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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, 2018
Commission File Number 001-00395
 ________________________
https://cdn.kscope.io/637443a2b3dfc435d7365d5013f7a73a-ncrbbpreferred2015a09.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.)
864 Spring Street NW
Atlanta, GA 30308
(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 19, 2018, there were approximately 118.2 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
2018
 
2017
 
2018
 
2017
Product revenue
$
534

 
$
657

 
$
1,585

 
$
1,829

Service revenue
1,016

 
1,006

 
3,019

 
2,905

Total revenue
1,550

 
1,663

 
4,604

 
4,734

Cost of products
473

 
528

 
1,344

 
1,430

Cost of services
667

 
663

 
2,027

 
1,959

Selling, general and administrative expenses
226

 
220

 
732

 
678

Research and development expenses
59

 
53

 
190

 
178

Asset impairment charges
—

 
—

 
183

 
—

Total operating expenses
1,425

 
1,464

 
4,476

 
4,245

Income from operations
125

 
199

 
128

 
489

Interest expense
(43
)
 
(42
)
 
(125
)
 
(122
)
Other (expense), net
(10
)
 
(7
)
 
(24
)
 
(16
)
Income (loss) from continuing operations before income taxes
72

 
150

 
(21
)
 
351

Income tax (benefit) expense
(15
)
 
31

 
(20
)
 
78

Income (loss) from continuing operations
87

 
119

 
(1
)
 
273

(Loss) income from discontinued operations, net of tax
(1
)
 
—

 
(38
)
 
5

Net income (loss)
86

 
119

 
(39
)
 
278

Net income attributable to noncontrolling interests
2

 
1

 
2

 
1

Net (loss) income attributable to NCR
$
84

 
$
118

 
$
(41
)
 
$
277

Amounts attributable to NCR common stockholders:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
85

 
$
118

 
$
(3
)
 
$
272

Series A convertible preferred stock dividends
(12
)
 
(12)

 
(36
)
 
(36
)
Deemed dividend on modification of Series A convertible preferred stock
—

 
—

 
—

 
(4
)
Deemed dividend on Series A convertible preferred stock related to redemption
—

 
—

 
—

 
(58
)
Income (loss) from continuing operations attributable to NCR common stockholders
73

 
106

 
(39
)
 
174

(Loss) income from discontinued operations, net of tax
(1
)
 
—

 
(38
)
 
5

Net income (loss) attributable to NCR common stockholders
$
72

 
$
106

 
$
(77
)
 
$
179

Income (loss) per share attributable to NCR common stockholders:
 
 
 
 
 
 
 
Income (loss) per common share from continuing operations
 
 
 
 
 
 
 
Basic
$
0.62

 
$
0.87

 
$
(0.33
)
 
$
1.43

Diluted
$
0.57

 
$
0.77

 
$
(0.33
)
 
$
1.37

Net income (loss) per common share
 
 
 
 
 
 
 
Basic
$
0.61

 
$
0.87

 
$
(0.65
)
 
$
1.47

Diluted
$
0.56

 
$
0.77

 
$
(0.65
)
 
$
1.41

Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
118.0

 
121.5

 
118.4

 
121.9

Diluted
149.3

 
153.1

 
118.4

 
126.9

See Notes to Condensed Consolidated Financial Statements.

3
Table of Contents

NCR Corporation
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 
In millions
Three months ended September 30
 
Nine months ended September 30
2018
 
2017
 
2018
 
2017
Net income (loss)
$
86

 
$
119

 
$
(39
)
 
$
278

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Currency translation adjustments
 
 
 
 
 
 
 
Currency translation (losses) gains
(13
)
 
6

 
(43
)
 
35

Derivatives
 
 
 
 
 
 
 
Unrealized gains (losses) on derivatives
1

 
(5
)
 
5

 
(15
)
   (Losses) gains on derivatives recognized during the period
(2
)
 
1

 
(2
)
 
(2
)
        Less income tax (benefit) provision
(1
)
 
—

 
(1
)
 
3

Employee benefit plans
 
 
 
 
 
 
 
   Amortization of prior service benefit
(2
)
 
(1
)
 
(7
)
 
(6
)
   Amortization of actuarial loss (benefit)
—

 
(1
)
 
1

 
(2
)
        Less income tax provision
—

 
—

 
1

 
2

Other comprehensive (loss) income
(17
)
 
—

 
(46
)
 
15

Total comprehensive income (loss)
69

 
119

 
(85
)
 
293

Less comprehensive income (loss) attributable to noncontrolling interests:
 
 
 
 
 
 
 
   Net income
2

 
1

 
2

 
1

   Currency translation gains (losses)
1

 
(2
)
 
(2
)
 
(2
)
Amounts attributable to noncontrolling interests
3

 
(1
)
 
—

 
(1
)
Comprehensive income (loss) attributable to NCR
$
66

 
$
120

 
$
(85
)
 
294

See Notes to Condensed Consolidated Financial Statements.

4
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NCR Corporation
Condensed Consolidated Balance Sheets (Unaudited)
In millions, except per share amounts
September 30, 2018
 
December 31, 2017
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
334

 
$
537

Accounts receivable, net
1,309

 
1,270

Inventories
916

 
780

Other current assets
296

 
243

Total current assets
2,855

 
2,830

Property, plant and equipment, net
348

 
341

Goodwill
2,589

 
2,741

Intangibles, net
501

 
578

Prepaid pension cost
133

 
118

Deferred income taxes
488

 
460

Other assets
591

 
586

Total assets
$
7,505

 
$
7,654

Liabilities and stockholders’ equity
 
 
 
Current liabilities
 
 
 
Short-term borrowings
$
246

 
$
52

Accounts payable
804

 
762

Payroll and benefits liabilities
225

 
219

Contract liabilities
427

 
458

Other current liabilities
302

 
398

Total current liabilities
2,004

 
1,889

Long-term debt
2,881

 
2,939

Pension and indemnity plan liabilities
803

 
798

Postretirement and postemployment benefits liabilities
130

 
133

Income tax accruals
118

 
148

Other liabilities
261

 
200

Total liabilities
6,197

 
6,107

Commitments and Contingencies (Note 9)

 

Redeemable noncontrolling interest
14

 
15

Series A convertible preferred stock: par value $0.01 per share, 3.0 shares authorized, 0.9 and 0.8 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively; redemption amount and liquidation preference of $859 and $825 as of September 30, 2018 and December 31, 2017, respectively
846

 
810
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, 2018 and December 31, 2017, respectively
—

 
—

Common stock: par value $0.01 per share, 500.0 shares authorized, 118.0 and 122.0 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively
1

 
1

Paid-in capital
19

 
60

Retained earnings
666

 
857

Accumulated other comprehensive loss
(242
)
 
(199)

Total NCR stockholders’ equity
444

 
719

Noncontrolling interests in subsidiaries
4

 
3

Total stockholders’ equity
448

 
722

Total liabilities and stockholders’ equity
$
7,505

 
$
7,654

See Notes to Condensed Consolidated Financial Statements.

5
Table of Contents

NCR Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
In millions
Nine months ended September 30
2018
 
2017
Operating activities
 
 
 
Net (loss) income
$
(39
)
 
$
278

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Income (loss) from discontinued operations
38

 
(5
)
Depreciation and amortization
249

 
263

Stock-based compensation expense
55

 
60

Deferred income taxes
(15
)
 
19

Gain on sale of property, plant and equipment
(2
)
 
(2
)
Impairment of goodwill and long-lived assets
193

 
1

Changes in assets and liabilities:
 
 
 
Receivables
(102
)
 
(107
)
Inventories
(182
)
 
(120
)
Current payables and accrued expenses
31

 
(132
)
Contract liabilities
(36
)
 
20

Employee benefit plans
(18
)
 
(13
)
Other assets and liabilities
(9
)
 
8

Net cash provided by operating activities
163

 
270

Investing activities
 
 
 
Expenditures for property, plant and equipment
(104
)
 
(81
)
Proceeds from sale of property, plant and equipment
3

 
6

Additions to capitalized software
(130
)
 
(125
)
Other investing activities, net
(4
)
 
—

Net cash used in investing activities
(235
)
 
(200
)
Financing activities
 
 
 
Short term borrowings, net
7

 
10

Payments on term credit facilities
(51
)
 
(37
)
Payments on revolving credit facilities
(1,433
)
 
(1,110
)
Borrowings on revolving credit facilities
1,608

 
1,335

Repurchases of Company common stock
(210
)
 
(350
)
Proceeds from employee stock plans
16

 
11

Tax withholding payments on behalf of employees
(30
)
 
(24
)
Other financing activities
—

 
(1
)
Net cash used in financing activities
(93
)
 
(166
)
Cash flows from discontinued operations
 
 
 
Net cash used in operating activities
(23
)
 
(14
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(12
)
 
16

Decrease in cash, cash equivalents, and restricted cash
(200
)
 
(94
)
Cash, cash equivalents and restricted cash at beginning of period
543

 
507

Cash, cash equivalents and restricted cash at end of period
$
343

 
$
413

in millions
September 30
2018
 
2017
Reconciliation of cash, cash equivalents and restricted cash as shown in the Condensed Consolidated Statements of Cash Flows
 
 
 
Cash and cash equivalents
$
334

 
$
405

Restricted cash included in Other assets
9

 
8

Total cash, cash equivalents and restricted cash
$
343

 
$
413

See Notes to Condensed Consolidated Financial Statements.

6
Table of Contents

NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)

Index to Financial Statements and Supplemental Data
 


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


 
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 2017 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, 2017.

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. Except as described below, no matters were identified that required adjustment of the Condensed Consolidated Financial Statements or additional disclosure.

Planned Acquisition of JetPay Corporation On October 19, 2018, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with JetPay Corporation (“JetPay”), a provider of end-to-end payment processing and human capital management solutions, pursuant to which NCR agreed to purchase all of the outstanding shares of common stock of JetPay through a cash tender offer at a price per share of $5.05 for a total value of approximately $184 million.

NCR plans to finance the acquisition through existing cash and existing capacity under its revolving credit facility. The transaction has been approved by the Board of Directors of each company. The transaction, which is subject to approval by regulatory authorities and other customary closing conditions, is currently expected to close by the end of the fourth quarter of 2018. However, it is possible that factors outside of our control could require us to complete the transaction at a later time or not at all.

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. Reclassifications had no effect on prior year net income or shareholders’ equity.

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 $18 million and $25 million during the three and nine months ended September 30, 2018, respectively, as compared to $37 million and $43 million during the three and nine months ended September 30, 2017, respectively. As of September 30, 2018 and December 31, 2017, we had $12 million and $18 million, respectively, in receivables outstanding from Bradesco.

Recent Accounting Pronouncements

Issued

In February 2016, the Financial Accounting Standards Board (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 and NCR plans to apply the provisions of the new leasing standard at the effective date rather than at the beginning of the earliest period presented under the transition method provided. The standard also includes options to elect a number of practical expedients.  We plan on electing the

8
Table of Contents
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs and are evaluating the remaining practical expedients available under the guidance. As part of the adoption of the standard, we have selected and are in the process of implementing new lease accounting software. We are also in the process of identifying and designing appropriate changes to our business processes, systems and controls to support the new standard, and we are continuing to evaluate the impact of the standard on our consolidated financial statements and related disclosures. At this time the Company cannot estimate the quantitative impact of adopting the new standard, but it is expected to have a material effect to the total assets and total liabilities reported on the consolidated balance sheet, and is not expected to have a material effect to the consolidated statement of operations or the consolidated statement of cash flows.

In August 2018, the FASB issued an accounting standard update which require additional disclosures related to the weighted-average interest crediting rates for cash balance plans and an explanation for the reasons for significant gains and losses related to changes in the benefit obligation for the period. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 on a retrospective basis with early adoption permitted. The impact of adopting this guidance is not expected to have a material impact on our consolidated financial statements.

In August 2018, the FASB issued an accounting standard update with new guidance on fair value measurement disclosure requirements which requires the disclosure of additions to and transfers into and out of Level 3 of the fair value hierarchy. The update also requires disclosure about the uncertainty in measurement as of the reporting date. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 with early adoption permitted. The impact of adopting this guidance is not expected to have a material impact on our consolidated financial statements.

In August 2018, the FASB issued additional guidance for an accounting update that was issued in April 2015 related to accounting for implementation costs incurred in a cloud computing arrangement that is also a service contract. If a cloud computing arrangement also includes an internal-use software, an intangible asset is recognized and a liability is recognized for any payments related to the software license. However, if a cloud computing arrangement does not include a software license, the entity should account for the arrangement as a service contract and any fees associated with the service are expensed as incurred. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The impact of adopting this guidance is not expected to have a material impact on our consolidated financial statements.

In October 2018, the FASB issued an accounting standards update for hedge accounting guidance that was issued in August 2017 which we adopted during the first quarter of the this year. This guidance allows for the use of a broad Treasury repurchase agreement financing rate which is referred to as the Secured Overnight Financing Rate (SOFR) to be used as an additional benchmark rate for hedge accounting purposes. This guidance is effective for entities that have already adopted the amendments of the hedge accounting guidance referenced above for fiscal years beginning after December 15, 2018 on a prospective basis for qualifying new or re-designated hedging relationships entered into on or after the date of adoption. The adoption of this accounting standard update is not expected to have a material effect on our consolidated financial statements.
Adopted

In May 2014, the FASB issued a new revenue recognition standard that superseded existing 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 was 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”). Effective January 1, 2018, we adopted the standard using the modified retrospective method applied to contracts that were not complete as of the date of adoption and recorded a cumulative adjustment to increase retained earnings by $2 million. Adoption of the new standard resulted in changes to our accounting policies for revenue recognition and deferred commissions. Refer to Note 2. Accounting Policies related to Revenue with Contracts with Customers, for the updated policy disclosures, and Note 3. Revenue Recognized under Previous Guidance, for presentation of what revenue would have been in the current periods had the Company continued to recognize revenue under the previous accounting guidance.

In August 2016, the FASB issued an accounting standards update which provides guidance regarding the classification of certain cash receipts and cash payments on the statement of cash flows, where specific guidance is provided for issues not previously addressed. This guidance is effective for annual reporting periods, including interim reporting within those periods, beginning after December 15, 2017, with early adoption permitted, and is required to be adopted using a retrospective approach. The adoption of this accounting standards update did not have a material effect on the Company's statement of cash flows.

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


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. Effective January 1, 2018, we adopted the standard using the modified retrospective method and recorded a cumulative adjustment to increase retained earnings by $13 million.

In November 2016, the FASB issued an accounting standards update which clarifies how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. The guidance requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The accounting standards 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 retrospectively with early adoption permitted. The adoption of this accounting standards update did not have a material effect on the Company's statement of cash flows.

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 standards 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. The adoption of this standard did not 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, which we early adopted as of January 1, 2018. Refer to Note 4. Goodwill and Long-Lived Assets for further discussion.

In March 2017, the FASB issued an accounting standards update with new guidance on an 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 standards update did not 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 standards update did not 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 standards update did not have a material effect on the Company's net income, cash flows or financial condition.


10
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NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

In February 2018, the FASB issued an accounting standards update which permits entities to reclassify tax effects stranded in accumulated other comprehensive income as a result of the enactment of the Tax Cuts and Jobs Act (U.S. Tax Reform) to retained earnings. Entities can elect to apply the guidance retrospectively or in the period of adoption. 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 standards update did not have a material effect on the Company's net income, cash flows or financial condition.

In March 2018, the FASB issued an accounting standards update which allowed SEC registrants to record provisional amounts in earnings for the year ended December 31, 2017 due to the complexities involved in accounting for the enactment of U.S. Tax Reform. The standard was effective upon issuance. The Company recognized the estimated income tax effects of U.S. Tax Reform in its 2017 Consolidated Financial Statements in accordance with SEC Staff Accounting Bulletin No. 118 (SAB No. 118). Refer to Note 6. Income Taxes, for further information regarding the provisional amounts recorded by the Company as of December 31, 2017.

2. ACCOUNTING POLICIES RELATED TO REVENUE WITH CONTRACTS WITH CUSTOMERS

The Company records revenue, net of sales tax, when the following five steps have been completed:

•
Identification of the contract(s) with a customer
•
Identification of the performance obligation(s) in the contract
•
Determination of the transaction price
•
Allocation of the transaction price to the performance obligations in the contract
•
Recognition of revenue when, or as, we satisfy performance obligations

The Company records revenue when, or as, performance obligations are satisfied by transferring control of a promised good or service to the customer. The Company evaluates the transfer of control primarily from the customer’s perspective where the customer has the ability to direct the use of and obtain substantially all of the remaining benefits from that good or service.

Our product revenue includes hardware and software which is generally recognized at a point in time, once all conditions for revenue recognition have been met. For hardware products, control is generally transferred when the customer has the ability to direct the use of and obtain substantially all of the remaining benefits of the products, which generally coincides with when the customer has assumed risk of loss of the goods sold. For software products, control is generally transferred when the customer takes possession of, or has complete access to, the software. In certain instances, customer acceptance is required prior to the passage of title and risk of loss of the delivered products. In such cases, revenue is not recognized until the customer acceptance is obtained. Delivery, acceptance, and transfer of title and risk of loss generally occur in the same reporting period. NCR's customers may request that delivery and passage of title and risk of loss occur on a bill and hold basis.

Our services revenue includes software as a service (SaaS), professional consulting, installation and maintenance support. SaaS primarily consists of fees to provide our customers access to our platform and cloud-based applications. Revenue from SaaS contracts is recognized as variable consideration directly allocated based on customer usage or on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Professional consulting primarily consists of software implementation, integration, customization and optimization services. Revenue from professional consulting contracts that involve significant production, modification or customization of the software is recognized over time as the services are performed. Revenue from professional consulting contracts that does not involve significant production, modification or customization of the software is recognized when the services are completed or customer acceptance of the service is received, if required. For installation and maintenance, control is transferred as the services are provided or ratably over the service period, or, if applicable, after customer acceptance of the service. We apply the ‘as invoiced’ practical expedient, for performance obligations satisfied over time, if the amount we may invoice corresponds directly with the value to the customer of the Company’s performance to date.  This expedient permits us to recognize revenue in the amount we invoice the customer.

NCR frequently enters contracts that include multiple performance obligations, including hardware, software, professional consulting services, installation services and maintenance support services. For these arrangements, the Company allocates the transaction price, at contract inception, to each performance obligation on a relative standalone selling price basis. The primary method used to estimate standalone selling price is the price that the Company charges for that good or service when the Company sells it separately in similar circumstances to similar customers.
If a contract includes software and services that involve significant production, modification or customization of the software, the services are not distinct from the software. For these contracts, both the software and professional services revenue is recognized

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

over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Estimated losses, if any, are recognized as soon as such losses become known.

The nature of our arrangements gives rise to several types of variable consideration including service level agreement credits, stock rotation rights, trade-in credits and volume-based rebates. At contract inception, we include this variable consideration in our transaction price when there is a basis to reasonably estimate the amount of the fee and it is probable there will not be a significant reversal. These estimates are generally made using the expected value method and a portfolio approach, based on historical experience, anticipated performance and our best judgment at the time. These estimates are reassessed at each reporting date. Because of our confidence in estimating these amounts, they are included in the transaction price of our contracts and the associated remaining performance obligations.

As a practical expedient, we do not adjust the promised amount of consideration for the effects of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised product or service to a customer and when the customer pays for that product or service will be one year or less. Payment terms with our customers are established based on industry and regional practices and generally do not exceed 30 days. We do not typically include extended payment terms in our contracts with customers.

The Company also does not adjust the transaction price for taxes collected from customers, as those amounts are netted against amounts remitted to government authorities.

We account for shipping and handling activities related to contracts with customers as costs to fulfill our promise to transfer the associated products, rather than as a separate performance obligation. Accordingly, we record amounts billed for shipping and handling costs as a component of net product sales, and classify such costs as a component of cost of products.
Accounts Receivable, net
Accounts receivable, net includes amounts billed and currently due from customers as well as amounts unbilled which typically result from sales under contracts where revenue recognized exceeds the amount billed to the customer and where the Company has an unconditional right to consideration. The amounts due are stated at their net estimated realizable value. NCR establishes provisions for doubtful accounts using percentages of accounts receivable balances to reflect historical average credit losses and specific provisions for known issues, such as risks of default.
Contract Assets and Liabilities
Contract assets include unbilled amounts where right to payment is not solely subject to the passage of time. Amounts may not exceed their net realizable value. Contract liabilities consist of advance payments, billings in excess of revenue recognized and deferred revenue.

Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. If the net position is a contract asset, the current portion is included in other current assets and the non-current portion is included in other assets in the Condensed Consolidated Balance Sheet. If the net position is a contract liability, the current portion is included in contract liabilities and the non-current portion is included in other liabilities in the Condensed Consolidated Balance Sheet.

The following table presents the net contract asset and contract liability balances as of September 30, 2018 and January 1, 2018:
In millions
Location in the Condensed Consolidated Balance Sheet
 
September 30, 2018
 
January 1, 2018
Current portion of contract assets
Other current assets
 
$
18

 
$
28

Current portion of contract liabilities
Contract liabilities
 
$
427

 
$
458

Non-current portion of contract liabilities
Other liabilities
 
$
95

 
$
95


During the nine months ended September 30, 2018, the Company recognized $326 million in revenue that was included in contract liabilities as of January 1, 2018.
 
Deferred Commissions

12
Table of Contents
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)


Our incremental costs of obtaining a contract, which consist of certain sales commissions, primarily for our SaaS revenue, are deferred and amortized on a straight-line basis over the period of expected benefit. We determined the period of expected benefit by taking into consideration customer contracts, the estimated life of the customer relationship, including renewals when the renewal commission is not commensurate with the initial commission, the expected life of the underlying technology and other factors. We classify deferred commissions as current or non-current based on the timing of when we expect to recognize the expense. The current and non-current portions of deferred commissions are included in other current assets and other assets, respectively, in the Condensed Consolidated Balance Sheet as of September 30, 2018. Amortization of deferred commissions is included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018.

