Document
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 September 30, 2017
Commission File Number 001-00395
 ________________________
ncrbbpreferred2015a08.jpg
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
 
 
Accelerated filer
o
Non-accelerated filer
o
(Do not check if a smaller reporting company)
 
Smaller reporting company
o
 
 
 
 
Emerging Growth Company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transaction period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange act.  o 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o    No  þ
As of October 13, 2017, there were approximately 121.8 million shares of the registrant's 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 September 30
 
Nine months ended September 30
2017
 
2016
 
2017
 
2016
Product revenue
$
657

 
$
708

 
$
1,829

 
$
1,932

Service revenue
1,006

 
969

 
2,905

 
2,809

Total revenue
1,663

 
1,677

 
4,734

 
4,741

Cost of products
528

 
528

 
1,430

 
1,487

Cost of services
662

 
672

 
1,955

 
1,951

Selling, general and administrative expenses
220

 
225

 
676

 
678

Research and development expenses
53

 
56

 
178

 
159

Restructuring-related charges
—

 
7

 
—

 
13

Total operating expenses
1,463

 
1,488

 
4,239

 
4,288

Income from operations
200

 
189

 
495

 
453

Interest expense
(42
)
 
(41
)
 
(122
)
 
(130
)
Other (expense), net
(8
)
 
(8
)
 
(22
)
 
(33
)
Income from continuing operations before income taxes
150

 
140

 
351

 
290

Income tax expense
31

 
31

 
78

 
75

Income from continuing operations
119

 
109

 
273

 
215

(Loss) income from discontinued operations, net of tax
—

 
(2
)
 
5

 
(2
)
Net income
119

 
107

 
278

 
213

Net income attributable to noncontrolling interests
1

 
2

 
1

 
—

Net income attributable to NCR
$
118

 
$
105

 
$
277

 
$
213

Amounts attributable to NCR common stockholders:
 
 
 
 
 
 
 
Income from continuing operations
$
118

 
$
107

 
$
272

 
$
215

Series A convertible preferred stock dividends
(12
)
 
(13
)
 
(36
)
 
(37
)
Deemed dividend on modification of Series A convertible preferred stock
—

 
—

 
(4
)
 
—

Deemed dividend on Series A convertible preferred stock related to redemption
—

 
—

 
(58
)
 
—

Income from continuing operations attributable to NCR common stockholders
106

 
94

 
174

 
178

(Loss) income from discontinued operations, net of tax
—

 
(2
)
 
5

 
(2
)
Net income attributable to NCR common stockholders
$
106

 
$
92

 
$
179

 
$
176

Income per share attributable to NCR common stockholders:
 
 
 
 
 
 
 
Income per common share from continuing operations
 
 
 
 
 
 
 
Basic
$
0.87

 
$
0.76

 
$
1.43

 
$
1.41

Diluted
$
0.77

 
$
0.69

 
$
1.37

 
$
1.37

Net income per common share
 
 
 
 
 
 
 
Basic
$
0.87

 
$
0.74

 
$
1.47

 
$
1.40

Diluted
$
0.77

 
$
0.68

 
$
1.41

 
$
1.36

Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
121.5

 
123.9

 
121.9

 
126.0

Diluted
153.1

 
155.4

 
126.9

 
156.8

See Notes to Condensed Consolidated Financial Statements.

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NCR Corporation
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 
In millions
Three months ended September 30
 
Nine months ended September 30
2017
 
2016
 
2017
 
2016
Net income
$
119

 
$
107

 
$
278

 
$
213

Other comprehensive income (loss):
 
 
 
 
 
 
 
Currency translation adjustments
 
 
 
 
 
 
 
Currency translation gains (losses)
6

 
3

 
35

 
(23
)
Derivatives
 
 
 
 
 
 
 
Unrealized (losses) gains on derivatives
(5
)
 
4

 
(15
)
 
4

   (Gains) losses on derivatives recognized during the period
1

 
—

 
(2
)
 
2

        Less income tax benefit (expense)
—

 
(1
)
 
3

 
(1
)
Employee benefit plans
 
 
 
 
 
 
 
   Amortization of prior service benefit
(1
)
 
(4
)
 
(6
)
 
(14
)
   Amortization of actuarial benefit
(1
)
 
—

 
(2
)
 
(1
)
        Less income tax benefit
—

 
1

 
2

 
4

Other comprehensive (loss) income
—

 
3

 
15

 
(29
)
Total comprehensive income
119

 
110

 
293

 
184

Less comprehensive income attributable to noncontrolling interests:
 
 
 
 
 
 
 
   Net income (loss)
1

 
2

 
1

 
—

   Currency translation losses
(2
)
 
(1
)
 
(2
)
 
(7
)
Amounts attributable to noncontrolling interests
(1
)
 
1

 
(1
)
 
(7
)
Comprehensive income attributable to NCR
$
120

 
$
109

 
$
294

 
191

See Notes to Condensed Consolidated Financial Statements.

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NCR Corporation
Condensed Consolidated Balance Sheets (Unaudited)
In millions, except per share amounts
September 30, 2017
 
December 31, 2016
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
405

 
$
498

Accounts receivable, net
1,408

 
1,282

Inventories
824

 
699

Other current assets
263

 
278

Total current assets
2,900

 
2,757

Property, plant and equipment, net
321

 
287

Goodwill
2,741

 
2,727

Intangibles, net
591

 
672

Prepaid pension cost
115

 
94

Deferred income taxes
595

 
575

Other assets
587

 
561

Total assets
$
7,850

 
$
7,673

Liabilities and stockholders’ equity
 
 
 
Current liabilities
 
 
 
Short-term borrowings
$
269

 
$
50

Accounts payable
720

 
781

Payroll and benefits liabilities
202

 
234

Deferred service revenue and customer deposits
465

 
468

Other current liabilities
390

 
432

Total current liabilities
2,046

 
1,965

Long-term debt
2,984

 
3,001

Pension and indemnity plan liabilities
771

 
739

Postretirement and postemployment benefits liabilities
127

 
127

Income tax accruals
138

 
142

Other liabilities
197

 
138

Total liabilities
6,263

 
6,112

Commitments and Contingencies (Note 7)

 

Redeemable noncontrolling interest
14

 
15

Series A convertible preferred stock: par value $0.01 per share, 3.0 shares authorized, 0.8 shares issued and outstanding as of September 30, 2017 and, 0.9 shares issued and outstanding as of December 31, 2016; redemption amount and liquidation preference of $813 and $870 as of September 30, 2017 and December 31, 2016, respectively
799

 
847
Stockholders’ equity
 
 
 
NCR stockholders’ equity
 
 
 
Preferred stock: par value $0.01 per share, 100.0 shares authorized, no shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively
—

 
—

Common stock: par value $0.01 per share, 500.0 shares authorized, 121.5 and 124.6 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively
1

 
1

Paid-in capital
44

 
32

Retained earnings
913

 
867

Accumulated other comprehensive loss
(188
)
 
(205)

Total NCR stockholders’ equity
770

 
695

Noncontrolling interests in subsidiaries
4

 
4

Total stockholders’ equity
774

 
699

Total liabilities and stockholders’ equity
$
7,850

 
$
7,673

See Notes to Condensed Consolidated Financial Statements.

