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NCR CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)(Edgar Glimpses Via Acquire Media NewsEdge) Overview The following were the significant events for the second quarter of 2014, each of which is discussed more fully in later sections of this MD&A: • Revenue increased approximately 8% from the prior year period; and • We continued to experience significant growth in software-related revenue (which we measure by combining software license and maintenance revenue, software as a service (SaaS) revenue and professional services revenue associated with software delivery). We have established a focused and consistent business strategy targeted at revenue growth, gross margin expansion, improved customer loyalty and employee engagement. To execute this strategy, we incorporate three key imperatives that align with our financial objectives for 2014 and beyond: deliver disruptive innovation; focus on migrating to higher margin software and recurring services revenue; and more fully enable our sales force with a consultative selling model that better leverages the innovation we are bringing to the market. Our strategy, which we continued to pursue in the second quarter of 2014, is summarized in more detail below: • Gain profitable share - We have been working to shift our business model to focus on growth of higher margin software and services revenue, including focusing our research and development efforts, changing and educating our sales force and executing transformative acquisitions in each of our core lines of business. At the same time, we are continuing our effort to optimize our investments in demand creation to increase NCR's market share in areas with the greatest potential for profitable growth, which include opportunities in self-service technologies with our core financial services, retail, and hospitality customers. We have focused on expanding our presence in our core industries, while seeking additional growth by: • penetrating market adjacencies in single and multi-channel self-service segments; • expanding and strengthening our geographic presence and sales coverage across customer tiers through use of the indirect channel; and • leveraging NCR Services and consumables solutions to grow our share of customer revenue, improve customer retention, and deliver increased value to our customers. • Expand into emerging growth industry segments - We are focused on broadening the scope of our self-service solutions from our existing customers to expand these solution offerings to customers in emerging industry-vertical markets including telecommunications and technology, travel and small business. We expect to grow our business in these industries through integrated service offerings in addition to targeted acquisitions and strategic partnerships. • Build the lowest cost structure in our industry - We strive to increase the efficiency and effectiveness of our core functions and the productivity of our employees through our continuous improvement initiatives. • Enhance our global service capability - We continue to identify and execute various initiatives to enhance our global service capability. We also focus on improving our service positioning, increasing customer service attach rates for our products and improving profitability in our services business. Our service capability can provide us a competitive advantage in winning customers, and it provides NCR with an attractive and stable revenue source. • Innovation of our people - We are committed to solution innovation across all customer industries. Our focus on innovation has been enabled by closer collaboration between NCR Services and our lines of business, and the movement of our software development and professional services resources directly into our various lines of business. We also have placed responsibility for hardware engineering in our Integrated Supply Chain organization, which is responsible for procuring the parts for, and manufacturing, our hardware products. Innovation is also driven through investments in training and developing our employees by taking advantage of our world-class training centers. We expect that these steps and investments will accelerate the delivery of innovative solutions focused on the needs of our customers and changes in consumer behavior. 41-------------------------------------------------------------------------------- Table of Contents • Enhancing the customer experience - We are committed to providing a customer experience to drive loyalty, focusing on product and software solutions based on the needs of our customers, a sales force enabled with the consultative selling model to better leverage the innovative solutions we are bringing to market, and sales and support service teams focused on delivery and customer interactions. We continue to rely on the Customer Loyalty Survey, among other metrics, to measure our current state and set a course for our future state where we aim to continuously improve with solution innovations as well as through the execution of our service delivery programs. • Pursue strategic acquisitions that promote growth and improve gross margin - We are continually exploring potential acquisition opportunities in the ordinary course of business to identify acquisitions that can accelerate the growth of our business and improve our gross margin mix, with a particular focus on software-oriented transactions. We may fund acquisitions through either equity or debt, including borrowings under our senior secured credit facility. In connection with executing this strategy, in July 2014, we announced a restructuring plan to strategically