occur within annual periods beginning on or after December 15, 2014 and interim periods within those years, with early adoption permitted. The implementation of the amended accounting guidance on January 1, 2015 did not have an impact on our consolidated financial statements.

Issued

In May 2014, the FASB issued a new revenue recognition standard, superseding previous revenue recognition guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard will be effective for the first interim period within annual periods beginning after December 15, 2017, with early adoption permitted for annual periods beginning after December 15, 2016, and can be adopted either retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the date of adoption. The Company is evaluating the impact that adopting this guidance will have on its consolidated financial statements.

7
Table of Contents
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

In August 2014, the FASB issued new guidance related to disclosures relating to going concern, including management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related disclosures when conditions or events raise substantial doubt about an entity's ability to continue as a going concern. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. The impact of adopting this guidance on January 1, 2017 is not expected to have a material impact on our consolidated financial statements.

In April 2015, the FASB issued new guidance related to the presentation of debt issuance costs, which amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability, consistent with debt discounts, instead of a deferred charge asset. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. The Company is evaluating the impact the adoption of this standard will have on its consolidated financial statements.

In April 2015, the FASB issued new guidance related to accounting for the fees paid in a cloud computing arrangement, which provides guidance to customers about whether a cloud computing arrangement includes a software license. If considered a software license, the arrangement should be accounted for as an acquisition of a software license. If not considered a software license, the arrangement should be accounted for as a service contract. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. The impact of adopting this guidance on January 1, 2016 is not expected to have a material impact on our consolidated financial statements.

In July 2015, the FASB issued new guidance on simplifying the measurement of inventory. Inventory within the scope of this update is required to be measured at the lower of its cost or net realizable value, with net realizable value being the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The standards update is effective prospectively for fiscal years and interim periods beginning after December 15, 2016, with early adoption permitted. The Company is evaluating the impact the adoption of this standard will have on its consolidated financial statements.

2. RESTRUCTURING PLAN

In July 2014, we announced a restructuring plan to strategically reallocate resources so that we can focus on our higher-growth, higher-margin opportunities in the software-driven consumer transaction technologies industry. The program is centered on ensuring that our people and processes are aligned with our continued transformation and includes: rationalizing our product portfolio to eliminate overlap and redundancy; taking steps to end-of-life older commodity product lines that are costly to maintain and provide low margins; moving lower productivity services positions to our new centers of excellence due to the positive impact of services innovation; and reducing layers of management and organizing around divisions to improve decision-making, accountability and strategic execution.

As a result of the restructuring plan, the Company recorded a total charge of $8 million and $24 million in the three and six months ended June 30, 2015, respectively. The Company expects to achieve annualized run-rate savings of approximately $105 million beginning in 2016. The Company expects that it may identify additional restructuring-related opportunities in connection with this restructuring plan, and may incur additional charges through 2015 related to such additional opportunities. Such additional charges are not reasonably estimable at this time as the Company is in the process of defining the nature and scope of these additional opportunities and quantifying the impact thereof.

Severance and other employee related costs The Company made $19 million and $6 million in severance-related payments under ASC 712 and ASC 420, respectively, related to the restructuring plan in the six months ended June 30, 2015.

Inventory-related charges In the three and six months ended June 30, 2015, the Company recorded $2 million and $3 million, respectively, of inventory-related charges for rationalizing its product portfolio to eliminate overlap and redundancy and to end-of-life older commodity product lines that are costly to maintain and provide low margins.

Asset-related charges In the three months ended June 30, 2015, the Company recorded a $2 million charge for the write-off of certain external use capitalized software for projects that have been abandoned. In the six months ended June 30, 2015, the Company recorded $16 million for asset-related charges, which includes the write-off of certain external use capitalized software for projects that have been abandoned as well as an impairment of long-lived assets that are no longer considered strategic and were held for sale. As of June 30, 2015, the carrying amount of the long-lived assets classified as held for sale was $17 million. The Company utilized Level 3 inputs, as defined in the fair value hierarchy, to measure the fair value.

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


Other exit costs In the three and six months ended June 30, 2015, the Company recorded and paid $4 million and $5 million, respectively, for lease and other contract termination costs.

The results by segment, as disclosed in Note 13, "Segment Information and Concentrations," exclude the impact of these costs, which is consistent with the manner by which management assesses the performance and evaluates the results of each segment. The following table summarizes the total liabilities relating to the restructuring plan, which are included on the Condensed Consolidated Balance Sheet in other current liabilities.
In millions
2015
Employee Severance and Other Exit Costs
 
Beginning balance as of January 1
$60
Cost recognized during the period
5
Utilization
(30)
Foreign currency translation adjustments
(2)
Ending balance as of June 30
$33

3. SUPPLEMENTAL FINANCIAL INFORMATION
The components of accounts receivable are summarized as follows:
In millions
June 30, 2015
 
December 31, 2014
Accounts receivable
 
 
 
Trade
$1,412
 
$1,382
Other
34
 
41
Accounts receivable, gross
1,446
 
1,423
Less: allowance for doubtful accounts
(21)
 
(19)
Total accounts receivable, net
$1,425
 
$1,404
The components of inventory are summarized as follows:
In millions
June 30, 2015
 
December 31, 2014
Inventories
 
 
 
Work in process and raw materials
$147
 
$132
Finished goods
184
 
148
Service parts
378
 
389
Total inventories
$709
 
$669
The components of other current assets are summarized as follows:
In millions
June 30, 2015
 
December 31, 2014
Other current assets
 
 
 
Current deferred tax assets
$215
 
$264
Other
266
 
240
Total other current assets
$481
 
$504



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

4. GOODWILL AND PURCHASED INTANGIBLE ASSETS

Goodwill

The carrying amounts of goodwill by segment as of June 30, 2015 and December 31, 2014 are included in the table below. Foreign currency fluctuations are included within other adjustments.

 
December 31, 2014
 
 
 
 
 
 
 
June 30, 2015
In millions
Goodwill
 
Accumulated Impairment Losses
 
Total
 
Additions
 
Impairment
 
Other
 
Goodwill
 
Accumulated Impairment Losses
 
Total
Financial Services
$
1,493

 
$
—

 
$
1,493

 
$
—

 
$
—

 
$
1

 
$
1,494

 
$
—

 
$
1,494

Retail Solutions
581

 
(7
)
 
574

 
—

 
—

 
—

 
581

 
(7
)
 
574

Hospitality
669

 
—

 
669

 
2

 
—

 
(5
)
 
666

 
—

 
666

Emerging Industries
24

 
—

 
24

 
—

 
—

 
—

 
24

 
—

 
24

Total goodwill
$
2,767

 
$
(7
)
 
$
2,760

 
$
2

 
$
—

 
$
(4
)
 
$
2,765

 
$
(7
)
 
$
2,758


Purchased Intangible Assets

NCR’s purchased intangible assets, reported in intangibles, net in the Condensed Consolidated Balance Sheets, were specifically identified when acquired, and are deemed to have finite lives. The gross carrying amount and accumulated amortization for NCR’s identifiable intangible assets were as set forth in the table below.
 
