# NCR Voyix Corp (VYX) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from NCR Voyix Corp's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/70866/000007086622000008/ncr-20211231.htm
Accession: 0000070866-22-000008
Filing date: 2022-02-25
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/VYX/
All MD&A years: /company/VYX/mda/
Next year: /company/VYX/mda/fy2022/ (FY 2022)

Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“MD&A”)

This section should be read in conjunction with the audited Consolidated Financial Statements and related Notes included in Item 8 of Part II of this Report. Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. See “Forward-Looking Statements” and “Risk Factors” in Item 1A of this Annual Report for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements that could cause future results to differ materially from those reflected in this section.

Our discussion within MD&A is organized as follows:

•Overview. This section contains background information on our Company and a summary of significant themes and events during the year as well as strategic initiatives and trends in order to provide context for management’s discussion and analysis of our financial condition and results of operations.

•Results of operations. This section contains an analysis of our results of operations presented in the accompanying Consolidated Statements of Operations by comparing the results for the year ended December 31, 2021 to the results for the year ended December 31, 2020. On June 21, 2021, we completed the acquisition of Cardtronics plc (“Cardtronics”), which is included in the Banking segment results. For management's discussion of our results of operations for the year ended December 31, 2020 in comparison with the year ended December 31, 2019, please see our Annual Report on Form 10-K filed with the SEC on February 26, 2021.

•Liquidity and capital resources. This section provides an analysis of our cash flows and a discussion of our contractual obligations at December 31, 2021.

•Critical accounting estimates. This section contains a discussion of the accounting policies that we believe are important to our financial condition and results of operations and that require judgment and estimates on the part of management in their application. In addition, all of our significant accounting policies, including critical accounting policies, are summarized in Note 1, “Basis of Presentation and Significant Accounting Policies”, in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Report.

OVERVIEW

BUSINESS OVERVIEW

NCR is a software- and services-led enterprise technology provider that runs stores, restaurants and self-directed banking for our customers. Our software platform, which runs in the cloud and includes microservices and APIs that integrate with our customers' systems, and our NCR-as-a-Service solutions bring together all of the capabilities and competencies of NCR to power the technology to run our customers’ operations. We serve customers in the banking, retail, hospitality, and telecommunications and technology (“T&T”) industries. In this Report, we categorize our operations into the following segments: Banking, Retail, Hospitality, and T&T. Each of our segments derives its revenue in each of the sales theaters in which NCR operates.

Effective January 1, 2022, the Company realigned its reportable segments to correspond with changes to its operating model, management structure and organizational responsibilities. The reportable segments effective January 1, 2022 include: Payments & Network; Digital Banking; Self-Service Banking; Retail; and Hospitality. Additionally, effective January 1, 2022, the expenses related to corporate functions that are not specifically attributable to an individual reportable segment along with any immaterial operating segment(s) are included in Corporate & Other.

NCR is a global company that is headquartered in Atlanta, Georgia. NCR’s reputation is founded upon over 137 years of providing quality products, services and solutions to our customers. At the heart of our customer and other business relationships is a commitment to acting responsibly, ethically and with the highest level of integrity. This commitment is reflected in NCR’s Code of Conduct, which is available on the Corporate Governance page of our website.

SIGNIFICANT THEMES AND EVENTS

As more fully discussed in later sections of this MD&A, the following were significant themes and events for 2021.

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•Revenue increased 15% from the prior year due to overall growth across the Banking, Retail and Hospitality segments

◦Software and services revenue represented 73% of total consolidated revenue

◦Recurring revenue increased 25% from the prior year and comprised 58% of total consolidated revenue

•Completed acquisition of Cardtronics on June 21, 2021, the world's largest non-bank ATM operator and services provider, and the acquisition of LibertyX on January 5, 2022, a leading cryptocurrency software provider;

•Completed various financing transactions related to the acquisition of Cardtronics, redeemed note due in 2025 to reduce interest expense, and subsequently reduced leverage; and

•Announced aspirational five-year goals for 2026, which include annual recurring revenue of 80 percent by 2026, annual non-GAAP earnings per share (“non-GAAP EPS”)(1) growth of 15 percent, and annual free cash flow(1) of $1 billion in 2026

(1) With respect to our goals of free cash flow and non-GAAP EPS growth, we are not providing a reconciliation to the respective GAAP measure because we are unable to predict with reasonable certainty the reconciling items that may affect GAAP EPS and Cash flow from operations without unreasonable effort.. For the definition of non-GAAP EPS, see the Our Strategy section within Item 1 of this Report. For our definition of free cash flow, see the Financial Condition, Liquidity and Capital Resources section later in MD&A.

STRATEGIC INITIATIVES AND TRENDS

In order to provide long-term value to all our stakeholders, we set complementary business goals and financial strategies. NCR is continuing its transition to become a software platform and payments company with a shift to a higher level of recurring revenue. Our business goal is to be a leading enterprise technology provider that runs stores, restaurants and self-directed banking through our software platform and our NCR-as-a-Service solutions. In late 2018, we set five-year strategic goals, originally set as 2024 targets. These included to transition our revenue mix so that 80 percent of our total revenue is comprised of software and services revenue, 60 percent of our total revenue is comprised of recurring revenue, and our adjusted EBITDA margin rate increases to 20 percent. Since we were near achieving those goals, in late 2021, we established aspirational five-year goals for 2026, which include annual recurring revenue of 80 percent by 2026, annual earnings per share (non-GAAP EPS) growth of 15 percent, and annual non-GAAP free cash flow of $1 billion in 2026. Execution of our goals and strategy is driven by the following key pillars: (i) focus on our customers; (ii) take care of our employees; (iii) bring high-quality, innovative products to market; and (iv) leverage our brand.

As we strive to achieve these aspirational five-year goals, we plan to capitalize on opportunities presented by the acquisitions of Cardtronics and LibertyX to accelerate our Payments & Network business as we go to market with a more robust offering in this segment. We also plan to continue to improve our execution to drive solid returns and to transform our business to drive a re-rate of our valuation.

On February 8, 2022, NCR announced that its Board of Directors unanimously approved commencing a comprehensive strategic review, with the assistance of outside advisors, which will evaluate a full range of strategic alternatives available to NCR to enhance value for all shareholders. Those strategic alternatives could include a disposition of a material business or assets of the Company, a spin-off, merger or sale of the Company, other structural changes, changes to branding or geographic footprint or other transactions or alternatives. The Board has not set a timetable for the conclusion of its review of strategic alternatives. NCR does not intend to comment further on the strategic review process unless and until NCR has determined that further disclosure is beneficial or required by law. Shareholders are advised that there can be no certainty that the strategic review will result in a transaction, or if a transaction is pursued that such a transaction will be completed.