reallocate resources to position NCR to focus on our highest growth, highest margin opportunities in the software-driven consumer transaction technologies industry. The program is centered on ensuring our people and processes are aligned with our continued transformation and include: rationalizing our product portfolio to eliminate overlap and redundancy; end-of-lifeing older commodity product lines that are costly to maintain and provide little to no return; moving lower productivity services positions to our new centers of excellence due to the positive impact of services innovation; and reducing layers of management and organizing around divisions to improve decision-making, accountability and strategic execution. NCR expects to incur a related pre-tax charge in the range of approximately $150 million to $200 million that will be included in income from operations, with approximately $150 million recorded in 2014 and the remainder recorded in 2015. The estimate includes both severance and asset related charges. The cash impact of the restructuring plan is expected to be approximately $50 million in 2014 and $50 million in 2015. Annualized savings are expected to reach approximately $90 million by 2016. We expect to continue with these initiatives, including the restructuring plan, for the remainder of 2014 and beyond, as we refine our business model and position the Company for growth and profitability. Potentially significant risks to the execution of our initiatives include the global economic environment and its effect on capital spending by our customers, competition that can drive further price erosion and potential loss of market share, geopolitical instability in some of the countries in which we operate, difficulties associated with introduction of products in new self-service markets, market adoption of our products by customers, management and servicing of our existing indebtedness, and integration of previously completed acquisitions. Results from Operations Three and Six Months Ended June 30, 2014 Compared to Three and Six Months Ended June 30, 2013 The following table shows our results for the three and six months ended June 30: Three months ended June 30 Six months ended June 30 In millions 2014 2013 2014 2013 Revenue $1,658 $1,535 $3,176 $2,945 Gross margin $480 $426 $896 $795 Gross margin as a percentage of revenue 29.0% 27.8% 28.2% 27.0% Operating expenses Selling, general and administrative expenses $247 $232 $492 $461 Research and development expenses 64 55 127 110 Income from operations $169 $139 $277 $224 42-------------------------------------------------------------------------------- Table of Contents The following table shows our revenues and gross margins from products and services for the three and six months ended June 30: Three months ended June 30 Six months ended June 30 In millions 2014 2013 2014 2013 Product revenue $722 $743 $1,356 $1,410 Cost of products 531 550 1,007 1,053 Product gross margin $191 $193 $349 $357 Product gross margin as a percentage of revenue 26.5% 26.0% 25.7% 25.3% Services revenue $936 $792 $1,820 $1,535 Cost of services 647 559 1,273 1,097 Services gross margin $289 $233 $547 $438 Services gross margin as a percentage of revenue 30.9% 29.4% 30.1% 28.5% The following table shows our revenues by theater for the three months ended June 30: % Increase (Decrease) % Increase Constant In millions 2014 % of Total 2013 % of Total (Decrease) Currency Americas $834 50% $760 50% 10% 11 % Europe 408 25% 369 24% 11% 8 %Asia Middle East Africa (AMEA) 416 25% 406 26% 2% 5 % Consolidated revenue $1,658 100% $1,535 100% 8% 9 % The following table shows our revenues by theater for the six months ended June 30: % Increase (Decrease) % Increase Constant In millions 2014 % of Total 2013 % of Total (Decrease) Currency Americas $1,614 51% $1,496 51% 8% 10 % Europe 773 24% 690 23% 12% 10 % Asia Middle East Africa (AMEA) 789 25% 759 26% 4% 8 % Consolidated revenue $3,176 100% $2,945 100% 8% 9 % Revenue For the three months ended June 30, 2014 compared to the three months ended June 30, 2013, revenue increased 8% due to improvement in our financial services, hospitality, and emerging industries lines of business. Digital Insight generated $87 million of revenue in the three months ended June 30, 2014. Foreign currency fluctuations unfavorably impacted the revenue comparison by 1%. Our product revenue decreased 3% and our services revenue increased 18% year-over-year. The decrease in our product revenue was due to declines in the financial services, retail solutions, and emerging industries lines of business in the Americas theater and declines in the retail solutions and emerging industries lines of business in the AMEA theater partially offset by growth in all lines of business in the Europe theater and growth in the financial services line of business in the AMEA theater. The increase in our services revenue was primarily attributable to increases in professional and installation services, maintenance services and software as a service (SaaS). Services revenue increased in all lines of business in the Americas and Europe theaters and increased in the financial services and retail solutions lines of business in the AMEA theater. 