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NCR Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
In millions
Nine months ended September 30
2017
 
2016
Operating activities
 
 
 
Net income
$
278

 
$
213

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
(Income) loss from discontinued operations
(5
)
 
2

Depreciation and amortization
263

 
259

Stock-based compensation expense
60

 
45

Deferred income tax expense
19

 
39

Gain on sale of property, plant and equipment
(2
)
 
—

Loss on divestiture
—

 
1

Impairment of other assets
1

 
2

Changes in assets and liabilities:
 
 
 
Receivables
(107
)
 
(138
)
Inventories
(120
)
 
(128
)
Current payables and accrued expenses
(132
)
 
68

Deferred service revenue and customer deposits
20

 
78

Employee benefit plans
(13
)
 
(38
)
Other assets and liabilities
9

 
(34
)
Net cash provided by operating activities
271

 
369

Investing activities
 
 
 
Expenditures for property, plant and equipment
(81
)
 
(45
)
Proceeds from sale of property, plant and equipment
6

 
—

Additions to capitalized software
(125
)
 
(115
)
Proceeds from divestiture
—

 
47

Other investing activities, net
—

 
(8
)
Net cash used in investing activities
(200
)
 
(121
)
Financing activities
 
 
 
Short term borrowings, net
10

 
(2
)
Payments on term credit facilities
(37
)
 
(84
)
Payments on revolving credit facilities
(1,110
)
 
(736
)
Borrowings on revolving credit facilities
1,335

 
856

Debt issuance costs
—

 
(8
)
Repurchases of Company common stock
(350
)
 
(250
)
Proceeds from employee stock plans
11

 
10

Tax withholding payments on behalf of employees
(24
)
 
(7
)
Other financing activities
(1
)
 
(2
)
Net cash used in financing activities
(166
)
 
(223
)
Cash flows from discontinued operations
 
 
 
Net cash used in operating activities
(14
)
 
(30
)
Effect of exchange rate changes on cash and cash equivalents
16

 
(5
)
(Decrease) increase in cash and cash equivalents
(93
)
 
(10
)
Cash and cash equivalents at beginning of period
498

 
328

Cash and cash equivalents at end of period
$
405

 
$
318

See Notes to Condensed Consolidated Financial Statements.

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NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)

Index to Financial Statements and Supplemental Data
 




7
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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 2016 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, 2016.

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.

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

On October 1, 2017, Appvion, Inc., formerly known as Appleton Papers, Inc. and referred to in Note 7, "Commitments and Contingencies," as “API,” filed for bankruptcy protection. API had made all of the Fox River-related payments required of it under the 2014 Funding Agreement, and therefore the Company expects no material impact on the Fox River matter from API’s bankruptcy. The 2014 Funding Agreement, as had the 1997 CSA (described in Note 7, "Commitments and Contingencies,"), also provided for API to fund certain activities with respect to so-called “future sites,” which included the Kalamazoo River. While that potential funding may now be called into question, the Company does not expect a material impact from the API bankruptcy with respect to such sites, inasmuch as BAT (as set out in Note 7, "Commitments and Contingencies,") shares that particular API liability to the Company on a joint and several basis under those agreements.

On October 11, 2017, the federal court in Wisconsin entered an order dismissing the contribution or allocation case referred to in Note 7, "Commitments and Contingencies," and directed the clerk to mark the case as closed. The government enforcement action continues, although NCR is no longer a party to it.

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.

Redeemable Noncontrolling Interests and Related Party Transactions In 2011, we sold a 49% voting equity interest in NCR Brasil - Indústria de Equipamentos para Automação S.A., a subsidiary of the Company (NCR Manaus), to Scopus Tecnologia Ltda. (Scopus). Under our investment agreements with Scopus, Scopus may elect to sell its shares in NCR Manaus at the then-current fair value to a third party that is not a competitor of NCR. If Scopus is unable to locate a buyer, Scopus may require NCR to purchase its noncontrolling interest for its then-current fair value.

We recognized revenue related to Banco Bradesco SA (Bradesco), the parent of Scopus, totaling $37 million and $43 million during the three and nine months ended September 30, 2017, respectively, as compared to $24 million and $52 million during the three and nine months ended September 30, 2016, respectively. As of September 30, 2017 and December 31, 2016, we had $36 million and $10 million, respectively, in receivables outstanding from Bradesco.

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


Recent Accounting Pronouncements

Issued

In May 2014, the Financial Accounting Standards Board (FASB) issued a new revenue recognition standard that will supersede current 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  (“full retrospective method”) or as a cumulative effect adjustment as of the date of adoption  (“modified retrospective method”). We have determined a substantial majority of our new accounting policies related to the new standard and believe it will have the following impacts:  
•
The new standard removes the current limitation on contingent revenue, and we expect that this may result in revenue being recognized earlier for certain contracts.
•
The new standard modifies the accounting for the costs to obtain a contract, such as the capitalization and deferral of commission expenses for certain recurring revenue streams, and we expect that this will be a change to our current policy to expense as incurred.
We plan to adopt the standard using the modified retrospective method when it becomes effective for the Company in the first quarter of fiscal 2018. We have identified, and are in the process of implementing, appropriate changes to our business processes, systems and controls to support revenue recognition and disclosure under the new standard. The Company is continuing to evaluate the effect that the standard will have on its consolidated financial statements and related disclosures. Overall, the Company believes that its implementation efforts are progressing as planned.

In February 2016, the FASB issued a new leasing standard that will supersede current guidance related to accounting for leases. The guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The standard will be effective for the first interim period within annual periods beginning after December 15, 2018, with early adoption permitted. The standard is required to be adopted using the modified retrospective approach. The Company is evaluating the impact that adopting this guidance will have on its consolidated financial statements and internal controls over financial reporting.

In October 2016, the FASB issued an accounting standards update which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. This standard is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. The Company is evaluating the impact that adopting this guidance will have on its consolidated financial statements and internal controls over financial reporting.

In January 2017, the FASB issued an accounting standards update which clarifies the definition of a business which is used across several areas of accounting. The area expected to see the most change is the evaluation of whether a transaction should be accounted for as an acquisition (or disposal) of assets, or as a business combination. The new guidance clarifies that to be a business there must also be at least one substantive process, and narrows the definition of outputs by more closely aligning it with how outputs are described in the new revenue recognition standard. The accounting standard update is required to be adopted for annual periods beginning after December 15, 2017, including interim periods within that annual period. The amendment is to be applied prospectively with early adoption permitted. We do not expect the adoption of this standard to have a material effect on our financial condition, results of operations or disclosures, as the standard applies only to businesses acquired after the adoption date.

In January 2017, the FASB issued an accounting standards update with new guidance intended to simplify the subsequent measurement of goodwill. The standards update eliminates the requirement for an entity to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, an entity will perform its annual, or interim, goodwill impairment testing by comparing the fair value of a reporting unit with its carrying amount and recording an impairment charge for the amount by which the carrying amount exceeds the fair value. The standards update is effective prospectively for annual and interim goodwill impairment testing performed in fiscal years beginning after December 15, 2019. The adoption of this standards update is not expected to impact our consolidated financial statements.


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

In March 2017, the FASB issued an accounting standards update with new guidance on the employer's presentation of defined benefit retirement costs in the income statement. Employers will present the service cost component of net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period. Only the service cost component will be eligible for capitalization in assets. Employers will present the other components of the net periodic benefit cost separately from the line item(s) that includes the service cost and outside of any subtotal of operating income, if one is presented. These components will not be eligible for capitalization in assets. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods therein, with early adoption permitted. The adoption of this accounting standard update is not expected to have a material effect on the Company's net income, cash flows or financial condition.

In May 2017, the FASB issued an accounting standards update which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. This update requires modification only if the fair value, vesting conditions or the classification of the award changes as a result of the change in terms or conditions. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods therein, with early adoption permitted. The adoption of this accounting standard update is not expected to have a material effect on the Company's net income, cash flows or financial condition.