Cybersecurity Risk Management

Similar to most companies, NCR and its customers are subject to more frequent and increasingly sophisticated cybersecurity attacks. The Company maintains cybersecurity risk management policies and procedures including disclosure controls, which it regularly evaluates for updates, for handling and responding to cybersecurity events. These policies and procedures include internal notifications and engagements and, as necessary, cooperation with law enforcement. Personnel involved in handling and responding to cybersecurity events periodically undertake tabletop exercises to simulate an event. Our internal notification procedures include notifying the applicable Company attorneys, which, depending on the level of severity assigned to the event, may include direct notice to, among others, the Company’s General Counsel, Ethics & Compliance Officer, and Chief Privacy Officer. Company attorneys support efforts to evaluate the materiality of any incidents, determine whether notice to third parties such as customers or vendors is required, determine whether any prohibition on insider trading is appropriate, and assess whether disclosure to stockholders or governmental filings, including with the SEC, are required. Our internal notification procedures also include notifying various NCR Information Technology Services managers, subject matter experts in the Company’s software department and Company leadership, depending on the level of severity assigned to the event.

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For further information on potential risks and uncertainties see Item 1A “Risk Factors.”

IMPACTS FROM THE COVID-19 PANDEMIC

We continue to navigate through the challenging times presented by COVID-19 with a sharp focus on and goal of safeguarding our employees, helping our customers and managing impacts on our supply chain. Despite the unprecedented environment, our teams are executing at a high level and we are advancing our strategy.

The COVID-19 pandemic is complex and continues to evolve, including the latest Omicron variant. While it is difficult to project the long-term impact of the pandemic, we expect it will negatively impact our business at least in the short-term. The ultimate impact on our overall financial condition and operating results will depend on the currently unknowable duration and severity of the pandemic, supply chain challenges and cost escalations including materials, labor and freight, and any additional governmental and public actions taken in response. We continue to evaluate the long-term impact that COVID-19 may have on our business model. There can be no assurance that the measures we have taken or will take will completely offset the negative impact of COVID-19.

For further information on the risks posed to our business from the COVID-19 pandemic, refer to Item 1A of this Form 10-K.

RESULTS OF OPERATIONS

Key Strategic Financial Metrics

The following tables show our key strategic financial metrics for the years ended December 31, the relative percentage that those amounts represent to total revenue, and the change in those amounts year-over-year. The software and services revenue and recurring revenue metrics below include the results of operations of Cardtronics for the period from the date of acquisition, June 21, 2021 to December 31, 2021.

Software and services revenue as a percentage of total revenue

[[GREPCENT_TABLE]]
[["","","","","","","","","Percentage of Total Revenue","","Increase (Decrease)"],["(in millions)","","2021","","2020","","2019","","2021","","2020","","2019","","2021 v 2020","","2020 v 2019"],["Software & Services","","$","5,204","","","$","4,452","","","$","4,528","","","72.7","%","","71.7","%","","65.5","%","","17","%","","(2)","%"],["Hardware","","$","1,952","","","$","1,755","","","$","2,387","","","27.3","%","","28.3","%","","34.5","%","","11","%","","(26)","%"],["Total Revenue","","$","7,156","","","$","6,207","","","$","6,915","","","100.0","%","","100.0","%","","100.0","%","","15","%","","(10)","%"]]
[[/GREPCENT_TABLE]]

Recurring revenue as a percentage of total revenue

[[GREPCENT_TABLE]]
[["","","","","","","","","Percentage of Total Revenue","","Increase (Decrease)"],["(in millions)","","2021","","2020","","2019","","2021","","2020","","2019","","2021 v 2020","","2020 v 2019"],["Recurring revenue (1)","","$","4,166","","","$","3,338","","","$","3,182","","","58.2","%","","53.8","%","","46.0","%","","25","%","","5","%"],["All other products and services","","$","2,990","","","$","2,869","","","$","3,733","","","41.8","%","","46.2","%","","54.0","%","","4","%","","(23)","%"],["Total Revenue","","$","7,156","","","$","6,207","","","$","6,915","","","100.0","%","","100.0","%","","100.0","%","","15","%","","(10)","%"]]
[[/GREPCENT_TABLE]]

(1) Recurring revenue includes all revenue streams from contracts where there is a predictable revenue pattern that will occur at regular intervals with a relatively high degree of certainty. This includes hardware and software maintenance revenue, cloud revenue, payment processing revenue, and certain professional services arrangements as well as term-based software license arrangements that include customer termination rights.

Net income (loss) from continuing operation and adjusted EBITDA(1) as a percentage of total revenue

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[[GREPCENT_TABLE]]
[["","","","","","","","","Percentage of Total Revenue","","Increase (Decrease)"],["(in millions)","","2021","","2020","","2019","","2021","","2020","","2019","","2021 v 2020","","2020 v 2019"],["Total Revenue","","$","7,156","","","$","6,207","","","$","6,915","","","100.0","%","","100.0","%","","100.0","%","","15","%","","(10)","%"],["Net income (loss) from continuing operations","","$","97","","","$","(7)","","","$","614","","","1.4","%","","(0.1)","%","","8.9","%","","n/m","","(101)","%"],["Adjusted EBITDA (1)","","$","1,244","","","$","896","","","$","1,058","","","17.4","%","","14.4","%","","15.3","%","","39","%","","(15)","%"]]
[[/GREPCENT_TABLE]]

(1) NCR's management uses the non-GAAP measure adjusted EBITDA because it provides useful information to investors as an indicator of strength and performance of the Company's ongoing business operations, including funding discretionary spending such as capital expenditures, strategic acquisitions, and other investments. NCR determines adjusted EBITDA based on GAAP net income (loss) from continuing operations attributable to NCR plus interest expense, net; plus income tax expense (benefit); plus depreciation and amortization; plus stock-based compensation expense; plus other income (expense); plus pension mark-to-market adjustments, pension settlements, pension curtailments and pension special termination benefits and other special items, including amortization of acquisition-related intangibles, restructuring charges, among others. Refer to the table below for the reconciliations of net income (loss) from continuing operations (GAAP) to adjusted EBITDA (non-GAAP).

[[GREPCENT_TABLE]]
[["In millions","2021","","2020","","2019"],["Net income (loss) from continuing operations (GAAP)","$","97","","","$","(7)","","","$","614"],["Pension mark-to-market adjustments","(118)","","","34","","","75"],["Transformation and restructuring costs","66","","","234","","","58"],["Acquisition-related amortization of intangibles","132","","","81","","","86"],["Acquisition-related (gains) costs","98","","","(6)","","","3"],["Internal reorganization and IP transfer","\u2014","","","\u2014","","","(37)"],["Loss on debt extinguishment","42","","","20","","","\u2014"],["Interest expense","238","","","218","","","197"],["Interest income","(8)","","","(8)","","","(4)"],["Depreciation and amortization (excluding acquisition-related amortization of intangibles)","357","","","275","","","232"],["Income tax expense (benefit)","186","","","(53)","","","(273)"],["Stock-based compensation expense","154","","","108","","","107"],["Adjusted EBITDA (non-GAAP)","$","1,244","","","$","896","","","$","1,058"]]
[[/GREPCENT_TABLE]]

Consolidated Results

The following table shows our results for the years December 31, the relative percentage that those amounts represent to revenue, and the change in those amounts year-over-year.