Set-up Fees and Costs

Fees for the design, configuration, implementation and installation related to the software applications that are provided as a service are recognized over the contract term, which is generally five years. The related costs incurred that are determined to be incremental and recoverable contract-specific costs are deferred and amortized over the period of benefit, which is generally seven years.

Remaining Performance Obligations

Remaining performance obligations represent the transaction price of orders for which products have not been delivered or services have not been performed. As of September 30, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $3.5 billion. The Company expects to recognize revenue on approximately three-quarters of the remaining performance obligations over the next 12 months, with the remainder recognized thereafter. The majority of our professional services are expected to be recognized over the next 12 months but this is contingent upon a number of factors, including customers’ needs and schedules.

The Company has made two elections which affect the value of remaining performance obligations described above. We do not disclose remaining performance obligations for SaaS contracts where variable consideration is directly allocated based on usage or when the original expected length is one year or less.

13
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NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

3. REVENUE RECOGNIZED UNDER PREVIOUS GUIDANCE

As noted in Note 1. Basis of Presentation and Summary of Significant Accounting Policies, the Company adopted the new revenue recognition guidance effective January 1, 2018, using the modified retrospective approach. As a result, we recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings as of January 1, 2018. Adopting the new standard primarily impacted the deferral of incremental commission costs of obtaining SaaS contracts with customers. Other changes impact the timing of recognition for term-based software license sales and renewals, and estimating variable consideration at contract inception.  

The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. As such, the following table presents the results for the three and nine months ended September 30, 2018 under the previous guidance:

 
Three months ended September 30, 2018
In millions, except per share amounts
Under Current Guidance
 
Adjustments
 
Under Previous Guidance
Condensed Consolidated Statement of Operations
 
 
 
 
 
Product revenue
$
534

 
$
(20
)
 
$
514

Cost of products
473

 
(12
)
 
461

Income from operations
125

 
(8
)
 
117

Income from continuing operations before income taxes
72

 
(8
)
 
64

Income tax benefit
(15
)
 
(3
)
 
(18
)
Income from continuing operations
87

 
(5
)
 
82

Net income
86

 
(5
)
 
81

Net income attributable to NCR
$
84

 
$
(5
)
 
$
79

Loss per common share from continuing operations
 
 
 
 

Basic
$
0.62

 
$
(0.04
)
 
$
0.58

Diluted
$
0.57

 
$
(0.03
)
 
$
0.54

Net loss per common share
 
 
 
 

Basic
$
0.61

 
$
(0.04
)
 
$
0.57

Diluted
$
0.56

 
$
(0.03
)
 
$
0.53




14
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NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 
Nine months ended September 30, 2018
In millions, except per share amounts
Under Current Guidance
 
Adjustments
 
Under Previous Guidance
Condensed Consolidated Statement of Operations
 
 
 
 
 
Product revenue
$
1,585

 
$
(30
)
 
$
1,555

Cost of products
1,344

 
(14
)
 
1,330

Income (loss) from operations
128

 
(16
)
 
112

Loss from continuing operations before income taxes
(21
)
 
(16
)
 
(37
)
Income tax benefit
(20
)
 
(5
)
 
(25
)
Loss from continuing operations
(1
)
 
(11
)
 
(12
)
Net loss
(39
)
 
(11
)
 
(50
)
Net loss attributable to NCR
$
(41
)
 
$
(11
)
 
$
(52
)
Loss per common share from continuing operations
 
 
 
 
 
Basic
$
(0.33
)
 
$
(0.09
)
 
$
(0.42
)
Diluted
$
(0.33
)
 
$
(0.09
)
 
$
(0.42
)
Net loss per common share
 
 
 
 
 
Basic
$
(0.65
)
 
$
(0.09
)
 
$
(0.74
)
Diluted
$
(0.65
)
 
$
(0.09
)
 
$
(0.74
)

The following table presents balances as of September 30, 2018 under the current and previous guidance:
In millions
Under Current Guidance
 
Adjustments
 
Under Previous Guidance
Condensed Consolidated Balance Sheet
 
 
 
 
 
Assets
 
 
 
 
 
Accounts receivable, net
$
1,309

 
$
13

 
$
1,322

Other current assets
296

 
(7
)
 
289

Total current assets
2,855

 
6

 
2,861

Deferred income taxes
488

 
6

 
494

Other assets
591

 
(27
)
 
564

Total Assets
$
7,505

 
$
(15
)
 
$
7,490

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Contract liabilities
$
427

 
$
1

 
$
428

Other current liabilities
302

 
(2
)
 
300

Total current liabilities
2,004

 
(1
)
 
2,003

Total liabilities
6,197

 
(1
)
 
6,196

Retained earnings
666

 
(14
)
 
652

Total NCR stockholders’ equity

444

 
(14
)
 
430

Total stockholders’ equity
448

 
(14
)
 
434

Total liabilities and stockholders’ equity
$
7,505

 
$
(15
)
 
$
7,490



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


4. GOODWILL AND LONG-LIVED ASSETS

In addition to our annual goodwill impairment test performed in the fourth quarter, we perform interim impairment tests for long-lived and intangible assets, including goodwill, whenever events or changes in circumstances indicate that the carrying amount of the asset (group), which is the reporting unit for goodwill purposes, may not be recoverable. As noted in the Company’s 2017 Annual Report on Form 10-K, our annual impairment test indicated that the Company's hardware segment had the least amount of excess fair value over the carrying value, where the excess of fair value over carrying value was approximately 20%.

Late in the quarter ended June 30, 2018, we determined there was an indication that the carrying value of the net assets assigned to the Hardware reporting unit may not be recoverable. This determination was based on the lowering of our full year forecast for 2018, driven by reduced revenue and gross margin rates expected for the third and fourth quarters of 2018, and the resulting impact on the current year and future cash flow projections of the Hardware reporting unit.  

Given the undiscounted cash flows of the asset group, which we determined to be at the reporting unit level, were below the carrying value of the net assets, we recorded an impairment charge for the difference between the fair value and the carrying value of the long-lived assets. The fair value of the long-lived assets was determined based on the nature of the asset through either third party appraisals, replacement cost or discounted cash flow analysis.

For goodwill, consistent with the annual impairment test, fair value of the Hardware reporting unit was estimated using a weighted methodology considering the output from both the income and market approaches. The income approach incorporates the use of discounted cash flow (DCF) analysis. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including markets and market shares, sales volumes and prices, costs to produce, tax rates, capital spending, discount rate and working capital changes. The market approach is performed using the Guideline Public Companies (GPC) method which is based on earnings multiple data. Under both approaches, the fair value of the Hardware reporting unit was determined to be below the net asset value. Accordingly, we recorded an impairment charge up to the value of the goodwill assigned to the Hardware reporting unit which was the full amount recorded. Refer to Note 1. Basis of Presentation and Summary of Significant Accounting Policies for disclosure of adoption of new accounting guidance which eliminates the requirement to measure the implied fair value of goodwill to measure a goodwill impairment charge.

As a result, in the three months ended June 30, 2018 the Company recorded impairment charges of $21 million related to property, plant and equipment held and used in NCR's hardware reporting unit, $16 million related to purchased intangibles and $146 million for goodwill assigned to the Hardware reporting unit. These charges were recorded in the line item asset impairment charges in our Condensed Consolidated Statement of Operations for the nine months ended September 30, 2018.

The carrying amounts of goodwill by segment as of September 30, 2018 and December 31, 2017 are included in the table below. Foreign currency fluctuations are included within other adjustments.
 
December 31, 2017
 
 
 
 
 
 
 
September 30, 2018
In millions
Goodwill
 
Accumulated Impairment Losses
 
Total
 
Additions
 
Impairment
 
Other
 
Goodwill
 
Accumulated Impairment Losses
 
Total
Software
$
1,944

 
$
(7
)
 
$
1,937

 
$
—

 
$
—

 
$
(6
)
 
$
1,938

 
$
(7
)
 
$
1,931

Services
658

 
—

 
658

 
—

 
—

 
—

 
658

 
—

 
658

Hardware
162

 
(16
)
 
146

 
—

 
(146
)
 
—

 
162

 
(162
)
 
—

Total goodwill
$
2,764

 
$
(23
)
 
$
2,741

 
$
—

 
$
(146
)
 
$
(6
)
 
$
2,758

 
$
(169
)
 
$
2,589



16
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NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

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, 2018
 
December 31, 2017
In millions
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
Identifiable intangible assets
 
 
 
 
 
 
 
 
 
Reseller & customer relationships
1 - 20
 
$
659

 
$
(205
)
 
$
659

 
$
(170
)
Intellectual property
2 - 8
 
397

 
(369
)
 
410

 
(351
)
Customer contracts
8
 
89

 
(85
)
 
89

 
(81
)
Tradenames
2 - 10
 
73

 
(58
)
 
73

 
(51
)
Total identifiable intangible assets
 
 
$
1,218

 
$
(717
)
 
$
1,231

 
$
(653
)

The aggregate amortization expense (actual and estimated) for identifiable intangible assets for the following periods is:
In millions
Three months ended September 30, 2018
 
Nine months ended September 30, 2018
 
Remainder of 2018 (estimated)
Amortization expense
$
20

 
$
64

 
$
21


 
 
For the years ended December 31 (estimated)
In millions
 
2019
 
2020
 
2021
 
2022
 
2023
Amortization expense
 
$
76

 
$
58

 
$
50

 
$
45

 
$
43

    

5. DEBT OBLIGATIONS

The following table summarizes the Company's short-term borrowings and long-term debt:
 
September 30, 2018
 
December 31, 2017
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)
$
62

 
3.92%
 
$
51

 
3.21%
Trade Receivables Securitization Facility
175

 
3.11%
 
—

 
 
Other (2)
9

 
31.33%
 
1

 
3.71%
 
Total short-term borrowings
$
246

 
 
 
$
52

 
 
Long-Term Debt
 
 
 
 
 
 
 
Senior Secured Credit Facility:
 
 
 
 
 
 
 
 
Term loan facility (1)
$
698

 
3.92%
 
$
759

 
3.21%
 
Revolving credit facility
—

 
 
 
—

 
 
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
(19
)
 
 
 
(23
)
 
 
Other (2)
2

 
0.96%
 
3

 
1.62%
 
Total long-term debt
$
2,881

 
 
 
$
2,939

 
 
(1) 
Interest rates are weighted-average interest rates as of September 30, 2018 and December 31, 2017.

17
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NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(2) 
Interest rates are weighted-average interest rates as of September 30, 2018 and December 31, 2017 primarily related to various international credit facilities.

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, 2018, the Senior Secured Credit Facility consisted of a term loan facility with an aggregate principal amount outstanding of $760 million and a revolving credit facility with an aggregate principal amount of $1.1 billion, of which zero 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, 2018, 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 $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.

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 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 (ii) 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, 2018, the maximum consolidated leverage ratio under the Senior Secured Credit Facility was 4.10 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.


18
Table of Contents
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

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.

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 $507 million and $491 million of outstanding accounts receivable as of September 30, 2018 and December 31, 2017, 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, 2018 and December 31, 2017 was $3.15 billion and $3.07 billion, respectively.

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

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.


6. INCOME TAXES

Income tax provisions for interim (quarterly) periods are based on an estimated annual effective income tax rate calculated separately from the effect of significant, infrequent or unusual items. Income tax benefit was $15 million for the three months ended September 30, 2018 compared to income tax expense of $31 million for the three months ended September 30, 2017. The decrease in income tax expense was driven by lower income before taxes, tax method changes filed during the quarter that resulted in lower deferred tax assets subject to the downward rate remeasurement resulting from U.S. Tax Reform and an increase in discrete benefits in the three months ended September 30, 2018. The increase in discrete benefits was primarily driven by the impact of tax restructuring transactions.

In addition, during the three months ended September 30, 2018, the Company identified two out of period adjustments that net to $2 million of income tax benefit. The first adjustment was due to an error in the calculation of deferred tax liabilities associated with software capitalization resulting in $13 million of income tax benefit which should have been recorded in the fourth quarter of 2017 when deferred taxes were remeasured in connection with U.S. Tax Reform. The second adjustment was to write-off income tax assets related to expired foreign tax credits resulting in $11 million of income tax expense which should have been recorded between 2010 through 2017. The Company determined the impact of these errors was not material to the annual or interim financial statements of previous periods and the effect of correcting these errors was not material to the three and nine months ended September 30, 2018 and is not expected to be material to the 2018 annual financial statements.

Income tax benefit was $20 million for the nine months ended September 30, 2018 compared to income tax expense of $78 million for the nine months ended September 30, 2017. The decrease in income tax expense was driven by lower income before taxes, tax method changes filed during the quarter that resulted in lower deferred tax assets subject to the downward rate remeasurement resulting from U.S. Tax Reform and an increase in discrete benefits in the nine months ended September 30, 2018. The increase in discrete benefits was primarily driven by favorable audit settlements in international jurisdictions and the impact of tax restructuring transactions.

U.S. Tax Reform was enacted in December 2017. The SEC staff issued SAB 118 that allowed the Company to record provisional amounts for the impacts of the legislation, with the requirement that the accounting be completed in a period not to exceed one year from the date of enactment of the legislation. Pursuant to SAB 118, we had reverted to tax law that existed prior to U.S. Tax Reform on the realizability of deferred tax assets for foreign tax credit carryforwards and future repatriation of earnings from our foreign subsidiaries. As of September 30, 2018, the Company had not completed the accounting in its entirety for the tax effects of the legislation.
Due to the timing of the enactment and complexities in the tax legislation, we made reasonable estimates of the effects and recorded provisional amounts in our financial statements as of December 31, 2017. The provisional expense related to the re-measurement of our net U.S. deferred tax assets to the 21% corporate income tax rate and the repatriation tax, net of related foreign tax credits. In the nine months ended September 30, 2018, the Company has made a $40 million reduction primarily related to the rate remeasurement provisional amount. As we continue to evaluate the impact of U.S. Tax Reform and interpret any additional guidance issued by the U.S. Treasury Department or other standard-setting bodies, we may adjust the provisional amounts. Completion of our accounting could lead to a material increase or decrease in our effective tax rate during 2018.
The Company engages in regular discussions and negotiations with taxing authorities regarding tax matters, and the Company has determined that during 2018 it expects to resolve certain tax matters related to U.S. and foreign jurisdictions. As a result, as of September 30, 2018, we estimate that it is reasonably possible that gross unrecognized tax benefits may decrease by $50 million to $55 million in 2018.


7. STOCK COMPENSATION PLANS

As of September 30, 2018, the Company’s primary type of stock-based compensation was restricted stock units and stock options. Stock-based compensation expense for the following periods were:

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

In millions
Three months ended September 30
 
Nine months ended September 30
2018
 
2017
 
2018
 
2017
Restricted stock units
$
13

 
$
18

 
$
50

 
$
57

Stock options
1

 
—

 
2

 
—

Employee stock purchase plan
1

 
1

 
3

 
3

Stock-based compensation expense
15

 
19

 
55

 
60

Tax benefit
—

 
(9)

 
(7
)
 
(21
)
Total stock-based compensation expense (net of tax)
$
15

 
$
10

 
$
48

 
$
39


Stock-based compensation expense is recognized in the financial statements based upon grant date fair value. During the nine months ended September 30, 2018, the Company granted stock options and the weighted average fair value of option grants was estimated based on the below weighted average assumptions, which was $9.80 for the nine months ended September 30, 2018. During the nine months ended September 30, 2017 the Company did not grant any stock options.

 
Nine months ended September 30, 2018
Dividend yield
$
—

Risk-free interest rate
2.50
%
Expected volatility
34.88
%
Expected holding period (years)
3.8


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

As of September 30, 2018, the total unrecognized compensation cost of $92 million related to unvested restricted stock grants is expected to be recognized over a weighted average period of approximately 1.0 year. As of September 30, 2018, the total unrecognized compensation cost of $18 million related to unvested stock option grants is expected to be recognized over a weighted average period of approximately 1.9 years.

Employee Stock Purchase Plan The Company's Employee Stock Purchase Plan ("ESPP") provides 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, 2018, employees purchased 0.2 million shares, at a discounted price of $25.59. For the three months ended September 30, 2017, employees purchased 0.2 million shares, at a discounted price of $34.57.

8. 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
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Net service cost
$
—

 
$
—

 
$
2

 
$
1

 
$
2

 
$
1

Interest cost
16

 
18

 
4

 
4

 
20

 
22

Expected return on plan assets
(10
)
 
(14
)
 
(9
)
 
(9
)
 
(19
)
 
(23
)
Amortization of prior service cost
—

 
—

 
1

 
1

 
1

 
1

Net periodic benefit cost (income)
$
6

 
$
4

 
$
(2
)
 
$
(3
)
 
$
4

 
$
1



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

Components of net periodic benefit cost (income) of the pension plans for the nine months ended September 30 were as follows:
In millions
U.S. Pension Benefits
 
International Pension Benefits
 
Total Pension Benefits
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Net service cost
$
—

 
$
—

 
$
6

 
$
5

 
$
6

 
$
5

Interest cost
46

 
54

 
15

 
14

 
61

 
68

Expected return on plan assets
(32
)
 
(43
)
 
(25
)
 
(26
)
 
(57
)
 
(69
)
Amortization of prior service cost
—

 
—

 
1

 
1

 
1

 
1

Net periodic benefit cost (income)
$
14

 
$
11

 
$
(3
)
 
$
(6
)
 
$
11

 
$
5


The benefit from the postretirement plan for the following periods were:
 
Three months ended September 30
 
Nine months ended September 30
2018
 
2017
 
2018
 
2017
Interest cost
$
—

 
$
1

 
$
—

 
$
1

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

 
—

 
1

 
1

Net postretirement benefit
$
(1
)
 
$
—

 
$
(3
)
 
$
(2
)

The net cost of the postemployment plan for the following periods were:
 
Three months ended September 30
 
Nine months ended September 30
In millions
2018
 
2017
 
2018
 
2017
Net service cost
$
4

 
$
7

 
$
23

 
$
26

Interest cost
—

 
1

 
2

 
2

Amortization of:
 
 
 
 
 
 
 
   Prior service benefit
(2
)
 
(1
)
 
(4
)
 
(3
)
   Actuarial gain
—

 
(1
)
 
—

 
(3
)
Net benefit cost
$
2

 
$
6

 
$
21

 
$
22


The components of pension, postretirement and postemployment expense (benefit), other than net service cost, are included in other (expense), net in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017 .

Employer Contributions

Pension For the three and nine months ended September 30, 2018, NCR contributed $4 million and $17 million, respectively, to its international pension plans. NCR anticipates contributing an additional $13 million to its international pension plans for a total of $30 million in 2018.

Postretirement For the three and nine months ended September 30, 2018, NCR contributed zero and $1 million, respectively, to its U.S. postretirement plan. NCR anticipates contributing an additional $1 million to its U.S. postretirement plan for a total of $2 million in 2018.

Postemployment For the three and nine months ended September 30, 2018, NCR contributed $11 million and $29 million, respectively, to its postemployment plans. NCR anticipates contributing an additional $31 million to its postemployment plans for a total of $60 million in 2018.



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9. COMMITMENTS AND CONTINGENCIES

In the normal course of business, NCR is subject to various proceedings, lawsuits, claims and other matters, including, for example, those that relate to the environment and health and safety, labor and employment, employee benefits, import/export compliance, intellectual property, data privacy and security, product liability, commercial disputes and regulatory compliance, among others. Additionally, NCR is subject to diverse and complex laws and regulations, including those relating to corporate governance, public disclosure and reporting, environmental safety and the discharge of materials into the environment, product safety, import and export compliance, data privacy and security, antitrust and competition, government contracting, anti-corruption, and labor and human resources, which are rapidly changing and subject to many possible changes in the future. Compliance with these laws and regulations, including changes in accounting standards, taxation requirements, and federal securities laws among others, may create a substantial burden on, and substantially increase costs to NCR or could have an impact on NCR's future operating results. 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 June 2014, one of the Company’s Brazilian subsidiaries, NCR Manaus, was notified of a Brazilian federal tax assessment of R168 million, or approximately $41 million as of September 30, 2018, 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 in 2014. In December 2017, the Company prevailed in this appeal regarding substantially all of the disputed amounts. However, the Brazilian federal tax authority has further appealed this dispute to the next procedural level, so the dispute is ongoing. In further proceedings on this matter, an intermediate tribunal decided in NCR's favor in August 2018; a written opinion had not been issued as of September 30, 2018, but is expected soon. The Brazilian tax authorities will have the ability to appeal the decision. The Company estimated the aggregate risk related to this matter to be between zero to approximately $61 million as of September 30, 2018. Although the Company has not recorded an accrual, 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.
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 discussed 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 include 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), and others. 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. The parties have also contended that NCR is 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

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

agreement with an environmental remediation contractor to perform the work at the Fox River site. In-water dredging and remediation under the clean-up plan commenced shortly thereafter.