43-------------------------------------------------------------------------------- Table of Contents For the six months ended June 30, 2014 compared to the six months ended June 30, 2013, revenue increased 8% due to improvement in our financial services, hospitality, and emerging industries lines of business. Digital Insight generated $163 million of revenue from the date of acquisition, January 10, 2014, through June 30, 2014. Foreign currency fluctuations unfavorably impacted the revenue comparison by 1%. Our product revenue decreased 4% and our services revenue increased 19% year-over-year. The decrease in our product revenue was due to declines in the financial services and retail solutions lines of business in the Americas theater and declines in the retail solutions and emerging industries lines of business in the AMEA theater partially offset by growth in the hospitality line of business in the Americas theater, growth in all lines of business in the Europe theater, and growth in the financial services and hospitality lines of business in the AMEA theater. The increase in our services revenue was primarily attributable to increases in professional and installation services, maintenance services and software as a service (SaaS). Services revenue increased in all lines of business in the Americas, Europe and AMEA theaters. Gross Margin Gross margin as a percentage of revenue in the three months ended June 30, 2014 was 29.0% compared to 27.8% in the three months ended June 30, 2013. Product gross margin in the three months ended June 30, 2014 was 26.5% compared to 26.0% in the three months ended June 30, 2013. Product gross margin in the three months ended June 30, 2014 was negatively impacted by $1 million in higher acquisition-related amortization of intangibles, or 0.1% as a percentage of product revenue. Excluding this item, product gross margin increased primarily due to a favorable sales mix. Services gross margin in the three months ended June 30, 2014 was 30.9% compared to 29.4% in the three months ended June 30, 2013. Services gross margin in the three months ended June 30, 2014 was negatively impacted by $6 million in higher acquisition-related amortization of intangibles and positively impacted by $5 million in lower pension expense, or 0.1% as a percentage of services revenue. Excluding these items, services gross margin increased due to a favorable mix of revenues, including an increase in SaaS revenues. Gross margin as a percentage of revenue in the six months ended June 30, 2014 was 28.2% compared to 27.0% in the six months ended June 30, 2013. Product gross margin in the six months ended June 30, 2014 was 25.7% compared to 25.3% in the six months ended June 30, 2013. Product gross margin in the six months ended June 30, 2014 was negatively impacted by $3 million in higher acquisition-related amortization of intangibles, or 0.2% as a percentage of product revenue. Excluding this item, product gross margin increased primarily due to a favorable sales mix. Services gross margin in the six months ended June 30, 2014 was 30.1% compared to 28.5% in the six months ended June 30, 2013. Services gross margin in the six months ended June 30, 2014 was negatively impacted by $12 million in higher acquisition-related amortization of intangibles and positively impacted by $10 million in lower pension expense, or 0.2% as a percentage of services revenue. Excluding these items, services gross margin increased due to a favorable mix of revenues, including an increase in SaaS revenues. Selling, General and Administrative Expenses Selling, general and administrative expenses were $247 million, or 14.9% as a percentage of revenue, in the three months ended June 30, 2014 as compared to $232 million, or 15.1% as a percentage of revenue, in the three months ended June 30, 2013. Selling, general and administrative expenses in the three months ended June 30, 2014 included $6 million of acquisition-related costs, $14 million of acquisition-related amortization of intangibles, $1 million of OFAC and FCPA related legal costs, and $1 million of pension costs. Selling, general, and administrative expenses in the three months ended June 30, 2013 included $14 million of acquisition-related costs, $8 million of acquisition-related amortization of intangibles, and $3 million of pension costs. Excluding these items, selling, general and administrative expenses remained relatively consistent as a percentage of revenue. Selling, general and administrative expenses were $492 million, or 15.5% as a percentage of revenue, in the six months ended June 30, 2014 as compared to $461 million, or 15.7% as a percentage of revenue, in the six months ended June 30, 2013. Selling, general and administrative expenses in the six months ended June 30, 2014 included $20 million of acquisition-related costs, $28 million of acquisition-related amortization of intangibles, $2 million of OFAC and FCPA related legal costs, and $1 million of pension costs. Selling, general and administrative expenses in the six months ended June 30, 2013 included $30 million of acquisition-related costs, $14 million of acquisition-related amortization of intangibles, $1 million of OFAC and FCPA related legal costs, and $5 million of pension costs. Excluding these items, selling, general and administrative expenses remained relatively consistent as a percentage of revenue. Research and Development Expenses Research and development expenses were $64 million, or 3.9% as a percentage of revenue, in the three months ended June 30, 2014 as compared to $55 million, or 3.6% as a percentage of revenue, in the three months ended June 30, 2013. Research and development expenses were $127 million, or 4.0% as a percentage of revenue, in the six months ended June 30, 2014 as compared to $110 million, or 3.7% as a percentage of revenue, in the six months ended June 30, 2013. The increase in both periods is in line with management expectations as we continue to invest in broadening our solutions. 