Amortization
Period
(in Years)
 
June 30, 2015
 
December 31, 2014
In millions
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
Identifiable intangible assets
 
 
 
 
 
 
 
 
 
Reseller & customer relationships
1 - 20
 
$
660

 
$
(77
)
 
$
660

 
$
(63
)
Intellectual property
2 - 8
 
393

 
(213
)
 
393

 
(181
)
Customer contracts
8
 
89

 
(34
)
 
89

 
(22
)
Tradenames
2 - 10
 
74

 
(29
)
 
74

 
(24
)
Non-compete arrangements
2 - 5
 
8

 
(8
)
 
8

 
(8
)
Total identifiable intangible assets
 
 
$
1,224

 
$
(361
)
 
$
1,224

 
$
(298
)

The aggregate amortization expense (actual and estimated) for identifiable intangible assets for the following periods is:
In millions
Three months ended June 30, 2015
 
Six months ended June 30, 2015
 
Remainder of 2015 (estimated)
Amortization expense
$
31

 
$
63

 
$
64


 
 
For the years ended December 31 (estimated)
In millions
 
2016
 
2017
 
2018
 
2019
 
2020
Amortization expense
 
$
125

 
$
116

 
$
85

 
$
75

 
$
57




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

5. DEBT OBLIGATIONS

The following table summarizes the Company's short-term borrowings and long-term debt:
 
June 30, 2015
 
December 31, 2014
In millions, except percentages
Amount
 
Weighted-Average Interest Rate
 
Amount
 
Weighted-Average Interest Rate
Short-Term Borrowings
 
 
 
 
 
 
 
Current portion of Senior Secured Credit Facility (1)
$
26

 
2.95%
 
$
85

 
2.91%
Trade Receivables Securitization Facility
—

 

 
96

 
0.83%
Other (2)
33

 
7.00%
 
6

 
7.31%
 
Total short-term borrowings
$
59

 
 
 
$
187

 
 
Long-Term Debt
 
 
 
 
 
 
 
Senior Secured Credit Facility:
 
 
 
 
 
 
 
 
Term loan facility due 2018 (1)
$
1,194

 
2.95%
 
$
1,246

 
2.91%
 
Revolving credit facility due 2018 (1)
—

 

 
—

 

Senior notes:


 
 
 
 
 
 
 
5.00% Senior Notes due 2022
600

 
 
 
600

 
 
 
4.625% Senior Notes due 2021
500

 
 
 
500

 
 
 
5.875% Senior Notes due 2021
400

 
 
 
400

 
 
 
6.375% Senior Notes due 2023
700

 
 
 
700

 
 
Other (2)
21

 
7.20%
 
26

 
7.23%
 
Total long-term debt
$
3,415

 
 
 
$
3,472

 
 
(1) 
Interest rates are weighted average interest rates as of June 30, 2015 and December 31, 2014 related to the Senior Secured Credit Facility, which incorporate the impact of the interest rate swap agreement described in Note 11, "Derivatives and Hedging Instruments."
(2) 
Interest rates are weighted average interest rates as of June 30, 2015 and December 31, 2014 and are primarily related to various international credit facilities and a note payable in the U.S.

Senior Secured Credit Facility  The Company is party to a senior secured credit facility with JPMorgan Chase Bank, NA (JPMCB), as administrative agent, and a syndicate of lenders (as amended, the Senior Secured Credit Facility). As of June 30, 2015, the Senior Secured Credit Facility consisted of a term loan facility in an aggregate principal amount of $1.35 billion, and a revolving credit facility in an aggregate principal amount of $850 million. The revolving credit facility also allows a portion of the availability to be used for outstanding letters of credit, and as of June 30, 2015, there were no outstanding letters of credit.

The outstanding principal balance of the term loan facility is required to be repaid in equal quarterly installments in annual amounts. As a result of prepayments during the quarter, the repayment schedule now requires quarterly installments of approximately $26 million beginning June 30, 2016 and approximately $34 million beginning September 30, 2016, with the balance being due at maturity on July 25, 2018. Borrowings under the revolving portion of the credit facility are due July 25, 2018. Amounts outstanding under the Senior Secured Credit Facility bear interest, at the Company's option, at a base rate equal to the highest of (i) the federal funds rate plus 0.50%, (ii) the administrative agent's “prime rate” and (iii) the one-month LIBOR rate plus 1.00% (the Base Rate) or LIBOR, plus a margin ranging from 0.25% to 1.25% for Base Rate-based loans that are either term loans or revolving loans and ranging from 1.25% to 2.25% for LIBOR-based loans that are either term loans or revolving loans, depending on the Company's consolidated leverage ratio. The terms of the Senior Secured Credit Facility also require certain other fees and payments to be made by the Company, including a commitment fee on the undrawn portion of the revolving credit facility.

The Company's obligations under the Senior Secured Credit Facility are guaranteed by certain of its wholly-owned domestic subsidiaries. The Senior Secured Credit Facility and these guarantees are secured by a first priority lien and security interest in certain equity interests owned by the Company and the guarantor subsidiaries in certain of their respective domestic and foreign subsidiaries, and a perfected first priority lien and security interest in substantially all of the Company's U.S. assets and the assets of the guarantor subsidiaries, subject to certain exclusions. These security interests would be released if the Company achieves an “investment grade” rating, and will remain released so long as the Company maintains that rating.

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

The Senior Secured Credit Facility includes affirmative and negative covenants that restrict or limit the ability of the Company and its subsidiaries to, among other things, incur indebtedness; create liens on assets; engage in certain fundamental corporate changes or changes to the Company's business activities; make investments; sell or otherwise dispose of assets; engage in sale-leaseback or hedging transactions; repurchase stock, pay dividends or make similar distributions; repay other indebtedness; engage in certain affiliate transactions; or enter into agreements that restrict the Company's ability to create liens, pay dividends or make loan repayments. The Senior Secured Credit Facility also includes financial covenants that require the Company to maintain:
•
a consolidated leverage ratio on the last day of any fiscal quarter, not to exceed (i) in the case of any fiscal quarter ending after December 31, 2014 and on or prior to December 31, 2016, (a) the sum of (x) 4.25 and (y) an amount (not to exceed 0.50) to reflect new debt used to reduce NCR's underfunded pension liabilities, to (b) 1.00, (ii) in the case of any fiscal quarter ending after December 31, 2016 and on or prior to December 31, 2017, 4.00 to 1.00, and (iii) in the case of any fiscal quarter ending after December 31, 2017, 3.75 to 1.00; and
•
an interest coverage ratio on the last day of any fiscal quarter greater than or equal to 3.50 to 1.00.

At June 30, 2015, the maximum consolidated leverage ratio under the Senior Secured Credit Facility was 4.35 to 1.00.

The Senior Secured Credit Facility also contains events of default, which are customary for similar financings. Upon the occurrence of an event of default, the lenders may, among other things, terminate the loan commitments, accelerate all loans and require cash collateral deposits in respect of outstanding letters of credit. If the Company is unable to pay or repay the amounts due, the lenders could, among other things, proceed against the collateral granted to them to secure such indebtedness.

The Company may request, at any time and from time to time, but the lenders are not obligated to fund, the establishment of one or more incremental term loans and/or revolving credit facilities (subject to the agreement of existing lenders or additional financial institutions to provide such term loans and/or revolving credit facilities) with commitments in an aggregate amount not to exceed the greater of (i) $150 million, and (ii) such amount as would not (a) prior to the date that the Company obtains an investment grade rating cause the leverage ratio under the Senior Secured Credit Facility, calculated on a pro forma basis including the incremental facility and assuming that it and the revolver are fully drawn, to exceed 2.50 to 1.00, and (b) on and after the date that the Company obtains an investment grade rating cause the leverage ratio under the Senior Secured Credit Facility, calculated on a pro forma basis including the incremental facility and assuming that it and the revolver are fully drawn, to exceed a ratio that is 0.50 less than the leverage ratio then applicable under the financial covenants of the Senior Secured Credit Facility, the proceeds of which can be used for working capital requirements and other general corporate purposes.

Senior Unsecured Notes On September 17, 2012, the Company issued $600 million aggregate principal amount of 5.00% senior unsecured notes due in 2022 (the 5.00% Notes). The 5.00% Notes were sold at 100% of the principal amount and will mature on July 15, 2022. On December 18, 2012, the Company issued $500 million aggregate principal amount of 4.625% senior unsecured notes due in 2021 (the 4.625% Notes). The 4.625% Notes were sold at 100% of the principal amount and will mature on February 15, 2021. On December 19, 2013, the Company issued $400 million aggregate principal amount of 5.875% senior unsecured notes due in 2021 (the 5.875% Notes) and $700 million aggregate principal amount of 6.375% senior unsecured notes due in 2023 (the 6.375% Notes). The 5.875% Notes were sold at 100% of the principal amount and will mature on December 15, 2021 and the 6.375% Notes were sold at 100% of the principal amount and will mature on December 15, 2023. The senior unsecured notes are guaranteed, fully and unconditionally, on an unsecured senior basis, by our subsidiary, NCR International, Inc.