[[GREPCENT_TABLE]]
[["","","","","","","","Percentage of Revenue (1)","","Increase (Decrease)"],["(in millions)","2021","","2020","","2019","","2021","","2020","","2019","","2021 v 2020","","2020 v 2019"],["Product revenue","$","2,193","","","$","2,005","","","$","2,681","","","30.6","%","","32.3","%","","38.8","%","","9","%","","(25)","%"],["Service revenue","4,963","","","4,202","","","4,234","","","69.4","%","","67.7","%","","61.2","%","","18","%","","(1)","%"],["Total revenue","7,156","","","6,207","","","6,915","","","100.0","%","","100.0","%","","100.0","%","","15","%","","(10)","%"],["Product gross margin","343","","","272","","","535","","","15.6","%","","13.6","%","","20.0","%","","26","%","","(49)","%"],["Service gross margin","1,550","","","1,252","","","1,386","","","31.2","%","","29.8","%","","32.7","%","","24","%","","(10)","%"],["Total gross margin","1,893","","","1,524","","","1,921","","","26.5","%","","24.6","%","","27.8","%","","24","%","","(21)","%"],["Selling, general and administrative expenses","1,151","","","1,069","","","1,051","","","16.1","%","","17.2","%","","15.2","%","","8","%","","2","%"],["Research and development expenses","268","","","234","","","259","","","3.7","%","","3.8","%","","3.7","%","","15","%","","(10)","%"],["Income from operations","$","474","","","$","221","","","$","611","","","6.6","%","","3.6","%","","8.8","%","","114","%","","(64)","%"]]
[[/GREPCENT_TABLE]]

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(1) The percentage of revenue is calculated for each line item divided by total revenue, except for product gross margin, service gross margin and total gross margin, which are divided by the related component of revenue.

Revenue

[[GREPCENT_TABLE]]
[["","","","","","","","Percentage of Total Revenue","","Increase (Decrease)"],["(in millions)","2021","","2020","","2019","","2021","","2020","","2019","","2021 v 2020","","2020 v 2019"],["Product revenue","$","2,193","","","$","2,005","","","$","2,681","","","30.6","%","","32.3","%","","38.8","%","","9","%","","(25)","%"],["Service revenue","4,963","","","4,202","","","4,234","","","69.4","%","","67.7","%","","61.2","%","","18","%","","(1)","%"],["Total revenue","$","7,156","","","$","6,207","","","$","6,915","","","100.0","%","","100.0","%","","100.0","%","","15","%","","(10)","%"]]
[[/GREPCENT_TABLE]]

Product revenue includes our hardware and software license revenue streams. Service revenue includes hardware and software maintenance revenue, implementation services revenue, interchange and surcharge revenue, cloud revenue as well as professional services revenue.

Total revenue increased 15% in 2021 from 2020 driven by an increase in service revenue of 18% and an increase in product revenue of 9%. The increase in services was driven by growth in payments revenue, which includes the results of Cardtronics, and other recurring revenue streams, primarily in cloud and managed services. The increase in product revenue was due to higher self-checkout and point-of-sale revenue.

Gross Margin

[[GREPCENT_TABLE]]
[["","","","","","","","Percentage of Revenue (1)","","Increase (Decrease)"],["(in millions)","2021","","2020","","2019","","2021","","2020","","2019","","2021 v 2020","","2020 v 2019"],["Product gross margin","$","343","","","$","272","","","$","535","","","15.6","%","","13.6","%","","20.0","%","","26","%","","(49)","%"],["Service gross margin","1,550","","","1,252","","","1,386","","","31.2","%","","29.8","%","","32.7","%","","24","%","","(10)","%"],["Total gross margin","$","1,893","","","$","1,524","","","$","1,921","","","26.5","%","","24.6","%","","27.8","%","","24","%","","(21)","%"]]
[[/GREPCENT_TABLE]]

(1) The percentage of revenue is calculated for each line item divided by the related component of revenue.

Gross margin as a percentage of revenue was 26.5% in 2021 compared to 24.6% in 2020. Gross margin for the year ended December 31, 2021 included $39 million related to transformation and restructuring costs and $60 million related to amortization of acquisition-related intangible assets. Gross margin for the year ended December 31, 2020 included $150 million related to transformation and restructuring costs and $22 million related to amortization of acquisition-related intangible assets. Excluding these items, gross margin as a percentage of revenue increased from 27.3% to 27.8% due to higher revenue partially offset by increased component and freight costs due to supply chain challenges. Continued increases in labor costs as well as component parts, freight, services, and interest rates could negatively impact our gross margin in future periods.We are working to mitigate the impact of these rising costs through a variety of actions, such as increasing the prices of our products and services, pre-purchasing materials, locking in prices in advance or utilizing alternate sources of materials. However, we may not be completely successful in these efforts and even when we are successful, there may be a time lag before the impacts of these actions are reflected in our margins.

Selling, General and Administrative Expenses

[[GREPCENT_TABLE]]
[["","","","","","","","Percentage of Total Revenue","","Increase (Decrease)"],["(in millions)","2021","","2020","","2019","","2021","","2020","","2019","","2021 v 2020","","2020 v 2019"],["Selling, general and administrative expenses","$","1,151","","","$","1,069","","","$","1,051","","","16.1","%","","17.2","%","","15.2","%","","8","%","","2","%"]]
[[/GREPCENT_TABLE]]

Selling, general, and administrative expenses were $1.151 billion in 2021 up from $1.069 billion in 2020. As a percentage of revenue, selling, general and administrative expenses were 16.1% in 2021 and 17.2% in 2020. In 2021, selling, general and administrative expenses included $20 million of transformation costs, $72 million of acquisition-related amortization of intangibles and $84 million of acquisition-related costs. In 2020, selling, general and administrative expenses included $66 million of transformation and restructuring costs, $59 million of acquisition-related amortization of intangibles and $1 million of acquisition-related costs. Excluding these items, selling, general and administrative expenses decreased as a percentage of revenue from 15.2%

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in 2020 to 13.6% in 2021 primarily due to the increase in revenue and the impact of expense reduction measures taken entering 2021.