44-------------------------------------------------------------------------------- Table of Contents Interest and Other Expense Items Interest expense was $46 million in the three months ended June 30, 2014 compared to $26 million in the three months ended June 30, 2013. Interest expense increased in the three months ended June 30, 2014 primarily as a result of interest payable on the Company's senior unsecured notes. Other expense, net was $3 million in the three months ended June 30, 2014 and June 30, 2013. Other expense, net in the three months ended June 30, 2014 primarily included losses from foreign exchange contracts not designated as hedging instruments, foreign currency fluctuations and bank fees. Other income, net in the three months ended June 30, 2013 primarily included losses from foreign currency fluctuations. Interest expense was $89 million in the six months ended June 30, 2014 compared to $47 million in the six months ended June 30, 2013 primarily as a result of interest payable on the Company's senior unsecured notes. Other expense, net was $10 million in the six months ended June 30, 2014 compared to other expense, net of $1 million in the the six months ended June 30, 2013. Other expense, net in the six months ended June 30, 2014 primarily included losses from foreign exchange contracts not designated as hedging instruments, foreign currency fluctuations and bank fees. Other expense, net in the six months ended June 30, 2013 primarily included losses from foreign currency fluctuations, partially offset by a gain on the sale of an investment. Provision for Income Taxes Income tax provisions for interim (quarterly) periods are based on an estimated annual effective income tax rate calculated separately from the effect of significant or unusual items. Income tax expense was $29 million for the three months ended June 30, 2014 compared to $23 million for the three months ended June 30, 2013. The increase in income tax expense was primarily driven by an increase in earnings. Income tax expense was $33 million for the six months ended June 30, 2014 compared to $25 million for the six months ended June 30, 2013. The increase in income tax expense was primarily driven by the one-time benefit of approximately $16 million included in the six months ended June 30, 2013 in connection with the American Taxpayer Relief Act, which was partially offset by an increase in discrete benefits in the six months ended June 30, 2014. NCR is subject to numerous federal, state and foreign tax audits. While NCR believes that appropriate reserves exist for issues that might arise from these audits, should these audits be settled, the resulting tax effect could impact the tax provision and cash flows in future periods. Revenue and Operating Income by Segment The Company manages and reports its businesses in the following four segments: • Financial Services - We offer solutions to enable customers in the financial services industry to reduce costs, generate new revenue streams and enhance customer loyalty. These solutions include a comprehensive line of ATM and payment processing hardware and software; cash management, video banking and customer-facing digital banking software; and related installation, maintenance, and managed and professional services. We also offer a complete line of printer consumables. • Retail Solutions - We offer solutions to customers in the retail industry designed to improve selling productivity and checkout processes as well as increase service levels. These solutions primarily include retail-oriented technologies, such as point of sale terminals and point of sale software; an omni-channel retail software platform with a comprehensive suite of retail software applications; innovative self-service kiosks, such as self-checkout; as well as bar-code scanners. We also offer installation, maintenance, managed and professional services and a complete line of printer consumables. • Hospitality - We offer technology solutions to customers in the hospitality industry, serving businesses that range from a single store or restaurant to global chains and sports and entertainment venues. Our solutions include point of sale hardware and software solutions, installation, maintenance, managed and professional services and a complete line of printer consumables. • Emerging Industries - We offer maintenance as well as managed and professional services for third-party computer hardware provided to select manufacturers, primarily in the telecommunications industry, who value and leverage our global service capability. Also included in the Emerging Industries segment are solutions designed to enhance the customer experience for the travel and gaming industries, such as self-service kiosks, and the small business industry, such as an all-in-one point of sale solution. Additionally, we offer installation, maintenance, and managed and professional services. 45-------------------------------------------------------------------------------- Table of Contents Each of these segments derives its revenues by selling products and services in the sales theaters in which NCR operates. Segments are measured for profitability by the Company's chief operating decision maker based on revenue and segment operating income. For purposes of discussing our operating results by segment, we exclude the impact of certain items (described below) from segment operating income, consistent with the manner by which management reviews each segment, evaluates performance, and reports our segment results under accounting principles generally accepted in the United States of America (otherwise known as GAAP). This format is useful to investors because it allows analysis and comparability of operating trends. It also includes the same information that is used by NCR