In August 2017, the FASB issued an accounting standards update which simplifies certain aspects of hedge accounting and improves disclosures of hedging arrangements through the elimination of the requirement to separately measure and report hedge ineffectiveness. This update generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item in order to align financial reporting of hedge relationships with economic results. Entities must apply the amendments to cash flow and net investment hedge relationships that exist on the date of adoption using a modified retrospective approach. The presentation and disclosure requirements must be applied prospectively. This guidance is effective for fiscal years beginning after December 15, 2018, and interim periods therein, with early adoption permitted. The adoption of this accounting standard update is not expected to have a material effect on the Company's net income, cash flows or financial condition.

Adopted

In March 2016, the FASB issued an accounting standards update that amended the accounting standard related to employee share-based payments. The guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid in capital pools. The guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. The adoption approach varies based on the amendment topic. As a result of the adoption, we recorded an adjustment of approximately $39 million to the January 1, 2017 retained earnings balance to recognize federal tax credit carryforwards attributable to excess tax benefits on stock compensation that had not been previously recognized to additional paid in capital. The Company also expects the new standard to have an on-going impact on the recording of excess tax benefits and deficiencies in our consolidated balance sheets and consolidated statements of income and comprehensive income. However, the magnitude of such impact is dependent upon our future grants of stock awards, our future stock price in relation to the fair value of awards on the grant date and the exercise behavior of stock option holders.

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




2. GOODWILL AND PURCHASED INTANGIBLE ASSETS

Goodwill

The carrying amounts of goodwill by segment as of September 30, 2017 and December 31, 2016 are included in the table below. Foreign currency fluctuations are included within other adjustments.
 
December 31, 2016
 
 
 
 
 
 
 
September 30, 2017
In millions
Goodwill
 
Accumulated Impairment Losses
 
Total
 
Additions
 
Impairment
 
Other
 
Goodwill
 
Accumulated Impairment Losses
 
Total
Software
$
1,930

 
$
(7
)
 
$
1,923

 
$
—

 
$
—

 
$
14

 
$
1,944

 
$
(7
)
 
$
1,937

Services
658

 
—

 
658

 
—

 
—

 
—

 
658

 
—

 
658

Hardware
162

 
(16
)
 
146

 
—

 
—

 
—

 
162

 
(16
)
 
146

Total goodwill
$
2,750

 
$
(23
)
 
$
2,727

 
$
—

 
$
—

 
$
14

 
$
2,764

 
$
(23
)
 
$
2,741


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)
 
September 30, 2017
 
December 31, 2016
In millions
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
Identifiable intangible assets
 
 
 
 
 
 
 
 
 
Reseller & customer relationships
1 - 20
 
$
659

 
$
(159
)
 
$
656

 
$
(128
)
Intellectual property
2 - 8
 
394

 
(339
)
 
392

 
(302
)
Customer contracts
8
 
89

 
(77
)
 
89

 
(66
)
Tradenames
2 - 10
 
73

 
(49
)
 
73

 
(42
)
Total identifiable intangible assets
 
 
$
1,215

 
$
(624
)
 
$
1,210

 
$
(538
)


The aggregate amortization expense (actual and estimated) for identifiable intangible assets for the following periods is:
In millions
Three months ended September 30, 2017
 
Nine months ended September 30, 2017
 
Remainder of 2017 (estimated)
Amortization expense
$
29

 
$
86

 
$
30


 
 
For the years ended December 31 (estimated)
In millions
 
2018
 
2019
 
2020
 
2021
 
2022
Amortization expense
 
$
85

 
$
75

 
$
57

 
$
49

 
$
45

    



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


3. DEBT OBLIGATIONS

The following table summarizes the Company's short-term borrowings and long-term debt:
 
September 30, 2017
 
December 31, 2016
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)
$
56

 
2.99%
 
$
45

 
2.88%
Trade Receivables Securitization Facility (1)
200

 
2.09%
 
—

 
 
Other (2)
13

 
13.08%
 
5

 
7.41%
 
Total short-term borrowings
$
269

 
 
 
$
50

 
 
Long-Term Debt
 
 
 
 
 
 
 
Senior Secured Credit Facility:
 
 
 
 
 
 
 
 
Term loan facility (1)
$
776

 
2.99%
 
$
821

 
2.88%
 
Revolving credit facility (1)
25

 
2.99%
 
—

 
 
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

 
 
Deferred financing fees
(25
)
 
 
 
(29
)
 
 
Other (2)
8

 
6.51%
 
9

 
6.64%
 
Total long-term debt
$
2,984

 
 
 
$
3,001

 
 
(1) 
Interest rates are weighted-average interest rates as of September 30, 2017 and December 31, 2016.
(2) 
Interest rates are weighted-average interest rates as of September 30, 2017 and December 31, 2016 primarily related to various international credit facilities and a note payable in the U.S.

Senior Secured Credit Facility On March 31, 2016, the Company amended and restated its senior secured credit facility with and among certain foreign subsidiaries of NCR (the Foreign Borrowers), the lenders party thereto and JPMorgan Chase Bank, NA (JPMCB) as the administrative agent, and refinanced its term loan facility and revolving credit facility thereunder (the Senior Secured Credit Facility). As of September 30, 2017, the Senior Secured Credit Facility consisted of a term loan facility with an aggregate principal amount outstanding of $832 million and a revolving credit facility with an aggregate principal amount of $1.1 billion, of which $25 million was outstanding. The revolving credit facility also allows a portion of the availability to be used for outstanding letters of credit, and as of September 30, 2017, there were no letters of credit outstanding.

Up to $400 million of the revolving credit facility is available to the Foreign Borrowers. Term loans were made to the Company in U.S. Dollars, and loans under the revolving credit facility are available in U.S. Dollars, Euros and Pound Sterling.

The outstanding principal balance of the term loan facility is required to be repaid in equal quarterly installments of approximately $11 million beginning June 30, 2016, $17 million beginning June 30, 2018, and $23 million beginning June 30, 2019, with the balance being due at maturity on March 31, 2021. Borrowings under the revolving portion of the credit facility are due March 31, 2021. Amounts outstanding under the Senior Secured Credit Facility bear interest at LIBOR (or, in the case of amounts denominated in Euros, EURIBOR), or, at NCR’s option, in the case of amounts denominated in U.S. Dollars, at a base rate equal to the highest of (a) the federal funds rate plus 0.50%, (b) JPMCB’s “prime rate” and (c) the one-month LIBOR rate plus 1.00% (the Base Rate), plus, in each case, a margin ranging from 1.25% to 2.25% for LIBOR-based loans that are either term loans or revolving loans and EURIBOR-based revolving loans and ranging from 0.25% to 1.25% for Base Rate-based loans that are either term loans or revolving loans, in each case, 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.


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

The obligations of the Company and Foreign Borrowers under the Senior Secured Credit Facility are guaranteed by certain of the Company's wholly-owned domestic subsidiaries. The Senior Secured Credit Facility and these guarantees are secured by a first priority lien and security interest in certain equity interests owned by the Company and the guarantor subsidiaries in certain of their respective domestic and foreign subsidiaries, and a perfected first priority lien and security interest in substantially all of the Company's U.S. assets and the assets of the guarantor subsidiaries, subject to certain exclusions. These security interests would be released if the Company achieves an “investment grade” rating, and will remain released so long as the Company maintains that rating.
The Senior Secured Credit Facility includes affirmative and negative covenants that restrict or limit the ability of the Company and its subsidiaries to, among other things, incur indebtedness; create liens on assets; engage in certain fundamental corporate changes or changes to the Company's business activities; make investments; sell or otherwise dispose of assets; engage in sale-leaseback or hedging transactions; repurchase stock, pay dividends or make similar distributions; repay other indebtedness; engage in certain affiliate transactions; or enter into agreements that restrict the Company's ability to create liens, pay dividends or make loan repayments. The Senior Secured Credit Facility also includes 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 on or prior to December 31, 2017, (a) the sum of 4.25 and an amount (not to exceed 0.50) to reflect debt used to reduce NCR’s unfunded pension liabilities to (b) 1.00, (ii) in the case of any fiscal quarter ending after December 31, 2017 and on or prior to December 31, 2019, (a) the sum of 4.00 and an amount (not to exceed 0.50) to reflect debt used to reduce NCR’s unfunded pension liabilities to (b) 1.00, and (iii) in the case of any fiscal quarter ending after December 31, 2019, the sum of (a) 3.75 and an amount (not to exceed 0.50) to reflect debt used to reduce NCR’s unfunded pension liabilities to (b) 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 September 30, 2017, the maximum consolidated leverage ratio under the Senior Secured Credit Facility was 4.35 to 1.00.