Research and Development Expenses

[[GREPCENT_TABLE]]
[["","","","","","","","Percentage of Total Revenue","","Increase (Decrease)"],["(in millions)","2021","","2020","","2019","","2021","","2020","","2019","","2021 v 2020","","2020 v 2019"],["Research and development expenses","$","268","","","$","234","","","$","259","","","3.7","%","","3.8","%","","3.7","%","","15","%","","(10)","%"]]
[[/GREPCENT_TABLE]]

Research and development expenses were $268 million in 2021, up from $234 million in 2020. As a percentage of revenue, these costs were 3.7% in 2021 and 3.8% in 2020. In 2021, research and development expenses included $1 million of costs related to our transformation and restructuring initiatives. In 2020, research and development expenses included $11 million of transformation and restructuring costs. After considering this item, research and development expenses increased slightly as a percentage of revenue from 3.6% in 2020 to 3.7% in 2021 due to an increase in investments related to our strategic initiatives.

Loss on Extinguishment of Debt

[[GREPCENT_TABLE]]
[["","","","","","","","Increase (Decrease)"],["(in millions)","2021","","2020","","2019","","2021 v 2020","","2020 v 2019"],["Loss on extinguishment of debt","$","42","","","$","20","","","$","\u2014","","","110","%","","100","%"]]
[[/GREPCENT_TABLE]]

Loss on extinguishment of debt was $42 million in 2021 related to the premium paid for early redemption of $400 million aggregate principal amount of 8.125% senior secured notes due 2025, which includes the write-off of deferred financing fees of $5 million and a cash redemption premium of $37 million. Refer to Note 5, “Debt Obligations”, of the Notes to Consolidated Financial Statements for additional discussion on the financing transactions.

Loss on extinguishment of debt was $20 million in 2020 related to the early extinguishment of the $600 million aggregate principal amount of 5.00% senior unsecured notes due in 2022 and the $700 million aggregate principal amount of 6.375% senior unsecured notes due in 2023. The loss included the write-off of deferred financing fees of $5 million and a cash redemption premium of $15 million.

Interest Expense

[[GREPCENT_TABLE]]
[["","","","","","","","Increase (Decrease)"],["(in millions)","2021","","2020","","2019","","2021 v 2020","","2020 v 2019"],["Interest expense","$","238","","","$","218","","","$","197","","","9","%","","11","%"]]
[[/GREPCENT_TABLE]]

Interest expense was $238 million in 2021 compared to $218 million in 2020. Interest expense in all years was primarily related to the Company's senior unsecured notes and borrowings under the Company's senior secured credit facility. The increase in interest expense in 2021 was related to the increase in total outstanding debt as a result of the closing of the acquisition of Cardtronics. The higher average outstanding principal balances during 2021 were partially offset by the lower average interest rates on the Company's senior unsecured notes, interest expense increased in 2021 compared to 2020.

Other Income (Expense), net

Other income (expense), net was income of $90 million in 2021, expense of $42 million in 2020 and expense of $73 million in 2019, with the components reflected in the following table:

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[[GREPCENT_TABLE]]
[["In millions","2021","","2020","","2019"],["Interest income","$","8","","","$","8","","","$","5"],["Foreign currency fluctuations and foreign exchange contracts","(22)","","","(14)","","","(23)"],["Bank-related fees","(27)","","","(5)","","","(7)"],["Employee benefit plans","131","","","(31)","","","(82)"],["Gain on entity liquidations","\u2014","","","\u2014","","","37"],["Impairment of an equity investment","\u2014","","","(7)","","","\u2014"],["Bargain purchase gain on acquisition","\u2014","","","7","","","\u2014"],["Other, net","\u2014","","","\u2014","","","(3)"],["Other income (expense), net","$","90","","","$","(42)","","","$","(73)"]]
[[/GREPCENT_TABLE]]

Employee benefit plans within Other income (expense), net includes the components of pension, postemployment and postretirement expense, other than service cost. This includes actuarial gains and losses from the annual pension mark-to-market adjustment. In 2021, there was an actuarial gain of $118 million compared to actuarial loss of $34 million in 2020. The actuarial gain in 2021 was primarily due to an increase in discount rates as well as a favorable impact from an update to the mortality tables. The loss in 2020 was primarily due to a decrease in the discount rates.

In 2021, the increase in bank-related fees was primarily due to $19 million related to certain structuring and commitment fees as a result of the financing transactions entered into during the first quarter of 2021 related to the transaction with Cardtronics.

Income Taxes

[[GREPCENT_TABLE]]
[["","","","","","","","Increase (Decrease)"],["(in millions)","2021","","2020","","2019","","2021 v 2020","","2020 v 2019"],["Income tax expense (benefit)","$","186","","","$","(53)","","","$","(273)","","","(451)","%","","(81)","%"]]
[[/GREPCENT_TABLE]]

Our effective tax rate was 65% in 2021 and 90% in 2020. During 2021, significant matters impacting our tax rate include a $36 million expense from recording a valuation allowance against interest expense deduction carryforwards in the United States, a $14 million benefit from the deferred tax impact of a tax law change in the United Kingdom and a $40 million non-cash expense resulting from an internal entity restructuring. During 2020, the tax rate was impacted by a $48 million benefit resulting from the release of a valuation allowance against U.S. foreign tax credits and the re-establishment of expected foreign tax credit offsets to unrecognized tax benefits.

In the fourth quarter of 2021, the Company recorded $9 million of income tax expense ($4.7 million of which related to multiple prior annual periods) related to the utilization of foreign tax credits in prior years and an additional valuation allowance required for interest expense carryforwards recognized in interim periods during 2021. The Company determined that the adjustments in the fourth quarter of 2021 were not material, quantitatively or qualitatively, to the impacted annual and interim financial statements.

While we are subject to numerous federal, state and foreign tax audits, we believe 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. During 2022, the Company expects to resolve certain tax matters related to U.S. and foreign jurisdictions. These resolutions could have a material impact on the effective tax rate in 2022.

We regularly review our deferred tax assets for recoverability and establish a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized.  The determination as to whether a deferred tax asset will be realized is made on a jurisdictional basis and is based on the evaluation of positive and negative evidence.  This evidence includes historical taxable income/loss, projected future taxable income, the expected timing of the reversal of existing temporary differences and the implementation of tax planning strategies. 

Loss from Discontinued Operations, net of tax

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[[GREPCENT_TABLE]]
[["","","","","","","","Increase (Decrease)"],["(in millions)","2021","","2020","","2019","","2021 v 2020","","2020 v 2019"],["Income (loss) from discontinued operations, net of tax","$","\u2014","","","$","(72)","","","$","(50)","","","(100)","%","","44","%"]]
[[/GREPCENT_TABLE]]

In 2021, income (loss) from discontinued operations was zero, net of tax.