NCR and API, along with B.A.T Industries p.l.c. (BAT), share among themselves a portion of the cost of the Fox River clean-up and natural resource damages (NRD) based upon a 1998 agreement (the Cost Sharing Agreement), a 2005 arbitration award (subsequently confirmed as a judgment), and a September 30, 2014 Funding Agreement (the Funding Agreement). The Cost Sharing Agreement and the arbitration resolved disputes that arose out of the Company's 1978 sale of its Fox River facilities to API. The Cost Sharing Agreement and arbitration award resulted in a 45% share for NCR of the first $75 million of such costs (a threshold that was reached in 2008), and a 40% share for amounts in excess of $75 million. The Funding Agreement arose out of a 2012 to 2014 arbitration dispute between NCR and API, 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; (API’s Fox River-related obligations under the Funding Agreement were fully satisfied in 2016); the Funding Agreement also provides NCR contractual avenues for payment of, via direct and third-party sources, (1) the difference between BAT’s and API’s 60% obligation under the Cost Sharing Agreement and arbitration award on the one hand and their ongoing (since September 2014) 50% payments under the Funding Agreement on the other, as well as (2) 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 September 2014. As of September 30, 2018 and December 31, 2017, the receivable under the Funding Agreement was approximately $42 million and $38 million, respectively, and was included in other assets in the Condensed Consolidated Balance Sheet. The Company anticipates that it will collect sums related to the receivable in 2019 or later, likely after the remediation efforts related to the Fox River matter, described below, are complete. This receivable is not taken into account in calculating the Company’s Fox River net reserve.

The Company's litigations relating to contribution and enforcement claims concerning the Fox River have largely been concluded. A proposed consent decree settlement (the CD settlement) with respect to the contribution action (a case originally filed by NCR and API) and the government enforcement action (a case originally filed by the federal and state governments against several PRPs, including the Company) was successfully negotiated by NCR and the federal and state governments and was approved by the federal district court in Wisconsin, which had been presiding over those cases, on August 22, 2017. A final order of dismissal as to the Company in the contribution and government enforcement actions was subsequently entered; one party, Glatfelter, has appealed the approval of the CD settlement. That appeal remains pending.

The CD settlement, if approved on appeal, is expected to resolve the remaining Fox River-related claims against the Company. 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 2019 or 2020; (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.
In the quarter ending September 30, 2017, the remediation general contractor commenced an arbitration against the LLC, in a dispute over contract interpretation. That dispute is scheduled for a hearing in mid-2019.
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. Although API filed for bankruptcy protection in October 2017, it had made all of the payments to the Company in connection with the Fox River that are required of it by the Funding Agreement.
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

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

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 (with remaining litigation believed to be limited to the Glatfelter appeal and the claim brought by the general contractor, both referenced above); and (5) the share of NCR's payments that BAT will bear (which is governed by the Cost Sharing Agreement and the Funding Agreement, as discussed above; API is in bankruptcy and is not presumed likely to bear further shares of NCR’s payments). With respect to NRD, in connection with a certain settlement entered into by other PRPs in 2015, the Government withdrew the NRD claims it had prosecuted on behalf of NRD trustees, including those NRD claims asserted against the Company.
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, 2018, the gross reserve for the Fox River matter was approximately $19 million, compared to $36 million as of December 31, 2017. As of September 30, 2018, the net reserve for the Fox River matter was approximately $18 million, compared to $35 million as of December 31, 2017. The change in the net reserve is due 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, 2018 and December 31, 2017, 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.) Those companies have made the payments requested of them by the Company on an ongoing basis.
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 USEPA 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 Georgia-Pacific (GP) affiliate corporations in a private-party contribution and cost recovery action for alleged pollution. The suit, pending in Michigan, asks that the Company and the other defendants to pay a "fair portion" of these companies’ costs. Various removal and remedial actions remain to be decided upon and performed at the Kalamazoo River site, the costs for which generally have not yet been determined; in 2017 Records of Decisions were issued for two parts of the river, but such decisions for the majority of the work are expected to be made only over the next several years. The suit alleges that the Company is liable to the GP entities 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 at the Kalamazoo River site had occurred prior to 1969). NCR preserved its right to appeal the September 2013 decision.

In the 2013 decision the Court did not determine NCR’s share of overall liability. Relative shares of liability for the four companies were tried to the court in a subsequent phase of the case in December 2015. In a ruling issued on March 29, 2018, the court addressed responsibility for the costs that GP had incurred in the past, totaling to approximately $50 million; NCR and GP were each assigned a 40% share of those costs, and the other two companies were assigned 15% and 5% as their allocations. The court entered a judgment in the case on June 19, 2018, in which it indicated that it would not, allocate future costs, but would enter a declaratory judgment that the four companies together had responsibility for future costs, in amounts and shares to be determined. NCR expects to have claims against BAT and API under the Funding Agreement, discussed above for Kalamazoo River remediation expenses. API filed for bankruptcy protection in October 2017, and thus payment of its potential share under the Funding Agreement for so-called “future sites,” which would include the Kalamazoo River site, may be at risk, but as liability under the Cost Sharing Agreement and the Funding Agreement is joint and several, the bankruptcy is not anticipated to affect the Company’s ability to seek that

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

amount from BAT. The Company will also have indemnity or reimbursement claims against AT&T and Nokia under the arrangement discussed above in connection with the Fox River matter after expenses have met a contractual threshold set out in the 1996 agreement referenced above in the Fox River discussion.
In light of the 2018 decision, the Company has increased its reserve for the Kalamazoo River matter to $46 million as of September 30, 2018; as many aspects of the costs of remediation will not be determined for several years (and thus the high end of a range of possible costs for many areas of the site cannot be quantified at this time). The Company has made what it considers to be reasonable estimates of the low end of a range for such costs where remedies are identified, and/or of the costs of investigations and studies for areas of the river where remedies have not yet been determined, and the reserve is informed by those estimates. The extent of NCR’s potential liability remains subject to many uncertainties, particularly inasmuch as the work to be performed will take place in the 2020s and 2030s. Under other assumptions or estimates for possible costs of remediation, which the Company does not at this point consider to be reasonably estimable or verifiable, it is possible that the charge the Company has taken to discontinued operations reflected in this paragraph could approximately double.
In July 2018 the Company appealed to the United States Court of Appeals for the Seventh Circuit both the 2013 court decision, which it believes is in conflict with a decision from the Fox River trial court as to Operable Unit 1 of that site and an affirmance of that decision from the Court of Appeals for the Sixth Circuit, and the 2018 court decision, on various legal grounds.
Environmental-Related Insurance Recoveries In connection with the Fox River and other environmental sites, through September 30, 2018, NCR has received a combined gross total of approximately $202 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. The Company does not anticipate the material insurance recoveries specific to Kalamazoo River remediation costs will be available to it, owing to considerations under applicable Michigan law. Claims with respect to Kalamazoo River defense costs have now been settled, with the amounts of those settlements included in the sum reported above.
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 and Kalamazoo River sites, as described above, assets relating to the AT&T and Nokia indemnities and to the BAT obligations are recorded as payment is supported by contractual agreements, public filings and/or payment history.

Guarantees and Product Warranties In the ordinary course of business, NCR may issue performance guarantees on behalf of its subsidiaries to certain of its customers and other parties. Some of those guarantees may be backed by standby letters of credit, surety bonds, or similar instruments. In general, under the guarantees, NCR would be obligated to perform, or cause performance, over the term of the underlying contract in the event of an unexcused, uncured breach by its subsidiary, or some other specified triggering event, in each case as defined by the applicable guarantee. NCR believes the likelihood of having to perform under any such guarantee is remote. As of September 30, 2018 and December 31, 2017, 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.


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

The Company recorded the activity related to the warranty reserve for the nine months ended September 30 as follows:
In millions
2018
 
2017
Warranty reserve liability
 
 
 
Beginning balance as of January 1
$
26

 
$
27

Accruals for warranties issued
27

 
29

Settlements (in cash or in kind)
(32
)
 
(31
)
Ending balance as of September 30
$
21

 
$
25

 
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.


10. 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, 2018 and 2017, the Company paid dividends-in-kind of $11 million, respectively, associated with the Series A Convertible Preferred Stock. During the nine months ended September 30, 2018 and 2017, the Company paid dividends-in-kind of $34 million, respectively, associated with the Series A Convertible Preferred Stock. As of September 30, 2018 and December 31, 2017, 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, 2018 or 2017.

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

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

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 12. Earnings per Share for additional discussion.

As of September 30, 2018 and December 31, 2017, 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 28.6 million and 27.5 million shares, respectively.


11. STOCKHOLDER'S EQUITY

Changes in stockholders' equity in the nine months ended September 30, 2018 were as follows:
in millions
NCR Stockholders' Equity
Non-Redeemable Noncontrolling Interests in Subsidiaries
Total Stockholders' Equity
Balance at December 31, 2017
$
719

$
3

$
722

Adoption of accounting standard updates
15

—

15

Balance at January 1, 2018
734

3

737

Net loss
(41
)
1

(40
)
Other comprehensive loss
(44
)
—

(44
)
Repurchases of Company common stock
(210
)
—

(210
)
Series A Convertible Preferred Stock dividends
(36
)
—

(36
)
Employee stock compensation expense
55

—

55

Tax witholdings related to vesting of stock based awards
(30
)
—

(30
)
Proceeds from employee stock plans
16

—

16

Balance at September 30, 2018
$
444

$
4

$
448


During the nine months ended September 30, 2018, the Company repurchased 6.1 million shares of its common stock for $210 million. Upon repurchase, the shares were retired. Refer to Note 1. Basis of Presentation and Summary of Significant Accounting Policies for further discussion of the adoption of accounting standard updates.



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

12. 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, unvested restricted stock units and stock options do not have nonforfeitable rights to common stock dividends or common stock dividend equivalents. Accordingly, the Series A Convertible Preferred Stock, unvested restricted stock units and stock options do not qualify as participating securities. See Note 7. 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
 
2018
 
2017
 
2018
 
2017
Numerator
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
85

 
$
118

 
$
(3
)
 
$
272

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

 
—

 
—

 
(4
)
Deemed dividend on Series A Convertible Preferred Stock redemption
 
—

 
—

 
—

 
(58
)
Net income (loss) from continuing operations attributable to NCR common stockholders
 
73

 
106

 
(39
)
 
174

(Loss) income from discontinued operations, net of tax
 
(1
)
 
—

 
(38
)
 
5

Net income (loss) attributable to NCR common stockholders
 
$
72

 
$
106

 
$
(77
)
 
$
179

 
 
 
 
 
 
 
 
 
Denominator
 
 
 
 
 
 
 
 
Basic weighted average number of shares outstanding
 
118.0

 
121.5

 
118.4

 
121.9

 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share:
 
 
 
 
 
 
 
 
From continuing operations
 
$
0.62

 
$
0.87

 
$
(0.33
)
 
$
1.43

From discontinued operations
 
(0.01
)
 
—

 
(0.32
)
 
0.04

Total basic earnings (loss) per share
 
$
0.61

 
$
0.87

 
$
(0.65
)
 
$
1.47


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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
 
2018
 
2017
 
2018
 
2017
Numerator
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
85

 
$
118

 
$
(3
)
 
$
272

Series A Convertible Preferred Stock dividends
 
—

 
—

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

 
—

 
—

 
(4
)
Deemed dividend on Series A Convertible Preferred Stock redemption
 
—

 
—

 
—

 
(58
)
Net income (loss) from continuing operations attributable to NCR common stockholders
 
85

 
118

 
(39
)
 
174

(Loss) income from discontinued operations, net of tax
 
(1
)
 
—

 
(38
)
 
5

Net income (loss) attributable to NCR common stockholders
 
$
84

 
$
118

 
$
(77
)
 
$
179

 
 
 
 
 
 
 
 
 
Basic weighted average number of shares outstanding
 
118.0

 
121.5

 
118.4

 
121.9

Dilutive effect of as-if converted Series A Convertible Preferred Stock
 
28.4

 
26.9

 
—

 
—

Dilutive effect of restricted stock units
 
2.9

 
4.7

 
—

 
5.0

Denominator
 
149.3

 
153.1

 
118.4

 
126.9

 
 
 
 
 
 
 
 
 
Diluted earnings (loss) per share:
 
 
 
 
 
 
 
 
From continuing operations
 
$
0.57

 
$
0.77

 
$
(0.33
)
 
$
1.37

From discontinued operations
 
(0.01
)
 
—

 
(0.32
)
 
0.04

Total diluted earnings (loss) per share
 
$
0.56

 
$
0.77

 
$
(0.65
)
 
$
1.41


For the three months ended September 30, 2018, 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 dividend. Weighted average restricted stock units and stock options of 3.0 million were excluded from the diluted share count because their effect would have been anti-dilutive.

For the three months ended September 30, 2017, 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, 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, 2018, 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 excluded were 28.1 million. Weighted average restricted stock units of 6.7 million 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. Weighted average restricted stock units of 0.8 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)


13. 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, 2018, the balance in AOCI related to foreign exchange derivative transactions was a gain 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, 2018
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
 
$
80

 
$
3

 
Other current liabilities
 
$
—

 
$
—

Total derivatives designated as hedging instruments
 
 
 
 
$
3

 
 
 
 
 
$
—

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Other current assets
 
$
164

 
$
1

 
Other current liabilities
 
$
227

 
$
1

Total derivatives not designated as hedging instruments
 
 
 
 
1

 
 
 
 
 
1

Total derivatives
 
 
 
 
$
4

 
 
 
 
 
$
1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Values of Derivative Instruments
 
December 31, 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
 
$
104

 
$
—

 
Other current liabilities
 
$
142

 
$
1

Total derivatives designated as hedging instruments
 
 
 
 
$
—

 
 
 
 
 
$
1

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Other current assets
 
$
101

 
$
1

 
Other current liabilities
 
$
292

 
$
1

Total derivatives not designated as hedging instruments
 
 
 
 
1

 
 
 
 
 
1

Total derivatives
 
 
 
 
$
1

 
 
 
 
 
$
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, 2018 and 2017 were as follows:
In millions
Amount of Gain (Loss) Recognized in Other Comprehensive Income (OCI) on Derivative
 
 
 
Amount of (Gain) Loss Reclassified from AOCI into the Condensed Consolidated Statement of Operations
Derivatives in Cash Flow Hedging Relationships
For the three months ended September 30, 2018
 
For the three months ended September 30, 2017
 
Location of (Gain) Loss Reclassified from AOCI into the Condensed Consolidated Statement of Operations
 
For the three months ended September 30, 2018
 
For the three months ended September 30, 2017
Foreign exchange contracts
$
1

 
$
(5
)
 
Cost of products
 
$
(2
)
 
$
1

 
 
 
 
 
 
 
 
 
 
In millions
Amount of Gain (Loss) Recognized in Other Comprehensive Income (OCI) on Derivative
 
 
 
Amount of (Gain) Loss Reclassified from AOCI into the Condensed Consolidated Statement of Operations
Derivatives in Cash Flow Hedging Relationships
For the nine months ended September 30, 2018
 
For the nine months ended September 30, 2017
 
Location of (Gain) Loss Reclassified from AOCI into the Condensed Consolidated Statement of Operations (Effective Portion)
 
For the nine months ended September 30, 2018
 
For the nine months ended September 30, 2017
Foreign exchange contracts
$
5

 
$
(15
)
 
Cost of products
 
$
(2
)
 
$
(2
)


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
 
2018
 
2017
 
2018
 
2017
Foreign exchange contracts
Other (expense), net
 
$
(1
)
 
$
(1
)
 
$
(4
)
 
$
(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, 2018, we did not have any significant concentration of credit risk related to financial instruments.


14. 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, 2018 and December 31, 2017 are set forth as follows:

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

  
September 30, 2018
In millions
Total
 
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)
$
25

 
$
25

 
$
—

 
$
—

Foreign exchange contracts (2)
4

 
—

 
4

 
—

Total
$
29

 
$
25

 
$
4

 
$
—

Liabilities:
 
 
 
 
 
 
 
Foreign exchange contracts (3)
$
1

 
$
—

 
$
1

 
$
—

Total
$
1

 
$
—

 
$
1

 
$
—


 
December 31, 2017
In millions
Total
 
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)
$
90

 
$
90

 
$
—

 
$
—

Foreign exchange contracts (2)
1

 
—

 
1

 
—

Total
$
91

 
$
90

 
$
1

 
$
—

Liabilities:
 
 
 
 
 
 
 
Foreign exchange contracts (3)
2

 
—

 
2

 
—

Total
$
2

 
$
—

 
$
2

 
$
—


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

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

Assets Measured at Fair Value on a Non-recurring Basis

From time to time, certain assets are measured at fair value on a nonrecurring basis using significant unobservable inputs (Level 3). NCR reviews the carrying values of investments when events and circumstances warrant and considers all available evidence in evaluating when declines in fair value are other-than-temporary declines. Other than the impairment charges described in Note 4. Goodwill and Long-Lived Assets, no material impairment charges or non-recurring fair value adjustments were recorded during the three and nine months ended September 30, 2018 and 2017.

15. SEGMENT INFORMATION AND CONCENTRATIONS

The Company manages and reports the following three segments:

•
Software - Our software offerings include industry-based software platforms, applications and application suites for the financial services, retail, hospitality and small business industries. We also offer a portfolio of other industry-oriented software applications including cash management software, video banking software, fraud and loss prevention applications, check and document imaging, remote-deposit capture and customer-facing mobile and digital banking

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

applications for the financial services industry; and secure electronic and mobile payment solutions, sector-specific point of sale software applications, and back-office inventory and store and restaurant management applications for the retail and hospitality industries. Additionally, we provide ongoing software support and maintenance services, as well as consulting and implementation services for our software solutions.
•
Services - Our global end-to-end services solutions include assessment and preparation, staging, installation, implementation, and maintenance and support for our solutions. We also provide systems management and complete managed services for our product offerings. In addition, we provide installation, maintenance and servicing for third party networking products and computer hardware from select manufacturers.
•
Hardware - Our hardware solutions include our suite of financial-oriented self-service ATM-related hardware, and our retail- and hospitality-oriented point of sale (POS) terminal, self-checkout (SCO) kiosk and related hardware. We also offer other self-service kiosks, such as self-check in/out kiosks for airlines, and wayfinding solutions for buildings and campuses.

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

The following table presents revenue and operating income by segment:
In millions
Three months ended September 30
 
Nine months ended September 30
2018
 
2017
 
2018
 
2017
Revenue by segment
 
 
 
 
 
 
 
Software License
$
80

 
$
79

 
$
218

 
$
241

Software Maintenance
92

 
95

 
276

 
278

Cloud
158

 
149

 
468

 
436

Professional Services
150

 
153

 
448

 
437

Software
480

 
476

 
1,410

 
1,392

 
 
 
 
 
 
 
 
Services
616

 
609

 
1,827

 
1,754

 
 
 
 
 
 
 
 
ATM
237

 
273

 
612

 
709

SCO
60

 
79

 
236

 
276

POS
157

 
221

 
519

 
588

IPS
—

 
5

 
—

 
15

Hardware
454

 
578

 
1,367

 
1,588

Consolidated revenue
1,550

 
1,663

 
4,604

 
4,734

Operating income (loss) by segment
 
 
 
 
 
 
 
Software
127

 
148

 
351

 
399

Services
90

 
88

 
229

 
206

Hardware
(56
)
 
(2
)
 
(106
)
 
(1
)
Subtotal - segment operating income
161

 
234

 
474

 
604

Other adjustments (1)
36

 
35

 
346

 
115

Income from operations
$
125

 
$
199

 
$
128

 
$
489


(1) 
The following table presents the other adjustments for NCR:

35
Table of Contents
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

In millions
Three months ended September 30
 
Nine months ended September 30
2018
 
2017
 
2018
 
2017
Transformation and restructuring costs
$
16

 
$
5

 
$
98

 
$
26

Asset impairment charges
—

 
—

 
183

 
—

Acquisition-related amortization of intangible assets
20

 
29

 
64

 
86

Acquisition-related costs
—

 
1

 
1

 
3

Total other adjustments
$
36

 
$
35


$
346

 
$
115


The following table presents revenue by geography for NCR:
In millions
Three months ended September 30
 
Nine months ended September 30
2018
 
2017
 
2018
 
2017
Americas
$
898

 
$
989

 
$
2,662

 
$
2,751

Europe, Middle East and Africa (EMEA)
414

 
448

 
1,240

 
1,324

Asia Pacific (APJ)
238

 
226

 
702

 
659

Total revenue
$
1,550

 
$
1,663

 
$
4,604

 
$
4,734


The following table presents revenue from products and services for NCR:
In millions
Three months ended September 30
 
Nine months ended September 30
2018
 
2017
 
2018
 
2017
Product revenue
$
534

 
$
657

 
$
1,585

 
$
1,829

Professional services and installation services revenue
276

 
278

 
803

 
766

Recurring revenue, including maintenance and cloud revenue
740

 
728

 
2,216

 
2,139

Total revenue
$
1,550

 
$
1,663

 
$
4,604

 
$
4,734

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

Changes in AOCI by Component
In millions
Currency Translation Adjustments
Changes in Employee Benefit Plans
Changes in Fair Value of Effective Cash Flow Hedges
Total
Balance as of December 31, 2017
$
(183
)
$
(15
)
$
(1
)
$
(199
)
Impact of adoption of new accounting standard (1)
—

1

—

1

Other comprehensive income (loss) before reclassifications
(41
)
—

—

(41
)
Amounts reclassified from AOCI
—

(5
)
2

(3
)
Net current period other comprehensive (loss) income
(41
)
(5
)
2

(44
)
Balance as of September 30, 2018
$
(224
)
$
(19
)
$
1

$
(242
)

(1) See Note 1. Basis of Presentation and Summary of Significant Accounting Policies for further discussion on the adoption of a new accounting standard related to stranded tax affects in AOCI as a result of U.S. Tax Reform.


