Overview

As more fully discussed in later sections of this MD&A, the following were the significant events for the first quarter of 2009:

• Revenue declined 15% from the prior year period due to continued economic weakness;

• Foreign currency fluctuations negatively impacted revenue by 5%;

• NCR continued to accelerate cost reduction initiatives;

• NCR ended the first quarter with a strong cash position;

• NCR announced an investment in the entertainment industry

In the first quarter of 2009, we continued to focus on our strategic initiatives to provide maximum value to our stakeholders. The strategic initiatives and actions we are taking in 2009 are as follows:

1) Gain profitable share We continue to optimize our investments in demand creation to increase NCR's market share in areas with the greatest potential for profitable revenue growth, which include opportunities in self-service technologies with our core financial services and retail customers. We intend to expand and strengthen our geographic presence and sales coverage in addition to penetrating adjacent single and multi-channel self-service solution segments.

2) Expand into emerging growth industry segments The Company continues to focus on broadening the scope of our self-service solutions from our existing customers to expand these solution offerings to customers in newer industry-vertical markets including: travel and gaming, healthcare and public sector, entertainment, and software and technology. We expect to grow our business in these industries through integrated service offerings in addition to targeted acquisitions and strategic partnerships. One example of this was our April 2009 acquisition of TNR Holdings Corp. and the announcement of our intention to invest approximately $60 million in the entertainment industry during the coming year.

3) Build the lowest cost structure in our industry The Company is continuing to focus on increasing the efficiency and effectiveness of our core functions and the productivity of our employees. While we continued to make progress in this regard in the first quarter, we intend to ensure that our execution throughout the remainder of 2009 will allow us to capture efficiencies and intended cost savings.

4) Enhance our global service capability The Company continues to execute various initiatives to enhance its global service capability. We continue to focus on improving our service positioning, increasing our service attach rates for our products and continue to improve profitability in our services business. Our service capability provides us a growing competitive advantage in winning customers and it provides NCR with an ever-more attractive and stable revenue source.

5) Focus on working capital and balance sheet In 2008, NCR made significant improvements managing working capital, especially in the areas of accounts receivable and inventory. In 2009, we will continue to focus on these areas to further improve our operating cash flow and working capital position. The Company will continue to make investments in areas that generate maximum growth, such as self-service research and development and demand creation.

We expect to continue with these initiatives for the remainder of 2009 and beyond, as we refine our business model and position the Company for growth and profitability.

Results from Operations

The following table shows our results for the three months ended March 31:



         In millions                                      2009        2008
         Revenue                                         $ 1,008     $ 1,183
         Gross margin                                    $   184     $   259
         Gross margin as a percentage of revenue            18.3 %      21.9 %
         Operating expenses
         Selling, general, and administrative expenses   $   159     $   159
         Research and development expense                     35          35

         (Loss) income from operations                   $   (10 )   $    65

The following table shows our revenues and gross margins from products and services for the three months ended March 31:

         In millions                                         2009       2008
         Product revenue                                    $  458     $  603
         Cost of products                                      370        441

         Product gross margin                                   88        162

         Product gross margin as a percentage of revenue      19.2 %     26.9 %

         Services revenue                                   $  550     $  580
         Cost of services                                      454        483

         Services gross margin                                  96         97

         Services gross margin as a percentage of revenue     17.5 %     16.7 %

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008

Revenue

Revenue decreased 15% from the first quarter of 2008 primarily due to the difficult economic environment, which negatively impacted sales volumes for both products and services. The effects of foreign currency fluctuations provided a negative impact to revenue of 5% in the first quarter of 2009. In the first quarter of 2009, our product revenue decreased 24% and services revenue decreased 5% as compared to the first quarter of 2008. The decrease in product revenue was primarily due to sales declines across all of our geographic segments, with significant declines in Europe, Middle East, and Africa (EMEA) and Asia Pacific and Japan (APJ). This was attributable to the overall market and economic conditions and its effect on capital spending, especially on customers in the financial services and retail and hospitality industries. The decrease in services revenue was primarily due to the effects of foreign currency.