management to make decisions regarding the segments and to assess our financial performance. The effect of pension expense and other significant, non-recurring items on segment operating income have been excluded from the operating income for each reporting segment presented below. Our segment results are reconciled to total Company results reported under GAAP in Note 13, "Segment Information" of the Notes to Condensed Consolidated Financial Statements. In the segment discussions below, we have disclosed the impact of foreign currency fluctuations as it relates to our segment revenue due to its significance during the quarter. Financial Services Segment The following table presents the Financial Services revenue and segment operating income for the three and six months ended June 30: Three months ended June 30 Six months ended June 30 In millions 2014 2013 2014 2013 Revenue $900 $782 $1,694 $1,496 Operating income $137 $95 $240 $152 Operating income as a percentage of revenue 15.2% 12.1% 14.2% 10.2% We completed the acquisition of Digital Insight on January 10, 2014. As a result, the revenue and operating income results for the Financial Services segment include the impact of Digital Insight from January 10, 2014. Digital Insight generated $87 million and $163 million of revenue and $27 million and $50 million of operating income in the three and six months ended June 30, 2014, respectively. Financial Services revenue increased 15% in the three months ended June 30, 2014 compared to the three months ended June 30, 2013. Financial Services revenue increased 13% in the six months ended June 30, 2014 compared to the six months ended June 30, 2013. The increase in both periods was driven by growth in product sales and services revenue in the Europe and AMEA theaters and growth in services revenue in the Americas theater, which includes the impact of the Digital Insight business, partially offset by declines in product sales in the Americas theater. Foreign currency fluctuations had an unfavorable impact on the three and six months ended revenue comparison by 1% and 2%, respectively. Operating income increased in the three months ended June 30, 2014 compared to the three months ended June 30, 2013 and in the six months ended June 30, 2014 compared to the six months ended June 30, 2013. The increase in both periods in operating income was driven by a higher mix of software revenue and the contribution of the Digital Insight business as noted above. Retail Solutions Segment The following table presents the Retail Solutions revenue and segment operating income for the three and six months ended June 30: Six months ended June Three months ended June 30 30 In millions 2014 2013 2014 2013 Revenue $503 $515 $993 $1,004 Operating income $48 $49 $84 $90 Operating income as a percentage of revenue 9.5% 9.5% 8.5% 9.0% Retail Solutions revenue decreased 2% in the three months ended June 30, 2014 compared to the three months ended June 30, 2013. Retail Solutions revenue decreased 1% in the six months ended June 30, 2014 compared to the six months ended June 30, 2013. The decrease in both periods was driven by declines in product sales in the Americas and AMEA theaters, partially offset 46-------------------------------------------------------------------------------- Table of Contents by growth in product sales in the Europe theater and growth in services revenue in all theaters. Foreign currency fluctuations did not impact the revenue comparison in either period. Operating income decreased in the three months ended June 30, 2014 compared to the three months ended June 30, 2013 and in the six months ended June 30, 2014 as compared to the six months ended June 30, 2013. The decrease in both periods in operating income was primarily due to decreased revenues. Hospitality Segment The following table presents the Hospitality revenue and segment operating income for the three and six months ended June 30: Three months ended June 30 Six months ended June 30 In millions 2014 2013 2014 2013 Revenue $170 $158 $319 $289 Operating income $23 $27 $35 $48 Operating income as a percentage of revenue 13.5% 17.1% 11.0% 16.6% Hospitality revenue increased 8% in the three months ended June 30, 2014 compared to the three months ended June 30, 2013. The increase was driven by higher product sales in the Europe theater and services revenue in the Americas and Europe theaters. Foreign currency fluctuations did not impact the revenue comparison. Hospitality revenue increased 10% in the six months ended June 30, 2014 compared to the six months ended June 30, 2013. The increase was driven by higher product sales and services revenue in all theaters. Foreign currency fluctuations did not impact the revenue comparison. Operating income decreased in the three months ended June 30, 2014 compared to the three months ended June 30, 2013 and in the six months ended June 30, 2014 as compared to the six months ended June 30, 2013. The decrease in both periods was driven by an unfavorable mix of revenue, including a large software transaction in the second quarter of 2013. Emerging Industries Segment The following table presents the Emerging Industries revenue and segment operating income for the three and six months ended June 30: Three months ended June 30 Six months ended June 30 In millions 2014 2013 2014 2013 Revenue $85 $80 $170 $156 Operating income $2 $11 $6 $21 Operating income as a percentage of revenue 2.4% 13.8% 3.5% 13.5% The Emerging Industries segment revenue increased 6% in the three months ended June 30, 2014 compared to the three months ended June 30, 2013. The increase was driven by higher product sales and services revenue in the Europe theater