Reclassifications Out of AOCI

36
Table of Contents
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 
 
For the three months ended September 30, 2018
 
Employee Benefit Plans
 
 
 
In millions
Amortization of Actuarial Loss (Gain)
Amortization of Prior Service Benefit
Effective Cash Flow Hedge Loss (Gain)
 
Total
Affected line in Condensed Consolidated Statement of Operations:
 
 
 
 
 
 
Cost of products
$
—

$
—

$
(2
)
 
$
(2
)
 
Cost of services
—

(2
)
—

 
(2
)
 
Selling, general and administrative expenses
—

(1
)
—

 
(1
)
 
Research and development expenses
—

1

—

 
1

 
Total before tax
$
—

$
(2
)
$
(2
)
 
$
(4
)
 
Tax expense
 
 
 
 
—

 
Total reclassifications, net of tax
 
 
 
 
$
(4
)

 
 
For the three months ended September 30, 2017
 
Employee Benefit Plans
 
 
 
In millions
Amortization of Actuarial Loss (Gain)
Amortization of Prior Service Benefit
Effective Cash Flow Hedge Loss (Gain)
 
Total
Affected line in Condensed Consolidated Statement of Operations:
 
 
 
 
 
 
Cost of products
$
—

$
—

$
1


$
1

 
Cost of services
—

(2
)
—

 
(2
)
 
Research and development expenses
(1
)
1

—

 
—

 
Total before tax
$
(1
)
$
(1
)
$
1

 
$
(1
)
 
Tax expense
 
 
 
 
—

 
Total reclassifications, net of tax
 
 
 
 
$
(1
)

 
 
For the nine months ended September 30, 2018
 
Employee Benefit Plans
 
 
 
In millions
Amortization of Actuarial Loss (Gain)
Amortization of Prior Service Benefit
Effective Cash Flow Hedge Loss (Gain)
 
Total
Affected line in Condensed Consolidated Statement of Operations:
 
 
 
 
 
 
Cost of products
$
—

$
—

$
(2
)
 
$
(2
)
 
Cost of services
1

(5
)
—

 
(4
)
 
Selling, general and administrative expenses
—

(2
)
—

 
(2
)
 
Total before tax
$
1

$
(7
)
$
(2
)
 
$
(8
)
 
Tax expense
 
 
 
 
1

 
Total reclassifications, net of tax
 
 
 
 
$
(7
)


37
Table of Contents
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 
 
For the nine months ended September 30, 2017
 
Employee Benefit Plans
 
 
 
In millions
Amortization of Actuarial Loss (Gain)
Amortization of Prior Service Benefit
Effective Cash Flow Hedge Loss (Gain)
 
Total
Affected line in Condensed Consolidated Statement of Operations:
 
 
 
 
 
 
Cost of products
$
—

$
—

$
(2
)
 
$
(2
)
 
Cost of services
—

(4
)
—

 
(4
)
 
Selling, general and administrative expenses
(1
)
(2
)
—

 
(3
)
 
Research and development expenses
(1
)
—

—

 
(1
)
 
Total before tax
$
(2
)
$
(6
)
$
(2
)
 
$
(10
)
 
Tax expense
 
 
 
 
2

 
Total reclassifications, net of tax
 
 
 
 
$
(8
)

17. RESTRUCTURING PLAN

In the second quarter of 2018, we announced a hardware transformation initiative to streamline our manufacturing operations that will help us reduce our exposure to variable hardware demand as well as increase global utilization rates and optimize our supply chain network. As a part of this initiative, we plan to reduce the number of manufacturing plants and move the manufacturing operations at those plants to other existing NCR facilities and current third party suppliers.

As a result of the restructuring plan, the Company recorded a total charge of $9 million and $33 million in the three and nine months ended September 30, 2018, respectively. The Company expects that it may incur additional charges during 2018 related to this restructuring program. Such additional charges will be expensed as incurred. The restructuring program is scheduled to be completed by the end of 2019.

Severance and other employee related costs The Company recorded $2 million as a discrete benefit in accordance with ASC 712, Employers’ Accounting for Postemployment Benefits, when the severance liability was determined to be probable and reasonably estimable. The Company also recorded $2 million of employee related costs in accordance with ASC 420, Exit or Disposal Cost Obligations. The Company made no severance-related payments under ASC 712 in the three and nine months ended September 30, 2018. The Company made $2 million and $3 million in severance-related payments under ASC 420 in the three and nine months ended September 30, 2018, respectively.

Inventory related charges The Company recorded $7 million and $24 million of inventory related charges for rationalizing its product portfolio and writing down inventory to be sold to third party suppliers to the lower cost or net realizable value in the three and nine months ended September 30, 2018, respectively.

Other exit costs The Company recorded $2 million and $4 million in the three and nine months ended September 30, 2018, respectively, for costs primarily related to moving inventory and fixed assets from the plant locations that will be closed. Of these costs, $2 million and $3 million, respectively, were included in selling, general and administrative expenses in the three and nine months ended September 30, 2018 and zero and $1 million were included in cost of products in the three and nine months ended September 30, 2018, respectively.

The results by segment, as disclosed in Note 15. Segment Information and Concentrations, exclude the impact of these costs, which is consistent with the manner by which management assesses the performance and evaluates the results of each segment. The following table summarizes the costs recorded in accordance with ASC 420, Exit or Disposal Cost Obligations, and ASC 712, Employers’ Accounting for Postemployment Benefits, and the remaining liabilities as of September 30, 2018, which are included in the Condensed Consolidated Balance Sheet in Other Current Liabilities.

38
Table of Contents
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

In millions
September 30, 2018
Employee Severance and Other Exit Costs
 
Beginning balance as of January 1
$
—

Cost recognized during the period
9

Utilization
(7
)
Ending balance as of September 30
$
2



18. SUPPLEMENTAL FINANCIAL INFORMATION
The components of accounts receivable are summarized as follows:
In millions
September 30, 2018
 
December 31, 2017
Accounts receivable
 
 
 
Trade
$
1,307

 
$
1,270

Other
28

 
37

Accounts receivable, gross
1,335

 
1,307

Less: allowance for doubtful accounts
(26
)
 
(37
)
Total accounts receivable, net
$
1,309

 
$
1,270

The components of inventory are summarized as follows:
In millions
September 30, 2018
 
December 31, 2017
Inventories
 
 
 
Work in process and raw materials
$
273

 
$
185

Finished goods
261

 
190

Service parts
382

 
405

Total inventories
$
916

 
$
780




19. CONDENSED CONSOLIDATING SUPPLEMENTAL GUARANTOR INFORMATION

The Company's 5.00% Notes, 4.625% Notes, 5.875% Notes and 6.375% Notes are guaranteed by the Company's subsidiary, NCR International, Inc. (Guarantor Subsidiary), which is 100% owned by the Company and has guaranteed fully and unconditionally the obligations to pay principal and interest for these senior unsecured notes. The guarantees are subject to release under certain circumstances as described below:

•
the designation of the Guarantor Subsidiary as an unrestricted subsidiary under the indenture governing the notes;
•
the release of the Guarantor Subsidiary from its guarantee under the Senior Secured Credit Facility;
•
the release or discharge of the indebtedness that required the guarantee of the notes by the Guarantor Subsidiary;
•
the permitted sale or other disposition of the Guarantor Subsidiary to a third party; and
•
the Company's exercise of its legal defeasance option of its covenant defeasance option under the indenture governing the notes.
 
Refer to Note 5. Debt Obligations for additional information.

In connection with the previously completed registered exchange offers for the 5.00% Notes, 4.625% Notes, 5.875% Notes and 6.375% Notes, the Company is required to comply with Rule 3-10 of SEC Regulation S-X (Rule 3-10), and has therefore included the accompanying Condensed Consolidating Financial Statements in accordance with Rule 3-10(f) of SEC Regulation S-X.


39
Table of Contents
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

The following supplemental information sets forth, on a consolidating basis, the condensed statements of operations and comprehensive income (loss), the condensed balance sheets and the condensed statements of cash flows for the parent issuer of these senior unsecured notes, for the Guarantor Subsidiary and for the Company and all of its consolidated subsidiaries.


Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
For the three months ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
In millions
Parent Issuer
 
Guarantor Subsidiary
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Product revenue
$
234

 
$
7

 
$
348

 
$
(55
)
 
$
534

Service revenue
541

 
9

 
466

 
—

 
1,016

Total revenue
775

 
16

 
814

 
(55
)
 
1,550

Cost of products
225

 
4

 
299

 
(55
)
 
473

Cost of services
357

 
4

 
306

 
—

 
667

Selling, general and administrative expenses
132

 
1

 
93

 
—

 
226

Research and development expenses
40

 
—

 
19

 
—

 
59

Asset impairment charges
1

 
—

 
(1
)
 
—

 
—

Total operating expenses
755

 
9

 
716

 
(55
)
 
1,425

Income (loss) from operations
20

 
7

 
98

 
—

 
125

Interest expense
(42
)
 
—

 
(4
)
 
3

 
(43
)
Other (expense) income, net
—

 
2

 
(9
)
 
(3
)
 
(10
)
Income (loss) from continuing operations before income taxes
(22
)
 
9

 
85

 
—

 
72

Income tax expense (benefit)
(80
)
 
2

 
63

 
—

 
(15
)
Income (loss) from continuing operations before earnings in subsidiaries
58

 
7

 
22

 
—

 
87

Equity in earnings of consolidated subsidiaries
26

 
38

 
—

 
(64
)
 
—

Income (loss) from continuing operations
84

 
45

 
22

 
(64
)
 
87

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

 
—

 
(1
)
 
—

 
(1
)
Net income (loss)
$
84

 
$
45

 
$
21

 
$
(64
)
 
$
86

Net income (loss) attributable to noncontrolling interests
—

 
—

 
2

 
—

 
2

Net income (loss) attributable to NCR
$
84

 
$
45

 
$
19

 
$
(64
)
 
$
84

Total comprehensive income (loss)
66

 
40

 
5

 
(42
)
 
69

Less comprehensive income (loss) attributable to noncontrolling interests
—

 
—

 
3

 
—

 
3

Comprehensive income (loss) attributable to NCR common stockholders
$
66

 
$
40

 
$
2

 
$
(42
)
 
$
66


40
Table of Contents
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
For the three months ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
In millions
Parent Issuer
 
Guarantor Subsidiary
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Product revenue
$
338

 
$
13

 
$
357

 
$
(51
)
 
$
657

Service revenue
518

 
6

 
482

 
—

 
1,006

Total revenue
856

 
19

 
839

 
(51
)
 
1,663

Cost of products
264

 
8

 
307

 
(51
)
 
528

Cost of services
340

 
1

 
322

 
—

 
663

Selling, general and administrative expenses
110

 
1

 
109

 
—

 
220

Research and development expenses
43

 
—

 
10

 
—

 
53

Total operating expenses
757

 
10

 
748

 
(51
)
 
1,464

Income (loss) from operations
99

 
9

 
91

 
—

 
199

Interest expense
(41
)
 
—

 
(3
)
 
2

 
(42
)
Other (expense) income, net
(13
)
 
1

 
7

 
(2
)
 
(7
)
Income (loss) from continuing operations before income taxes
45

 
10

 
95

 
—

 
150

Income tax expense (benefit)
14

 
1

 
16

 
—

 
31

Income (loss) from continuing operations before earnings in subsidiaries
31

 
9

 
79

 
—

 
119

Equity in earnings of consolidated subsidiaries
87

 
73

 
—

 
(160
)
 
—

Income (loss) from continuing operations
118

 
82

 
79

 
(160
)
 
119

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

 
—

 
—

 
—

 
—

Net income (loss)
$
118

 
$
82

 
$
79

 
$
(160
)
 
$
119

Net income (loss) attributable to noncontrolling interests
—

 
—

 
1

 
—

 
1

Net income (loss) attributable to NCR
$
118

 
$
82

 
$
78

 
$
(160
)
 
$
118

Total comprehensive income (loss)
120

 
95

 
81

 
(177
)
 
119

Less comprehensive income (loss) attributable to noncontrolling interests
—

 
—

 
(1
)
 
—

 
(1
)
Comprehensive income (loss) attributable to NCR common stockholders
$
120

 
$
95

 
$
82

 
$
(177
)
 
$
120



41
Table of Contents
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
For the nine months ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
In millions
Parent Issuer
 
Guarantor Subsidiary
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Product revenue
$
769

 
$
36

 
$
936

 
$
(156
)
 
$
1,585

Service revenue
1,577

 
25

 
1,417

 
—

 
3,019

Total revenue
2,346

 
61

 
2,353

 
(156
)
 
4,604

Cost of products
690

 
15

 
795

 
(156
)
 
1,344

Cost of services
1,053

 
10

 
964

 
—

 
2,027

Selling, general and administrative expenses
426

 
2

 
304

 
—

 
732

Research and development expenses
115

 
—

 
75

 
—

 
190

Asset impairment charges
166

 
—

 
17

 
—

 
183

Total operating expenses
2,450

 
27

 
2,155

 
(156
)
 
4,476

Income (loss) from operations
(104
)
 
34

 
198

 
—

 
128

Interest expense
(121
)
 
—

 
(10
)
 
6

 
(125
)
Other (expense) income, net
(15
)
 
4

 
(7
)
 
(6
)
 
(24
)
Income (loss) from continuing operations before income taxes
(240
)
 
38

 
181

 
—

 
(21
)
Income tax expense (benefit)
(56
)
 
6

 
30

 
—

 
(20
)
Income (loss) from continuing operations before earnings in subsidiaries
(184
)
 
32

 
151

 
—

 
(1
)
Equity in earnings of consolidated subsidiaries
179

 
159

 
—

 
(338
)
 
—

Income (loss) from continuing operations
(5
)
 
191

 
151

 
(338
)
 
(1
)
Income (loss) from discontinued operations, net of tax
(36
)
 
—

 
(2
)
 
—

 
(38
)
Net income (loss)
$
(41
)
 
$
191

 
$
149

 
$
(338
)
 
$
(39
)
Net income (loss) attributable to noncontrolling interests
—

 
—

 
2

 
—

 
2

Net income (loss) attributable to NCR
$
(41
)
 
$
191

 
$
147

 
$
(338
)
 
$
(41
)
Total comprehensive income (loss)
(85
)
 
148

 
102

 
(250
)
 
(85
)
Less comprehensive income (loss) attributable to noncontrolling interests
—

 
—

 
—

 
—

 
—

Comprehensive income (loss) attributable to NCR common stockholders
$
(85
)
 
$
148

 
$
102

 
$
(250
)
 
$
(85
)



42
Table of Contents
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
For the nine months ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
In millions
Parent Issuer
 
Guarantor Subsidiary
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Product revenue
$
948

 
$
66

 
$
1,030

 
$
(215
)
 
$
1,829

Service revenue
1,522

 
20

 
1,363

 
—

 
2,905

Total revenue
2,470

 
86

 
2,393

 
(215
)
 
4,734

Cost of products
728

 
30

 
887

 
(215
)
 
1,430

Cost of services
1,013

 
6

 
940

 
—

 
1,959

Selling, general and administrative expenses
373

 
3

 
302

 
—

 
678

Research and development expenses
115

 
—

 
63

 
—

 
178

Total operating expenses
2,229

 
39

 
2,192

 
(215
)
 
4,245

Income (loss) from operations
241

 
47

 
201

 
—

 
489

Interest expense
(118
)
 
—

 
(8
)
 
4

 
(122
)
Other (expense) income, net
(41
)
 
—

 
29

 
(4
)
 
(16
)
Income (loss) from continuing operations before income taxes
82

 
47

 
222

 
—

 
351

Income tax expense (benefit)
23

 
19

 
36

 
—

 
78

Income (loss) from continuing operations before earnings in subsidiaries
59

 
28

 
186

 
—

 
273

Equity in earnings of consolidated subsidiaries
213

 
170

 
—

 
(383
)
 
—

Income (loss) from continuing operations
272

—

198

 
186

 
(383
)
 
273

Income (loss) from discontinued operations, net of tax
5

 
—

 
—

 
—

 
5

Net income (loss)
$
277

 
$
198

 
$
186

 
$
(383
)
 
$
278

Net income (loss) attributable to noncontrolling interests
—

 
—

 
1

 
—

 
1

Net income (loss) attributable to NCR
$
277

 
$
198

 
$
185

 
$
(383
)
 
$
277

Total comprehensive income (loss)
294

 
235

 
199

 
(435
)
 
293

Less comprehensive income (loss) attributable to noncontrolling interests
—

 
—

 
(1
)
 
—

 
(1
)
Comprehensive income (loss) attributable to NCR common stockholders
$
294

 
$
235

 
$
200

 
$
(435
)
 
$
294



43
Table of Contents
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

Condensed Consolidating Balance Sheet
September 30, 2018
 
 
 
 
 
 
 
 
 
 
In millions
Parent Issuer
 
Guarantor Subsidiary
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
31

 
$
5

 
$
298

 
$
—

 
$
334

Accounts receivable, net
39

 
12

 
1,258

 
—

 
1,309

Inventories
326

 
6

 
584

 
—

 
916

Due from affiliates
639

 
2,077

 
386

 
(3,102
)
 
—

Other current assets
130

 
45

 
160

 
(39
)
 
296

Total current assets
1,165

 
2,145

 
2,686

 
(3,141
)
 
2,855

Property, plant and equipment, net
244

 
1

 
103

 
—

 
348

Goodwill
2,081

 
—

 
508

 
—

 
2,589

Intangibles, net
438

 
—

 
63

 
—

 
501

Prepaid pension cost
—

 
—

 
133

 
—

 
133

Deferred income taxes
345

 
—

 
153

 
(10
)
 
488

Investments in subsidiaries
3,177

 
2,806

 
—

 
(5,983
)
 
—

Long-term intercompany notes receivable
31

 
1

 
36

 
(68
)
 
—

Other assets
490

 
51

 
50

 
—

 
591

Total assets
$
7,971

 
$
5,004

 
$
3,732

 
$
(9,202
)
 
$
7,505

 
 
 
 
 
 
 
 
 
 
Liabilities and stockholders’ equity
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
Short-term borrowings
$
62

 
$
—

 
$
184

 
$
—

 
$
246

Accounts payable
357

 
3

 
444

 
—

 
804

Payroll and benefits liabilities
121

 
—

 
104

 
—

 
225

Contract liabilities
205

 
6

 
216

 
—

 
427

Due to affiliates
2,192

 
116

 
794

 
(3,102
)
 
—

Other current liabilities
139

 
3

 
199

 
(39
)
 
302

Total current liabilities
3,076

 
128

 
1,941

 
(3,141
)
 
2,004

Long-term debt
2,879

 
—

 
2

 
—

 
2,881

Pension and indemnity plan liabilities
528

 
—

 
275

 
—

 
803

Postretirement and postemployment benefits liabilities
19

 
3

 
108

 
—

 
130

Income tax accruals
17

 
10

 
91

 
—

 
118

Due to affiliates
—

 
37

 
31

 
(68
)
 
—

Other liabilities
162

 
16

 
93

 
(10
)
 
261

Total liabilities
6,681

 
194

 
2,541

 
(3,219
)
 
6,197

Redeemable noncontrolling interest
—

 
—

 
14

 
—

 
14

Series A convertible preferred stock
846

 
—

 
—

 
—

 
846

Stockholders’ equity
 
 
 
 
 
 
 
 
 
Total NCR stockholders’ equity
444

 
4,810

 
1,173

 
(5,983
)
 
444

Noncontrolling interests in subsidiaries
—

 
—

 
4

 
—

 
4

Total stockholders’ equity
444

 
4,810

 
1,177

 
(5,983
)
 
448

Total liabilities and stockholders’ equity
$
7,971

 
$
5,004

 
$
3,732

 
$
(9,202
)
 
$
7,505


44
Table of Contents
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

Condensed Consolidating Balance Sheet
December 31, 2017
 
 
 
 
 
 
 
 
 
 
In millions
Parent Issuer
 
Guarantor Subsidiary
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
97

 
$
11

 
429

 
$
—

 
$
537

Accounts receivable, net
62

 
12

 
1,196

 
—

 
1,270

Inventories
311

 
7

 
462

 
—

 
780

Due from affiliates
646

 
1,801

 
283

 
(2,730
)
 
—

Other current assets
78

 
39

 
162

 
(36
)
 
243

Total current assets
1,194

 
1,870

 
2,532

 
(2,766
)
 
2,830

Property, plant and equipment, net
207

 
—

 
134

 
—

 
341

Goodwill
2,228

 
—

 
513

 
—

 
2,741

Intangibles, net
503

 
—

 
75

 
—

 
578

Prepaid pension cost
—

 
—

 
118

 
—

 
118

Deferred income taxes
334

 
—

 
157

 
(31
)
 
460

Investments in subsidiaries
3,008

 
2,942

 
—

 
(5,950
)
 
—

Due from affiliates
31

 
1

 
39

 
(71
)
 
—

Other assets
472

 
63

 
51

 
—

 
586

Total assets
$
7,977

 
$
4,876

 
$
3,619

 
$
(8,818
)
 
$
7,654

 
 
 
 
 
 
 
 
 
 
Liabilities and stockholders’ equity
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
Short-term borrowings
$
52

 
$
—

 
$
—

 
$
—

 
$
52

Accounts payable
382

 
—

 
380

 
—

 
762

Payroll and benefits liabilities
124

 
—

 
95

 
—

 
219

Contract liabilities
216

 
6

 
236

 
—

 
458

Due to affiliates
1,884

 
130

 
716

 
(2,730
)
 
—

Other current liabilities
204

 
5

 
225

 
(36
)
 
398

Total current liabilities
2,862

 
141

 
1,652

 
(2,766
)
 
1,889

Long-term debt
2,937

 
—

 
2

 
—

 
2,939

Pension and indemnity plan liabilities
515

 
—

 
283

 
—

 
798

Postretirement and postemployment benefits liabilities
20

 
3

 
110

 
—

 
133

Income tax accruals
20

 
5

 
123

 
—

 
148

Due to affiliates
—

 
39

 
32

 
(71
)
 
—

Other liabilities
94

 
36

 
101

 
(31
)
 
200

Total liabilities
6,448

 
224

 
2,303

 
(2,868
)
 
6,107

Redeemable noncontrolling interest
—

 
—

 
15

 
—

 
15

Series A convertible preferred stock
810

 
—

 
—

 
—

 
810

Stockholders’ equity
 
 
 