The Company has the option to redeem the 5.00% Notes, in whole or in part, at any time on or after July 15, 2017, at a redemption price of 102.5%, 101.667%, 100.833% and 100% during the 12-month periods commencing on July 15, 2017, 2018, 2019 and 2020 and thereafter, respectively, plus accrued and unpaid interest to the redemption date. Prior to July 15, 2017, the Company may redeem the 5.00% Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a make-whole premium and accrued and unpaid interest to the redemption date.

The Company has the option to redeem the 4.625% Notes, in whole or in part, at any time on or after February 15, 2017, at a redemption price of 102.313%, 101.156% and 100% during the 12-month periods commencing on February 15, 2017, 2018 and 2019 and thereafter, respectively, plus accrued and unpaid interest to the redemption date. Prior to February 15, 2017, the Company may redeem the 4.625% Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a make-whole premium and accrued and unpaid interest to the redemption date. Prior to February 15, 2016, the Company may redeem the 4.625% Notes in an aggregate principal amount not to exceed 35% of the aggregate principal amount of the notes originally issued at a redemption price of 104.625% plus accrued and unpaid interest to the redemption date, with the net cash proceeds from one or more qualified equity offerings under certain further requirements.


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

The Company has the option to redeem the 5.875% Notes, in whole or in part, at any time on or after December 15, 2017, at a redemption price of 102.938%, 101.469% and 100% during the 12-month periods commencing on December 15, 2017, 2018 and 2019 and thereafter, respectively, plus accrued and unpaid interest to the redemption date. Prior to December 15, 2017, the Company may redeem the 5.875% Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a make-whole premium and accrued and unpaid interest to the redemption date. Prior to December 15, 2016, the Company may redeem the 5.875% Notes in an aggregate principal amount not to exceed 35% of the aggregate principal amount of the notes originally issued at a redemption price of 105.875% plus accrued and unpaid interest to the redemption date, with the net cash proceeds from one or more qualified equity offerings under certain further requirements.

The Company has the option to redeem the 6.375% Notes, in whole or in part, at any time on or after December 15, 2018, at a redemption price of 103.188%, 102.125%, 101.063% and 100% during the 12-month periods commencing on December 15, 2018, 2019, 2020 and 2021 and thereafter, respectively, plus accrued and unpaid interest to the redemption date. Prior to December 15, 2018, the Company may redeem the 6.375% Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a make-whole premium and accrued and unpaid interest to the redemption date. Prior to December 15, 2016, the Company may redeem the 6.375% Notes in an aggregate principal amount not to exceed 35% of the aggregate principal amount of the notes originally issued at a redemption price of 106.375% plus accrued and unpaid interest to the redemption date, with the net cash proceeds from one or more qualified equity offerings under certain further requirements.

The terms of the indentures for these notes limit the ability of the Company and certain of its subsidiaries to, among other things, incur additional debt or issue redeemable preferred stock; pay dividends or make certain other restricted payments or investments; incur liens; sell assets; incur restrictions on the ability of the Company's subsidiaries to pay dividends to the Company; enter into affiliate transactions; engage in sale and leaseback transactions; and consolidate, merge, sell or otherwise dispose of all or substantially all of the Company's or such subsidiaries' assets. These covenants are subject to significant exceptions and qualifications. For example, if these notes are assigned an investment grade rating by Moody's or S&P and no default has occurred or is continuing, certain covenants will be terminated.

Trade Receivables Securitization Facility In November 2014, the Company established a two-year revolving trade receivables securitization facility (the A/R Facility) with PNC Bank, National Association (PNC) as the administrative agent, and various lenders.  The A/R Facility provides for up to $200 million in funding based on the availability of eligible receivables and other customary factors and conditions. 

Under the A/R Facility, NCR sells and/or contributes certain of its U.S. trade receivables to a wholly-owned, bankruptcy-remote subsidiary as they are originated, and advances by the lenders to that subsidiary are secured by those trade receivables.  The assets of this financing subsidiary are restricted as collateral for the payment of its obligations under the A/R Facility, and its assets and credit are not available to satisfy the debts and obligations owed to the creditors of the Company. The Company includes the assets, liabilities and results of operations of this financing subsidiary in its consolidated financial statements. The financing subsidiary owned $433 million and $373 million of outstanding accounts receivable as of June 30, 2015 and December 31, 2014, respectively, and these amounts are included in accounts receivable, net in the Company’s Condensed Consolidated Balance Sheets.

The financing subsidiary will pay annual commitment and other customary fees to the lenders, and advances by a lender under the A/R Facility will accrue interest (i) at a reserve-adjusted LIBOR rate or a base rate equal to the highest of (a) the applicable lender’s prime rate or (b) the federal funds rate plus 0.50%, if the lender is a committed lender, or (ii) based on commercial paper interest rates if the lender is a commercial paper conduit lender.  Advances may be prepaid at any time without premium or penalty.

The A/R Facility contains various customary affirmative and negative covenants and default and termination provisions which provide for the acceleration of the advances under the A/R Facility in circumstances including, but not limited to, failure to pay interest or principal when due, breach of representation, warranty or covenant, certain insolvency events or failure to maintain the security interest in the trade receivables, and defaults under other material indebtedness.

Fair Value of Debt The Company utilized Level 2 inputs, as defined in the fair value hierarchy, to measure the fair value of the long-term debt, which, as of June 30, 2015 and December 31, 2014 was $3.52 billion and $3.67 billion, respectively. Management's fair value estimates were based on quoted prices for recent trades of NCR’s long-term debt, quoted prices for similar instruments, and inquiries with certain investment communities.


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

6. INCOME TAXES

Income tax provisions for interim (quarterly) periods are based on an estimated annual effective income tax rate calculated separately from the effect of significant, infrequent or unusual items. Income tax expense was $32 million for the three months ended June 30, 2015 compared to $29 million for the three months ended June 30, 2014. The increase in income tax expense was primarily driven by an unfavorable mix in earnings in continuing operations. Income tax expense was $34 million for the six months ended June 30, 2015 compared to $33 million for the six months ended June 30, 2014. The increase in income tax expense was primarily driven by a reduction in discrete benefits in the six months ended June 30, 2015, partially offset by the decrease in earnings. During the three and six months ended June 30, 2015, there was no tax benefit recorded on the $427 million charge related to the settlement of the UK London pension plan due to a valuation allowance against deferred tax assets in the United Kingdom. Refer to Note 8, “Employee Benefit Plans.” for additional discussion on the settlement of the UK London pension plan.

7. STOCK COMPENSATION PLANS

As of June 30, 2015, the Company’s primary types of stock-based compensation were restricted stock and stock options. Stock-based compensation expense for the following periods was:
In millions
Three months ended June 30
 
Six months ended June 30
2015
 
2014
 
2015
 
2014
Restricted stock expense
$11
 
$9
 
$20
 
$19
Tax benefit
(3)
 
(2)
 
(6)
 
(6)
Total stock-based compensation (net of tax)
$8
 
$7
 
$14
 
$13

Stock-based compensation expense is recognized in the financial statements based upon fair value. During the three and six months ended June 30, 2015 and 2014, the Company did not grant any stock options. As of June 30, 2015, the total unrecognized compensation cost of $102 million related to unvested restricted stock grants is expected to be recognized over a weighted average period of approximately 1.3 years.