and higher services revenue in the Americas theater, partially offset by declines in product sales in the Americas and AMEA theaters. Foreign currency fluctuations did not impact the revenue comparison. The Emerging Industries segment revenue increased 9% in the six months ended June 30, 2014 compared to the six months ended June 30, 2013. The increase was driven by higher product sales and services revenue in the Europe theater and higher services revenue in the Americas and AMEA theaters, partially offset by declines in product sales in the AMEA theater. Foreign currency fluctuations did not impact the revenue comparison. Operating income decreased in the three months ended June 30, 2014 compared to the three months ended June 30, 2013 and in the six months ended June 30, 2014 compared to the six months ended June 30, 2013. Operating income in both periods was negatively impacted by onboarding costs associated with managed services contracts and continued investment in the small business industry. 47-------------------------------------------------------------------------------- Table of Contents Financial Condition, Liquidity, and Capital Resources Cash provided by operating activities was $111 million in the six months ended June 30, 2014 and cash used in operating activities was $11 million in the six months ended June 30, 2013. The increase in cash provided by operating activities was primarily driven by increased profitability and reduced pension contributions in the six months ended June 30, 2014. NCR's management uses a non-GAAP measure called "free cash flow" to assess the financial performance of the Company. We define free cash flow as net cash provided by (used in) operating activities and cash provided by (used in) discontinued operations, less capital expenditures for property, plant and equipment, less additions to capitalized software, plus discretionary pension contributions and settlements. We believe free cash flow information is useful for investors because it relates the operating cash flows from the Company's continuing and discontinued operations to the capital that is spent to continue and improve business operations. In particular, free cash flow indicates the amount of cash available after capital expenditures for, among other things, investments in the Company's existing businesses, strategic acquisitions, repurchase of NCR stock and repayment of debt obligations. Free cash flow does not represent the residual cash flow available for discretionary expenditures, since there may be other non-discretionary expenditures that are not deducted from the measure. Free cash flow does not have a uniform definition under GAAP, and therefore NCR's definition may differ from other companies' definitions of this measure. This non-GAAP measure should not be considered a substitute for, or superior to, cash flows from operating activities under GAAP. The table below reconciles net cash provided by (used in) operating activities to NCR's non-GAAP measure of free cash flow for the six months ended June 30: Six months ended June 30 In millions 2014 2013 Net cash provided by (used in) operating activities $111 $(11) Less: Expenditures for property, plant and equipment (66) (44) Less: Additions to capitalized software (73) (45) Net cash used in discontinued operations (38) (24) Pension discretionary contributions and settlements 18 80 Free cash used (non-GAAP) $(48) $(44) The increase in expenditures for property, plant and equipment and capitalized software was due to continued investment in the business. The change in cash flows from discontinued operations was driven by increases in Fox River transaction and remediation costs as well as the timing of payments from indemnification parties. Financing activities and certain other investing activities are not included in our calculation of free cash flow. Other investing activities primarily include business acquisitions, divestitures and investments as well as proceeds from the sales of property, plant and equipment. During the six months ended June 30, 2014, we completed the acquisition of Digital Insight for $1.64 billion, net of cash acquired. During the six months ended June 30, 2013, we completed multiple acquisitions that totaled $696 million, net of cash acquired, including the acquisition of Retalix Ltd. for $664 million, net of cash acquired. Our financing activities primarily include proceeds from employee stock plans, repurchase of NCR common stock and borrowings and repayments of credit facilities and notes. During the six months ended June 30, 2014 and 2013, proceeds from employee stock plans were $7 million and $45 million, respectively. During the six months ended June 30, 2014 and 2013, we paid $24 million and $27 million, respectively, of tax withholding payments on behalf of employees for stock based awards that vested. 