 
 
 
 
 
 
Total NCR stockholders’ equity
719

 
4,652

 
1,298

 
(5,950
)
 
719

Noncontrolling interests in subsidiaries
—

 
—

 
3

 
—

 
3

Total stockholders’ equity
719

 
4,652

 
1,301

 
(5,950
)
 
722

Total liabilities and stockholders’ equity
$
7,977

 
$
4,876

 
$
3,619

 
$
(8,818
)
 
$
7,654



45
Table of Contents
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

Condensed Consolidating Statement of Cash Flows
For the nine months ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
In millions
Parent Issuer
 
Guarantor Subsidiary
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
$
226

 
$
(151
)
 
$
102

 
$
(14
)
 
$
163

Investing activities
 
 
 
 
 
 
 
 
 
Expenditures for property, plant and equipment
(85
)
 
—

 
(19
)
 
—

 
(104
)
Proceeds from sale of property, plant and equipment
1

 
—

 
2

 
—

 
3

Additions to capitalized software
(111
)
 
—

 
(19
)
 
—

 
(130
)
Proceeds from (payments of) intercompany notes
207

 
145

 
—

 
(352
)
 
—

Other investing activities, net
(4
)
 
—

 
—

 
—

 
(4
)
Net cash provided by (used in) investing activities
8

 
145

 
(36
)
 
(352
)
 
(235
)
Financing activities
 
 
 
 
 
 
 
 
 
Short term borrowings, net
(1
)
 
—

 
8

 
—

 
7

Payments on term credit facilities
(51
)
 
—

 
—

 
—

 
(51
)
Payments on revolving credit facilities
(1,055
)
 
—

 
(378
)
 
—

 
(1,433
)
Borrowings on revolving credit facilities
1,055

 
—

 
553

 
—

 
1,608

Repurchase of Company common stock
(210
)
 


 


 


 
(210
)
Proceeds from employee stock plans
16

 
—

 
—

 
—

 
16

Dividend distribution to consolidated subsidiaries
—

 
—

 
(14
)
 
14

 
—

Borrowings (repayments) of intercompany notes
—

 
—

 
(352
)
 
352

 
—

Tax withholding payments on behalf of employees
(30
)
 
—

 
—

 
—

 
(30
)
Net cash provided by (used in) financing activities
(276
)
 
—

 
(183
)
 
366

 
(93
)
Cash flows from discontinued operations
 
 
 
 
 
 
 
 
 
Net cash used in operating activities
(23
)
 
—

 
—

 
—

 
(23
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
—

 
—

 
(12
)
 
—

 
(12
)
Increase (decrease) in cash, cash equivalents and restricted cash
(65
)
 
(6
)
 
(129
)
 
—

 
(200
)
Cash, cash equivalents and restricted cash at beginning of period
97

 
11

 
435

 
—

 
543

Cash, cash equivalents and restricted cash at end of period
$
32

 
$
5

 
$
306

 
$
—

 
$
343


In millions
September 30, 2018
Reconciliation of cash, cash equivalents and restricted cash as shown in the Condensed Consolidated Statements of Cash Flows
Parent Issuer
 
Guarantor Subsidiary
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Cash and cash equivalents
$
31

 
$
5

 
$
298

 
$
—

 
$
334

Restricted cash included in Other assets
1

 
—

 
8

 
—

 
9

Total cash, cash equivalents and restricted cash
$
32

 
$
5

 
$
306

 
$
—

 
$
343



46
Table of Contents
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)






Condensed Consolidating Statement of Cash Flows
For the nine months ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
In millions
Parent Issuer
 
Guarantor Subsidiary
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
$
332

 
$
(58
)
 
$
3

 
$
(7
)
 
$
270

Investing activities
 
 
 
 
 
 
 
 
 
Expenditures for property, plant and equipment
(55
)
 
—

 
(26
)
 
—

 
(81
)
Proceeds from sales of property, plant and equipment
—

 
—

 
6

 
—

 
6

Additions to capitalized software
(101
)
 
—

 
(24
)
 
—

 
(125
)
Proceeds from (payments of) intercompany notes
182

 
55

 
—

 
(237
)
 
—

Investments in equity affiliates
(2
)
 
—

 
—

 
2

 
—

Other investing activities, net
(1
)
 
—

 
1

 
—

 
—

Net cash provided by (used in) investing activities
23

 
55

 
(43
)
 
(235
)
 
(200
)
Financing activities
 
 
 
 
 
 
 
 
 
Short term borrowings, net
—

 
—

 
10

 
—

 
10

Payments on term credit facilities
(34
)
 
—

 
(3
)
 
—

 
(37
)
Payments on revolving credit facilities
(1,070
)
 
—

 
(40
)
 
—

 
(1,110
)
Borrowings on revolving credit facilities
1,095

 
—

 
240

 
—

 
1,335

Repurchase of Company common stock
(350
)
 
—

 
—

 
—

 
(350
)
Proceeds from employee stock plans
11

 
—

 
—

 
—

 
11

Other financing activities
(1
)
 
—

 
—

 
—

 
(1
)
Equity contribution
—

 
—

 
2

 
(2
)
 
—

Dividend distribution to consolidated subsidiaries
—

 
—

 
(7
)
 
7

 
—

Borrowings (repayments) of intercompany notes
—

 
—

 
(237
)
 
237

 
—

Tax withholding payments on behalf of employees
(24
)
 
—

 
—

 
—

 
(24
)
Net cash provided by (used in) financing activities
(373
)
 
—

 
(35
)
 
242

 
(166
)
Cash flows from discontinued operations
 
 
 
 
 
 
 
 
 
Net cash used in operating activities
(14
)
 
—

 
—

 
—

 
(14
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
—

 
1

 
15

 
—

 
16

Increase (decrease) in cash, cash equivalents, and restricted cash
(32
)
 
(2
)
 
(60
)
 
—

 
(94
)
Cash, cash equivalents and restricted cash at beginning of period
67

 
12

 
428

 
—

 
507

Cash, cash equivalents and restricted cash at end of period
$
35

 
$
10

 
$
368

 
$
—

 
$
413


47
Table of Contents
NCR Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

In millions
September 30, 2017
Reconciliation of cash, cash equivalents and restricted cash as shown in the Condensed Consolidated Statements of Cash Flows
Parent Issuer
 
Guarantor Subsidiary
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Cash and cash equivalents
$
35

 
$
10

 
$
360

 
$
—

 
$
405

Restricted cash included in Other assets
—

 
—

 
8

 
—

 
8

Total cash, cash equivalents and restricted cash
$
35

 
$
10

 
$
368

 
$
—

 
$
413


48
Table of Contents

Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)
Overview
The following were the significant events for the third quarter of 2018, each of which is discussed more fully in later sections of this MD&A:
•
Revenue decreased approximately 7% from the prior year period and 5% excluding unfavorable foreign currency impacts;
•
Software revenue increased 1% from the prior year period, driven by cloud revenue growth of 6%, and operating margin declined 460 basis points from the prior year period;
•
Services revenue increased 1% and operating margin rate increased 20 basis points from the prior year period; and
•
Hardware revenue decreased 21% and operating margin rate declined significantly from the prior year period.

The rise of digital commerce, mobile engagement and globalization have dramatically altered the relationship between business and consumer. Increasingly, mega-trends such as big data, the Internet of things and the cloud are driving the next generation of changes in consumer behavior. Consumers now expect businesses to provide a rich, integrated and personalized experience across all commerce channels, including in-store, online and mobile. Our mission is to innovate and enable the next generation of consumer experiences and productivity gains to enrich the interactions of businesses with their customers. To fulfill this mission, we have developed a long-term strategy built on being a global technology solutions company that uses cloud-based and other software, coupled with end-to-end smart-edge hardware and services solutions, to help our customers deliver on the promise of an omni-channel experience. We believe that our mission and long-term strategy position NCR to continue to drive sustainable revenue, profit and cash flow, and to improve value for all of our stakeholders.

To deliver on our mission and strategy, we are focused on the following main initiatives in 2018:

•
Customer Experience - Improving the customer experience by improving solution quality, availability and security.

•
Strategic and Recurring Revenue - Continuing our focus on cloud, software platform, smart-edge devices and professional and managed services to drive profitable revenue and operating income.

•
Sales Effectiveness - Providing our sales force with the training, tools, support and coverage model necessary to optimize efficiency and achieve our sales plan.

•
Services Transformation - Driving performance and sustainable margin improvement by focusing on productivity and efficiency improvements, expanding our remote diagnostics and repair capabilities, creating greater discipline in our product lifecycle management, and employing a higher mix of managed services.

•
Evolving our Business Model - Continuing the shift in our business model to provide innovative end-to-end solutions for our customers, with best in class support while keeping an efficient cost structure to create competitive advantage.

•
New Products - Launching new industry products, powered by our platform software with best in class product lifecycle management and go-to-market support, and migrating and releasing existing licensed software products as cloud-based products.

•
Operating Model Innovation - Eliminating waste, utilizing effective product lifecycle management, increasing productivity, using technology as an enabler, and executing on business process improvements to reduce costs and use savings to invest in strategic initiatives, product innovation and people.

•
Team and Talent - Attracting, developing and retaining top talent by deploying competitive recruiting and training programs, evolving our brand, and continuously engaging with employees.

Consistent with the foregoing, we are implementing certain initiatives focused on realigning resources and optimizing our portfolio of software solutions, accelerating structural changes in our services business and streamlining our hardware operations, particularly in supply chain and manufacturing. In addition, we plan, in pursuing our strategy, to continue to manage our costs effectively, to selectively pursue acquisitions and divestitures that promote our strategy, and to selectively penetrate market adjacencies in single and emerging growth industry segments.


49
Table of Contents

Potentially significant risks to the execution of our initiatives and achievement of our strategy include the strength of demand for automated teller machines and other financial services hardware and its effect on our businesses; our ability to generate accurate forecasts of product demand and to engage third-party suppliers and manufacturers appropriately to meet that demand, including the on-boarding of new or additional suppliers; domestic and global economic and credit conditions including, in particular, those resulting from the imposition or threat of protectionist trade policies or import or export tariffs, global and regional market conditions and spending trends in the financial services and retail industries, new comprehensive U.S. tax legislation, modified or new global or regional trade agreements, the determination by the United Kingdom to exit the European Union, uncertainty over further potential changes in Eurozone participation and fluctuations in oil and commodity prices; our ability to transform our business model and to sell higher-margin software and services, including our ability to successfully streamline our hardware operations through manufacturing network redesign and use of outsourced manufacturing; the success of our restructuring plans and cost reduction initiatives; our ability to improve execution in our sales and services organizations; market acceptance of new solutions and competition in the information technology industry; cybersecurity risks and compliance with data privacy and protection requirements; disruptions in or problems with our data center hosting facilities; defects or errors in our products; the historical seasonality of our sales; tax rates and new U.S. tax legislation; uncertainties or delays associated with the transition of key business leaders and foreign currency fluctuations.

Results from Operations

Three and Nine months ended September 30, 2018 Compared to Three and Nine months ended September 30, 2017

The following table shows our results for the three and nine months ended September 30:
 
Three months ended September 30
 
Nine months ended September 30
In millions
2018
 
2017
 
2018
 
2017
Revenue
$
1,550

 
$
1,663

 
$
4,604

 
$
4,734

Gross margin
$
410

 
$
472

 
$
1,233

 
$
1,345

Gross margin as a percentage of revenue
26.5
%
 
28.4
%
 
26.8
%
 
28.4
%
Operating expenses
 
 
 
 
 
 
 
      Selling, general and administrative expenses
$
226

 
$
220

 
$
732

 
$
678

      Research and development expenses
59

 
53

 
190

 
178

      Asset impairment charges
—

 
—

 
183

 
—

Income from operations
$
125

 
$
199

 
$
128

 
$
489


The following table shows our revenue by geographic theater for the three months ended September 30:
In millions
2018
% of Total
 
2017
% of Total
 
% Increase (Decrease)
% Increase (Decrease) Constant Currency (1)
Americas
$
898

58%
 
$
989

59%
 
(9)%
(8)%
Europe, Middle East and Africa (EMEA)
414

27%
 
448

27%
 
(8)%
(6)%
Asia Pacific (APJ)
238

15%
 
226

14%
 
5%
10%
Consolidated revenue
$
1,550

100%
 
$
1,663

100%
 
(7)%
(5)%

The following table shows our revenue by geographic theater for the nine months ended September 30:
In millions
2018
% of Total
 
2017
% of Total
 
% Increase (Decrease)
% Increase (Decrease) Constant Currency (1)
Americas
$
2,662

58%
 
$
2,751

58%
 
(3)%
(3)%
Europe, Middle East and Africa (EMEA)
1,240

27%
 
1,324

28%
 
(6)%
(10)%
Asia Pacific (APJ)
702

15%
 
659

14%
 
7%
6%
Consolidated revenue
$
4,604

100%
 
$
4,734

100%
 
(3)%
(3)%


The following table shows our revenue by segment for the three months ended September 30:

50
Table of Contents

In millions
2018
% of Total
 
2017
% of Total
 
% Increase (Decrease)
% Increase (Decrease) Constant Currency (1)
Software
$
480

31%
 
$
476

29%
 
1%
2%
Services
616

40%
 
609

36%
 
1%
4%
Hardware
454

29%
 
578

35%
 
(21)%
(20)%
Consolidated revenue
$
1,550

100%
 
$
1,663

100%
 
(7)%
(5)%

The following table shows our revenue by segment for the nine months ended September 30:
In millions
2018
% of Total
 
2017
% of Total
 
% Increase (Decrease)
% Increase (Decrease) Constant Currency (1)
Software
$
1,410

30%
 
$
1,392

29%
 
1%
1%
Services
1,827

40%
 
1,754

37%
 
4%
3%
Hardware
1,367

30%
 
1,588

34%
 
(14)%
(14)%
Consolidated revenue
$
4,604

100%
 
$
4,734

100%
 
(3)%
(3)%

(1) The tables above for the three and nine months ended ended September 30 are presented with period-over-period revenue growth or declines on a constant currency basis. Constant currency is a non-GAAP measure that excludes the effects of foreign currency fluctuations. We calculate this information by translating prior period revenue growth at current period monthly average exchange rates. We believe that examining period-over-period revenue growth or decline excluding foreign currency fluctuations is useful for assessing the underlying performance of our business, and our management uses revenue growth adjusted for constant currency to evaluate period-over-period operating performance. This non-GAAP measure should not be considered a substitute for, or superior to, period-over-period revenue growth under GAAP.
The following table provides a reconciliation of geographic theater revenue percentage growth (GAAP) to revenue percentage growth constant currency (non-GAAP) for the three months ended September 30, 2018:
 
Revenue % Growth (GAAP)
Favorable (unfavorable) FX impact
Revenue % Growth Constant Currency (non-GAAP)
Americas
(9)%
(1)%
(8)%
EMEA
(8)%
(2)%
(6)%
APJ
5%
(5)%
10%
Consolidated revenue
(7)%
(2)%
(5)%

The following table provides a reconciliation of geographic theater revenue percentage growth (GAAP) to revenue percentage growth constant currency (non-GAAP) for the nine months ended September 30, 2018:
 
Revenue % Growth (GAAP)
Favorable (unfavorable) FX impact
Revenue % Growth Constant Currency (non-GAAP)
Americas
(3)%
—%
(3)%
EMEA
(6)%
4%
(10)%
APJ
7%
1%
6%
Consolidated revenue
(3)%
—%
(3)%

The following table provides a reconciliation of segment revenue percentage growth (GAAP) to revenue percentage growth constant currency (non-GAAP) for the three months ended September 30, 2018:

51
Table of Contents

 
Revenue % Growth (GAAP)
Favorable (unfavorable) FX impact
Revenue % Growth Constant Currency (non-GAAP)
Software
1%
(1)%
2%
Services
1%
(3)%
4%
Hardware
(21)%
(1)%
(20)%
Consolidated revenue
(7)%
(2)%
(5)%

The following table provides a reconciliation of segment revenue percentage growth (GAAP) to revenue percentage growth constant currency (non-GAAP) for the nine months ended September 30, 2018:
 
Revenue % Growth (GAAP)
Favorable (unfavorable) FX impact
Revenue % Growth Constant Currency (non-GAAP)
Software
1%
—%
1%
Services
4%
1%
3%
Hardware
(14)%
—%
(14)%
Consolidated revenue
(3)%
—%
(3)%


Revenue

For the three months ended September 30, 2018 compared to the three months ended September 30, 2017, revenue decreased 7% due to a decrease in Hardware revenue partially offset by an increase in Software and Services revenue. Foreign currency fluctuations unfavorably impacted the revenue comparison by 2%.

Software revenue increased 1% driven by growth in cloud and software license, partially offset by declines in software maintenance and professional services. Services revenue increased 1% due to growth in both hardware maintenance and managed and implementation services. Hardware revenue decreased 21% primarily due to declines in Point-of-Sale (POS), Automated Teller Machine (ATM), and Self-Checkout (SCO) revenue.

For the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, revenue decreased 3% due to a decrease in Hardware revenue partially offset by an increase in Software and Services revenue. Foreign currency fluctuations had no impact on the revenue comparison.

Software revenue increased 1% driven by growth in cloud and professional services, partially offset by declines in software license and software maintenance. Services revenue increased 4% due to growth in both hardware maintenance and managed and implementation services. Hardware revenue decreased 14% due to declines in ATM, SCO and POS revenue.

The changes to segment revenue and the drivers thereof are discussed in further detail under "Revenue and Operating Income by Segment" below.

Gross Margin

Gross margin as a percentage of revenue in the three months ended September 30, 2018 was 26.5% compared to 28.4%, in the three months ended September 30, 2017. Gross margin in the three months ended September 30, 2018 included $9 million of costs related to restructuring and transformation initiatives and $6 million related to acquisition-related amortization of intangibles. Gross margin in the three months ended September 30, 2017 included of $1 million of costs related to transformation initiatives and $12 million related to acquisition-related amortization of intangibles. Excluding these items, gross margin as a percentage of revenue decreased from 29.2% to 27.4%.

Gross margin as a percentage of revenue in the nine months ended September 30, 2018 was 26.8% compared to 28.4% in the nine months ended September 30, 2017. Gross margin in the nine months ended September 30, 2018 included $54 million of costs related to restructuring and transformation initiatives and $18 million related to acquisition-related amortization of intangibles.

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Gross margin in the nine months ended September 30, 2017 included $11 million of costs related to transformation initiatives and $37 million related to acquisition-related amortization of intangibles. Excluding these items, gross margin as a percentage of revenue decreased 29.4% to 28.3%.

In the three and nine months ended September 30, 2018, gross margin as a percentage of revenue expanded in our Services segment, which reflects the results of our strategic focus on business process improvement initiatives and a mix shift towards higher value managed services. The Services gross margin rate expansion was offset by a decline in our Software and Hardware segments. The decline in Software gross margin rate was primarily due to lower software license revenue partially offset by margin expansion in cloud. The decline in Hardware gross margin rate was due to increased costs associated with alleviating supply chain constraints.

Operating Expenses

Selling, general and administrative expenses were $226 million, or 14.6% as a percentage of revenue, in the three months ended September 30, 2018 as compared to $220 million, or 13.2% as a percentage of revenue, in the three months ended September 30, 2017. Selling, general and administrative expenses in the three months ended September 30, 2018 included $14 million of acquisition-related amortization of intangibles and $6 million of costs related to restructuring and transformation initiatives. Selling, general, and administrative expenses in the three months ended September 30, 2017 included $17 million of acquisition-related amortization of intangibles, $3 million of costs related to our transformation initiatives and $1 million of acquisition-related costs. Excluding these items, selling, general and administrative expenses increased from 12.0% as a percentage of revenue in the three months ended September 30, 2017 to 13.3% as a percentage of revenue in the three months ended September 30, 2018 due to continued investment in the business.

Selling, general and administrative expenses were $732 million, or 15.9% as a percentage of revenue, in the nine months ended September 30, 2018 as compared to $678 million, or 14.3% as a percentage of revenue, in the nine months ended September 30, 2017. Selling, general and administrative expenses in the nine months ended September 30, 2018 included $46 million of acquisition-related amortization of intangibles, $38 million of costs related to restructuring and transformation initiatives, and $1 million of acquisition related costs. Selling, general, and administrative expenses in the nine months ended September 30, 2017 included $49 million of acquisition-related amortization of intangibles, $10 million of costs related to our transformation initiative and $3 million of acquisition-related costs. Excluding these items, selling, general and administrative expenses increased from 13.0% as a percentage of revenue in the nine months ended September 30, 2017 to 14.1% as a percentage of revenue in the nine months ended September 30, 2018 due to continued investment in the business.

Research and development expenses were $59 million, or 3.8% as a percentage of revenue, in the three months ended September 30, 2018 as compared to $53 million, or 3.2% as a percentage of revenue, in the three months ended September 30, 2017. Research and development expenses in the three months ended September 30, 2018 and September 30, 2017 each included $1 million of costs related to our restructuring and transformation initiatives. Excluding these costs, research and development expenses as a percentage of revenue increased from 3.1% in the three months ended September 30, 2017 to 3.7% in the three months ended September 30, 2018.

Research and development expenses were $190 million, or 4.1% as a percentage of revenue, in the nine months ended September 30, 2018 as compared to $178 million, or 3.8% as a percentage of revenue, in the nine months ended September 30, 2017. Research and development expenses in the nine months ended September 30, 2018 and 2017 included $6 million and $5 million, respectively, of costs related to our restructuring and transformation initiatives. Excluding these costs, research and development expenses as a percentage of revenue increased from 3.7% in the nine months ended September 30, 2017 to 4.0% in the nine months ended September 30, 2018.