In 2020, the loss from discontinued operations was $72 million, net of tax, primarily related to updates in estimates and assumptions for the Fox River and Kalamazoo River environmental reserves.

Revenue and Adjusted EBITDA by Segment

The Company manages and reports its businesses in the following segments: Banking, Retail, Hospitality and T&T. 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 adjusted EBITDA. Adjusted EBITDA is defined as GAAP net income (loss) from continuing operations attributable to NCR plus interest expense, net; plus income tax expense (benefit); plus depreciation and amortization; plus stock-based compensation expense; plus other income (expense); plus pension mark-to-market adjustments, pension settlements, pension curtailments and pension special termination benefits and other special items, including amortization of acquisition-related intangibles, restructuring charges, among others. The special items are considered non-operational so are excluded from the adjusted EBITDA metric utilized by our chief operating decision maker in evaluating segment performance and are separately delineated to reconcile back to total reported income from operations. Management believes 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.

Corporate and Other reconciles our segment results to adjusted EBITDA, which primarily includes other income (expense) that are managed only on a total company basis and are, accordingly, reflected only in consolidated results.

The following table shows our segment revenue and adjusted EBITDA for the years ended December 31, the relative percentage that those amounts represent to revenue, and the change in those amounts year-over-year. The Banking revenue and adjusted EBITDA metrics below include the results of operations of Cardtronics for the period from the date of acquisition, June 21, 2021 to December 31, 2021.

[[GREPCENT_TABLE]]
[["","","","","","","","Percentage of Revenue (1)","","Increase (Decrease)"],["(in millions)","2021","","2020","","2019","","2021","","2020","","2019","","2021 v 2020","","2020 v 2019"],["Revenue"],["Banking","$","3,730","","","$","3,098","","","$","3,512","","","52.1","%","","49.9","%","","50.8","%","","20","%","","(12)","%"],["Retail","2,281","","","2,080","","","2,217","","","31.9","%","","33.5","%","","32.0","%","","10","%","","(6)","%"],["Hospitality","848","","","684","","","843","","","11.9","%","","11.0","%","","12.2","%","","24","%","","(19)","%"],["T&T","297","","","345","","","343","","","4.1","%","","5.6","%","","5.0","%","","(14)","%","","1","%"],["Consolidated Revenue","$","7,156","","","$","6,207","","","$","6,915","","","100.0","%","","100.0","%","","100.0","%","","15","%","","(10)","%"],["Adjusted EBITDA by segment"],["Banking","$","777","","","$","546","","","$","663","","","20.8","%","","17.6","%","","18.9","%","","42","%","","(18)","%"],["Retail","322","","","255","","","262","","","14.1","%","","12.3","%","","11.8","%","","26","%","","(3)","%"],["Hospitality","117","","","73","","","115","","","13.8","%","","10.7","%","","13.6","%","","60","%","","(37)","%"],["T&T","40","","","39","","","57","","","13.5","%","","11.3","%","","16.6","%","","3","%","","(32)","%"],["Corporate and Other","(12)","","","(17)","","","(39)"],["Total Adjusted EBITDA","$","1,244","","","$","896","","","$","1,058","","","17.4","%","","14.4","%","","15.3","%","","39","%","","(15)","%"]]
[[/GREPCENT_TABLE]]

(1) For segment revenue, the percentage of revenue is calculated for each line item divided by total revenue. For segment adjusted EBITDA, the percentage of revenue is calculated for each line item divided by the related segment revenue amount.

Segment Revenue

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Banking revenue increased 20% due to the inclusion of Cardtronics, as well as higher software and services revenue. Retail revenue increased 10% due to higher point-of-sale and self-checkout solutions revenue. Hospitality revenue increased 24% driven primarily by an increase in point-of-sale solutions revenue. T&T revenue decreased 14% in 2021 compared to 2020 driven by a decrease in services revenue.

Segment Adjusted EBITDA

For the year ended December 31, 2021 compared to the year ended December 31, 2020

Banking, Retail and Hospitality adjusted EBITDA increased in 2021 compared to 2020 primarily driven by higher revenue as well as cost reduction actions taken in the prior year. T&T adjusted EBITDA increased in 2021 compared to 2020 driven by cost reduction actions taken in the prior year partially offset by lower revenue.

For the year ended December 31, 2020 compared to the year ended December 31, 2019

Banking, Retail and Hospitality adjusted EBITDA decreased in 2020 compared to 2019 primarily driven by lower hardware revenue partially offset by cost saving initiatives implemented in 2020. T&T adjusted EBITDA decreased in 2020 compared to 2019 driven by an unfavorable mix of revenue partially offset by the increase in revenue.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

In the year ended December 31, 2021, net cash provided by operating activities was $1.077 billion and in the year ended December 31, 2020, net cash provided by operating activities was $641 million. The increase in net cash provided by operating activities was due to higher operating earnings as well as the agreement entered into during the third quarter of 2021 to sell short term receivables from certain trade accounts to an unaffiliated financial institution which provided a $300 million benefit to operating cash flows. Refer to Note 6, “Trade Receivables Facility”, in the Notes to Consolidated Financial Statements for more information.

NCR’s management uses a non-GAAP measure called “free cash flow” to assess the financial performance of the Company. We previously defined 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 (if any). In 2021, with the increase in our restricted cash settlement activity and the initial sale of trade accounts receivables under the agreement entered into during the 3rd quarter, we began defining free cash flow as net cash provided by (used in) operating activities less capital expenditures for property, plant and equipment, less additions to capitalized software, plus/minus restricted cash settlement activity, plus acquisition-related items, less the impact from the initial sale of trade accounts receivables under the agreement entered into during the 3rd quarter of 2021, and plus pension contributions and settlements. All periods presented have been recast to reflect this new definition. We believe free cash flow information is useful for investors because it relates the operating cash flows from the Company’s continuing operations to the capital that is spent and to 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 and investments, repurchase of NCR stock and repayment of debt obligations. Free cash flow does not represent the residual cash flow available for discretionary expenditures, since there may be other non-discretionary expenditures that are not deducted from the measure. Free cash flow does not have a uniform definition under GAAP, and therefore NCR’s definition of this measure may differ from that of other companies. This non-GAAP measure should not be considered a substitute for, or superior to, cash flows from operating activities under GAAP.