8. EMPLOYEE BENEFIT PLANS

Components of net periodic benefit cost (income) for the three months ended June 30 were as follows:
In millions
U.S. Pension Benefits
 
International Pension Benefits
 
Total Pension Benefits
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Net service cost
$—
 
$—
 
$3
 
$3
 
$3
 
$3
Interest cost
22
 
34
 
12
 
20
 
34
 
54
Expected return on plan assets
(18)
 
(29)
 
(17)
 
(26)
 
(35)
 
(55)
Curtailment
—
 
—
 
(3)
 
—
 
(3)
 
—
Settlement
—
 
—
 
427
 
—
 
427
 
—
Net periodic benefit cost (income)
$4
 
$5
 
$422
 
$(3)
 
$426
 
$2


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

Components of net periodic benefit cost (income) for the six months ended June 30 were as follows:
In millions
U.S. Pension Benefits
 
International Pension Benefits
 
Total Pension Benefits
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Net service cost
$—
 
$—
 
$6
 
$6
 
$6
 
$6
Interest cost
44
 
66
 
27
 
41
 
71
 
107
Expected return on plan assets
(36)
 
(59)
 
(39)
 
(52)
 
(75)
 
(111)
Amortization of prior service cost
—
 
—
 
—
 
1
 
—
 
1
Curtailment
—
 
—
 
(3)
 
—
 
(3)
 
—
Settlement
—
 
—
 
427
 
(2)
 
427
 
(2)
Net periodic benefit cost (income)
$8
 
$7
 
$418
 
$(6)
 
$426
 
$1

During the second quarter of 2015, the Company completed the transfer of the UK London pension plan to an insurer. As a result of the transfer, the Company recorded a settlement loss of $427 million in the three and six months ended June 30, 2015 in the Condensed Consolidated Statement of Operations as well as an offsetting decrease to prepaid pension costs in the Condensed Consolidated Balance Sheet as of June 30, 2015.

The benefit from the postretirement plan for the three and six months ended June 30 was:
 
Three months ended June 30
 
Six months ended June 30
In millions
2015
 
2014
 
2015
 
2014
Amortization of:
 
 
 
 
 
 
 
   Prior service benefit
(4)
 
(4)
 
(9)
 
(9)
   Actuarial loss
—
 
—
 
1
 
1
Net postretirement benefit
$(4)
 
$(4)
 
$(8)
 
$(8)

The cost of the postemployment plan for the three and six months ended June 30 was:
 
Three months ended June 30
 
Six months ended June 30
In millions
2015
 
2014
 
2015
 
2014
Net service cost
$4
 
$3
 
$8
 
$7
Interest cost
1
 
2
 
2
 
4
Amortization of prior service benefit
(1)
 
(1)
 
(2)
 
(2)
Net benefit cost
$4
 
$4
 
$8
 
$9
Restructuring severance cost
(3)
 
—
 
(5)
 
—
Total postemployment cost
$1
 
$4
 
$3
 
$9

Employer Contributions

Pension For the three and six months ended June 30, 2015, NCR contributed approximately $7 million and $14 million, respectively, to its international pension plans. In 2015, NCR anticipates contributing an additional $21 million to its international pension plans for a total of $35 million. NCR may make one or more additional discretionary contributions over the next twelve months, but no such contributions are currently scheduled.

Postretirement For the three and six months ended June 30, 2015, NCR contributed zero and $1 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 $4 million in 2015.

Postemployment For the three and six months ended June 30, 2015, NCR contributed approximately $9 million and $20 million, respectively, to its postemployment plans. NCR anticipates contributing an additional $60 million to its postemployment plans for a total of $80 million in 2015, which includes planned contributions associated with the previously announced restructuring plan. See Note 2, "Restructuring Plan," for additional information.


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

9. COMMITMENTS AND CONTINGENCIES

In the normal course of business, NCR is subject to various proceedings, lawsuits, claims and other matters, including, for example, those that relate to the environment and health and safety, labor and employment, employee benefits, import/export compliance, intellectual property, data privacy and security, product liability, commercial disputes and regulatory compliance, among others. Additionally, NCR is subject to diverse and complex laws and regulations, including those relating to corporate governance, public disclosure and reporting, environmental safety and the discharge of materials into the environment, product safety, import and export compliance, data privacy and security, antitrust and competition, government contracting, anti-corruption, and labor and human resources, which are rapidly changing and subject to many possible changes in the future. Compliance with these laws and regulations, including changes in accounting standards, taxation requirements, and federal securities laws among others, may create a substantial burden on, and substantially increase costs to NCR or could have an impact on NCR's future operating results. NCR believes the amounts provided in its Condensed Consolidated Financial Statements, as prescribed by GAAP, are currently adequate in light of the probable and estimable liabilities with respect to such matters, but there can be no assurances that the amounts required to satisfy alleged liabilities from such matters will not impact future operating results. Other than as stated below, the Company does not currently expect to incur material capital expenditures related to such matters. However, there can be no assurances that the actual amounts required to satisfy alleged liabilities from various lawsuits, claims, legal proceedings and other matters, including, but not limited to the Fox River and Kalamazoo River environmental matters and other matters discussed below, and to comply with applicable laws and regulations, will not exceed the amounts reflected in NCR’s Condensed Consolidated Financial Statements or will not have a material adverse effect on its consolidated results of operations, capital expenditures, competitive position, financial condition or cash flows. Any costs that may be incurred in excess of those amounts provided as of June 30, 2015 cannot currently be reasonably determined, or are not currently considered probable.

In 2012, NCR received anonymous allegations from a purported whistleblower regarding certain aspects of the Company's business practices in China, the Middle East and Africa. The principal allegations received in 2012 related to the Company's compliance with the Foreign Corrupt Practices Act (FCPA) and federal regulations that prohibit U.S. persons from engaging in certain activities in Syria.  NCR promptly retained experienced outside counsel and began an internal investigation of those allegations that was completed in January 2013.  On August 31, 2012, the Board of Directors received a demand letter from an individual shareholder demanding that the Board investigate and take action in connection with certain of the whistleblower allegations. The Board formed a Special Committee to investigate those matters, and that Special Committee also separately retained experienced outside counsel, and completed an investigation in January 2013. On January 23, 2013, upon the recommendation of the Special Committee following its review, the Board of Directors adopted a resolution rejecting the shareholder demand. As part of its resolution, the Board determined, among other things, that the officers and directors named in the demand had not breached their fiduciary duties and that the Company would not commence litigation against the named officers and directors. The Board further resolved to review measures proposed and implemented by management to strengthen the Company's compliance with trade embargos, export control laws and anti-bribery laws. In March 2013, the shareholder who sent the demand filed a derivative action in a Georgia state court, naming as defendants three Company officers, five members of the Board of Directors, and the Company as a nominal defendant. As reported in prior filings, the litigation and associated shareholder demands have been resolved.

With respect to Syria, in 2012 NCR voluntarily notified the U.S. Treasury Department, Office of Foreign Assets Control (OFAC) of potential violations and ceased operations in Syria, which were commercially insignificant. The notification related to confusion stemming from the Company's failure to register in Syria the transfer of the Company's Syrian branch to a foreign subsidiary and to deregister the Company's legacy Syrian branch, which was a branch of NCR Corporation. The Company has applied for and received from OFAC various licenses that have permitted the Company to take measures required to wind down its past operations in Syria. The Company also submitted a detailed report to OFAC regarding this matter, including a description of the Company's comprehensive export control program and related remedial measures.

With respect to the FCPA, the Company made a presentation to the staff of the Securities and Exchange Commission (SEC) and the U.S. Department of Justice (DOJ) providing the facts known to the Company related to the whistleblower's FCPA allegations, and advising the government that many of these allegations were unsubstantiated. The Company responded to subpoenas of the SEC and to requests of the DOJ for documents and information related to the FCPA, including matters related to the whistleblower's FCPA allegations. The Company's investigations of the whistleblower's FCPA allegations identified a few opportunities to strengthen the Company's comprehensive FCPA compliance program, and the Company continues to evaluate and enhance its compliance program as appropriate.

With respect to the DOJ, the Company responded to its most recent requests for documents in 2014. With respect to the SEC, on June 22, 2015, the SEC staff notified the Company that it did not intend to recommend an enforcement action against the Company with respect to these matters.


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

The Company continues to cooperate with the authorities. There can be no assurance that the Company will not be subject to fines or other remedial measures as a result of OFAC's investigation.