Asset impairment charges were $183 million in the nine months ended September 30, 2018, which included a $146 million impairment of goodwill assigned to the Hardware reporting unit and a $37 million impairment charge related to long-lived assets held and used in our Hardware operations. Refer to Note 4. Goodwill and Long-Lived Assets of the Notes to Condensed Consolidated Financial Statements for additional discussion.

Interest and Other Expense Items

Interest expense was $43 million in the three months ended September 30, 2018 compared to $42 million in the three months ended September 30, 2017.

Interest expense was $125 million in the nine months ended September 30, 2018 compared to $122 million in the nine months ended September 30, 2017.


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Other expense, net was $10 million in the three months ended September 30, 2018 compared to $7 million in the three months ended September 30, 2017. Other expense, net in the three months ended September 30, 2018 and 2017 included $10 million and $9 million, respectively, of losses from foreign currency remeasurement and foreign exchange contracts not designated as hedging instruments.

Other expense, net was $24 million in the nine months ended September 30, 2018 compared to $16 million in the nine months ended September 30, 2017. Other expense, net in the nine months ended September 30, 2018 and September 30, 2017 included $23 million and $19 million, respectively, of losses from foreign currency remeasurement and foreign exchange contracts not designated as hedging instruments.

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, infrequent or unusual items. Income tax benefit was $15 million for the three months ended September 30, 2018 compared to income tax expense of $31 million for the three months ended September 30, 2017. The decrease was driven by lower income before taxes, tax method changes filed during the quarter that resulted in lower deferred tax assets subject to the downward rate remeasurement resulting from U.S. Tax Reform and an increase in discrete benefits in the three months ended September 30, 2018. The increase in discrete benefits was primarily driven by the impact of tax restructuring transactions.

Income tax benefit was $20 million for the nine months ended September 30, 2018 compared to income tax expense of $78 million for the nine months ended September 30, 2017. The decrease in income tax expense was driven by lower income before taxes, tax method changes filed during the quarter that resulted in lower deferred tax assets subject to the downward rate remeasurement resulting from U.S. Tax Reform and an increase in discrete benefits in the nine months ended September 30, 2018. The increase in discrete benefits was primarily driven by favorable audit settlements in international jurisdictions and tax restructuring transactions.
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 2018 or future periods. The Company regularly reviews our deferred tax assets for recoverability based on the evaluation of positive and negative evidence; given current earnings and anticipated future earnings at certain subsidiaries, the Company believes that there is a reasonable possibility sufficient positive evidence may become available that would allow the release of a valuation allowance within the next twelve months.
Income (Loss) from Discontinued Operations

In the three months ended September 30, 2018, loss from discontinued operations was $1 million, net of tax, compared to zero the three months ended September 30, 2017. The increase in loss from discontinued operations was related to environmental matters.

In the nine months ended September 30, 2018 loss from discontinued operations was $38 million, net of tax, due to a ruling on the Kalamazoo environmental matter in the first quarter as well as audit settlements partially related to Teradata in the second quarter. In the nine months ended September 30, 2017, income from discontinued operations was $5 million due to an insurance settlement received related to an environmental matter.

Revenue and Operating Income by Segment

The Company manages and reports the following three segments:
•
Software - Our software offerings include industry-based software platforms, applications and application suites for the financial services, retail, hospitality and small business industries. We also offer a portfolio of other industry-oriented software applications including cash management software, video banking software, fraud and loss prevention applications, check and document imaging, remote-deposit capture and customer-facing mobile and digital banking applications for the financial services industry; and secure electronic and mobile payment solutions, sector-specific point of sale software applications, and back-office inventory and store and restaurant management applications for the retail and hospitality industries. Additionally, we provide ongoing software support and maintenance services, as well as consulting and implementation services for our software solutions.
•
Services - Our global end-to-end services solutions include assessment and preparation, staging, installation, implementation, and maintenance and support for our solutions. We also provide systems management and complete

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managed services for our product offerings. In addition, we provide installation, maintenance and servicing for third party networking products and computer hardware from select manufacturers.
•
Hardware - Our hardware solutions include our suite of financial-oriented self-service ATM-related hardware, and our retail- and hospitality-oriented point of sale terminal, self-checkout kiosk and related hardware. We also offer other self-service kiosks, such as self-check in/out kiosks for airlines, and wayfinding solutions for buildings and campuses.

Each of these segments derives its revenue by selling 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 non-operational items from segment operating income, consistent with the manner by which management reviews each segment, evaluates performance, and reports our segment results under 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. Our segment results are reconciled to total Company results reported under GAAP in Note 15. Segment Information and Concentrations 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.

Software Segment

The following table shows the Software segment revenue and operating income for the three and nine months ended September 30:
 
Three months ended September 30
 
Nine months ended September 30
In millions
2018
 
2017
 
2018
 
2017
Revenue
$
480

 
$
476

 
$
1,410

 
$
1,392

Operating income
$
127

 
$
148

 
$
351

 
$
399

Operating income as a percentage of revenue
26.5
%
 
31.1
%
 
24.9
%
 
28.7
%

In the three months ended September 30, 2018 compared to the three months ended September 30, 2017, Software revenue increased 1%, driven by growth in cloud revenue of 6% and software license revenue of 1%, partially offset by declines in software maintenance of 3% and professional services revenue of 2%. Cloud revenue growth was due to the impact from prior period bookings. Software license revenue increased due to higher unattached software licenses, partially offset by lower attached software license revenue due to declines in Hardware. Professional services revenue declined due to the timing of services performed compared to the prior year. Software maintenance revenue declined due to lower software license sales from prior periods. Foreign currency fluctuations had an unfavorable impact of 1% on the revenue comparison.

In the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, Software revenue increased 1%, driven by growth in cloud revenue of 7% and professional services revenue of 3%, partially offset by declines in software license revenue of 10% and software maintenance revenue of 1%. Cloud revenue growth was due to the impact from prior period bookings. Professional services revenue growth was due to demand for the Company's channel transformation and digital enablement solutions in the first half of 2018. Software license revenue declined due to lower hardware sales and lower unattached software license sales in the first half of 2018. Foreign currency fluctuations had no impact on the revenue comparison.

Operating income decreased in the three months ended September 30, 2018 compared to the three months ended September 30, 2017. The decrease in operating income was primarily driven by software license mix as well as higher employee related expenses.

Operating income decreased in the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The decrease in operating income was primarily driven by lower software license revenue, the software license mix as well as higher employee related expenses.


Services Segment

The following table shows the Services segment revenue and operating income for the three and nine months ended September 30:

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Three months ended September 30
 
Nine months ended September 30
In millions
2018
 
2017
 
2018
 
2017
Revenue
$
616

 
$
609

 
$
1,827

 
$
1,754

Operating income
$
90

 
$
88

 
$
229

 
$
206

Operating income as a percentage of revenue
14.6
%
 
14.4
%
 
12.5
%
 
11.7
%

In the three and nine months ended September 30, 2018 compared to the three and nine months ended September 30, 2017, Services revenue increased 1% and 4%, respectively, driven by growth in hardware maintenance revenue and continued increases in managed and implementation services revenue. In the three months ended September 30, 2018 foreign currency fluctuations had an unfavorable impact on the revenue comparison of 3%. In the nine months ended September 30, 2018 foreign currency fluctuations had a favorable impact of 1%.

Operating income increased in the three and nine months ended September 30, 2018 compared to the three and nine months ended September 30, 2017 primarily due to higher revenue and sustainable improvements achieved through our Mission One (M1) initiative.

Hardware Segment

The following table shows the Hardware segment revenue and operating loss for the three and nine months ended September 30:
 
Three months ended September 30
 
Nine months ended September 30
In millions
2018
 
2017
 
2018
 
2017
Revenue
$
454

 
$
578

 
$
1,367

 
$
1,588

Operating (loss) income
$
(56
)
 
$
(2
)
 
$
(106
)
 
$
(1
)
Operating (loss) income as a percentage of revenue
(12.3
)%
 
(0.3
)%
 
(7.8
)%
 
(0.1
)%

In the three months ended September 30, 2018 compared to the three months ended September 30, 2017, Hardware revenue decreased 21% due to declines in ATM revenue of 13%, POS revenue of 29% and SCO revenue of 24%. ATM revenue declined as we continued to work through supply chain constraints due to increased demand for our new ATM product family. By the end of the quarter, we had largely resolved supply chain constraints and our overall plan to improve manufacturing operations is progressing with production levels exiting the third quarter consistent with the expected ramp in the fourth quarter. POS revenue declined due to the timing of several large customer roll-outs in the prior year. SCO revenue decreased due to the timing of customer roll-outs in the current year. Foreign currency fluctuations had an unfavorable impact on the revenue comparison of 1%.

In the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, Hardware revenue decreased 14% due to declines in ATM revenue of 14%, SCO revenue of 14% and POS revenue of 12%. ATM revenue declined due to lower volume as well as supply chain constraints related to new product introductions. SCO revenue decreased due to timing of customer projects compared to the prior year period. POS revenue declined due to the timing of customer projects for store transformation solutions. Foreign currency fluctuations had no impact on the revenue comparison.

Operating loss increased in the three and nine months ended September 30, 2018 compared to the three and nine months ended September 30, 2017 driven by lower revenue, an unfavorable product mix, pricing pressure, and higher cost associated with improving the supply chain constraints.

Financial Condition, Liquidity, and Capital Resources

Cash provided by operating activities was $163 million in the nine months ended September 30, 2018 compared to cash provided by operating activities of $270 million in the nine months ended September 30, 2017. The decrease in cash provided by operating activities was due to lower earnings.

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,

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investments in the Company’s existing businesses, strategic acquisitions, repurchases 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 operating activities to NCR’s non-GAAP measure of free cash flow for the nine months ended September 30:
 
Nine months ended September 30
In millions
2018
 
2017
Net cash provided by operating activities
$
163

 
$
270

Expenditures for property, plant and equipment
(104
)
 
(81
)
Additions to capitalized software
(130
)
 
(125
)
Net cash used in discontinued operations
(23
)
 
(14
)
Free cash (outflow) flow (non-GAAP)
$
(94
)
 
$
50


The increase in expenditures for property, plant and equipment was primarily due to tenant improvements in our new world headquarters, which are partially reimbursed by the lessor and included in net cash provided by operating activities.

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 sale of property, plant and equipment.

Our financing activities primarily include proceeds from employee stock plans, repurchases of NCR common stock and borrowings and repayments of credit facilities and notes. During the nine months ended September 30, 2018 and 2017, we repurchased a total of $210 million and $350 million, respectively, of our common stock. During the nine months ended September 30, 2018 and 2017, proceeds from employee stock plans were $16 million and $11 million, respectively. During the nine months ended September 30, 2018 and 2017, we paid $30 million and $24 million, respectively, of tax withholding payments on behalf of employees for stock based awards that vested.

Long Term Borrowings As of September 30, 2018, our senior secured credit facility consisted of a term loan facility with an aggregate outstanding principal balance of $760 million, and a revolving credit facility in an aggregate principal amount of $1.1 billion, of which none was outstanding. Additionally, the revolving credit facility has up to $400 million available to certain foreign subsidiaries. Loans under the revolving credit facility are available in U.S. Dollars, Euros and Pound Sterling. The revolving credit facility also allows a portion of the availability to be used for outstanding letters of credit, and as of September 30, 2018, there were no letters of credit outstanding. As of December 31, 2017, the outstanding principal balance of the term loan facility was $810 million and the outstanding balance on the revolving facility was zero.

As of September 30, 2018 and December 31, 2017, we had outstanding $700 million in aggregate principal balance of 6.375% senior unsecured notes due in 2023, $600 million in aggregate principal balance of 5.00% senior unsecured notes due in 2022, $500 million in aggregate principal balance of 4.625% senior unsecured notes due in 2021 and $400 million in aggregate principal balance of 5.875% senior unsecured notes due in 2021.

Our revolving trade receivables securitization facility provides the Company with up to $200 million in funding based on the availability of eligible receivables and other customary factors and conditions. As of September 30, 2018 and December 31, 2017, the Company had $175 million and zero, respectively, outstanding under the facility.

Employee Benefit Plans In 2018, we expect to make contributions of $30 million to our international pension plans, $60 million to our postemployment plan and $2 million to our postretirement plan. For additional information, refer to Note 8. Employee Benefit Plans of the Notes to the Condensed Consolidated Financial Statements.

Transformation and Restructuring Initiatives Our previously announced restructuring and transformation initiatives continue to progress on track. In Services, our Mission One performance and profit improvement program continues to deliver revenue growth and margin expansion. In Hardware, we are continuing the move to a more variable cost structure by reducing the number of manufacturing plants and ramping up production with contract manufacturers. As we execute on these initiatives, NCR expects to incur a related pre-tax charge over the next two years in the range of approximately $200 million to $250 million, with $100 million to $150 million in 2018, that will be included in income from operations. The cash impact of these transformation initiatives

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is expected to be approximately $150 million to $200 million over the next two years, with $100 million in 2018. We plan to achieve run-rate savings of approximately $150 million per year by 2020. In the nine months ended September 30, 2018, we incurred a $98 million pre-tax charge and $60 million of cash payments.

However, in order to focus the organization on the strategic growth areas, we are announcing a spend optimization program to drive cost savings through operational efficiencies to generate at least $100 million of savings in 2019. These initiatives will create efficiencies in our corporate functions, reduce spend in the non-strategic areas and limit discretionary spending. We expect to incur a pre-tax charge of $75 million to $100 million over the next twelve months, with approximately $50 million incurred during the fourth quarter of 2018. The cash impact is expected to be $75 million to $100 million which will be paid in 2018 and 2019.

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. 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, 2018 and 2017, the Company paid dividends-in-kind of $11 million, respectively, associated with the Series A Convertible Preferred Stock. During the nine months ended September 30, 2018 and 2017, the Company paid dividends-in-kind of $34 million, respectively, associated with the Series A Convertible Preferred Stock. As of September 30, 2018 and December 31, 2017, 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, 2018 or 2017.

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.

As of September 30, 2018 and December 31, 2017, the maximum number of common shares that could be required to be issued upon conversion of the outstanding shares of the Series A Convertible Preferred Stock was 28.6 million and 27.5 million, respectively.

Cash and Cash Equivalents Held by Foreign Subsidiaries Cash and cash equivalents held by the Company's foreign subsidiaries at September 30, 2018 and December 31, 2017 were $303 million and $442 million, respectively. Under current tax laws and regulations, if cash and cash equivalents and short-term investments held outside the U.S. are distributed to the U.S. in the form of dividends or otherwise, we may be subject to additional U.S. income taxes and foreign withholding taxes, which could be significant.

Summary As of September 30, 2018, our cash and cash equivalents totaled $334 million and our total debt was $3.15 billion. As of September 30, 2018, our borrowing capacity under the revolving credit facility was approximately $1.1 billion, and under our trade receivables securitization facility was $25 million. 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 2017 Annual Report on Form 10-K and Item 1A 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 and other payments related to the Fox River and Kalamazoo River environmental matters, debt servicing obligations, and our operating requirements for the next twelve months.

Contractual and Other Commercial Commitments
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.
Critical Accounting Policies and Estimates

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As described in Note 1. Basis of Presentation and Summary of Significant Accounting Policies, of the Notes to Condensed Consolidated Financial Statements, we adopted various accounting standard updates effective January 1, 2018, most notably the adoption of the new revenue recognition accounting guidance.
Management reassessed the critical accounting policies as disclosed in our 2017 Annual Report on Form 10-K and determined that, other than the change in accounting for revenue recognition, there were no changes to our critical accounting policies or our estimates associated with those policies in the nine months ended September 30, 2018.  See discussion in Note 2. Accounting Policies related to Revenue with Contracts with Customers of the Notes to Condensed Consolidated Financial Statements for new revenue recognition related accounting 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.
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,” “plan,” “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: the strength of demand for ATMs and other financial services hardware and its effect on the results of our businesses and reportable segments; our ability to generate accurate forecasts of product demand and to engage third-party suppliers appropriately to meet that demand, including the on-boarding of new or additional suppliers; domestic and global economic and credit conditions including, in particular, those resulting from uncertainty in the "BRIC" economies, economic sanctions against Russia, the determination by Britain to exit the European Union, the potential for changes to global or regional trade agreements or the imposition of protectionist trade policies, and the imposition of import or export tariffs or border adjustments; the impact of our indebtedness and its terms on our financial and operating activities; the impact of the terms of our strategic relationship with Blackstone and our Series A Convertible Preferred Stock; the transformation of our business model and our ability to sell higher-margin software and services; the possibility of disruptions in or problems with our data center hosting facilities; cybersecurity risks and compliance with data privacy and protection requirements; our ability to successfully introduce new solutions and compete in the information technology industry; our ability to improve execution in our sales and services organizations; defects or errors in our products; manufacturing disruptions, including those caused by or related to outsourced manufacturing; collectability difficulties in subcontracting relationships in Emerging Industries; the historical seasonality of our sales; foreign currency fluctuations; the availability and success of acquisitions, divestitures and alliances; our pension strategy and underfunded pension obligation; the success of our restructuring plans and cost reduction initiatives, including those in our Hardware segment; tax rates; reliance on third party suppliers; development and protection of intellectual property; workforce turnover and the ability to attract and retain skilled employees; uncertainties or delays associated with the transition of key business leaders; 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. The contents of the Company’s web site are not incorporated into this quarterly report or the Company’s other filings with the U.S. Securities and Exchange Commission.

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Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

We are exposed to market risks primarily from changes in foreign currency exchange rates and interest rates. It is our policy to manage our foreign exchange exposure and debt structure in order to manage capital costs, control financial risks and maintain financial flexibility over the long term. In managing market risks, we employ derivatives according to documented policies and procedures, including foreign currency contracts and interest rate swaps. We do not use derivatives for trading or speculative purposes.

Foreign Exchange Risk

Since a substantial portion of our operations and revenue occur outside the United States, and in currencies other than the U.S. Dollar, our results can be significantly impacted by changes in foreign currency exchange rates. We have exposure to approximately 50 functional currencies and are exposed to foreign currency exchange risk with respect to our sales, profits and assets and liabilities denominated in currencies other than the U.S. Dollar. Although we use financial instruments to hedge certain foreign currency risks, we are not fully protected against foreign currency fluctuations and our reported results of operations could be affected by changes in foreign currency exchange rates. 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. These foreign exchange contracts are designated as highly effective cash flow hedges. This is primarily done through the hedging of foreign currency denominated inter-company inventory purchases by the marketing units. All of these transactions are forecasted. We also use derivatives not designated as hedging instruments consisting primarily of forward contracts to hedge foreign currency denominated balance sheet exposures. For these derivatives we recognize gains and losses in the same period as the remeasurement losses and gains of the related foreign currency-denominated exposures.

We utilize non-exchange traded financial instruments, such as foreign exchange forward and option contracts, that we purchase exclusively from highly rated financial institutions. We record these contracts on our balance sheet at fair market value based upon market price quotations from the financial institutions. We do not enter into non-exchange traded contracts that require the use of fair value estimation techniques, but if we did, they could have a material impact on our financial results.

For purposes of analyzing potential risk, we use sensitivity analysis to quantify potential impacts that market rate changes may have on the fair values of our hedge portfolio related to firmly committed or forecasted transactions. The sensitivity analysis represents the hypothetical changes in value of the hedge position and does not reflect the related gain or loss on the forecasted underlying transaction. A 10% appreciation or depreciation in the value of the U.S. Dollar against foreign currencies from the prevailing market rates would have resulted in a corresponding increase or decrease of $8 million as of September 30, 2018 in the fair value of the hedge portfolio. The Company expects that any increase or decrease in the fair value of the portfolio would be substantially offset by increases or decreases in the underlying exposures being hedged.

The U.S. Dollar was stronger in the third quarter of 2018 compared to the third quarter of 2017 based on comparable weighted averages for our functional currencies. This had an unfavorable impact of 2% on third quarter 2018 revenue versus third quarter 2017 revenue. This excludes the effects of our hedging activities and, therefore, does not reflect the actual impact of fluctuations in exchange rates on our operating income.

Interest Rate Risk

We are subject to interest rate risk principally in relation to variable-rate debt. Approximately 70% of our borrowings were on a fixed rate basis as of September 30, 2018. The increase in pre-tax interest expense for the nine months ended September 30, 2018 from a hypothetical 100 basis point increase in variable interest rates would be approximately $7 million.


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Concentrations of Credit Risk

We are 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 balance sheet. Exposure to credit risk is managed through credit approvals, credit limits, selecting major international financial institutions (as counterparties to hedging transactions) and monitoring procedures. Our business often involves large transactions with customers for which we do not require collateral. If one or more of those customers were to default in its obligations under applicable contractual arrangements, we could be exposed to potentially significant losses. Moreover, a prolonged downturn in the global economy could have an adverse impact on the ability of our customers to pay their obligations on a timely basis. We believe that the reserves for potential losses are adequate. As of September 30, 2018, we did not have any significant concentration of credit risk related to financial instruments.


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Item 4.
CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
NCR has established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the Exchange Act)) to provide reasonable assurance that information required to be disclosed by NCR in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by NCR in the reports that it files or submits under the Exchange Act is accumulated and communicated to NCR’s management, including its Chief Executive and Chief Financial Officers, as appropriate to allow timely decisions regarding required disclosure. Based on their evaluation as of the end of the third quarter of 2018, conducted under their supervision and with the participation of management, the Company’s Chief Executive and Chief Financial Officers have concluded that NCR’s disclosure controls and procedures are effective to meet such objectives and that NCR’s disclosure controls and procedures adequately alert them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in NCR’s Exchange Act filings.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the three months ended  September 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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Part II. Other Information

Item 1.
LEGAL PROCEEDINGS

The information required by this item is included in Note 9. Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements in this quarterly report and is incorporated herein by reference.