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

The Company may request, at any time and from time to time, but the lenders are not obligated to fund, the establishment of one or more incremental term loans and/or revolving credit facilities (subject to the agreement of existing lenders or additional financial institutions to provide such term loans and/or revolving credit facilities) with commitments in an aggregate amount not to exceed the greater of (i) $150 million, and (ii) such amount as would not (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. Under the indentures for these notes, the Company has the option to redeem each series of notes, in whole or in part, at various times for specified prices, plus accrued and unpaid interest.


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

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.  In November 2016, the Company amended the A/R Facility to extend the maturity date to November 2018. 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 $492 million and $426 million of outstanding accounts receivable as of September 30, 2017 and December 31, 2016, respectively, and these amounts are included in accounts receivable, net in the Company’s Condensed Consolidated Balance Sheets.

The financing subsidiary pays annual commitment and other customary fees to the lenders, and advances by a lender under the A/R Facility 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 that 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 September 30, 2017 and December 31, 2016 was $3.37 billion and $3.16 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)

4. 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 $31 million for the three months ended September 30, 2017 and 2016, respectively. Income tax expense was driven by an increase in discrete benefits, offset by an increase due to higher income from continuing operations in the three months ended September 30, 2017. Income tax expense was $78 million and $75 million for the nine months ended September 30, 2017 and 2016, respectively. The increase in income tax expense was driven by an increase in income from continuing operations, partially offset by an increase in discrete benefits in the nine months ended September 30, 2017. The increase in discrete benefits was primarily driven by the recognition of excess tax benefits of stock-based compensation awards in the income statement as a result of the adoption of the accounting standard update related to employee share-based payments. Refer to Note 1, “Basis of Presentation and Summary of Significant Accounting Policies” for additional discussion.




15
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NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

5. STOCK COMPENSATION PLANS

As of September 30, 2017, the Company’s primary type of stock-based compensation was restricted stock units. Stock-based compensation expenses for the following periods were:
In millions
Three months ended September 30
 
Nine months ended September 30
2017
 
2016
 
2017
 
2016
Restricted stock units
$
18

 
$
16

 
$
57

 
$
45

Employee stock purchase plan
1

 
—

 
3

 
—

Stock-based compensation expense
19

 
16

 
60

 
45

Tax benefit
(9)

 
(6)

 
(21)

 
(14
)
Total stock-based compensation expense (net of tax)
$
10

 
$
10

 
$
39

 
$
31


Stock-based compensation expense is recognized in the financial statements based upon fair value.

Restricted Stock Units As of September 30, 2017, the total unrecognized compensation cost of $128 million related to unvested restricted stock grants is expected to be recognized over a weighted average period of approximately 1.1 years.

Employee Stock Purchase Plan Effective January 1, 2017, the Company amended its Employee Stock Purchase Plan ("ESPP") to provide employees a 15% discount on stock purchases using a three-month look-back feature where the discount is applied to the stock price that represents the lower of NCR’s closing stock price on either the first day or the last day of each calendar quarter. Participants can contribute between 1% and 10% of their compensation.

For the three months ended September 30, 2017, employees purchased 0.2 million  shares, at a discounted price of $34.57. For the nine months ended September 30, 2017, employees purchased 0.4 million shares. The intrinsic value of shares purchased during the three and nine months ended September 30, 2017 was $0.8 million and $2.3 million, respectively. The intrinsic value is calculated as the difference between the market value on the date of purchase and the purchase price of the shares.

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



6. EMPLOYEE BENEFIT PLANS

Components of net periodic benefit cost (income) of the pension plans for the three months ended September 30 were as follows:
In millions
U.S. Pension Benefits
 
International Pension Benefits
 
Total Pension Benefits
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Net service cost
$
—

 
$
—

 
$
1

 
$
2

 
$
1

 
$
2

Interest cost
18

 
23

 
4

 
7

 
22

 
30

Expected return on plan assets
(14
)
 
(18
)
 
(9
)
 
(10
)
 
(23
)
 
(28
)
Amortization of prior service cost
—

 
—

 
1

 
1

 
1

 
1

Net periodic benefit cost (income)
$
4

 
$
5

 
$
(3
)
 
$
—

 
$
1

 
$
5


Components of the net periodic benefit cost (income) of the pension plans for the nine months ended September 30 were as follow:
In millions
U.S. Pension Benefits
 
International Pension Benefits
 
Total Pension Benefits
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Net service cost
$
—

 
$
—

 
$
5

 
$
6

 
$
5

 
$
6

Interest cost
54

 
68

 
14

 
21

 
68

 
89

Expected return on plan assets
(43
)
 
(54
)
 
(26
)
 
(28
)
 
(69
)
 
(82
)
Amortization of prior service cost
—

 
—

 
1

 
1

 
1

 
1

Net periodic benefit cost (income)
$
11

 
$
14

 
$
(6
)
 
$
—

 
$
5

 
$
14



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

Effective January 1, 2017, we changed the method used to estimate the service and interest components of net periodic benefit cost (income) for our significant pension plans where yield curves are available. Previously, we estimated such cost components utilizing a single weighted-average discount rate derived from the yield curve used to measure the pension benefit obligation. The new methodology utilizes a full yield curve approach by applying the specific spot rates along the yield curve used in the determination of the pension benefit obligation to their underlying projected cash flows and provides a more precise measurement of service and interest costs by improving the correlation between projected cash flows and their corresponding spot rates. This change does not affect the measurement of our total benefit obligation and is applied prospectively as a change in estimate, beginning January 1, 2017.

The benefit from the postretirement plan for the three and nine months ended September 30 was:
 
Three months ended September 30
 
Nine months ended September 30
In millions
2017
 
2016
 
2017
 
2016
Interest cost
$
1

 
$
—

 
$
1

 
$
—

Amortization of:
 
 
 
 
 
 
 
   Prior service benefit
$
(1
)
 
$
(4
)
 
(4
)
 
(11
)
   Actuarial loss
—

 
1

 
1

 
2

Net postretirement benefit
$
—

 
$
(3
)
 
$
(2
)
 
$
(9
)

The cost of the postemployment plan for the three and nine months ended September 30 was:
 
Three months ended September 30
 
Nine months ended September 30
In millions
2017
 
2016
 
2017
 
2016
Net service cost
$
7

 
$
4

 
$
26

 
$
12

Interest cost
1

 
—

 
2

 
1

Amortization of:
 
 
 
 
 
 
 
   Prior service benefit
(1
)
 
(1
)
 
(3
)
 
(4
)
   Actuarial gain
(1
)
 
(1
)
 
(3
)
 
(3
)
Net benefit cost
$
6

 
$
2

 
$
22

 
$
6

Restructuring severance cost
—

 
2

 
—

 
4

Total postemployment cost
$
6

 
$
4

 
$
22

 
$
10


Employer Contributions

Pension For the three and nine months ended September 30, 2017, NCR contributed $6 million and $15 million, respectively, to its international pension plans. In 2017, NCR anticipates contributing an additional $15 million to its international pension plans for a total of $30 million.