48-------------------------------------------------------------------------------- Table of Contents On December 4, 2013, we amended our senior secured credit facility with and among the lenders party thereto and JPMorgan Chase Bank, N.A. (JPMCB), as the administrative agent. On December 4, 2013, under and in connection with the senior secured credit facility, we also entered into an incremental facility agreement with and among the lenders party thereto and JPMCB, as administrative agent. This incremental facility agreement created an additional $250 million of term loan commitments under the senior secured credit facility, which, along with incremental borrowings under the revolving credit facility, were drawn on January 10, 2014 in connection with the completion of the acquisition of Digital Insight. As of June 30, 2014, the senior secured credit facility consisted of a term loan facility in an aggregate principal amount of $1.37 billion, and a revolving credit facility in an aggregate principal amount of $850 million. The revolving credit facility also allows a portion of the availability to be used for outstanding letters of credit, and as of June 30, 2014, there were no outstanding letters of credit. As of June 30, 2014, the outstanding principal balance of the term loan facility was $1.37 billion and the outstanding balance on the revolving facility was $315 million. As of June 30, 2014 and December 31, 2013, we had outstanding $700 million in aggregate principal balance of 6.375% senior unsecured notes due 2023, $600 million in aggregate principal balance of 5.00% senior unsecured notes due 2022, $500 million in aggregate principal balance of 4.625% senior unsecured notes due 2021 and $400 million in aggregate principal balance of 5.875% senior unsecured notes due 2021. The aggregate principal amount from the 6.375% and 5.875% senior unsecured note offerings was initially deposited into a segregated escrow account, and was held in that escrow account to be used solely for the acquisition of Digital Insight, which was completed on January 10, 2014. See Note 5, "Debt Obligations," of the Notes to the Condensed Consolidated Financial Statements for additional information on our senior secured credit facility and senior unsecured notes and Note 3, "Acquisitions," of the Notes to the Condensed Consolidated Financial Statements for additional information on the acquisition of Digital Insight. In 2014, we expect to make contributions of $18 million to the executive pension plan, $78 million to the international pension plans, $35 million to the postemployment plan and $4 million to the postretirement plan. Included in these contributions, in connection with the previously announced third phase of our pension strategy, we expect to make discretionary pension contributions and settlements of approximately $46 million during 2014. We may make one or more additional discretionary contributions over the next twelve months, but no such contributions are currently scheduled. Additionally, in connection with the restructuring plan announced in July 2014, we expect to make incremental contributions to our postemployment plan of approximately $50 million in 2014. See Note 8, "Employee Benefit Plans," of the Notes to the Condensed Consolidated Financial Statements for additional discussion on our employee benefit plans. In 2014, NCR expects to make approximately $46 million of remediation and other payments related to the Fox River environmental matter, net of the payment obligations of its co-obligors; the amount does not include an estimate for payments to be received from insurers or indemnification parties. For additional information, refer to Note 9, "Commitments and Contingencies," of the Notes to Condensed Consolidated Financial Statements. Cash and cash equivalents held by the Company's foreign subsidiaries at June 30, 2014 and December 31, 2013, were $446 million and $461 million, respectively. Under current tax laws and regulations, if cash and cash equivalents and short-term investments held outside the United States are distributed to the United States in the form of dividends or otherwise, we may be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes, which could be significant. As of June 30, 2014, our cash and cash equivalents totaled $483 million and our total debt was $3.92 billion. Our borrowing capacity under the revolving credit facility was approximately $535 million at June 30, 2014. Our ability to generate positive cash flows from operations is dependent on general economic conditions, competitive pressures, and other business and risk factors described in Item 1A of Part I of the Company's 2013 Annual Report on Form 10-K and Item IA of Part II of this Quarterly Report on Form 10-Q. If we are unable to generate sufficient cash flows from operations, or otherwise comply with the terms of our credit facilities or senior unsecured notes, we may be required to seek additional financing alternatives. We believe that we have sufficient liquidity based on our current cash position, cash flows from operations and existing financing to meet our required pension, postemployment, and postretirement plan contributions, remediation payments related to the Fox River environmental matter, debt servicing obligations, payments related to the restructuring plan, and our operating requirements for the next twelve months. 49-------------------------------------------------------------------------------- Table of Contents Contractual and Other Commercial Commitments On January 10, 2014, in connection with the completion of the acquisition of Digital Insight, $250 million in incremental term loans were drawn under the Company's December 2013 incremental facility along with incremental borrowings under the revolving portion of the Company's senior secured credit facility. These borrowings have significantly altered the contractual and other commercial commitments related to debt obligations and interest on debt obligations previously described in our Annual Report on Form 10-K for the year ended December 31, 2013. The following table outlines our future debt obligations and future interest on debt obligations as of June 30, 2014 with projected cash payments in the years shown: July 1, 2014 through December 31, 2019 & In millions Total Amounts 2014 2015 - 2016 2017 - 2018 Thereafter Debt obligations $3,923 $46 $216 $1,453 $2,208 Interest on debt obligations 1,182 89 323 288 482 $5,105 $135 $539 $1,741 $2,690 For purposes of this