In June 2014, one of the Company’s Brazilian subsidiaries, NCR Manaus, was notified of a Brazilian federal tax assessment of R$168 million, or approximately $54 million as of June 30, 2015, including penalties and interest regarding certain federal indirect taxes for 2010 through 2012. The assessment alleges improper importation of certain components into Brazil's free trade zone that would nullify related indirect tax incentives. We have not recorded an accrual for the assessment, as the Company believes it has a valid position regarding indirect taxes in Brazil and, as such, has filed an appeal. However, it is possible that the Company could be required to pay taxes, penalties and interest related to this matter, which could be material to the Company's Condensed Consolidated Financial Statements. As of June 30, 2015, the Company estimated the aggregate risk related to this matter to be zero to approximately $63 million, which includes penalties and interest subsequent to the assessment.

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

Fox River NCR is one of eight entities that were formally notified by governmental and other entities, such as local Native American tribes, that they are PRPs for environmental claims (under CERCLA and other statutes) arising out of the presence of polychlorinated biphenyls (PCBs) in sediments in the lower Fox River and in the Bay of Green Bay in Wisconsin. The other Fox River PRPs that received notices are Appleton Papers Inc. (API; now known as Appvion, Inc.), P.H. Glatfelter Company (“Glatfelter”), Georgia-Pacific Consumer Products LP (GP, successor to Fort James Operating Company), 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. NCR was identified as a PRP because of alleged PCB discharges from two carbonless copy paper manufacturing facilities it previously owned, which were located along the Fox River. NCR sold its facilities in 1978 to API. Some parties contend that NCR is also responsible for PCB discharges from paper mills owned by other companies because NCR carbonless copy paper "broke" was allegedly purchased by those other mills as a raw material.

The United States Environmental Protection Agency (USEPA) and Wisconsin Department of Natural Resources (together, the Governments) developed clean-up plans for the upper and lower parts of the Fox River and for portions of the Bay of Green Bay. On November 13, 2007, the Governments issued a unilateral administrative order (the 2007 Order) under CERCLA to the eight original PRPs, requiring them to perform remedial work under the Governments’ clean-up plan for the lower parts of the river (operable units 2 through 5). In April 2009, NCR and API formed a limited liability company (the LLC), which entered into an agreement with an environmental remediation contractor to perform the work at the Fox River site. In-water dredging and remediation under the clean-up plan commenced shortly thereafter.

NCR and API, along with B.A.T Industries p.l.c. (BAT), share among themselves a portion of the cost of the Fox River clean-up and natural resource damages (NRD) based upon a 1998 agreement (the Cost Sharing Agreement), a 2005 arbitration award (subsequently confirmed as a judgment), and a September 30, 2014 Funding Agreement (the Funding Agreement). The Cost Sharing Agreement and the arbitration resolved disputes that arose out of the Company's 1978 sale of its Fox River facilities to API. The Cost Sharing Agreement and arbitration award resulted in a 45% share for NCR of the first $75 million of such costs (a threshold that was reached in 2008), and a 40% share for amounts in excess of $75 million. The Funding Agreement, arose out of a 2012 to 2014 arbitration dispute between NCR and API, provides for regular, ongoing funding of NCR-incurred Fox River remediation costs via contributions, made to a new limited liability corporation created by the Funding Agreement, by BAT, API and, for 2014, API's indemnitor Windward Prospects. The Funding Agreement creates an obligation on BAT and API to fund 50% of NCR’s Fox River remediation costs from October 1, 2014 forward; the Funding Agreement also provides NCR opportunities to recoup, both indirectly from third parties and directly, the difference between BAT’s and API’s 60% obligation under the Cost Sharing Agreement and arbitration award on the one hand and their 50% payments under the Funding Agreement on the other, as well as the difference between the amount NCR received under the Funding Agreement and the amount owed to it under the Cost Sharing Agreement and arbitration award for the period from April 2012 through the end of September 2014.


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

Various litigation proceedings concerning the Fox River are pending, and, as the result of appellate decisions in September 2014, NCR’s potential liability for the Fox River matter, for purposes of calculating the Company’s Fox River reserve, is no longer considered to be 100% of the remediation costs in the lower parts of the river. In a contribution action filed in 2008 seeking to determine allocable responsibility of several companies and governmental entities, a federal court in Wisconsin had issued rulings in 2009 and 2011 that effectively placed all remediation liability on NCR for four of the five “operable units” of the site. In another part of the same lawsuit, the Company prevailed in a 2012 trial on claims seeking to hold it liable under an “arranger” theory for the most upriver portion of the site, operable unit 1.

On September 25, 2014, the United States Court of Appeals for the Seventh Circuit issued its ruling on appeal. That ruling vacated the lower court’s contribution decisions that were adverse to NCR (i.e., it vacated “the decision to hold NCR responsible for all of the response costs at operable units 2 through 5 in contribution”), set aside an adverse judgment against the Company in the amount of $76 million, and affirmed the Company’s favorable verdict in the “arranger” liability trial with respect to operable unit 1. The case was remanded to the federal district court in Wisconsin for further proceedings, for potential consideration of additional factors noted by the appellate court, in which proceedings NCR will vigorously contest the amount of remediation costs allocable to it, and seek to recover from other parties portions of the costs it has previously paid. The case is scheduled for trial on June 13, 2016.

In the quarter ended March 31, 2015, under a case management order applicable to the remanded case the federal district court allowed the filing of certain additional contractual and other claims, including claims against the Company, as well as certain claims by API against other parties (in light of the September 2014 appellate ruling that had restored those claims), which resulted in claims for potential indemnity by those other parties against the Company (under the Funding Agreement, to the extent the Company is liable for such claims, API must pay its recoveries into the limited liability corporation created by the Funding Agreement, and the Company may then seek to obtain reimbursement under its terms). The Company also updated the amounts it is seeking in its affirmative claims against other parties. Additionally, in March 2015, notwithstanding the prior trial and appellate results that had been favorable to the Company, the court entered a ruling holding NCR liable for contamination in operable unit 1, an area upriver from the Company’s former facilities, on what the court considered to be new guidance created by the appellate court in its September 2014 decision. The Company believes the March 2015 decision incorrectly applied the appellate court ruling. While the Company's effort to obtain special appellate review in the form of a petition for mandamus was denied on May 1, 2015 by the appellate court, in a decision dated May 15, 2015 the district court indicated, in a ruling that addressed several issues, that NCR had no liability for operable unit 1, noting “NCR discharged no PCBs in OU1, and therefore has no divisible share of the clean-up costs for that area."

In 2010 the Governments filed a lawsuit (the Government enforcement action) in Wisconsin federal court against the companies named in the 2007 Order. After a 2012 trial, in May 2013 that court held, among other things, that harm at the site is not divisible, and it entered a declaratory judgment against seven defendants (including NCR) finding them jointly and severally liable to comply with the applicable provisions of the 2007 Order. The court also issued an injunction against four companies (including NCR), ordering them to comply with the applicable provisions of the 2007 Order; only NCR complied with the injunction. Several parties, including NCR, appealed from the judgment. In a companion opinion to the ruling described in the preceding paragraph, the United States Court of Appeals for the Seventh Circuit, also on September 25, 2014, vacated the injunction, and also vacated the declaratory judgment that had been entered against the Company. The court also ruled that NCR’s defense based on divisibility of harm at the site, which the district court had rejected, must be reconsidered by that court.

The case was remanded to the federal district court in Wisconsin for further proceedings. In a ruling on May 15, 2015, the district court ruled in NCR’s favor and rejected the Governments’ efforts to reinstate the declaratory judgment against NCR. The court issued findings in favor of the Company’s divisibility defense, and held that NCR’s share of liability for operable unit 4 was 28% (the Company has already paid more than 28% of the remediation costs for that part of the river); the court invited the Company to submit a proposed judgment in the Government enforcement action. Various parties have asked the court to reconsider its ruling, and one has sought to intervene as a co-plaintiff with the Governments, and those motions remained pending as of June 30, 2015. With respect to remaining remediation work, one other PRP, GP, has agreed by virtue of an earlier settlement with the Governments that it is “liable to the United States . . . for performance of all response actions that the [2007 Order] requires for” the lower portion of operable unit 4 and operable unit 5. The declaratory judgment in the Government enforcement action with respect to liability under the 2007 Order against another defendant, Glatfelter, which pursued its appeal on grounds different from those pursued by NCR, was affirmed.