Gross Margin

Gross margin as a percentage of revenue for the three months ended March 31, 2009 was 18.3% compared to 21.9% in the first quarter of 2008. Product gross margin of 19.2% in the first quarter of 2009 declined 7.7 percentage points from 26.9% in the first quarter of 2008. The decline in the product gross margin was due to lower volumes, which resulted in reduced operating leverage and an unfavorable sales mix as compared to the prior year first quarter. These items offset cost savings achieved through our manufacturing realignment and continued focus on cost reduction actions in the first quarter of 2009. Services gross margin increased to 17.5%

for the first quarter of 2009 from 16.7% in the first quarter of 2008. Services gross margin was negatively impacted by $18 million in higher pension expense or 3% as a percentage of service revenue in the first quarter of 2009 as compared to the first quarter of 2008. Lower labor costs from reduced headcount and increased productivity in the first quarter of 2009 as compared to the first quarter of 2008 more than offset the impact of higher pension expense, which resulted in an increase in services gross margin.

Restructuring and Re-engineering

Organizational Realignment On January 1, 2008, NCR began management of its business on a geographic basis, changing from a previous model of global business units organized by product and service offering. As a result, in the second quarter of 2008, NCR commenced a global realignment initiative to reduce redundancies and process inefficiencies to become more customer-focused and market-driven. This initiative is addressing legacy process inefficiencies and unbalanced resource allocation by focusing on organizational design, process re-engineering and business process outsourcing. The initiative has resulted in reductions in employment and productivity improvements, while freeing up funds to invest in growth programs such as sales, engineering, and market development. The realignment activities included approximately 900 employee terminations and relate to each of our reportable segments of the Americas, EMEA and APJ.

The Company made $10 million in severance payments during the first quarter of 2009. As of March 31, 2009, there is a remaining accrued liability balance of $14 million, including the impact of $2 million related to foreign currency fluctuation, as compared to $26 million as of December 31, 2008. This liability is recorded in the Condensed Consolidated Balance Sheet in other current liabilities as the Company expects that payment of the remaining obligation will occur in 2009.

The actions taken to date are expected to generate incremental, annualized savings of approximately $40 million. We realized approximately half of that amount during 2008 and expect to achieve the full, annualized savings beginning in 2009. The Company continues to identify additional opportunities focusing on organizational design, process re-engineering and business process outsourcing and therefore, expects additional realignment activities through 2010 as a result of this initiative. The costs and related savings from these additional activities are not reasonably estimable at this time as we are in the process of defining the scope of the activities and quantifying the impacts thereof.

The costs of these realignment initiatives are not expected to have a significant impact on the Company's financial position, revenues, liquidity or sources and uses of capital resources. The realignment costs are expected to be funded by the Company's cash on hand and cash flows from operations, and although this will result in short-term cash outflows, the Company expects future cost savings and no adverse impact to revenue as a result of these changes.

Manufacturing Realignment In the first quarter of 2007, the Company initiated a manufacturing realignment initiative primarily related to its ATM products, which included outsourcing certain manufacturing activities in the Americas region and shifting other manufacturing activities from high cost to low cost geographies in the EMEA region as well as the APJ region. This realignment resulted in approximately 1,100 employee terminations and, as expected, improved productivity and freed capital in order to invest the related cost savings in revenue-generating programs such as sales, engineering and market development. The remaining reserve balance of approximately $1 million as of March 31, 2009 is recorded in the Condensed Consolidated Balance Sheet in other current liabilities as the Company expects that payment of the remaining obligation will occur in 2009.

Real estate consolidation and restructuring During the first quarter of 2008, the Company recognized a $16 million gain in selling, general and administrative expenses in the Condensed Consolidated Statement of Operations from the sale of a manufacturing facility in Canada, which had a net book value of $4 million.