Postretirement For the three and nine months ended September 30, 2017, NCR contributed zero and $1 million, respectively, to its U.S. postretirement plan. NCR anticipates contributing an additional $2 million to its U.S. postretirement plan for a total of $3 million in 2017.

Postemployment For the three and nine months ended September 30, 2017, NCR contributed $8 million and $22 million, respectively, to its postemployment plans. NCR anticipates contributing an additional $13 million to its postemployment plans for a total of $35 million in 2017.



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

7. COMMITMENTS AND CONTINGENCIES

In the normal course of business, NCR is subject to various proceedings, lawsuits, claims and other matters, including, for example, those that relate to the environment and health and safety, labor and employment, employee benefits, import/export compliance, intellectual property, data privacy and security, product liability, commercial disputes and regulatory compliance, among others. Additionally, NCR is subject to diverse and complex laws and regulations, including those relating to corporate governance, public disclosure and reporting, environmental safety and the discharge of materials into the environment, product safety, import and export compliance, data privacy and security, antitrust and competition, government contracting, anti-corruption, and labor and human resources, which are rapidly changing and subject to many possible changes in the future. Compliance with these laws and regulations, including changes in accounting standards, taxation requirements, and federal securities laws among others, may create a substantial burden on, and substantially increase costs to NCR or could have an impact on NCR's future operating results. The Company has reflected all liabilities when a loss is considered probable and reasonably estimable in the Condensed Consolidated Financial Statements. We do not believe there is a reasonable possibility that losses exceeding amounts already recognized have been incurred, but there can be no assurances that the amounts required to satisfy alleged liabilities from such matters will not impact future operating results. Other than as stated below, the Company does not currently expect to incur material capital expenditures related to such matters. However, there can be no assurances that the actual amounts required to satisfy alleged liabilities from various lawsuits, claims, legal proceedings and other matters, including, but not limited to the Fox River and Kalamazoo River environmental matters and other matters discussed below, and to comply with applicable laws and regulations, will not exceed the amounts reflected in NCR’s Condensed Consolidated Financial Statements or will not have a material adverse effect on its consolidated results of operations, capital expenditures, competitive position, financial condition or cash flows.
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. As previously reported, the Company and its Board of Directors completed investigations with the assistance of experienced outside counsel and resolved a related shareholder derivative action.
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. With respect to the DOJ, the Company responded to its most recent requests for documents in 2014. 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.
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 applied for and received from OFAC various licenses that permitted the Company to take measures required to wind down its past operations in Syria. The last such license expired in April 2016, and in connection with that expiration the Company abandoned its remaining property in Syria, which was commercially insignificant, and ended the employment of its final two employees there, who had remained employed by the Company to assist with the execution of the Company's wind-down activities pursuant to authority granted by the OFAC licenses. The Company also submitted detailed reports to OFAC regarding this matter, including a description of the Company's comprehensive export control program and related remedial measures, and a description of the abandonment and related circumstances. In correspondence dated May 5, 2017, OFAC advised the Company it would not seek monetary penalties against the Company, and issued a so-called “cautionary letter” as a “final enforcement response.”

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

In 2013 the Company entered into a subcontract with a prime contractor with respect to certain information technology components of two airport construction projects in Oman. In 2015 the prime contractor’s contract with an Omani public agency was terminated for cause; the Company and the prime contractor (a joint venture) subsequently provided to each other notices of termination of the subcontract. The prime contractor subsequently filed liquidation proceedings in Oman. The Company had delivered and installed goods and services in the approximate amount of $40 million as of 2015 when the various contracts were terminated, approximately half of which sum remains due and owing; under the terms of the subcontract, most of the payment obligations by the Omani public agency to the terminated prime contractor, and from the terminated prime contractor to the Company, had not at that time matured. The Company remains engaged in the construction projects, having been urged by the Omani public agency to enter into a new subcontract with a new prime contractor, which the Company did later in 2015. In 2016 the Company entered into a partial settlement agreement with the Omani public agency under which it was paid approximately half of the sums owed to it, in exchange for certain deliverables under the original subcontract. The Company has identified various avenues to pursue, against the prime contractor and others, including the parent of one of the joint venture partners in the terminated prime contractor, to obtain recoveries of the remaining amounts owed to it. Based on the status of negotiations and proceedings as of September 30, 2017, the Company continues to maintain a reserve of approximately $20 million with respect to those portions of its claim that it considered did not meet the Company’s standard for probable recovery.
In June 2014, one of the Company’s Brazilian subsidiaries, NCR Manaus, was notified of a Brazilian federal tax assessment of R168 million, or approximately $53 million as of September 30, 2017, 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. The Company estimated the aggregate risk related to this matter to be zero to approximately $77 million as of September 30, 2017.

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.

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

NCR and API, along with B.A.T Industries p.l.c. (BAT), share among themselves a portion of the cost of the Fox River clean-up and natural resource damages (NRD) based upon a 1998 agreement (the Cost Sharing Agreement), a 2005 arbitration award (subsequently confirmed as a judgment), and a September 30, 2014 Funding Agreement (the Funding Agreement). The Cost Sharing Agreement and the arbitration resolved disputes that arose out of the Company's 1978 sale of its Fox River facilities to API. The Cost Sharing Agreement and arbitration award resulted in a 45% share for NCR of the first $75 million of such costs (a threshold that was reached in 2008), and a 40% share for amounts in excess of $75 million. The Funding Agreement arose out of a 2012 to 2014 arbitration dispute between NCR and API, and provides for regular, ongoing funding of NCR-incurred Fox River remediation costs via contributions, made to a new limited liability corporation created by the Funding Agreement, by BAT, API and, for 2014, API's indemnitor Windward Prospects. The Funding Agreement creates an obligation on BAT and API to fund 50% of NCR’s Fox River remediation costs from October 1, 2014 forward, although API’s Fox River-related obligations under the Funding Agreement were fully satisfied in 2016; 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. Please see Note 1, “Basis of Presentation and Summary of Significant Accounting Policies,” for additional information on API.
Various litigation proceedings concerning the Fox River are pending or have been concluded, and have been described in detail in previous Forms 10-Q and 10-K. As previously reported, a motion to approve the consent decree settlement (the CD settlement), which settlement was described by the Company in its Form 10-Q for the first quarter of 2017 had been pending in the federal district court in Wisconsin that had been overseeing the contribution action and the government enforcement action. In an order dated August 22, 2017, that court approved the CD settlement. As of September 30, 2017, the parties were addressing the content of a final order dismissing the litigation. Please see Note 1, “Basis of Presentation and Summary of Significant Accounting Policies,” for additional information on that litigation.
The CD settlement was negotiated by the federal and state governments and NCR, and is expected to resolve the remaining Fox River-related claims against the Company, subject to any appeals. The key components of the approved CD settlement, include (1) the Company’s commitment to complete the remediation of the Fox River, which is now expected to be completed in 2018 or 2019; (2) the Company’s conditional agreement to waive its contribution claims against the two remaining defendants in the case, GP and Glatfelter; (3) the Company’s agreement not to appeal the trial court’s decision on divisibility of harm; (4) the Governments’ agreement to include in the settlement so-called “contribution protection” in the Company’s favor as to GP’s and Glatfelter’s contribution claims against the Company, the effect of which will be to extinguish those claims; (5) the Governments’ agreement not to pursue the Company for the Governments’ past oversight costs; and (6) the Governments’ agreement to exercise prosecutorial discretion in pursuing other parties for future oversight costs and long-term monitoring and maintenance, with the Company retaining so-called “backstop” liability in the event that the other parties fail to pay future oversight costs or to perform long-term monitoring and maintenance. Additionally, although certain state law claims by GP and Glatfelter against the Company may not be affected directly by the CD settlement, the CD settlement provides that the Company’s contribution claims against those two parties will revive if those parties attempt to assert any claims against the Company relating to the Fox River, including any state law claims.
With respect to 2017 remediation, the Company had agreed to perform the remediation obligations set forth in the CD settlement while the motion for approval was pending, and that remediation work has proceeded.
With respect to the Company’s prior dispute with API, which was generally superseded by the Funding Agreement, the Company received timely payments as they came due under the Funding Agreement. Please see Note 1, “Basis of Presentation and Summary of Significant Accounting Policies,” for additional information on API.
In the quarter ending September 30, 2017, the remediation general contractor commenced an arbitration against the LLC, in a dispute over contract interpretation.
NCR's eventual remediation liability, followed by long-term monitoring expected to be performed by others, will depend on a number of factors. In establishing the reserve, NCR attempts to estimate a range of reasonably possible outcomes for each of these factors, although each range is itself uncertain. NCR uses its best estimate within the range, if that is possible. Where there is a range of equally possible outcomes, and there is no amount within that range that is considered to be a better estimate than any other amount, NCR uses the low end of the range. The significant factors include: (1) the total remaining clean-up costs, including long-term monitoring following completion of the clean-up, and what parties are assigned to discharge the post-clean-up tasks (as noted, the Company no longer expects to bear long-term monitoring costs); (2) total NRD for the site and the share that NCR will bear (which is now resolved as to the Company); (3) the share of clean-up costs that NCR will bear (which is resolved under the CD settlement); (4) NCR's transaction and litigation costs to defend itself 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