table, we used interest rates as of June 30, 2014 to estimate the future interest on debt obligations and have assumed no voluntary prepayments of existing debt. See Note 5, "Debt Obligations," of the Notes to Condensed Consolidated Financial Statements for additional information related to our debt obligations and the related interest rate terms. For purposes of this table, we have also incorporated the expected fixed payments based on our interest rate swap related to our term loan. See Note 11, "Derivatives and Hedging Instruments" of the Notes to Condensed Consolidated Financial Statements for additional information related to our interest rate swap. The Company's uncertain tax positions are not expected to have a significant impact on liquidity or sources and uses of capital resources. Our product warranties are discussed in Note 9, "Commitments and Contingencies," of the Notes to Condensed Consolidated Financial Statements. Disclosure Pursuant to Section 13(r)(1)(D)(iii) of the Securities Exchange Act. Pursuant to Section 13(r)(1)(D)(iii) of the Securities Exchange Act of 1934, as amended, we note that, during the period from April 1, 2014 through June 30, 2014, we maintained a bank account and guarantees at the Commercial Bank of Syria ("CBS"), which was designated as a Specially Designated National pursuant to Executive Order 13382 ("EO 13382") on August 10, 2011. This bank account and the guarantees at CBS were maintained in the normal course of business prior to the listing of CBS pursuant to EO 13382. The bank account generated no interest during the period covered by this report. We note that the last known account balance as of July 23, 2014 was approximately $5,084. The guarantees did not generate any revenue or profits for the Company. Pursuant to a license granted to the Company by the Office of Foreign Asset Controls ("OFAC") on January 3, 2013, and subsequent licenses granted on April 29, 2013, July 12, 2013, and February 28, 2014, the Company is winding down its past operations in Syria. In connection with these efforts, the Company has also received a license from OFAC to close the CBS account and terminate any guarantees; an application to renew that license is pending. Following the closure of the account and termination of the guarantees, the Company does not intend to engage in any further business activities with CBS. Critical Accounting Policies and Estimates Management has reassessed the critical accounting policies as disclosed in our 2013 Form 10-K and determined that there were no changes to our critical accounting policies in the six months ended June 30, 2014. Also, there were no significant changes in our estimates associated with those policies. New Accounting Pronouncements See discussion in Note 1, "Basis of Presentation and Summary of Significant Accounting Policies" of the Notes to Condensed Consolidated Financial Statements for new accounting pronouncements. 50-------------------------------------------------------------------------------- Table of Contents Forward-Looking Statements This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements use words such as "expect," "anticipate," "outlook," "intend," "believe," "will," "should," "would," "could" and words of similar meaning. Statements that describe or relate to NCR's plans, goals, intentions, strategies or financial outlook, and statements that do not relate to historical or current fact, are examples of forward-looking statements. Forward-looking statements are based on our current beliefs, expectations and assumptions, which may not prove to be accurate, and involve a number of known and unknown risks and uncertainties, many of which are out of NCR's control. Forward-looking statements are not guarantees of future performance, and there are a number of important factors that could cause actual outcomes and results to differ materially from the results contemplated by such forward-looking statements, including those factors relating to: domestic and global economic and credit conditions; the impact of our indebtedness and its terms on our financial and operating activities; our ability to successfully introduce new solutions and compete and in the information technology industry; the transformation of our business model and our ability to sell higher-margin software and services; defects or errors in our products; manufacturing disruptions; the historical seasonality of our sales; foreign currency fluctuations; the availability and success of acquisitions, divestitures and alliances, including the acquisition of Digital Insight; our pension strategy and underfunded pension obligation; the success of our recently announced restructuring plan; tax rates; compliance with data privacy and protection requirements; reliance on third party suppliers; development and protection of intellectual property; workforce turnover and the ability to attract and retain skilled employees; environmental exposures from our historical and ongoing manufacturing activities; and uncertainties with regard to regulations, lawsuits, claims and other matters across various jurisdictions. Additional information concerning these and other factors can be found in the Company's filings with the U.S. Securities and Exchange Commission, including the Company's most recent annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Any forward-looking statement speaks only as of the date on which it is made. The Company does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Information About NCR NCR encourages investors to visit its web site (http://www.ncr.com) which is updated regularly with financial and other important information about NCR. |