Effects of Pension, Postemployment, and Postretirement Benefit Plans

Gross margin and operating expenses for the three months ended March 31, 2009
and 2008 were impacted by certain employee benefit plans as shown below:



                       In millions              2009      2008
                       Pension expense          $  38     $   6
                       Postemployment expense      11        13
                       Postretirement benefit      (1 )      -

                       Total Expense            $  48     $  19

During the three months ended March 31, 2009, NCR incurred $38 million of pension expense compared to $6 million in the first quarter of 2008. The increase was primarily due to lower expected return on plan assets and increased actuarial loss amortization due to the loss on assets that we experienced in 2008.

Postemployment plan expense during the first quarter of 2009 decreased to $11 million from $13 million during the same time period in 2008. The decrease was driven primarily by a $1 million adjustment in the expected costs of the 2008 organizational realignment initiative. These realignment initiatives are described in more detail in the "Restructuring and Re-engineering" section of this MD&A.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses were unchanged in the first quarter of 2009 as compared to the first quarter of 2008. As a percentage of revenue, these expenses were 15.8% in the first quarter of 2009 compared to 13.4% in the first quarter of 2008. In the first quarter of 2009, pension expense was $13 million as compared to $1 million in the first quarter of 2008. In the first quarter of 2008, selling, general, and administrative expenses included a gain of $16 million from the sale of a manufacturing facility in Canada. After considering these items, selling, general, and administrative expenses decreased in the first quarter of 2009 due to the Company's acceleration of cost reduction measures, the benefit of cost savings from the organizational realignment initiated in the prior year, and the favorable impact of foreign exchange fluctuations. Cost reduction measures enacted in the first quarter of 2009 included limiting discretionary expenses and the reduction of incentive compensation.

Research and Development Expenses

Research and development expenses were unchanged in the first quarter of 2009 as compared to the first quarter of 2008. Research and development expenses as a percentage of revenue increased to 3.5% in the first quarter of 2009 from 3.0% in the first quarter of 2008. The increase in research and development expenses as a percentage of revenue was due to the decline in revenue. In the first quarter of 2009, cost reduction measures that included limiting discretionary spending were offset in part by a $1 million increase in pension expense in the first quarter of 2009 as compared to the first quarter of 2008.

Interest and Other Income Items

Interest expense remained consistent in the first quarter of 2009 with the prior year period.

Other income, net decreased by $7 million in the first quarter of 2009 as compared to the first quarter of 2008, primarily due to a decrease in interest income of $6 million. Other income includes items such as gains or losses on equity investments, costs and recoveries related to environmental matters that relate to businesses previously disposed of, and interest income. Interest income was $2 million in the first quarter of 2009 compared to $8 million in the first quarter of 2008. The decrease in interest income was primarily due to lower interest rates earned on excess, invested cash during the first quarter of 2009. Other income in the first quarter of 2009 included a $5 million benefit related to the settlement of insurance recoveries related to the Fox River environmental matter, which was offset by an impairment charge of $5 million related to one of NCR's equity method investments.

Provision for Income Taxes

Income tax provisions for interim (quarterly) periods are based on estimated annual income tax rates calculated separately from the effect of significant infrequent or unusual items. The effective tax rate for the three months ended March 31, 2009 was 7% as compared to an effective tax rate of 26% for the three months ended March 31, 2008. The lower effective tax rate in 2009 was due to an operating loss before income taxes and accruals related to uncertain tax positions.

NCR is subject to numerous U.S. and foreign audits. While NCR believes that appropriate reserves exist for issues that might arise from these audits, should these audits be settled, the resulting tax effect could impact the tax provision and cash flows in future periods.