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

PRPs, in the year ended December 31, 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 September 30, 2017, the net reserve for the Fox River matter was approximately $12 million, compared to $27 million as of December 31, 2016. The change in the net reserve is due primarily to payments for clean-up activities and litigation costs. NCR contributes to the LLC to fund remediation activities and generally, by contract, has funded certain amounts of remediation expenses in advance. As of September 30, 2017 and December 31, 2016, approximately zero remained from this funding. NCR's reserve for the Fox River matter is reduced as the LLC makes payments to the remediation contractor and other vendors with respect to remediation activities.
Under a 1996 agreement, AT&T Corp. (AT&T) and Nokia (as the successor to Lucent Technologies and Alcatel-Lucent USA) are responsible severally (not jointly) for indemnifying NCR for certain portions of the amounts paid by NCR for the Fox River matter over a defined threshold and subject to certain offsets. (The agreement governs certain aspects of AT&T's divestiture of NCR and of what was then known as Lucent Technologies.) NCR's estimate of what AT&T and Nokia remain obligated to pay under the indemnity totaled approximately $17 million and $31 million as of September 30, 2017 and December 31, 2016, respectively, and is deducted in determining the net reserve discussed above.
Kalamazoo River In November 2010, USEPA issued a "general notice letter" to NCR with respect to the Allied Paper, Inc./Portage Creek/Kalamazoo River Superfund Site (Kalamazoo River site) in Michigan. Three other companies - International Paper, Mead Corporation, and Consumers Energy - also received general notice letters at or about the same time. USEPA asserts that the site is contaminated by various substances, primarily PCBs, as a result of discharges by various paper mills located along the river. USEPA does not claim that the Company made direct discharges into the Kalamazoo River, and NCR never had facilities at or near the Kalamazoo River site, but indicated that "NCR may be liable under Section 107 of CERCLA ... as an arranger, who by contract or agreement, arranged for the disposal, treatment and/or transportation of hazardous substances at the Site." USEPA stated that it "may issue special notice letters to [NCR] and other PRPs for future RI/FS [remedial investigation / feasibility studies] and RD/RA [remedial design / remedial action] negotiations."

In connection with the Kalamazoo River site, in December 2010 the Company, along with two other defendants, was sued in federal court by three 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. Various removal and remedial actions remain to be performed at the Kalamazoo River site, the costs for which generally have not yet 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, and the majority of contamination had occurred prior to 1969). NCR has preserved its right to appeal the September 2013 decision.

The Court did not determine NCR’s share of the overall liability, which the Company believes should be de minimis, or how NCR’s liability relates to the liability of other liable or potentially liable parties at the site. Relative shares of liability were tried to the court in a subsequent phase of the case; the trial concluded in December 2015, and posttrial briefing concluded in March 2016. The parties are awaiting the court's judgment. Prior to trial, in response to a motion filed by the Company, the court dismissed several portions of GP’s claims as time-barred, with the result that the past costs being tried total to approximately $50 million. The court may or may not also rule on the allocation of future costs. 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 Nokia under the arrangement discussed above in connection with the Fox River matter. Please see Note 1, “Basis of Presentation and Summary of Significant Accounting Policies,” with respect to API.

Environmental-Related Insurance Recoveries In connection with the Fox River and other environmental sites, through September 30, 2017, NCR has received a combined gross total of approximately $186 million in settlements reached with its principal insurance carriers. Portions of many of these settlements agreed in the 2010 through 2013 timeframe are payable to a law firm that litigated the claims on the Company's behalf. Some of the settlements cover not only the Fox River but also other environmental sites; some are limited to the Kalamazoo River site. Some of the settlements are directed to defense costs and some are directed to indemnity costs.

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

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. In those cases where insurance carriers or third-party indemnitors have agreed to pay any amounts and management believes that collectability of such amounts is probable, the amounts are recorded in the Condensed Consolidated Financial Statements. For the Fox River site, as described above, assets relating to the AT&T and Nokia indemnities 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 September 30, 2017 and December 31, 2016, NCR had no material obligations related to such guarantees, and therefore its Condensed Consolidated Financial Statements do not have any associated liability balance.

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

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

The Company recorded the activity related to the warranty reserve for the nine months ended September 30 as follows:
In millions
2017
 
2016
Warranty reserve liability
 
 
 
Beginning balance as of January 1
$
27

 
$
24

Accruals for warranties issued
29

 
31

Settlements (in cash or in kind)
(31
)
 
(29
)
Ending balance as of September 30
$
25

 
$
26

 
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, any payments made by the Company under these types of agreements have not had a material effect on the Company’s consolidated financial condition, results of operations or cash flows.

Leases NCR conducts certain of its sales and manufacturing operations using leased facilities, and also operates certain equipment and vehicles under leases, the initial lease terms of which vary in length. Many of the leases contain renewal options and escalation clauses that are not material to the overall lease portfolio. Since the filing of our 2016 Form 10-K, there have been no significant changes in future minimum lease payments under non-cancelable operating leases other than an increase of approximately $57 million related to a new lease agreement signed in Europe. The lease term is expected to commence in 2019, with projected cash payments of approximately $3 million in 2019, $11 million in 2020-2021 and $43 million in 2022 and thereafter.