The table below reconciles net cash provided by (used in) operating activities, the most directly comparable GAAP measure, to NCR’s non-GAAP measure of free cash flow for the years ended December 31:

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[[GREPCENT_TABLE]]
[["In millions","2021","","2020","","2019"],["Net cash provided by operating activities","$1,077","","$641","","$634"],["Capital expenditures for property, plant and equipment","(106)","","(31)","","(91)"],["Additions to capitalized software","(242)","","(232)","","(238)"],["Restricted cash settlement activity","(41)","","\u2014","","(5)"],["Transaction costs","55","","\u2014","","\u2014"],["Sale of accounts receivables","(300)","","\u2014","","\u2014"],["Pension contribution","17","","89","","23"],["Free cash flow (non-GAAP)","$460","","$467","","$323"]]
[[/GREPCENT_TABLE]]

In 2021, free cash flow decreased slightly from 2020 as a result of higher capital expenditures for property, plant and equipment related to ATMs to be deployed, and higher additions to capitalized software of $10 million due to an increase in investments related to our strategic initiatives. In addition, working capital also increased primarily due to inventory and the higher component costs.

In 2020, net cash provided by operating activities increased $7 million, which contributed to a net increase in free cash flow of $144 million in comparison to 2019. Additionally, capital expenditures for property, plant and equipment decreased $60 million primarily due to the initiatives implemented earlier in the year to address the business impacts from the COVID-19 pandemic. Additions to capitalized software decreased slightly $6 million as the Company continued to focus on investment in our strategic growth platforms.

Certain financing activities and certain other investing activities are not included in our calculation of free cash flow. Our other investing activities primarily include business acquisitions, investments, as well as proceeds from the sales of property, plant and equipment. During the year ended December 31, 2021, the payments for business combinations was $2.47 billion, net of cash acquired, mainly for the consideration paid related to the acquisition of Cardtronics completed in 2021.

Our financing activities include borrowings and repayments of credit facilities and notes. During the year ended December 31, 2021, we issued new senior unsecured notes for an aggregate principal amount of $1.2 billion and amended and restated the senior secured credit facility to add an incremental term loan for $1.505 billion, of which $200 million converted into the revolving credit facility. We paid $53 million of deferred financing fees related to these transactions. Additionally, we redeemed all of the $400 million outstanding aggregate principal amount of the Company’s 8.125% senior notes due 2025. We paid $37 million of early redemption fees related to this transaction. The $300 million trade receivables securitization facility was extinguished as part of the purchase agreement and the sale agreements. Refer to Note 5, “Debt Obligations”, and Note 6, “Trade Receivables Facility”, in the Notes to Consolidated Financial Statements for more information.

During the year ended December 31, 2020, we issued new senior unsecured notes for an aggregate principal amount of $1.5 billion and we paid $21 million of deferred financing fees related to these transactions. Additionally, in the year ended December 31, 2020, we redeemed the $600 million aggregate principal amount of 5.000% senior unsecured notes due in 2022 and $700 million aggregate principal amount of 6.375% senior unsecured notes due in 2023. As a part of our debt extinguishment, we recognized a loss of $20 million, which includes the write-off of deferred financing fees of $5 million and a cash redemption premium of $15 million.

Financing activities during the year ended December 31, 2021 also included the proceeds from stock employee plans of $44 million and tax withholding payments on behalf of employees for stock based awards that vested of $50 million. Financing activities during the year ended December 31, 2020 also included the redemption of the outstanding Series A Convertible Preferred Stock owned by two affiliated shareholders for a total cash consideration of $144 million, the repurchase of our common stock for $41 million, dividends paid on the Series A preferred stock of $9 million, proceeds from stock employee plans of $17 million as well as tax withholding payments on behalf of employees for stock based awards that vested of $28 million.

Long Term Borrowings The senior secured credit facility consists of term loan facilities in an aggregate principal amount of $2.055 billion, of which $1.94 billion was outstanding as of December 31, 2021. Additionally, the senior secured credit facility provides for a five-year revolving credit facility with an aggregate principal amount of $1.3 billion, of which $380 million was outstanding as of December 31, 2021. The revolving credit facility also allows a portion of the availability to be used for letters of credit, and as of December 31, 2021, there were $26 million in letters of credit outstanding.

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As of December 31, 2021, we had outstanding $1.2 billion in aggregate principal balance of 5.125% senior unsecured notes due in 2029, $500 million in aggregate principal balance of 5.750% senior unsecured notes due in 2027, $650 million aggregate principal balance of 5.000% senior unsecured notes due in 2028, $500 million in aggregate principal balance of 6.125% senior unsecured notes due in 2029, and $450 million in aggregate principal balance of 5.250% senior unsecured notes due in 2030.

On August 12, 2021 (the “Redemption Date”), the Company redeemed all of the outstanding $400 million 8.125% Notes at a redemption price equal to 100% of the principal amount of the 8.125% Notes plus the excess of (if any) (a) the present value at the Redemption Date of (i) the redemption price of 8.125% Notes on April 15, 2022, plus (ii) all required remaining scheduled interest payments due on the 8.125% Notes through April 15, 2022 (but excluding accrued and unpaid interest to and excluding the Redemption Date), computed using a discount rate equal to the Adjusted Treasury Rate (as described in the terms of the indenture relating to the 8.125% Notes), over (b) the principal amount of the 8.125% Notes on the Redemption Date, and accrued and unpaid interest to and excluding the Redemption Date (the “Redemption Price”).

On September 30, 2021 NCR amended and restated its existing Receivables Financing Agreement to modify certain terms of the Company’s existing revolving trade receivables securitization facility (the “T/R Facility”). As part of the amendment, the Company repaid the outstanding balances under the facility and the borrowing capacity under the facility was eliminated.

See Note 5, “Debt Obligations”, of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Report for further information on the senior secured credit facility (including certain amendments to such facility), the senior unsecured notes, the trade receivables securitization facility and our financing activities in connection with the Cardtronics transaction.

Employee Benefit Plans We expect to make pension, postemployment and postretirement plan contributions of approximately $46 million in 2022. See Note 9, “Employee Benefit Plans”, of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Report for additional discussion on our pension, postemployment and postretirement plans.

Series A Convertible Preferred Stock In 2015, NCR issued 820,000 shares of Series A Convertible Preferred Stock. As of December 31, 2021, there were approximately 300,000 shares that remained issued and outstanding. Holders of Series A Convertible Preferred Stock are entitled to a cumulative dividend at the rate of 5.5% per annum, which was payable quarterly in arrears and payable in-kind for the first sixteen dividend payments, after which, beginning in the first quarter of 2020, are payable in cash or in-kind at the option of the Company. The holders also have certain redemption rights or put rights, including the right to require us to repurchase all or any portion of the Series A Convertible Preferred Stock on any date during the three months commencing on and immediately following March 16, 2024 and the three months commencing on and immediately following every third anniversary of such date, at 100% of the liquidation preference plus all accrued but unpaid dividends.

Additionally, 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 December 31, 2021, 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 9.2 million shares which would represent approximately 7% of our outstanding common stock as of December 31, 2021 including the preferred shares on an as-converted basis.