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

With respect to ongoing 2015 remediation, following negotiations with the Governments and GP the Company agreed in April 2015 to perform a portion of the work planned for 2015, and to fund approximately one-third of the cost of that work, with GP funding an equal amount. This agreement was formalized in a stipulation and proposed consent decree filed with the federal court; each party is preserving its rights to recover its 2015 costs from the other in the contribution litigation. The Governments are demanding that Glatfelter agree to perform or fund the remaining approximate one-third of the work. Remediation work for the 2015 season commenced on March 31, 2015, and NCR, GP and Glatfelter are each undertaking certain remediation efforts.

With respect to the Company’s prior dispute with API, which was generally superseded by the Funding Agreement, the Company has continued to receive timely payments under the Funding Agreement. 

NCR's eventual remediation liability, followed by long-term monitoring, will depend on a number of factors. In establishing the reserve, NCR attempts to estimate a range of reasonably possible outcomes for each of these factors, although each range is itself uncertain. NCR uses its best estimate within the range, if that is possible. Where there is a range of equally possible outcomes, and there is no amount within that range that is considered to be a better estimate than any other amount, NCR uses the low end of the range. In general, the most significant factors include: (1) the total remaining clean-up costs, including long-term monitoring following completion of the clean-up; (2) total NRD for the site; (3) the share of clean-up costs and NRD that NCR will bear; (4) NCR's transaction and litigation costs to defend itself in this matter; and (5) the share of NCR's payments that API and/or BAT will bear, as discussed above. With respect to NRD, in connection with a certain settlement entered into by other PRPs, in the quarter ended June 30, 2015 the Government asked the court to allow it to withdraw the NRD claims it had prosecuted on behalf of NRD trustees, including those NRD claims asserted against the Company (the Government had represented it would do so in the course of presenting the settlement to the court for approval).

Calculation of the Company's Fox River reserve is subject to several complexities, and it is possible there could be additional changes to some elements of the reserve over upcoming periods, although the Company is unable to predict or estimate such changes at this time. There can be no assurance that the clean-up and related expenditures and liabilities will not have a material effect on NCR's capital expenditures, earnings, financial condition, cash flows, or competitive position. As of June 30, 2015, the net reserve for the Fox River matter was approximately $23 million, compared to $40 million as of December 31, 2014. The decrease in the net reserve is due to payments for clean-up activities and litigation costs, and to take into account the impact of the court decision on divisibility. NCR contributes to the LLC in order to fund remediation activities and generally, by contract, has funded certain amounts of remediation expenses in advance. As of June 30, 2015 and December 31, 2014, approximately zero remained from this funding. NCR's reserve for the Fox River matter is reduced as the LLC makes payments to the remediation contractor and other vendors with respect to remediation activities.

Under a 1996 agreement, AT&T and Alcatel-Lucent are responsible severally (not jointly) for indemnifying NCR for certain portions of the amounts paid by NCR for the Fox River matter over a defined threshold and subject to certain offsets. (The agreement governs certain aspects of AT&T Corp.'s divestiture of NCR and of what was then known as Lucent Technologies.) NCR's estimate of what AT&T and Alcatel-Lucent remain obligated to pay under the indemnity totaled approximately $11 million and $30 million as of June 30, 2015 and December 31, 2014, respectively, and is deducted in determining the net reserve discussed above.

In connection with the Fox River and other matters, through June 30, 2015, NCR has received a combined total of approximately $173 million in 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.

Kalamazoo River In November 2010, USEPA issued a "general notice letter" to NCR with respect to the Allied Paper, Inc./Portage Creek/Kalamazoo River Superfund Site (Kalamazoo River site) in Michigan. Three other companies - International Paper, Mead Corporation, and Consumers Energy - also received general notice letters at or about the same time. USEPA asserts that the site is contaminated by various substances, primarily PCBs, as a result of discharges by various paper mills located along the river. USEPA does not claim that the Company made direct discharges into the Kalamazoo River, 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." USEPA stated that it "may issue special notice letters to [NCR] and other PRPs for future RI/FS [remedial investigation / feasibility studies] and RD/RA [remedial design / remedial action] negotiations."


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

In connection with the Kalamazoo River site, in December 2010 the Company, along with two other defendants, was sued in federal court by three GP affiliate corporations in a contribution and cost recovery action for alleged pollution. The suit, pending in Michigan, asks that the Company pay a "fair portion" of these companies’ costs, which are represented in the complaint as $79 million to that point in time; various removal and remedial actions remain to be performed at the Kalamazoo River site, the costs for which have not been determined. The suit alleges that the Company is liable as an "arranger" under CERCLA. The initial phase of the case was tried in a Michigan federal court in February 2013; on September 26, 2013 the court issued a decision that held NCR was liable as an “arranger,” as of at least March 1969. (PCB-containing carbonless copy paper was produced from approximately 1954 to April 1971.) The Court did not determine NCR’s share of the overall liability or how NCR’s liability relates to the liability of other liable or potentially liable parties at the site. Relative shares of liability will be litigated in a subsequent phase of the case, with trial scheduled to commence on September 22, 2015. NCR has preserved its right to appeal the September 2013 decision, and in March 2015 moved for the dismissal of all or some of the claims against it on the basis of applicable statutes of limitations; that motion remained pending as of June 30, 2015. If the Company is found liable for money damages or otherwise with respect to the Kalamazoo River site, it would have claims against BAT and API under the Cost Sharing Agreement, the arbitration award, the judgment and the Funding Agreement discussed above in connection with the Fox River matter (the Funding Agreement may provide partial reimbursement of such damages depending on the extent of certain recoveries, if any, against third parties under its terms). The Company would also have claims against AT&T and Alcatel-Lucent under the arrangement discussed above in connection with the Fox River matter.

Environmental Remediation Estimates It is difficult to estimate the future financial impact of environmental laws, including potential liabilities. NCR records environmental provisions when it is probable that a liability has been incurred and the amount or range of the liability is reasonably estimable. Provisions for estimated losses from environmental restoration and remediation are, depending on the site, based generally on internal and third-party environmental studies, estimates as to the number and participation level of other PRPs, the extent of contamination, estimated amounts for attorney and other fees, and the nature of required clean-up and restoration actions. Reserves are adjusted as further information develops or circumstances change. Management expects that the amounts reserved from time to time will be paid out over the period of investigation, negotiation, remediation and restoration for the applicable sites. The amounts provided for environmental matters in NCR's Condensed Consolidated Financial Statements are the estimated gross undiscounted amounts of such liabilities, without deductions for indemnity insurance, third-party indemnity claims or recoveries from other PRPs, except as qualified in the following sentences. 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 obligations are recorded as payment is supported by contractual agreements, public filings and/or payment history.

Guarantees and Product Warranties Guarantees associated with NCR’s business activities are reviewed for appropriateness and impact to the Company’s Condensed Consolidated Financial Statements. As of June 30, 2015 and December 31, 2014, NCR had no material obligations related to such guarantees, and therefore its Condensed Consolidated Financial Statements do not have any associated liability balance.

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

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

The Company recorded the activity related to the warranty reserve for the six months ended June 30 as follows:
In millions
2015
 
2014
Warranty reserve liability
 
 
 
Beginning balance as of January 1
$
22

 
$
22

Accruals for warranties issued
19

 
18

Settlements (in cash or in kind)
(18)

 
(19)

Ending balance as of June 30
$
23

 
$
21

 

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

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

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. For the three and six months ended June 30, 2015, due to the net loss attributable to NCR common stockholders, potential common shares that would cause dilution, such as restricted stock awards and stock options, have been excluded from the diluted share count because their effect would have been anti-dilutive. For the three and six months ended June 30, 2015, the fully diluted shares would have been 172.0 million and 171.8 million shares. During the three and six months ended June 30, 2014, there were no anti-dilutive options.