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

8. SERIES A CONVERTIBLE PREFERRED STOCK

On December 4, 2015, NCR issued 820,000 shares of Series A Convertible Preferred Stock to certain entities affiliated with The Blackstone Group L.P. for an aggregate purchase price of $820 million, or $1,000 per share, pursuant to an Investment Agreement between the Company and Blackstone, dated November 11, 2015. In connection with the issuance of the Series A Convertible Preferred Stock, the Company incurred direct and incremental expenses of $26 million, including financial advisory fees, closing costs, legal expenses and other offering-related expenses. These direct and incremental expenses reduced the Series A Convertible Preferred Stock, and will be accreted through retained earnings as a deemed dividend from the date of issuance through the first possible known redemption date, March 16, 2024. Holders of Series A Convertible Preferred Stock are entitled to a cumulative dividend at the rate of 5.5% per annum, payable quarterly in arrears. During the three months ended September 30, 2017 and 2016, the Company paid dividends-in-kind of $11 million and $12 million, respectively, associated with the Series A Convertible Preferred Stock. During the nine months ended September 30, 2017 and 2016, the Company paid dividends-in-kind of $34 million and $35 million, respectively, associated with the Series A Convertible Preferred Stock. As of September 30, 2017 and December 31, 2016, the Company had accrued dividends of $3 million, respectively, associated with the Series A Convertible Preferred Stock. There were no cash dividends declared during the three and nine months ended September 30, 2017 or 2016.

The Series A Convertible Preferred Stock is convertible at the option of the holders at any time into shares of common stock at a conversion price of $30.00 per share, or a conversion rate of 33.333 shares of common stock per share of Series A Convertible Preferred Stock.

Under the Investment Agreement, Blackstone agreed not to sell or otherwise transfer its shares of Series A Convertible Preferred Stock (or any shares of common stock issued upon conversion thereof) without the Company’s consent until June 4, 2017. In March 2017, we provided Blackstone with an early release from this lock-up, allowing Blackstone to sell approximately 49% of its shares of Series A Convertible Preferred Stock, and in return, Blackstone agreed to amend the Investment Agreement to extend the lock-up on the remaining 51% of its shares of Series A Convertible Preferred Stock for six months until December 1, 2017.

In connection with the early release of the lock-up, Blackstone offered for sale 342,000 shares of Series A Convertible Preferred Stock in an underwritten public offering. In addition, Blackstone converted 90,000 shares of Series A Convertible Preferred Stock into shares of our common stock and we repurchased those shares of common stock for $48.47 per share. The underwritten offering and the stock repurchase were consummated on March 17, 2017.

The repurchase of the common shares immediately upon conversion is considered a redemption of the related preferred shares. As a result, the excess of the fair value of consideration transferred over the carrying value, of $58 million, was included as a deemed dividend in adjusting the income from common stockholders in calculating earnings per share for the nine months ended September 30, 2017. Additionally, we determined that the changes to the lock-up period were considered a modification of the Series A Convertible Preferred Stock. The impact of the modification, calculated as the difference in the fair value immediately before and immediately after the changes, of $4 million, was included as a deemed dividend in adjusting the income from common stockholders in calculating earnings per share for the nine months ended September 30, 2017. This adjustment was recorded as an increase to the Series A Convertible Preferred Shares and will reduce the accretion of the direct and incremental expenses associated with the original offering as described above. Refer to Note 10, "Earnings Per Share," for additional discussion.

As of September 30, 2017 and December 31, 2016, the maximum number of common shares that could be required to be issued upon conversion of the outstanding shares of Series A Convertible Preferred Stock was 27.1 million and 29.0 million shares, respectively.



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

9. STOCKHOLDERS' EQUITY

Changes in stockholders' equity in the nine months ended September 30, 2017 were as follows:
in millions
NCR Stockholders' Equity
Non-Redeemable Noncontrolling Interests in Subsidiaries
Total Stockholders' Equity
Balance at December 31, 2016
$
695

$
4

$
699

Adoption of share-based compensation accounting standard update
39

—

39

Balance at January 1, 2017
734

4

738

Net income
277

2

279

Other comprehensive income
17

(2
)
15

Repurchases of Company common stock
(350
)
—

(350
)
Series A Convertible Preferred Stock dividends
(36
)
—

(36
)
Deemed dividend on modification of Series A Convertible Preferred Stock
(4
)
—

(4
)
Redemption of Series A Convertible Preferred Stock
87

—

87

Employee stock compensation expense
60

—

60

Tax witholdings related to vesting of stock based awards
(26
)
—

(26
)
Proceeds from employee stock plans
11

—

11

Balance at September 30, 2017
$
770

$
4

$
774


During the nine months ended September 30, 2017, the Company repurchased 7.4 million shares of its common stock for $350 million. Upon repurchase, the shares were retired. Refer to Note 8, "Series A Convertible Preferred Stock," for further discussion of the Series A Convertible Preferred Stock dividends, the deemed dividend on modification and the redemption of the Series A Convertible Preferred Stock. Refer to Note 1, “Basis of Presentation and Summary of Significant Accounting Policies” for further discussion of the adoption of share-based compensation accounting standard update.



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

10. EARNINGS PER SHARE

Basic earnings per share (EPS) is calculated by dividing net income or loss attributable to NCR, less any dividends (declared or cumulative undeclared), deemed dividends, accretion or decretion, redemption or induced conversion on our Series A Convertible Preferred Stock, by the weighted average number of shares outstanding during the period.

In computing diluted EPS, we adjust the numerator used in the basic EPS computation, subject to anti-dilution requirements, to add back the dividends (declared or cumulative undeclared), deemed dividends, accretion or decretion, redemption or induced conversion on our Series A Convertible Preferred Stock. We adjust the denominator used in the basic EPS computation, subject to anti-dilution requirements, to include the dilution from potential shares related to the Series A Convertible Preferred Stock and stock-based compensation plans.

The holders of Series A Convertible Preferred Stock and unvested restricted stock units do not have nonforfeitable rights to common stock dividends or common stock dividend equivalents. Accordingly, the Series A Convertible Preferred Stock and unvested restricted stock units do not qualify as participating securities. See Note 5, "Stock Compensation Plans," for share information on NCR’s stock compensation plans.

The components of basic earnings per share are as follows:

In millions, except per share amounts
 
Three months ended September 30
 
Nine months ended September 30
 
2017
 
2016
 
2017
 
2016
Numerator
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
118

 
$
107

 
$
272

 
$
215

Series A Convertible Preferred Stock dividends
 
(12
)
 
(13
)
 
(36
)
 
(37
)
Deemed dividend on modification of Series A Convertible Preferred Stock
 
—

 
—

 
(4
)
 
—

Deemed dividend on Series A Convertible Preferred Stock redemption
 
—

 
—

 
(58
)
 
—

Net income from continuing operations attributable to NCR common stockholders
 
106

 
94

 
174

 
178

Income (loss) from discontinued operations, net of tax
 
—

 
(2
)
 
5

 
(2
)
Net income attributable to NCR common stockholders
 
$
106

 
$
92

 
$
179

 
$
176

 
 
 
 
 
 
 
 
 
Denominator
 
 
 
 
 
 
 
 
Basic weighted average number of shares outstanding
 
121.5

 
123.9

 
121.9

 
126.0

 
 
 
 
 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
From continuing operations
 
$
0.87

 
$
0.76

 
$
1.43

 
$
1.41

From discontinued operations
 
—

 
(0.02
)
 
0.04

 
(0.01
)
Total basic earnings per share
 
$
0.87

 
$
0.74

 
$
1.47

 
$
1.40


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


The components of diluted earnings per share are as follows:
In millions, except per share amounts
 
Three months ended September 30
 
Nine months ended September 30
 
2017
 
2016
 
2017
 
2016
Numerator
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
118

 
$
107

 
$
272

 
$
215

Series A Convertible Preferred Stock dividends
 
—

 
—

 
(36
)
 
—

Deemed dividend on modification of Series A Convertible Preferred Stock
 
—

 
—

 
(4
)
 
—

Deemed dividend on Series A Convertible Preferred Stock redemption
 
—

 
—

 
(58
)
 