Item 1A.
RISK FACTORS

Part I, Item 1A ("Risk Factors") of the Company’s 2017 Annual Report on Form 10-K (the 2017 Annual Report) includes a discussion of the risks and uncertainties related to our business. The information presented below updates, and should be read in conjunction with, the risk factors and information disclosed in the 2017 Annual Report. Except as presented below, there have been no material changes from the risk factors described in the 2017 Annual Report.

Operating Results Fluctuations. Our revenue, operating results, and margins could fluctuate for a number of reasons, including those described below:

Manufacturing. At December 31, 2017:

•
we manufactured our ATMs in facilities located in Columbus, Georgia, USA; Manaus, Brazil; Budapest, Hungary; Beijing, China; and Chengalpattu, India;

•
our self-checkout solutions were manufactured in facilities located in Columbus, Georgia, USA and Budapest, Hungary;

•
our financial kiosk solutions were manufactured in facilities located in Beijing, China; Budapest, Hungary; Manaus, Brazil; and Chengalpattu, India;

•
our POS/Display terminals were manufactured in facilities located in Columbus, Georgia, USA; and Budapest, Hungary, and certain hand-held solutions were manufactured in Salzburg, Austria; and

•
we outsourced the manufacturing in all geographic regions of its payment solutions, some POS terminals, printers, bar code scanners and various other kiosks.

On April 23, 2018, we announced our intention to streamline our manufacturing operations by closing two manufacturing plants in the Columbus, Georgia area and another in Beijing, China, and to move the manufacturing operations at those plants to other existing NCR facilities and to current third party suppliers. If we develop or experience problems relating to product quality or on-time delivery to customers that we are unable to quickly manage and resolve, whether due to the geographical diversity of our manufacturing base, the use of contract or outsourced manufacturing, or otherwise, we could experience business interruption that could negatively impact our business and operating results.

Reliance on Third Parties. If third party suppliers upon which we rely are not able to fulfill our needs, our ability to bring our products to market in a timely fashion could be affected. In most cases, there are a number of vendors providing the services and producing the parts and components that we utilize in or in connection with our products. However, there are some services and components that are licensed or purchased from single sources due to price, quality, technology, functionality or other reasons. For example, we depend on transaction processing services from Accenture, computer chips and microprocessors from Intel and operating systems from Microsoft. Certain parts and components used in the manufacturing of our ATMs and the delivery of many of our retail solutions are also supplied by single sources. In addition, there are a number of key suppliers for our businesses that provide us with critical products for our solutions. If we were unable to secure the necessary services, including contract manufacturing, parts, software, components or products from a particular vendor, and we had to find an alternative supplier, our new and existing product shipments and solution deliveries, or the provision of contracted services, could be delayed, impacting our business and operating results.

We have, from time to time, formed alliances with third parties that have complementary products, software, services and skills. These alliances represent many different types of relationships, such as outsourcing arrangements to manufacture hardware and subcontract agreements with third parties to perform services and provide products and software to our customers in connection with our solutions. For example, we rely on third parties for cash replenishment services for our ATM products. We also rely on Jabil Inc. to provide contract manufacturing services for our automated teller machines and self-service checkout solutions, primarily for our customers in the Americas. These alliances introduce risks that we cannot control, such as nonperformance by third parties and difficulties with or delays in integrating elements provided by third parties into our solutions. Lack of information technology

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infrastructure, shortages in business capitalization, and manual processes and data integrity issues, particularly with smaller suppliers, can also create product time delays, inventory and invoicing problems, staging delays, as well as other operating issues. The failure of third parties to provide high-quality products or services that conform to required specifications or contractual arrangements could impair the delivery of our solutions on a timely basis, create exposure for non-compliance with our contractual commitments to our customers and impact our business and operating results. Also, some of these third parties have access to confidential NCR and customer data, the integrity and security of which are of significant importance to the Company.

Work Environment. Continuous improvement, customer experience, restructuring and cost reduction initiatives could negatively impact productivity and business results. In the past, we have undertaken restructuring plans, and, in addition, as part of our ongoing efforts to optimize our cost structure, from time to time, we shift and realign our internal organizational structure and resources. For example, on April 23, 2018, we announced our intention to streamline our manufacturing operations by closing two manufacturing plants in the Columbus, Georgia area and another in Beijing, China, and to move the manufacturing operations at those plants to other existing NCR facilities and to current third party suppliers. These activities could temporarily result in reduced productivity levels. If we are not able to timely execute on these initiatives, or if the costs to complete these initiatives is higher than anticipated, our results of operations or financial condition could be adversely affected. In addition to these initiatives, we have initiatives to grow and expand our software business, streamline our services business, enable our sales force to better sell our solutions, invest in our software and cloud solutions and improve the experience of our customers. We typically have many such initiatives underway. If we are not successful in implementing and managing these various initiatives and minimizing any resulting loss in productivity, we may not be able to achieve targeted cost savings or productivity gains, and our business and operating results could be negatively impacted.

On January 8, 2018, we opened our new world headquarters in Atlanta, Georgia, and have relocated our headquarters operations to this facility. From time to time we may undertake similar projects with respect to our office, manufacturing or other facilities. Implementation of relocation plans such as these could result in business disruption due to a lack of business continuity, which, among other things, could have a negative impact on our productivity and business and operating results.

If we do not retain key employees, or attract quality new and replacement employees, we may not be able to meet our business objectives. Our employees are vital to our success, including the successful transformation of the Company into a software and solutions driven business. Therefore, our ability to retain our key business leaders and our highly skilled software development, technical, sales, consulting and other key personnel, including key personnel of acquired businesses, is critical. These key employees may decide to leave NCR for other opportunities, or may be unavailable for health or other reasons. In addition, as our business model evolves, we may need to attract employees with different skill sets, experience and attributes to support that evolution. If we are unable to retain our key personnel, or we are unable to attract highly qualified new and replacement employees by offering competitive compensation, secure work environments and leadership opportunities now and in the future, our business and operating results could be negatively impacted. In addition, a failure to ensure the effective and timely transfer of knowledge and a smooth transition of key employees, including, among others, our Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Chief Technology Officer and Chief Human Resources Officer, could hinder business continuity, personnel retention and operational execution, which, among other things, could have a negative impact on our productivity and business and operating results. Uncertainties or delays associated with the transition of key business leaders could also cause fluctuation in our stock price.

Our ability to effectively manage our business could be negatively impacted if we do not invest in and maintain reliable technology infrastructure and information systems. It is periodically necessary to add to, replace, upgrade or modify our technology infrastructure and internal information systems. If we are unable to expand, replace, upgrade or modify such systems in a timely and cost-effective manner, especially in light of demands on our information technology resources, our ability to capture and process financial transactions and, therefore, our financial condition, results of operations, or ability to comply with legal and regulatory reporting obligations, may be negatively impacted.


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Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Plans and Programs

On October 19, 2016, the Board approved a share repurchase program, with no expiration from the date of authorization, for the systematic repurchase of the Company’s common stock to offset the dilutive effects of the Company’s employee stock purchase plan, equity awards and in-kind dividends on the Company’s Series A Convertible Preferred Stock. Availability under this program accrues quarterly based on the average value of dilutive issuances during the quarter.

On March 12, 2017, the Board approved a second share repurchase program that provides for the repurchase of up to $300 million of the Company’s common stock. On July 25, 2018, the Board authorized an incremental $200 million of share repurchases under this program.

No shares were repurchased under these programs during the three months ended September 30, 2018.

As of September 30, 2018, $290 million was available for repurchases under the March 2017 program, and approximately $293 million was available for repurchases under the October 2016 dilution offset program. The timing and amount of repurchases under these programs depend upon market conditions and may be made from time to time in open market purchases, privately negotiated transactions, accelerated stock repurchase programs, issuer self-tender offers or otherwise. The repurchases will be made in compliance with applicable securities laws and may be discontinued at any time.

The Company occasionally purchases vested restricted stock or exercised stock options at the current market price to cover withholding taxes. For the three months ended September 30, 2018, 15,325 shares were purchased at an average price of $28.05 per share.

The Company’s ability to repurchase its common stock is restricted under the Company’s senior secured credit facility and terms of the indentures for the Company’s senior unsecured notes, which prohibit certain share repurchases, including during the occurrence of an event of default, and establish limits on the amount that the Company is permitted to allocate to share repurchases and other restricted payments. The limitations are calculated using formulas based generally on 50% of the Company’s consolidated net income for the period beginning in the third quarter of 2012 through the end of the most recently ended fiscal quarter, subject to certain other adjustments and deductions, with certain prescribed minimums. These formulas are described in greater detail in the Company’s senior secured credit facility and the indentures for the Company’s senior unsecured notes, each of which is filed with the SEC.



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Item 6.     EXHIBITS
2.1
Separation and Distribution Agreement, dated as of August 27, 2007, between NCR Corporation and Teradata Corporation (Exhibit 10.1 to the Current Report on Form 8-K of Teradata Corporation dated September 6, 2007).
 
 
Articles of Amendment and Restatement of NCR Corporation (incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q of NCR Corporation for the quarter ended June 30, 2016).
 
 
Bylaws of NCR Corporation, as amended and restated on February 20, 2018 (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K of NCR Corporation dated February 23, 2018.
 
 
4.1
Common Stock Certificate of NCR Corporation (incorporated by reference to Exhibit 4.1 from the NCR Corporation Annual Report on Form 10-K for the year ended December 31, 1999).
 
 
Indenture, dated September 17, 2012, among NCR Corporation, as issuer, NCR International Inc. and Radiant Systems Inc. as subsidiary guarantors and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.01 to the Current Report on Form 8-K of NCR Corporation dated September 17, 2012).
 
 
Indenture, dated December 18, 2012, among NCR Corporation, as issuer, NCR International Inc. and Radiant Systems Inc. as subsidiary guarantors and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.01 to the Current Report on Form 8-K of NCR Corporation filed December 18, 2012).
 
 
Indenture, dated December 19, 2013, between NCR Escrow Corp. and U.S. Bank National Association relating to the $400 million aggregate principal amount of 5.875% senior notes due 2021 (the “5.875% Notes”) (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of NCR Corporation dated December 19, 2013 (the “December 19, 2013 Form 8-K”)).
 
 
First Supplemental Indenture relating to the 5.875% Notes, dated January 10, 2014, among NCR Corporation, NCR International, Inc. and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of NCR Corporation dated January 10, 2014 (the “January 10, 2014 Form 8-K”)).
 
 
Indenture, dated December 19, 2013, between NCR Escrow Corp. and U.S. Bank National Association relating to the $700 million aggregate principal amount of 6.375% senior notes due 2023 (the “6.375% Notes”) (incorporated by reference to Exhibit 4.2 to the December 19, 2013 Form 8-K).
 
 
First Supplemental Indenture relating to the 6.375% Notes, dated January 10, 2014, among NCR Corporation, NCR International, Inc. and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 to the January 10, 2014 Form 8-K).
 
 
Employment Agreement, dated July 18, 2018, between Owen Sullivan and NCR Corporation.
 
 
Amendment, effective as of July 26, 2018, to Employment Agreement, dated May 2, 2018, between Paul Langenbahn and NCR Corporation.
 
 
Employment Agreement, dated August 27, 2018, between Andre J. Fernandez and NCR Corporation.
 
 
Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934.
 
 
Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934.
 
 
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101
Financials in XBRL Format.
 
 

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
NCR CORPORATION
 
 
 
 
Date:
November 2, 2018
By:
 
    /s/ Andre Fernandez
 
 
 
 
Andre Fernandez
Executive Vice President and Chief Financial Officer

68
Exhibit


https://cdn.kscope.io/637443a2b3dfc435d7365d5013f7a73a-exhibitsa02.jpg

July 18, 2018

Mr. Owen Sullivan


Dear Owen:

I am pleased to present you with this offer of employment at NCR.

Employer (Legal Entity):

NCR Corporation (“NCR” or the “Company”)

Position; Reporting:

Chief Operating Officer, reporting to the Chief Executive Officer of NCR. You agree to devote substantially all of your attention and time during normal business hours to the business and affairs of NCR. You may serve on not more than one outside public board of directors during your employment with NCR.

Office Location:

Atlanta, Georgia Global Headquarters Office

Start Date:

Your employment with NCR will commence on July 23, 2018.

Job Grade:

This position is a Grade 24 position.



Mr. Owen Sullivan
July 18, 2018
Page 2



Base Salary:

Your annual base salary will be not less than US$725,000 commencing on your start date. We operate our payroll on a bi-weekly pay schedule where you will be paid two weeks’ salary five days following the close of each pay cycle. Your annual base salary will be reviewed from time to time by the CEO to determine appropriate increases, if any.

Management Incentive Plan:

Effective upon your start date you will participate in NCR’s Management Incentive Plan (“MIP”), subject to the terms of the MIP. The MIP is an annual bonus program with a payout that varies based on NCR’s results, your organization’s results, and your individual performance; it is payable in the first calendar quarter following the plan year.

You will also participate in the Customer Success component of the MIP, representing a target incentive opportunity equal to 10% of your annual base salary (with a maximum potential payout equal to 10% of your annual base salary, which thus operates as a “make or miss” opportunity), where the payout will be linked to NCR’s overall achievement of our annual Customer Loyalty goals.
 
Your MIP target incentive opportunity, which includes the Customer Success component referenced above, will be not less than 150% of your annual base salary (with a maximum potential payout equal to 2 times your target incentive opportunity), where the payout will be based on performance goals established by the CEO and approved by the Compensation and Human Resources Committee (the “Committee”) of the NCR Board of Directors.

Your MIP payout for the 2018 plan year will be no less than target, subject to pro-ration for the partial service year, and will be payable to you in or about March 2019. Please note that the MIP guidelines are subject to change from time to time, which will be determined at the discretion of the Committee. You must be employed by NCR at the time of payment in order to be eligible to receive any bonus or incentive payout from NCR.

Long Term Incentive (“LTI”) Equity Awards:

Subject to your acceptance of this offer by execution of this letter agreement, the Committee will grant to you the following equity awards effective August 1, 2018:



Mr. Owen Sullivan
July 18, 2018
Page 3



•
an option to purchase NCR shares with a grant date value equal to US$1,500,000, vesting in equal annual installments over four years (subject to your employment with NCR through the applicable vesting date), having a seven-year term and a strike price equal to the closing price of NCR shares on the grant date, and such other terms as set forth in NCR’s form of option award agreement (“Sign-On Option”);

•
an option to purchase NCR shares with a grant date value equal to US$2,250,000, vesting in equal annual installments over four years (subject to your employment with NCR through the applicable vesting date), having a seven-year term and a strike price equal to the closing price of NCR shares on the grant date, and such other terms as set forth in NCR’s form of option award agreement (“2018 Option”); and

•
restricted stock units corresponding to NCR shares with a grant date value equal to US$2,250,000, vesting in equal installments over three years, subject to your employment with NCR through the applicable vesting dates and such other terms as set forth in NCR’s form of restricted stock unit award agreement (“2018 RSU”);

You must electronically accept the award agreement associated with the award in order to be eligible to receive its benefits. Upon a termination of employment without Cause or for Good Reason (each as defined below), (x) the unvested portion of each of the Sign-On Option, the 2018 Option and the 2018 RSU immediately shall vest and (y) the Sign-On Option and the 2018 Option will remain exercisable until the earlier of the first anniversary of the date that your employment terminates and the option expiration date. Solely for purposes of the immediately preceding sentence:

•
“Cause” means (1) your conviction for committing a felony under U.S. federal law or the law of the state or country in which such action occurred, (2) your willful and continued failure to perform substantially your duties with NCR or any of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness) for a period of at least thirty (30) days after a written demand for substantial performance is delivered to you by the NCR Board of Directors, specifically identifying the manner in which the NCR Board of Directors believes that you have not substantially performed your duties; (3) your willful engaging in illegal conduct or gross misconduct which is materially and demonstrably injurious to NCR or (4) your material violation of NCR’s Code of Conduct. For purposes of this provision, no act or failure to act, on your part, shall be considered “willful” unless it is done, or omitted to be done, by you in bad faith or without reasonable belief that your action or omission was in the best interests of the Company. Any act, or


Mr. Owen Sullivan
July 18, 2018
Page 4



failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by you in good faith and in the best interests of the Company.

•
“Good Reason” means any of the following events without your prior written consent: (1) the assignment to you of any duties inconsistent in any respect with your position (including offices, titles and reporting requirements), authority, duties or responsibilities or any other diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by NCR promptly after receipt of notice thereof given by you; (2) NCR requiring you to be based at any office or location that is more than forty (40) miles distant from the location of your principal place of employment set forth herein; or (3) a material breach of this letter agreement or the grant agreements with respect to the Sign-On Option, the 2018 Option or the 2018 RSU; provided, however, that your termination of employment shall not be deemed to be for Good Reason unless (x) you have notified NCR in writing describing the occurrence of one or more Good Reason events within ninety (90) days of such occurrence, (y) NCR fails to cure such Good Reason event within thirty (30) days after its receipt of such written notice and (z) the termination of employment occurs within 180 days after the occurrence of the applicable Good Reason event.

Effective for 2019 and beyond you will also be eligible to participate in NCR’s Annual LTI Equity Award Program that typically occurs in February each year with a minimum grant date value in 2019 of $4,500,000 comprised of awards of the same type and in the same proportion as are awarded to other senior executives of NCR.

You must be a current employee of NCR on the applicable grant date in order to be eligible to receive any NCR LTI equity award. Other award terms are set forth in the plan governing these awards, and you must electronically accept the award agreement each time one is made in order to be eligible to receive its benefits.



Mr. Owen Sullivan
July 18, 2018
Page 5



Special Incentive Awards

The NCR Board of Directors will consider one-time incentive grants for special initiatives, e.g., a synergy bonus plan for acquisitions, under appropriate circumstances, as determined in the Board’s sole and absolute discretion.

Executive Severance and Change-in-Control Benefits:

You will participate in and be subject to the terms of NCR’s Executive Severance Plan and its Change-in-Control Severance Plan. You are accorded under the Change-In-Control plan a “Tier I” benefit level. For purposes of the Executive Severance Plan, “Cash Severance” shall equal the sum of 1.5 times your base salary plus your target bonus, as set forth therein. To receive any severance benefits you are required to execute NCR's standard form of general release of all claims in a form reasonably acceptable to NCR, as set out in the plans. Each plan is subject to amendment or termination by the Committee.

Employee Benefits:

You will be eligible for employee benefits on the terms generally provided by NCR to its senior executives from time to time, including NCR’s annual Executive Medical Exam Program, which currently provides up to US$5,000 on an annual basis for progressive, diagnostic analysis by NCR’s provider of choice, and the annual Executive Financial Planning Program, which currently provides an annual taxable reimbursement in an amount up to US$12,000 for actual services incurred with respect to your tax and financial planning needs. Each of these programs is subject to amendment or termination by the Committee.

Executive Relocation Program:

You will be eligible for NCR’s Executive Relocation Program, which includes the benefits outlined on the attached “Relocation Plan Summary document.”

Vacation/Holidays:

You will be entitled to receive paid vacation days and holidays in accordance with NCR’s standard vacation policy. Eligible vacation is based on grade level or years of NCR service, whichever provides the greater benefit.



Mr. Owen Sullivan
July 18, 2018
Page 6



NCR also provides six Floating Holidays, which can be used at any time during the year, while recognizing customer and business needs. In the year of hire, the number of available floating holidays is prorated.

Additionally, NCR recognizes the following six days as paid holidays: New Year’s Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.

Legal Expenses:

The Company will reimburse you for up to US$15,000 of reasonable, documented legal fees you incur in connection with your review and acceptance of this letter agreement and its attachments.

Other Terms and Conditions of Employment:

Your offer of employment described in this letter agreement is contingent upon your acceptance of the terms and conditions of employment outlined in this letter agreement (including Attachments A, B and C, each incorporated herein by reference and made a constituent part of this letter agreement), and your passing of a drug screen and background check. Please note that the letter agreement, through Attachment C, contains certain restrictive covenants concerning non-competition, non-customer-solicitation and non-recruitment/hiring, where such provisions are enforceable by law.

If you are in agreement with the terms of this letter agreement, including its attachments, please sign in the space provided below.

This letter agreement supersedes and completely replaces any prior oral or written communication concerning the subject matters addressed in this letter. This letter agreement should not be construed or interpreted as containing any guarantee of continued employment or employment for a specific term.

*        *        *        *        *        *

Owen, we are very excited about the contributions, experience and knowledge you can bring to NCR.




Mr. Owen Sullivan
July 18, 2018
Page 7



Sincerely,

NCR Corporation


By:    /s/ Michael D. Hayford
Name: Michael D Hayford
Title:      CEO & President



Accepting this Offer of Employment:

By accepting and signing NCR’s offer of employment you certify to NCR that you are not subject to a non-competition agreement with any company, person or entity, nor to any other post-employment restrictive covenants, that would preclude or restrict you from performing the NCR position being offered in this letter. We also advise you of NCR’s strong policy of respecting the intellectual property rights of other companies. You should not bring with you to your NCR position any documents or materials designated as, or that you know to be, confidential, proprietary or trade secret information of another company, nor in any other way disclose confidential, proprietary or trade secret information while employed by NCR.

You further acknowledge that this letter agreement, including its Attachments A, B and C, sets forth the terms and conditions of your employment with NCR. The employment relationship with NCR is by mutual consent (“Employment at Will”). This means either you or NCR has the right to discontinue the employment relationship with or without cause at any time and for any reason.



Mr. Owen Sullivan
July 18, 2018
Page 8




You acknowledge that you have read the foregoing information relative to NCR’s conditions of employment and understand that your employment offer is conditioned upon their satisfaction.