Cash and Cash Equivalents Held by Foreign Subsidiaries Cash and cash equivalents held by the Company's foreign subsidiaries were $412 million and $329 million at December 31, 2021 and 2020, respectively. As a result of the Tax Cuts and Jobs Act of 2017, including the repatriation tax, in general we will not be subject to additional U.S. taxes if cash and cash equivalents and short-term investments held outside the United States are distributed to the United States in the form of dividends or otherwise. However, we may be subject to foreign withholding taxes, which could be significant.

Summary As of December 31, 2021, our cash and cash equivalents totaled $447 million and our total debt was $5.62 billion. Our borrowing capacity under our senior secured credit facility was $894 million at December 31, 2021. Our ability to generate positive cash flows from operations is dependent on general economic conditions, the competitive environment in our industry, and is subject to the business and other risk factors described in Item 1A of Part I of this Report. If we are unable to generate sufficient cash flows from operations, or otherwise comply with the terms of our credit facilities, 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 expected pension, postemployment and postretirement plan contributions, remediation payments related to environmental

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matters, debt servicing obligations, payments related to transformation initiatives, and our operating requirements for the next twelve months, and in the long-term (i.e. beyond December 31, 2022) to meet our material cash requirements described below.

Material Cash Requirements from Contractual and Other Obligations In the normal course of business, we enter into various contractual obligations that impact, or could impact, the liquidity of our operations. The following table and discussion outlines our material obligations as of December 31, 2021 on an undiscounted basis, with projected cash payments in the years shown:

[[GREPCENT_TABLE]]
[["In millions","Total Amounts","2022","2023-2024","2025-2026","2027 & Thereafter"],["Debt obligations","$","5,622","","$","57","","$","592","","$","1,673","","$","3,300"],["Interest on debt obligations","1,553","","239","","467","","423","","424"],["Estimated environmental liability payments","120","","22","","35","","20","","43"],["Lease obligations","651","","137","","159","","97","","258"],["Purchase obligations","1,438","","1,405","","25","","8","","\u2014"],["Total obligations","$","9,384","","$","1,860","","$","1,278","","$","2,221","","$","4,025"]]
[[/GREPCENT_TABLE]]

For purposes of this table, we used interest rates as of December 31, 2021 to estimate the future interest on debt obligations outstanding as of December 31, 2021 and have assumed no voluntary prepayments of existing debt. See Note 5, “Debt Obligations”, of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Report for additional disclosure related to our debt obligations and the related interest rate terms. 

The estimated environmental liability payments included in the table of material cash requirements shown above are related to the Fox River, Kalamazoo River and Ebina environmental matters. The amounts shown are our expected payments, net of the payment obligations of co-obligors and an estimate for payments to be received from indemnification parties. For additional information, refer to Note 10, “Commitments and Contingencies”, of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Report.

Our lease obligations are primarily for future rental amounts for our world headquarters in Atlanta, Georgia, as well as for certain sales and manufacturing facilities in various domestic and international locations and leases related to equipment and vehicles.

Purchase obligations represent committed purchase orders and other contractual commitments for goods or services. The purchase obligation amounts were determined through information in our procurement systems and payment schedules for significant contracts. Included in the amounts are committed payments in relation to the long-term service agreement with Accenture under which NCR’s transaction processing activities and functions are performed.

We have a liability related to our uncertain tax positions. Due to the nature of the underlying liabilities and the extended time often needed to resolve income tax uncertainties, we cannot make reliable estimates of the amount or timing of cash payments that may be required to settle these liabilities. For additional information, refer to Note 7, “Income Taxes”, of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Report.

Our U.S. and international employee benefit plans, which are described in Note 9, “Employee Benefit Plans”, of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Report, could require significant future cash payments. In 2021, we made no discretionary contributions to our U.S. pension plan. We do not expect mandatory contributions until 2026 based on current funding requirements and assuming the Company does not complete any further actions, including, but not limited to, a further pre-fund or de-risking action. The funded status of NCR’s U.S. pension plan is an underfunded position of $503 million as of December 31, 2021 compared to an underfunded position of $539 million as of December 31, 2020. Our international retirement plans were in a funded position of $1 million as of December 31, 2021, as compared to an underfunded position of $128 million as of December 31, 2020. The decrease in our underfunded position is primarily attributable to an increase in discount rates as well as a favorable impact from a mortality update. Contributions to international pension plans are expected to be approximately $15 million in 2022.

We also have product warranties that may affect future cash flows. These items are not included in the table of obligations shown above, but are described in detail in Note 10, “Commitments and Contingencies”, of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Report.

Our senior secured credit facility and the indentures for our senior unsecured notes include affirmative and negative covenants that restrict or limit our ability to, among other things, incur indebtedness; create liens on assets; engage in certain fundamental corporate

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changes or changes to our business activities; make investments; sell or otherwise dispose of assets; engage in sale-leaseback or hedging transactions; pay dividends or make similar distributions; repay other indebtedness; engage in certain affiliate transactions; or enter into agreements that restrict our ability to create liens, pay dividends or make loan repayments. Our senior secured credit facility also includes financial covenants that require us to maintain:

•A consolidated leverage ratio on the last day of any fiscal quarter, not to exceed (i) in the case of any fiscal quarter ending on or prior to December 31, 2021, 5.50 to 1.00, (ii) in the case of any fiscal quarter ending on or prior to September 30, 2022, 5.25 to 1.00, and (iii) in the case of any fiscal quarter ending on or after December 31, 2022, 4.75 to 1.00.

The Company has the option to elect to increase the maximum permitted leverage ratio for the periods described in the foregoing clause (iii) by 0.25 in connection with the consummation of any material acquisition (as defined in the Senior Secured Credit Facility) for three fiscal quarters.

CRITICAL ACCOUNTING ESTIMATES

Our consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of these financial statements, we are required to make assumptions, estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosure of contingent liabilities. These assumptions, estimates and judgments are based on historical experience and are believed to be reasonable at the time. However, because future events and their effects cannot be determined with certainty, the determination of estimates requires the exercise of judgment. Our critical accounting policies are those that require assumptions to be made about matters that are highly uncertain. Different estimates could have a material impact on our financial results. Judgments and uncertainties affecting the application of these policies and estimates may result in materially different amounts being reported under different conditions or circumstances. Our management continually reviews these assumptions, estimates and judgments to ensure that our financial statements are presented fairly and are materially correct.

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require significant management judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result. The significant accounting policies and estimates that we believe are the most critical to aid in fully understanding and evaluating our reported financial results are discussed in the paragraphs below. Our senior management has reviewed these critical accounting estimates and related disclosures with our independent registered public accounting firm and the Audit Committee of our Board of Directors. See Note 1, “Basis of Presentation and Significant Accounting Policies”, of the Notes to Consolidated Financial Statements in Item 8 of Part II of this Report, which contains additional information regarding our accounting policies and other disclosures required by GAAP.