—

Net income from continuing operations attributable to NCR common stockholders
 
118

 
107

 
174

 
215

(Loss) income from discontinued operations, net of tax
 
—

 
(2
)
 
5

 
(2
)
Net income attributable to NCR common stockholders
 
$
118

 
$
105

 
$
179

 
$
213

 
 
 
 
 
 
 
 
 
Basic weighted average number of shares outstanding
 
121.5

 
123.9

 
121.9

 
126.0

Dilutive effect of as-if converted Series A Convertible Preferred Stock
 
26.9

 
28.4

 
—

 
28.0

Dilutive effect of restricted stock units
 
4.7

 
3.1

 
5.0

 
2.8

Denominator - from continuing operations and total
 
153.1

 
155.4

 
126.9

 
156.8

 
 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
 
From continuing operations
 
$
0.77

 
$
0.69

 
$
1.37

 
$
1.37

From discontinued operations
 
—

 
(0.01
)
 
0.04

 
(0.01
)
Total diluted earnings per share
 
$
0.77

 
$
0.68

 
$
1.41

 
$
1.36


For the three months ended September 30, 2017 and September 30, 2016, it was more dilutive to assume the Series A Convertible Preferred Stock was converted to common stock and therefore weighted average outstanding shares of common stock were adjusted by the as-if converted Series A Convertible Preferred Stock and the diluted earnings per share was calculated excluding the quarterly dividends. For the three months ended September 30, 2017 and September 30, 2016, weighted average restricted stock units of 0.8 million and zero, respectively were excluded from the diluted share count because their effect would have been anti-dilutive.

For the nine months ended September 30, 2017, shares related to the as-if converted Series A Convertible Preferred Stock were excluded from the diluted share count because their effect would have been anti-dilutive. The weighted shares related to as-if converted Series A Convertible Preferred Stock, considering the existing and redeemed shares, excluded were 27.5 million. For the nine months ended September 30, 2017, weighted average restricted stock units of 0.8 million were excluded from the diluted share count because their effect would have been anti-dilutive.

For the nine months ended September 30, 2016, it was more dilutive to assume the Series A Convertible Preferred Stock was converted to common stock and therefore weighted average outstanding shares of common stock were adjusted by the as-if converted Series A Convertible Preferred Stock and the diluted earnings per share was calculated excluding the quarterly dividends.
For the nine months ended September 30, 2016, weighted average restricted stock units of 0.1 million were excluded from the diluted share count because their effect would have been anti-dilutive.

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



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.

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 September 30, 2017, the balance in AOCI related to foreign exchange derivative transactions was a loss of $1 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.

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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
 
September 30, 2017
In millions
Balance Sheet
Location
 
Notional
Amount
 
Fair
Value
 
Balance Sheet
Location
 
Notional
Amount
 
Fair
Value
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Other current assets
 
$
213

 
$
1

 
Other current liabilities
 
$
134

 
$
2

Total derivatives designated as hedging instruments
 
 
 
 
$
1

 
 
 
 
 
$
2

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Other current assets
 
$
132

 
$
1

 
Other current liabilities
 
$
167

 
$
1

Total derivatives not designated as hedging instruments
 
 
 
 
1

 
 
 
 
 
1

Total derivatives
 
 
 
 
$
2

 
 
 
 
 
$
3

 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Values of Derivative Instruments
 
December 31, 2016
In millions
Balance Sheet
Location
 
Notional
Amount
 
Fair
Value
 
Balance Sheet
Location
 
Notional
Amount
 
Fair
Value
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Other current assets
 
$
251

 
$
18

 
Other current liabilities
 
$
56

 
$
1

Total derivatives designated as hedging instruments
 
 
 
 
$
18

 
 
 
 
 
$
1

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Other current assets
 
$
165

 
$
1

 
Other current liabilities
 
$
218

 
$
1

Total derivatives not designated as hedging instruments
 
 
 
 
1

 
 
 
 
 
1

Total derivatives
 
 
 
 
$
19

 
 
 
 
 
$
2


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

The effects of derivative instruments on the Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016 were as follows:
In millions
Amount of Gain (Loss) Recognized in Other Comprehensive Income (OCI) on Derivative
(Effective Portion)
 
 
 
Amount of (Gain) Loss Reclassified from AOCI into the Condensed Consolidated Statement of Operations
(Effective Portion)
 
 
 
Amount of (Gain) Loss Recognized in the Condensed Consolidated Statement of Operations (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Derivatives in Cash Flow Hedging Relationships
For the three months ended September 30, 2017
 
For the three months ended September 30, 2016
 
Location of (Gain) Loss Reclassified from AOCI into the Condensed Consolidated Statement of Operations (Effective Portion)
 
For the three months ended September 30, 2017
 
For the three months ended September 30, 2016
 
Location of (Gain) Loss Recognized in the Condensed Consolidated Statement of Operations (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
For the three months ended September 30, 2017
 
For the three months ended September 30, 2016
Foreign exchange contracts
$
(5
)
 
$
4

 
Cost of products
 
$
1

 
$
—

 
Other (expense), 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 nine months ended September 30, 2017
 
For the nine months ended September 30, 2016
 
Location of (Gain) Loss Reclassified from AOCI into the Condensed Consolidated Statement of Operations (Effective Portion)
 
For the nine months ended September 30, 2017
 
For the nine months ended September 30, 2016
 
Location of (Gain) Loss Recognized in the Condensed Consolidated Statement of Operations (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
For the nine months ended September 30, 2017
 
For the nine months ended September 30, 2016
Interest rate swap (1)
$
—

 
$
(1
)
 
Interest expense
 
$
—

 
$
2

 
Interest expense
 
$
—

 
$
—

Foreign exchange contracts
$
(15
)
 
$
5

 
Cost of products
 
$
(2
)
 
$
—

 
Other (expense), net
 
$
—

 
$
—


(1) The Company was party to an interest rate swap agreement that fixed 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.
In millions
 
 
Amount of Gain (Loss) Recognized in the
Condensed Consolidated Statement of Operations
 
 
 
Three months ended September 30
 
Nine months ended September 30
Derivatives not Designated as Hedging Instruments
Location of Gain (Loss) Recognized in the Condensed Consolidated Statement of Operations
 
2017
 
2016
 
2017
 
2016
Foreign exchange contracts
Other (expense), net
 
$
(1
)
 
$
1

 
$
(3
)
 
$
—

Concentration of Credit Risk
NCR is potentially subject to concentrations of credit risk on accounts receivable and financial instruments such as hedging instruments and cash and cash equivalents. Credit risk includes the risk of nonperformance by counterparties. The maximum potential loss may exceed the amount recognized on the Condensed Consolidated Balance Sheets. Exposure to credit risk is managed through credit approvals, credit limits, selecting major international financial institutions (as counterparties to hedging transactions) and monitoring procedures. NCR’s business often involves large transactions with customers, and if one or more of those customers were to default on its obligations under applicable contractual arrangements, the Company could be exposed to potentially significant losses. However, management believes that the reserves for potential losses are adequate. As of September 30, 2017, we did not have any significant concentration of credit risk related to financial instruments.

30
Table of Contents
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 September 30, 2017 and December 31, 2016 are set forth as follows:
  
 
 
September 30, 2017
In millions
September 30, 2017
 
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)
$
4

 
$
4

 
$
—

 
$
—

Foreign exchange contracts (2)
2

 
—

 
2

 
—

Total
$
6

 
$
4

 
$
2

 
$
—

Liabilities:
 
 
 
 
 
 
 
Foreign exchange contracts (3)
$
3

 
$
—

 
$
3

 
$
—

Total
$
3

 
$
—

 
$
3

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