Revenue and Gross Margin by Segment

NCR's products, services, and solutions enable our customers to connect, interact and transact with their customers and include: ATM hardware and software, traditional point-of-sale (POS) and self checkout solutions; self-service kiosk solutions; business consumables; solutions that digitally capture, process and retain item-based transactions; maintenance of NCR solutions; consulting, installation, implementation, and customer support services; as well as the maintenance and sale of third-party products and services. NCR manages its businesses on a functional geographic model and as a result, the Company reports on the following segments:

• Americas;

• Europe, Middle East and Africa (EMEA); and

• Asia Pacific and Japan (APJ).

Each of these segments derives its revenues by selling products and services to the financial services, retail and hospitality, travel and gaming, healthcare and public sector, entertainment and software and technology services industries. In addition, each segment sells products and services across the entire NCR product and service portfolio within their geography.

Segments are measured for profitability by the Company's chief operating decision maker based on revenue and segment gross margin. For purposes of discussing our operating results by segment, we exclude the impact of certain items (described below) from segment gross margin, consistent with the manner by which management reviews each segment, evaluates performance, and reports our segment results under Statement of Financial Accounting Standards No. 131 (SFAS 131), Disclosures about Segments of an Enterprise and Related Information. This format is useful to investors because it allows analysis and comparability of operating trends. It also includes the same information that is used by NCR management to make decisions regarding the segments and to assess our financial performance.

The effect of pension expense on segment gross margin, which was $21 million in the first quarter of 2009 and $2 million in the first quarter of 2008, has been excluded from the gross margin for each reporting segment presented below. Our segment results are reconciled to total Company results reported under accounting principles generally accepted in the United States of America (otherwise known as GAAP) in Note 11, "Segment Information" of the Notes to Condensed Consolidated Financial Statements.

In the segment discussions below, we have disclosed the impact of foreign currency fluctuations as it relates to our segment revenue due to its significance during the quarter.

Americas Segment

The following table presents the Americas revenue and segment gross margin for
the three months ended March 31:



             In millions                                2009       2008
             Revenue                                   $  459     $  487
             Gross margin                              $   80     $   93
             Gross margin as a percentage of revenue     17.4 %     19.1 %

Americas segment revenue decreased 6% during the first quarter of 2009 as compared to the first quarter of 2008. Foreign currency fluctuations negatively impacted the quarter-over-quarter revenue comparison by 2%. The decline in revenue was due to lower volumes in the United States (US), primarily attributed to customers in the retail and hospitality industry. Customers in the retail and hospitality industry have been negatively affected by continued weakness in retail sales and the US macroeconomic environment.

Gross margin as a percentage of revenue decreased 1.7 percentage points in the first quarter of 2009 as compared to the first quarter of 2008. Gross margin was negatively impacted by lower volumes in the United States that negatively impacted gross margin in addition to unfavorable product mix as compared to the prior year first quarter.

Europe, Middle East & Africa (EMEA) Segment

The following table presents EMEA revenue and segment gross margin for the three
months ended March 31:



             In millions                                2009       2008
             Revenue                                   $  386     $  493
             Gross margin                              $   92     $  122
             Gross margin as a percentage of revenue     23.8 %     24.7 %

EMEA segment revenue decreased 22% during the first quarter of 2009 as compared to the first quarter of 2008. Foreign currency fluctuations negatively impacted the quarter-over-quarter revenue comparison by 9%. The decrease in revenue was primarily driven by a reduction in product sales to customers in the financial services and retail and hospitality industries, especially in the United Kingdom and Eastern Europe. The decrease in sales was due to the global economic environment, which has negatively impacted capital spending.

Gross margin as a percentage of revenue decreased .9 percentage points in the first quarter of 2009 as compared to the first quarter of 2008. Gross margin was negatively impacted by lower sales volumes that more than offset cost savings achieved by our manufacturing and organizational realignment initiatives.