Acknowledged and Agreed:


Owen J. Sullivan
 


/s/ Owen J. Sullivan

 
Date:    July 18, 2018         





Exhibit


https://cdn.kscope.io/637443a2b3dfc435d7365d5013f7a73a-exhibitsa03.jpg
July 26, 2018                            

Personal & Confidential

Mr. Paul E. Langenbahn


Dear Paul,

This Amended Letter Agreement (the “Amendment”) modifies the terms of the May 2, 2018 Letter Agreement between you and NCR (the “May Letter”). NCR Corporation is referred to below as “NCR” or “the Company.” Except as expressly modified below, the terms of the May Letter remain enforceable, and except as set out in this Amendment, to the extent there is any conflict between the terms of this Amendment and any other written agreement between NCR and you, including the May Letter, the terms of this Amendment shall control.

I.
Position and Compensation:

Effective July 23, 2018, your new position is Executive Vice President, NCR Corporation and President, NCR Commerce. The position reports to the Chief Operating Officer of NCR Corporation and is a Grade 23 position. Except as set forth in this Amendment, your compensation and Management Incentive Plan arrangements remain as set forth in the May Letter.

II.
Retention Incentive:

You are also hereby granted a retention incentive totaling $1,000,000, payable in two independent installments on December 31, 2018 and June 30, 2019 (each an “Installment Date,” and collectively, the “Installment Dates”) subject to the conditions set forth in this Paragraph II. The retention incentive shall be subject to ordinary tax and other withholding. Payment shall be made within twenty days following each of the Installment Dates, but shall be deemed earned as of the Installment Date. The December 31, 2018 payout is $400,000.00; the June 30, 2019 payout is $600,000.00.

This retention incentive is conditioned upon your continued agreement to and compliance with the restrictive covenants set forth in Section 10 of the Promotional LTI Equity Award Agreement that you entered into in connection with the May Letter and your being on NCR’s payroll as of the Installment Date.

III.
Executive Severance Plan Benefits/Guaranteed Treatment Through April 30, 2020:

ACTIVE 234165772v.8
Mr. Paul Langenbahn
July 26, 2018
Page 2




As set out in the May Letter, you will continue to participate in NCR’s Executive Severance Plan (“ESP”), as may be amended from time to time.

Notwithstanding the foregoing and the May Letter, and without regard to whether the ESP is modified or terminated, including but not limited to by the Board, in the event of a qualifying termination under the terms of the ESP at any time between now and April 30, 2020, you will receive either: (a) the ESP benefits in effect as of May 2, 2018 or (b) the benefits of any new executive severance plan, whichever is of highest monetary or financial value.

In the event of a qualifying termination under the terms of the ESP that occurs at any time after April 30, 2020, you will receive any ESP benefits to which you may be entitled at that time, provided you remain eligible under its terms; if the ESP is terminated or otherwise no longer in existence at such time, you will receive no ESP benefits.

IV.
Adjustment to Succession Good Reason Termination:

By virtue of your appointment to the position described above and the corresponding changes to your authority and responsibilities, the Company acknowledges and agrees that an event qualifying as “Succession Good Reason,” as defined in the May Letter, has occurred and exists. Accordingly, the section of the May Letter entitled “Special CEO Succession Transition Provision” is amended as follows:

The clause “to be exercised within ninety (90) days following an event giving rise to Succession Good Reason as set out below” is hereby deleted and modified as set forth in this Paragraph IV. Specifically, you are entitled to invoke your right to resign for Succession Good Reason at any time between now and April 30, 2020 (the “Succession for Good Reason Period”), subject to the other provisions of this Amendment and the May Letter.

For avoidance of doubt, you will not be entitled to duplicate or multiple severance benefits in the event you are eligible for any of (a) the ESP benefits and/or (b) the guaranteed equivalent of ESP benefits as set out in the preceding section of this Amendment entitled “Executive Severance Plan Benefits/Guaranteed Treatment Through April 30, 2020”, and/or (c) the CIC Plan benefits, and (d) the Succession Good Reason resignation benefits created under the May Letter and modified by this Amendment; in any applicable termination instance you will be limited to the benefits of the highest monetary or financial value provided by any of the referenced plans or their equivalents.

If you are promoted to a position senior to the position set forth above in this Amendment (such as Chief Operating Officer or Chief Executive Officer), with accordingly materially greater responsibilities and compensation, the Succession Good Reason Period shall terminate three (3) calendar days after NCR provides written notice of such promotion and termination of such Succession for Good Reason Period.

V.
General


ACTIVE 234165772v.8
Mr. Paul Langenbahn
July 26, 2018
Page 3




1.Release. To receive any severance benefits from NCR, whether under the May Letter or this Amendment, you must execute a general release of all claims in a form acceptable to NCR, which shall be no less favorable to you than the form attached as Exhibit B to the CIC Severance Plan.

2.Disputes. The governing law and dispute resolution provisions of the May Letter remain unchanged and apply to this Amendment.

3.Merger Clause. This Amendment supersedes any prior oral or written communication concerning the subject matter addressed in it. Except as set out in this Amendment, to the extent there is any conflict between the terms of this Amendment and any other written agreement between NCR and you, including the May Letter, the terms of this Amendment shall control. For avoidance of doubt, none of the other agreements or plans referenced in this Amendment (such as the MIP, CIC Plan, ESP, LTI Plan) or the May Letter are modified, changed or amended, except as expressly set forth herein. References in the May Letter to equity award agreements, and incorporation of terms, shall be deemed to include the Promotional LTI Equity Award Agreement that you entered into in connection with the May Letter.

4.Employment. This Amendment is not to be construed or interpreted to contain any guarantee of continued employment or employment for a specific term. Your employment relationship with NCR is one of employment at will. This means either you or NCR has the right to discontinue the employment relationship with or without cause at any time and for any reason.


ACTIVE 234165772v.8
Mr. Paul Langenbahn
July 26, 2018
Page 4





Sincerely,

NCR Corporation


By: /s/Michael D. Hayford

Name: Michael D. Hayford

Date: July 26, 2018

I agree to the above and foregoing Amendment:


/s/ Paul E. Langenbahn
Paul E. Langenbahn

July 26, 2018
Date


ACTIVE 234165772v.8
Exhibit



https://cdn.kscope.io/637443a2b3dfc435d7365d5013f7a73a-exhibitsa01.jpg

PERSONAL AND CONFIDENTIAL
August 27, 2018

Mr. Andre J. Fernandez


Dear Andre:

Welcome to NCR, a global technology company that runs the everyday transactions that make your life easier.

With a global presence in 180 countries, our employees around the world offer a broad perspective and range of skills that enable our customers to make every customer interaction with their business an exceptional experience.

We are pleased to present you with this offer of employment at NCR. I am certain you will be a key contributor to this organization. On behalf of my team, we look forward to you joining us.

Employer (Legal Entity):

NCR Corp (the ‘Company’ or ‘NCR’)

Position:

Chief Financial Officer

Job Grade:

This position is a Grade 23.

Reporting To:

Michael Hayford, President & Chief Executive Officer

Location:

Atlanta, GA

Start Date:

Your employment shall commence on August 29, 2018.

Base Salary:

Your annual base salary will be $625,000.00 per year, commencing as of your Start Date. The Company operates on a bi-weekly pay schedule. Payday is scheduled five days following the close of each pay period. Your annual base salary will be reviewed from time to time by the CEO to determine appropriate increases, if any, and are subject to approval by the Compensation and Human Resources Committee (the “Committee”) of the NCR Board of Directors. Any decreases in base salary, other than as part of a base salary reduction taken by a majority of the members of the Executive Leadership team, will permit you to exercise the “good reason” clause as outlined below.

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Management Incentive Plan:

Effective upon your start date you will participate in NCR’s Management Incentive Plan (“MIP”), subject to the terms of the MIP. The MIP is an annual bonus program with a payout that varies based on NCR’s results, your organization’s results, and your individual performance; it is payable in the first calendar quarter following the plan year.

Your MIP target incentive opportunity, which includes the Customer Success component referenced below, will be not less than 125% of your annual base salary (with a maximum potential payout equal to 2 times your target incentive opportunity), where the payout will be based on performance goals established by the CEO and approved by the Committee.

Your MIP payout for the 2018 plan year will be no less than target, subject to pro-ration for the partial service year, and will be payable to you in or about March 2019. For 2018, this will also include guaranteed attainment of the Customer Success component of the MIP. Please note that the MIP guidelines are subject to change from time to time, which will be determined at the discretion of the Committee. You must be employed by NCR at the time of payment in order to be eligible to receive any bonus or incentive payout from NCR; provided that, if you are terminated by the Company without Cause or you terminate for Good Reason (as described below), you will be paid the bonus or incentive for any completed fiscal year for which the bonus or incentive has not yet been paid, based on actual Company performance. Additionally, in the event you are terminated by the Company without Cause or you terminate for Good Reason, in addition to any of the benefits for which you may be eligible under the Executive Severance Plan referenced below, if such termination occurs between July 1 and December 31 you will be paid a pro rata MIP payout for the year of termination, based on the Company’s actual performance and your days actually worked during the performance year, with such payout occurring at the time at which payouts are made for other executives; if such a termination occurs between January 1 and June 30, you will not be entitled to, or otherwise eligible for, a MIP or Customer Success payout for the year of termination. Nothing in the foregoing sentence will affect your eligibility, if any, for benefits under the Executive Severance Plan. Any of the payments described in this paragraph, to the extent they relate in any way to a termination without Cause or for Good Reason, shall require your execution of NCR’s standard form of general release of all claims in a form reasonably acceptable to NCR, and the passage of any time in which you are allowed to revoke the release.

Long Term Incentive (“LTI”) Equity Awards:

Subject to your acceptance of this offer by execution of this letter agreement, the Committee will grant to you the following equity awards effective September 1, 2018:

•
an option to purchase NCR shares with a grant date value equal to $1,000,000, vesting in equal annual installments over four years (subject to your employment with NCR through the applicable vesting date), having a seven-year term and a strike price equal to the closing price of NCR shares on the grant date, and such other terms as set forth in NCR’s form of option award agreement (“Sign-On Option”); and
•
restricted stock units corresponding to NCR shares with a grant date value equal to $3,000,000, vesting in equal installments over three years, subject to your employment with NCR through the applicable vesting dates and such other terms as set forth in NCR’s form of restricted stock unit award agreement (“Sign-On RSU”);

You must electronically accept the award agreement associated with the award in order to be eligible to receive its benefits. Upon a termination of employment without Cause or for Good Reason (each as defined below), (x) the unvested portion of each of the Sign-On Option, and the Sign-On RSU immediately shall vest and (y) the Sign-On Option will remain exercisable until the earlier of the first anniversary of the date that your employment terminates and the option expiration date. Solely for purposes of the immediately preceding sentence:


2



•
“Cause” means (1) your conviction for committing a felony under U.S. federal law or the law of the state or country in which such action occurred, (2) your willful and continued failure to perform substantially your duties with NCR or any of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness) for a period of at least thirty (30) days after a written demand for substantial performance is delivered to you by the NCR Board of Directors, specifically identifying the manner in which the NCR Board of Directors believes that you have not substantially performed your duties; (3) your willful engaging in illegal conduct or gross misconduct which is materially and demonstrably injurious to NCR or (4) your material violation of NCR’s Code of Conduct. For purposes of this provision, no act or failure to act, on your part, shall be considered “willful” unless it is done, or omitted to be done, by you in bad faith or without reasonable belief that your action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by you in good faith and in the best interests of the Company.

•
“Good Reason” means any of the following events without your prior written consent: (1) the assignment to you of any duties inconsistent in any respect with your position (including offices, titles and reporting requirements), authority, duties or responsibilities or any other diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by NCR promptly after receipt of notice thereof given by you; (2) NCR requiring you to be based at any office or location that is more than forty (40) miles distant from the location of your principal place of employment set forth herein; or (3) a material breach of this letter agreement or the grant agreements with respect to the Sign-On Option, the 2018 Option or the 2018 RSU; provided, however, that your termination of employment shall not be deemed to be for Good Reason unless (x) you have notified NCR in writing describing the occurrence of one or more Good Reason events within ninety (90) days of such occurrence, (y) NCR fails to cure such Good Reason event within thirty (30) days after its receipt of such written notice and (z) the termination of employment occurs within 180 days after the occurrence of the applicable Good Reason event.

Effective for 2019 and beyond you will also be eligible to participate in NCR’s Annual LTI Equity Award Program that typically occurs in February each year with a minimum grant date value in 2019 of $3,000,000 comprised of awards of the same type and in the same proportion as are awarded to other senior executives of NCR. Your target grant values in 2020 and subsequent years will be $3,000,000, but such values are not guaranteed or committed.

You must be a current employee of NCR on the applicable grant date in order to be eligible to receive any NCR LTI equity award. Other award terms are set forth in the plan governing these awards, and you must electronically accept the award agreement each time one is made in order to be eligible to receive its benefits.

If you are terminated by the Company without Cause, or if you terminate for Good Reason, and in either case such termination occurs during the period that begins six months after a grant or vesting date for a particular equity grant and that ends 364 days after that same grant or vesting date for a particular equity grant, you will be entitled to full vesting of the equity tranche for that particular grant that would otherwise vest on the scheduled vesting date next following your date of termination. For example, presuming an equity grant scheduled to vest ratably, with one-third vesting on February 22 in each of 2020, 2021 and 2022, if you are terminated by the Company without Cause on January 10, 2021, you will receive, on February 22, 2021, the vesting otherwise scheduled to occur on that date, in the full amount in which it was scheduled to occur; all other vesting thereafter for that particular grant would be subject to the applicable grant agreement and equity plan, including, as may be the case, forfeiture or prorated vesting; if instead under the same example you are terminated by the Company without Cause on April 1, 2020, you will not receive any vesting on February 22, 2021, other than any prorated vesting that may occur under an applicable award agreement or equity plan. Any option tranche that vests pursuant to the rules set forth in this paragraph

3



will remain exercisable until the earlier of the first anniversary of your date of termination or the option expiration date.

Executive Severance and Change-in-Control Benefits:

You will participate in and be subject to the terms of NCR’s Executive Severance Plan and its Change-in-Control Severance Plan. You are accorded under the Change-In-Control plan a “Tier I” benefit level upon joining NCR. For purposes of the Executive Severance Plan, “Cash Severance” shall equal the sum of 1.5 times your base salary plus your target bonus, as set forth therein. Additionally, if you become entitled to Separation Benefits under NCR’s Executive Severance Plan, the provisions set forth above in the section entitled “Long Term Incentive (‘LTI’) Equity Awards” with respect to the Sign-On Option and the Sign-On RSU shall apply. To receive any severance benefits you are required to execute NCR's standard form of general release of all claims in a form reasonably acceptable to NCR, as set out in the plans. Each plan is subject to amendment or termination by the Committee.

Employee Benefits:

You will be eligible for employee benefits on the terms generally provided by NCR to its senior executives from time to time, including NCR’s annual Executive Medical Exam Program, which currently provides up to $5,000 on an annual basis for progressive, diagnostic analysis by NCR’s provider of choice, and the annual Executive Financial Planning Program, which currently provides an annual taxable reimbursement in an amount up to $12,000 for actual services incurred with respect to your tax and financial planning needs. Each of these programs is subject to amendment or termination by the Committee.

Duties:

You will devote your full time and best efforts, talents, knowledge and experience to serving the Company. However, you may devote reasonable time to activities such as supervision of personal investments and activities involving professional, charitable, civic, educational, religious and similar types of activities, speaking engagements and membership on other boards of directors, provided such activities do not interfere in any material way with the business of the Company. You will be entitled to keep any amounts paid to you in connection with such activities (e.g., director fees). Notwithstanding the foregoing, you will seek advance authorization from the Chief Executive Officer before joining any boards, you may not serve as a director of more than one publicly traded company, and you may not serve as a director of any company that competes with NCR.


4




Executive Relocation - Full Plan:

You will be eligible for Relocation plan category USA/Canada Domestic Package E Homeowner relocation benefits as outlined on the attached ‘Relocation Plan Summary’ document, as enhanced by this section, at any time during the first three years of your employment with NCR.

During the period before your relocation to the Atlanta area, NCR will provide you with a transitional temporary living allowance not to exceed $5,000 per month (before tax assistance; and not to exceed a period of twelve months) to cover your duplicate housing costs incurred in Atlanta. NCR also will reimburse you for the cost of airline travel to and from your home to Atlanta as a business expense for up to one year. Please note that under NCR’s Executive Relocation Program, any relocation expenses paid or reimbursed by NCR will be subject to your full repayment on an after-tax basis in the unlikely event of your voluntary resignation from NCR during the two-year period following your Start Date.

Your acceptance of this offer will initiate your relocation process and a Weichert Relocation Counselor will be in contact with you to discuss your personal relocation needs. Meanwhile, please do not incur any relocation expenses or initiate any relocation plans until you have discussed your situation with your assigned Relocation Counselor. Further details of Relocation Assistance are detailed in the ‘Repayment Plan Summary’ document.

Relocations represent a significant financial investment for the Company. In recognition of this investment, under certain circumstances relocation expenses are recoverable by the Company in accordance with the attached Relocation Repayment Agreement. Please read the Relocation Repayment Agreement for detailed provisions. It’s your responsibility to contact your manager to arrange for repayment of the relocation funds within 30 days of your resignation, if you resign within the repayment period. You will be required to sign and return the Relocation Repayment Agreement before any relocation funds will be released or paid on your behalf.

Vacation/Holidays:

Under the Company's vacation policy, you are entitled to receive twenty-five (25) paid vacation days and six (6) federal holidays. Eligible vacation is pro-rated your first year of service and is based on grade level or years of NCR service, whichever provides the greater benefit.
The Company also provides six (6) Floating Holidays, which can be used at any time during the year while recognizing customer and business needs. In the first year of hire, the number of available floating holidays is prorated.
Additionally, the Company recognizes the following as paid holidays: New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.

Legal Expenses:

The Company will reimburse you for up to $15,000 of reasonable, documented legal fees you incur in connection with your review and acceptance of this letter agreement and its attachments.

Other Terms and Conditions of Employment:

Your offer of employment described in this letter agreement is contingent upon your acceptance of the terms and conditions of employment outlined in this letter agreement (including Attachments A, B and C, each incorporated herein by reference and made a constituent part of this letter agreement), and your passing of background check. Please note that this letter agreement, through Attachment C, contains certain restrictive covenants concerning non-competition, non-customer-solicitation and non-recruitment/hiring, where such provisions are enforceable by law.


5



If you are in agreement with the terms of this letter agreement, including its attachments, please sign in the space provided below.

This letter agreement supersedes and completely replaces any prior oral or written communication concerning the subject matters addressed in this letter. This letter agreement should not be construed or interpreted as containing any guarantee of continued employment or employment for a specific term.

*    *    *    *    *    *

Andre, we are very excited about the contributions, experience and knowledge you can bring to NCR.

Sincerely,

NCR Corporation

By:    /s/ Michael D. Hayford    
Name: Michael D. Hayford
Title:      CEO & President

Date: August 27, 2018

Attachments:

•
Accepting This Offer of Employment
•
NCR Corporation Employment Terms & Conditions
•
Arbitration Agreement, and Class, Collective, and Representative Action Waiver
•
Non-Compete, Non-Solicit, & Non-Recuit/Hire Post-Employment Restrictive Covenants


6




Accepting this Offer of Employment:

By accepting and signing NCR’s offer of employment you certify to NCR that you are not subject to a non-competition agreement with any company, person or entity, nor to any other post-employment restrictive covenants, that would preclude or restrict you from performing the NCR position being offered in this letter. We also advise you of NCR’s strong policy of respecting the intellectual property rights of other companies. You should not bring with you to your NCR position any documents or materials designated as, or that you know to be, confidential, proprietary or trade secret information of another company, nor in any other way disclose confidential, proprietary or trade secret information while employed by NCR.

You further acknowledge that this letter agreement, including its Attachments A, B and C, sets forth the terms and conditions of your employment with NCR. The employment relationship with NCR is by mutual consent (“Employment at Will”). This means either you or NCR has the right to discontinue the employment relationship with or without cause at any time and for any reason.

You acknowledge that you have read the foregoing information relative to NCR’s conditions of employment and understand that your employment offer is conditioned upon their satisfaction.

Acknowledged and Agreed:


Andre J. Fernandez



/s/ Andre J. Fernandez         Date: August 27, 2018


7

Exhibit


Exhibit 31.1
CERTIFICATION

I, Michael Hayford, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of NCR Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date:
November 2, 2018
 
/s/ Michael Hayford
 
 
 
Michael Hayford
 
 
 
President and Chief Executive Officer



Exhibit


Exhibit 31.2
CERTIFICATION

I, Andre Fernandez, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of NCR Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date:
November 2, 2018
 
/s/ Andre Fernandez
 
 
 
Andre Fernandez
 
 
 
Executive Vice President and Chief Financial Officer



Exhibit


Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
    
In connection with the Quarterly Report on Form 10-Q of NCR Corporation, a Maryland corporation (the “Company”) for the period ending September 30, 2018 as filed with the U.S. Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company does hereby certify, pursuant to 18 U.S.C. § 1350 (section 906 of the Sarbanes-Oxley Act of 2002), that:
(1)
the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
The foregoing certification (i) is given to such officers’ knowledge, based upon such officers’ investigation as such officers reasonably deem appropriate; and (ii) is being furnished solely pursuant to 18 U.S.C. § 1350 (section 906 of the Sarbanes-Oxley Act of 2002) and is not being filed as part of the Report or as a separate disclosure document.

Dated:
November 2, 2018
 
/s/ Michael Hayford
 
 
 
Michael Hayford
 
 
 
President and Chief Executive Officer

Dated:
November 2, 2018
 
/s/ Andre Fernandez
 
 
 
Andre Fernandez
 
 
 
Executive Vice President and Chief Financial Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signatures that appear in typed form within the electronic version of this written statement required by Section 906, has been provided to NCR Corporation and will be retained by NCR Corporation and furnished to the United States Securities and Exchange Commission or its staff upon request.