The components of basic and diluted earnings per share are as follows:
In millions, except per share amounts
Three months ended June 30
 
Six months ended June 30
2015
 
2014
 
2015
 
2014
Amounts attributable to NCR common stockholders:
 
 
 
 
 
 
 
(Loss) income from continuing operations
$
(344
)
 
$
90

 
$
(304
)
 
$
143

Income from discontinued operations, net of tax
—

 
—

 
—

 
—

Net (loss) income applicable to common shares
$
(344
)
 
$
90

 
$
(304
)
 
$
143

Weighted average outstanding shares of common stock
169.6

 
167.9

 
169.3

 
167.5

Dilutive effect of restricted stock and employee stock options
—

 
3.0

 
—

 
3.5

Weighted average outstanding shares of common stock - diluted
169.6

 
170.9

 
169.3
 
171.0
Earnings per share attributable to NCR common stockholders:
 
 
 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
From continuing operations
$
(2.03
)
 
$
0.54

 
$
(1.80
)
 
$
0.85

From discontinued operations
—

 
—

 
—

 
—

Net earnings per share (Basic)
$
(2.03
)
 
$
0.54

 
$
(1.80
)
 
$
0.85

Diluted earnings per share:
 
 
 
 
 
 
 
From continuing operations
$
(2.03
)
 
$
0.53

 
(1.80
)
 
$
0.84

From discontinued operations
—

 
—

 
—

 
—

Net earnings per share (Diluted)
$
(2.03
)
 
$
0.53

 
$
(1.80
)
 
$
0.84


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

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

Foreign Currency Exchange Risk

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

Our risk management strategy includes hedging, on behalf of certain subsidiaries, a portion of our forecasted, non-functional currency denominated cash flows for a period of up to 15 months. As a result, some of the impact of currency fluctuations on non-functional currency denominated transactions (and hence on subsidiary operating income, as stated in the functional currency), is mitigated in the near term. The amount we hedge and the duration of hedge contracts may vary significantly. In the longer term (greater than 15 months), the subsidiaries are still subject to the effect of translating the functional currency results to U.S. Dollars. To manage our exposures and mitigate the impact of currency fluctuations on the operations of our foreign subsidiaries, we hedge our main transactional exposures through the use of foreign exchange forward and option contracts. This is primarily done through the hedging of foreign currency denominated inter-company inventory purchases by NCR’s marketing units and the foreign currency denominated inputs to our manufacturing units. The related foreign exchange contracts are designated as highly effective cash flow hedges. The gains or losses on these hedges are deferred in accumulated other comprehensive income (AOCI) and reclassified to income when the underlying hedged transaction is recorded in earnings. As of June 30, 2015, the balance in AOCI related to foreign exchange derivative transactions was a gain of $3 million, net of tax. The gains or losses from derivative contracts related to inventory purchases are recorded in cost of products when the inventory is sold to an unrelated third party.

We also utilize foreign exchange contracts to hedge our exposure of assets and liabilities denominated in non-functional currencies. We recognize the gains and losses on these types of hedges in earnings as exchange rates change. We do not enter into hedges for speculative purposes.

Interest Rate Risk

The Company is party to an interest rate swap agreement that fixes the interest rate on a portion of the Company's LIBOR indexed floating rate borrowings under its Senior Secured Credit Facility through August 22, 2016. The notional amount of the interest rate swap as of June 30, 2015 was $434 million and amortizes to $341 million over the term. The Company designates the interest rate swap as a cash flow hedge of forecasted quarterly interest payments made on three-month LIBOR indexed borrowings under the Senior Secured Credit Facility. The interest rate swap was determined to be highly effective at inception.

Our risk management strategy includes hedging a portion of our forecasted interest payments. These transactions are forecasted and the related interest rate swap agreement is designated as a highly effective cash flow hedge. The gains or losses on this hedge are deferred in AOCI and reclassified to income when the underlying hedged transaction is recorded in earnings. As of June 30, 2015, the balance in AOCI related to the interest rate swap agreement was a loss of $2 million, net of tax.

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

The following tables provide information on the location and amounts of derivative fair values in the Condensed Consolidated Balance Sheets:
 
Fair Values of Derivative Instruments
 
June 30, 2015
In millions
Balance Sheet
Location
 
Notional
Amount
 
Fair
Value
 
Balance Sheet
Location
 
Notional
Amount
 
Fair
Value
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
Other current assets
 
$—
 
$—
 
Other current liabilities and other liabilities (1)
 
$434
 
$5
Foreign exchange contracts
Other current assets
 
119
 
5
 
Other current liabilities
 
34
 
1
Total derivatives designated as hedging instruments
 
 
 
 
$5
 
 
 
 
 
$6
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Other current assets
 
$105
 
$—
 
Other current liabilities
 
$217
 
$—
Total derivatives not designated as hedging instruments
 
 
 
 
—
 
 
 
 
 
—
Total derivatives
 
 
 
 
$5
 
 
 
 
 
$6
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Values of Derivative Instruments
 
December 31, 2014
In millions
Balance Sheet
Location
 
Notional
Amount
 
Fair
Value
 
Balance Sheet
Location
 
Notional
Amount
 
Fair
Value
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
Other current assets
 
$—
 
$—
 
Other current liabilities and other liabilities (1)
 
$462
 
$6
Total derivatives designated as hedging instruments
 
 
 
 
$—
 
 
 
 
 
$6
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Other current assets
 
$186
 
$1
 
Other current liabilities
 
$330
 
$5
Total derivatives not designated as hedging instruments
 
 
 
 
1
 
 
 
 
 
5
Total derivatives
 
 
 
 
$1
 
 
 
 
 
$11

(1) As of June 30, 2015, approximately $4 million was recorded in other current liabilities and $1 million was recorded in other liabilities related to the interest rate swap. As of December 31, 2014 approximately $4 million was recorded in other current liabilities and $2 million, was recorded in other liabilities related to the interest rate swap.


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

The effects of derivative instruments on the Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2015 and 2014 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 June 30, 2015
 
For the three months ended June 30, 2014
 
Location of Gain (Loss) Reclassified from AOCI into the Condensed Consolidated Statement of Operations (Effective Portion)
 
For the three months ended June 30, 2015
 
For the three months ended June 30, 2014
 
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 June 30, 2015
 
For the three months ended June 30, 2014
Interest rate swap
$—
 
$(1)
 
Interest expense
 
$(1)
 
$(2)
 
Interest expense
 
$—
 
$—
Foreign exchange contracts
$(2)
 
$—
 
Cost of products
 
$2
 
$—
 
Other (expense) income, net
 
$—
 
$—
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 six months ended June 30, 2015
 
For the six months ended June 30, 2014
 
Location of Gain (Loss) Reclassified from AOCI into the Condensed Consolidated Statement of Operations (Effective Portion)
 
For the six months ended June 30, 2015
 
For the six months ended June 30, 2014
 
Location of Gain (Loss) Recognized in the Condensed Consolidated Statement of Operations (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
For the six months ended June 30, 2015
 
For the six months ended June 30, 2014
Interest rate swap
$(1)
 
$(2)
 
Interest expense
 
$(2)
 
$(3)
 
Interest expense
 
$—
 
$—
Foreign exchange contracts
$8
 
$—
 
Cost of products
 
$4
 
$—
 
Other (expense), net
 
$—
 
$—

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 June 30, 2015
 
For the three months ended June 30, 2014
 
For the six months ended June 30, 2015
 
For the six months ended June 30, 2014
Foreign exchange contracts
Other (expense) income, net
 
$—
 
$(3)
 
$(1)
 
$(6)
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 June 30, 2015, NCR did not have any major concentration of credit risk related to financial instruments.