Asia Pacific & Japan (APJ) Segment

The following table presents APJ's revenue and segment gross margin for the
three months ended March 31:



             In millions                                2009       2008
             Revenue                                   $  163     $  203
             Gross margin                              $   33     $   46
             Gross margin as a percentage of revenue     20.2 %     22.7 %

APJ revenue decreased 20% during the first quarter of 2009 as compared to the first quarter of 2008. As further discussed in Note 1, "Basis of Presentation," of the Notes to the Condensed Consolidated Financial Statements, we reversed approximately $12 million of revenue in the first quarter of 2009 that had been incorrectly recorded during 2008. This adjustment decreased revenue by 6% in the first quarter of 2009 as compared to the first quarter of 2008. Foreign currency fluctuations negatively impacted revenue by 5% in the quarter-over-quarter comparison. During the first quarter of 2009, revenue was negatively impacted by significant product sales declines in Japan and, to a lesser extent, weakness in both Australia and India. In Japan, the current economic environment contributed to declines in sales to customers in the financial services and retail and hospitality industries.

Gross margin as a percentage of revenue decreased 2.5 percentage points in the first quarter of 2009 as compared to the first quarter of 2008. Gross margin was negatively impacted by lower sales volumes in the first quarter of 2009, which more than offset cost savings from prior realignment activities.

Financial Condition, Liquidity, and Capital Resources

In the first quarter of 2009, cash provided by operating activities decreased $43 million from the first quarter of 2008. Cash provided by operating activities was negatively impacted in the first quarter of 2009 as compared to the prior year period by the net loss in the quarter and a smaller improvement in receivables collections.

NCR's management uses a non-GAAP measure called "free cash flow," which we define as net cash provided by operating activities less capital expenditures for property, plant and equipment, and additions to capitalized software, to assess the financial performance of the Company. 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. The components used to calculate free cash flow are GAAP measures that are taken directly from the Condensed Consolidated Statements of Cash Flows. We believe free cash flow information is useful for investors because it relates the operating cash flows of the Company to the capital that is spent to continue and improve business operations. In particular, free cash flow indicates the amount of cash available after capital expenditures for, among other things, investments in the Company's existing businesses, strategic acquisitions, repurchase of NCR stock and repayment of debt obligations. Free cash flow does not represent the residual cash flow available for discretionary expenditures, since there may be other non-discretionary expenditures that are not deducted from the measure. This non-GAAP measure should not be considered a substitute for, or superior to, cash flows from operating activities under GAAP. The table below shows net cash provided by operating activities and capital expenditures for the three months ended March 31:

        In millions                                            2009      2008
        Net cash provided by operating activities              $  38     $  81
        Less: Expenditures for property, plant and equipment     (10 )     (17 )
        Less: Additions to capitalized software                  (15 )     (15 )

        Free cash flow                                         $  13     $  49

Capital expenditures decreased $7 million, while capitalized software additions remained flat, resulting in a net decrease in free cash flow of $36 million. Capital expenditures decreased due to lower planned investments in property, plant and equipment.

Financing activities and certain other investing activities are not included in our calculation of free cash flow. These other investing activities for the three months ended March 31, 2008 included net proceeds of $38 million from the sale of property, plant and equipment. Our financing activities for the three months ended March 31, 2008, included cash outflows from share repurchases of $193 million to repurchase approximately 8.7 million shares. During the first quarter of 2009, consistent with our initiatives to reduce cash outflow, we did not repurchase shares under our previously authorized share repurchase programs. Cash inflows from stock plans were $2 million in the three months ended March 31, 2009 compared to $4 million in the three months ended March 31, 2008. The decrease in cash inflows was primarily due to a decrease in the number of options exercised in the three months ended March 31, 2009.

Net cash used in operating activities from discontinued operations was $13 million in the three months ended March 31, 2008, which primarily related to payments for legal, accounting, professional and consulting services in connection with the spin-off of Teradata in 2007.

Our cash and cash equivalents totaled $717 million as of March 31, 2009. 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 2008 Annual Report on Form 10-K. If we are unable to generate sufficient cash flows from operations, or otherwise comply with the terms of our credit facilities and senior notes, we may be required to refinance all or a portion of our existing debt or seek additional . . .