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

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 June 30, 2015 and December 31, 2014 are set forth as follows:
  
 
 
Fair Value Measurements at June 30, 2015 Using
In millions
June 30, 2015
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Deposits held in money market mutual funds (1)
$
32

 
$
32

 
$
—

 
$
—

Foreign exchange contracts (2)
5

 
—

 
5

 
—

Total
$
37

 
$
32

 
$
5

 
$
—

Liabilities:
 
 
 
 
 
 
 
Interest rate swap (3)
$
5

 
$
—

 
$
5

 
$
—

Foreign exchange contracts (3)
1

 
—

 
1

 
—

Total
$
6

 
$
—

 
$
6

 
$
—


 
 
 
Fair Value Measurements at December 31, 2014 Using
In millions
December 31, 2014
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Deposits held in money market mutual funds (1)
$
82

 
$
82

 
$
—

 
$
—

Foreign exchange contracts (2)
1

 
—

 
1

 
—

Total
$
83

 
$
82

 
$
1

 
$
—

Liabilities:
 
 
 
 
 
 
 
Interest rate swap (3)
$
6

 
$
—

 
$
6

 
$
—

Foreign exchange contracts (3)
5

 
—

 
5

 
—

Total
$
11

 
$
—

 
$
11

 
$
—

_____________
(1)    Included in Cash and cash equivalents in the Condensed Consolidated Balance Sheet.
(2)    Included in Other current assets in the Condensed Consolidated Balance Sheet.
(3)    Included in Other current liabilities and Other liabilities in the Condensed Consolidated Balance Sheet.
Deposits Held in Money Market Mutual Funds A portion of the Company’s excess cash is held in money market mutual funds which generate interest income based on prevailing market rates. Money market mutual fund holdings are measured at fair value using quoted market prices and are classified within Level 1 of the valuation hierarchy.

Interest Rate Swap As a result of our Senior Secured Credit Facility, we are exposed to risk from changes in LIBOR, which may adversely affect our financial condition. To manage our exposure and mitigate the impact of changes in LIBOR on our financial results, we hedge a portion of our forecasted interest payments through the use of an interest rate swap agreement. The interest rate swap is valued using the income approach inclusive of nonperformance and counterparty risk considerations and is classified within Level 2 of the valuation hierarchy.

Foreign Exchange Contracts As a result of our global operating activities, we are exposed to risks from changes in foreign currency exchange rates, which may adversely affect our financial condition. To manage our exposures and mitigate the impact of currency fluctuations on our financial results, we hedge our primary transactional exposures through the use of foreign exchange forward and option contracts. The foreign exchange contracts are valued using the market approach based on observable market transactions of forward rates and are classified within Level 2 of the valuation hierarchy.


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

Assets Measured at Fair Value on a Non-recurring Basis

From time to time, certain assets are measured at fair value on a nonrecurring basis using significant unobservable inputs (Level 3). NCR reviews the carrying values of investments when events and circumstances warrant and considers all available evidence in evaluating when declines in fair value are other-than-temporary declines. Other than the impairment charge described in Note 2, "Restructuring Plan," no impairment charges or material non-recurring fair value adjustments were recorded during the three and six months ended June 30, 2015 and 2014.

13. SEGMENT INFORMATION AND CONCENTRATIONS
The Company manages and reports its businesses in the following four segments:

•
Financial Services - We offer solutions to enable customers in the financial services industry to reduce costs, generate new revenue streams and enhance customer loyalty. These solutions include a comprehensive line of ATM and payment processing hardware and software; cash management and video banking software and customer-facing digital banking services; and related installation, maintenance, and managed and professional services. We also offer a complete line of printer consumables.
•
Retail Solutions - We offer solutions to customers in the retail industry designed to improve selling productivity and checkout processes as well as increase service levels. These solutions primarily include retail-oriented technologies, such as point of sale terminals and point of sale software; an omni-channel retail software platform with a comprehensive suite of retail software applications; innovative self-service kiosks, such as self-checkout; as well as bar-code scanners. We also offer installation, maintenance, managed and professional services and a complete line of printer consumables.
•
Hospitality - We offer technology solutions to customers in the hospitality industry, serving businesses that range from a single store or restaurant to global chains and sports and entertainment venues. Our solutions include point of sale hardware and software solutions, installation, maintenance, managed and professional services and a complete line of printer consumables.
•
Emerging Industries - We offer maintenance as well as managed and professional services for third-party computer hardware provided to select manufacturers, primarily in the telecommunications industry, who value and leverage our global service capability. Also included in our Emerging Industries segment are solutions designed to enhance the customer experience for the travel industry, such as self-service kiosks, and the small business industry, such as an all-in-one point of sale solution. Additionally, we offer installation, maintenance, and managed and professional services.

These segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the chief operating decision maker in assessing segment performance and in allocating the Company's resources. Management evaluates the performance of the segments based on revenue and segment operating income. Assets are not allocated to segments, and thus are not included in the assessment of segment performance, and consequently, we do not disclose total assets by reportable segment.
The accounting policies used to determine the results of the operating segments are the same as those utilized for the condensed consolidated financial statements as a whole. Intersegment sales and transfers are not material.
In recognition of the volatility of the effects of pension expense on our segment results, and to maintain operating focus on business performance, pension expense, as well as other significant, non-recurring items, are excluded from the segment operating results utilized by our chief operating decision maker in evaluating segment performance and are separately delineated to reconcile back to total reported income from operations.
 

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

The following table presents revenue and operating income by segment:
In millions
Three months ended June 30
 
Six months ended June 30
2015
 
2014
 
2015
 
2014
Revenue by segment
 
 
 
 
 
 
 
Financial Services
$
840

 
$
900

 
$
1,638

 
$
1,694

Retail Solutions
505

 
503

 
950

 
993

Hospitality
172

 
170

 
320

 
319

Emerging Industries
87

 
85

 
172

 
170

Consolidated revenue
1,604

 
1,658

 
3,080

 
3,176

Operating income by segment
 
 
 
 
 
 
 
Financial Services
123

 
137

 
228

 
240

Retail Solutions
42

 
48

 
58

 
84

Hospitality
27

 
23

 
45

 
35

Emerging Industries
10

 
2

 
17

 
6

Subtotal - segment operating income
202

 
210

 
348

 
365

Pension expense
426

 
2

 
426

 
1

Other adjustments(1)
42

 
39

 
93

 
87

Income from operations
$
(266
)
 
$
169

 
$
(171
)
 
$
277


(1) 
The following table presents the other adjustments for NCR:
In millions
Three months ended June 30
 
Six months ended June 30
2015
 
2014
 
2015
 
2014
Restructuring plan
$
8

 
$
—

 
$
24

 
$
—

Acquisition-related amortization of intangible assets
31

 
30

 
63

 
60

Acquisition-related costs
3

 
6

 
5

 
20

Acquisition-related purchase price adjustments
—

 
2

 
—

 
5

OFAC and FCPA investigations
—

 
1

 
1

 
2

Total other adjustments
$
42

 
$
39

 
$
93

 
$
87


The following table presents revenue from products and services for NCR:
In millions
Three months ended June 30
 
Six months ended June 30
2015
 
2014
 
2015
 
2014
Product revenue
$
703

 
$
722

 
$
1,307

 
$
1,356

Professional services, installation services and cloud revenue
421

 
431

 
821

 
814

Total solution revenue
1,124

 
1,153

 
2,128

 
2,170

Support services revenue
480

 
505

 
952

 
1,006

Total revenue
$
1,604

 
$
1,658

 
$
3,080

 
$
3,176

 


27
Table of Contents
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

14. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (AOCI)

Changes in AOCI by Component
In millions
Currency Translation Adjustments
Changes in Employee Benefit Plans
Changes in Fair Value of Effective Cash Flow Hedges
Total
Balance as of December 31, 2014
$
(125
)
$
(8
)
$
(3
)
$
(136
)
Other comprehensive (loss) income before reclassifications
1

—

6

7

Amounts reclassified from AOCI
—

(6
)
(2
)
(8
)
Net current period other comprehensive (loss) income
1

(6
)
4

(1
)
Balance as of June 30, 2015
$
(124
)
$
(14
)
$
1

$
(137
)

Reclassifications Out of AOCI