Revenue Recognition We enter into contracts to sell our products and services, which may be sold separately or bundled with other products and services. As a result, interpretation and judgment are sometimes required to determine the appropriate accounting for these transactions, including: (1) whether performance obligations are considered distinct that should be accounted for separately versus together, how the price should be allocated among the performance obligations, and when to recognize revenue for each performance obligation; (2) developing an estimate of the stand-alone selling price, or SSP, of each distinct performance obligation; (3) combining contracts that may impact the allocation of the transaction price between product and services; and (4) estimating and accounting for variable consideration, including rights of return, rebates, expected penalties or other price concessions as a reduction of the transaction price.

Our estimates of SSP for each performance obligation require judgment that considers multiple factors, including, but not limited to, historical discounting trends for products and services, pricing practices in different geographies and industries, gross margin objectives, and internal costs. Our estimates for rights of return and rebates are based on historical sales returns and credits, specific criteria outlined in customer contracts or rebate agreements, and other factors known at the time. Our estimates for expected penalties and other price concessions are based on historical trends and expectations regarding future occurrence.

Changes in judgments with respect to these assumptions and estimates could impact the timing or amount of revenue recognition. Additional information regarding our revenue recognition policy is included in Note 1, “Basis of Presentation and Significant Accounting Policies” in the Notes to Consolidated Financial Statements.

Inventory Valuation We assess the valuation of our inventory on a periodic basis and make adjustments to the value to properly provide for potential exposure due to slow-moving, excess, obsolete or unusable inventory. Inventories are written down to net realizable value based on forecasted usage of part, sales orders, technological obsolescence and inventory aging. These factors can be impacted by market conditions, technology changes, changes in strategic direction, and customer demand and require estimates

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and management judgment that may include elements that are uncertain. On a quarterly basis, we review the current net realizable value of inventory and adjust for any inventory exposure due to age, obsolescence, or excess of cost over net realizable value.

Goodwill Goodwill is tested at the reporting unit level for impairment on an annual basis during the fourth quarter or more frequently if certain events occur indicating that the carrying value of goodwill may be impaired. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include a decline in expected cash flows, a significant adverse change in legal factors or in the business climate, a decision to sell a business, unanticipated competition, or slower growth rates, among others.

In the evaluation of goodwill for impairment, we have the option to perform a qualitative assessment to determine whether further impairment testing is necessary or to perform a quantitative assessment by comparing the fair value of a reporting unit to its carrying amount, including goodwill. Under the qualitative assessment, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. If under the quantitative assessment the fair value of a reporting unit is less than its carrying amount, then the amount of the impairment loss, if any, is determined based on the amount by which the carrying amount exceeds the fair value up to the total value of goodwill assigned to the reporting unit. Fair values of the reporting units are estimated using a weighted methodology considering the output from both the income and market approaches. The income approach incorporates the use of a 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 revenue growth, operating income margin and discount rate. Several of these assumptions vary among reporting units. The cash flow forecasts are generally based on approved strategic operating plans. The market approach is performed using the Guideline Public Companies (“GPC”) method which is based on earnings multiple data. We perform a reconciliation between our market capitalization and our estimate of the aggregate fair value of the reporting units, including consideration of a control premium.

Valuation of Long-lived Assets and Amortizable Other Intangible Assets We perform impairment tests for our long-lived assets if an event or circumstance indicates that the carrying amount of our long-lived assets may not be recoverable. In response to changes in industry and market conditions, we may also strategically realign our resources and consider restructuring, disposing of, or otherwise exiting businesses. Such activities could result in impairment of our long-lived assets or other intangible assets. We also are subject to the possibility of impairment of long-lived assets arising in the ordinary course of business. We consider the likelihood of impairment if certain events occur indicating that the carrying value of the long-lived assets may be impaired and we may recognize impairment if the carrying amount of a long-lived asset or intangible asset is not recoverable from its undiscounted cash flows. Impairment is measured as the difference between the carrying amount and the fair value of the asset. We use both the income approach and market approach to estimate fair value. Our estimates of fair value are subject to a high degree of judgment since they include a long-term forecast of future operations. Accordingly, any value ultimately derived from our long-lived assets may differ from our estimate of fair value.

We make strategic acquisitions that may have a material impact on our consolidated results of operations or financial position. We allocate the purchase price of acquired businesses to the assets acquired and liabilities assumed in the transaction at their estimated fair values. The estimates used to determine the fair value of long-lived assets, such as intangible assets, can be complex and require significant judgments. We use information available to us to make fair value determinations and engage independent valuation specialists, when necessary, to assist in the fair value determination of significant acquired long-lived assets. The determination of fair value requires estimates about cash flow forecasts, discount rates, revenue growth rates, EBITDA margin, customer attrition rate, and other future events that are judgmental in nature. While we use our best estimates and assumptions as a part of the purchase price allocation process, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Any adjustments subsequent to the measurement period are recorded to our consolidated statements of income. We are also required to estimate the useful lives of intangible assets to determine the amount of acquisition-related intangible asset amortization expense to record in future periods. Additional information regarding our acquisitions is included in Note 3, “Business Combinations and Divestitures”,in Notes to Consolidated Financial Statements.

Pension, Postretirement and Postemployment Benefits We sponsor domestic and foreign defined benefit pension and postemployment plans as well as domestic postretirement plans. As a result, we have significant pension, postretirement and postemployment benefit costs, which are developed from actuarial valuations. Actuarial assumptions attempt to anticipate future events and are used in calculating the expense and liability relating to these plans. These factors include assumptions we make about interest rates, expected investment return on plan assets, involuntary turnover rates, and rates of future compensation increases. In addition, our actuarial consultants advise us about subjective factors such as withdrawal rates and mortality rates to use in our valuations. We generally review and update these assumptions on an annual basis at the end of each fiscal year. We are required to consider current market conditions, including changes in interest rates, in making these assumptions. The actuarial assumptions that

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we use may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates, or longer or shorter life spans of participants. These differences may result in a significant impact to the amount of pension, postretirement or postemployment benefits expense we have recorded or may record. Ongoing pension, postemployment and postretirement expense impacts all of our segments. Pension mark-to-market adjustments, settlements, curtailments and special termination benefits are excluded from our segment results as those items are not included in the evaluation of segment performance. See Note 4, “Segment Information and Concentrations”, in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Report for a reconciliation of our segment results to income from operations.

The key assumptions used in developing our 2021 expense were discount rates of 1.7% for our U.S. pension plan and 1.4% for our postretirement plan, and an expected return on assets assumption of 2.1% for our U.S. pension plan in 2021. The U.S. plan represented 63% of the pension obligation and 100% of the postretirement plan obligation as of December 31, 2021. Holding all other assumptions constant, a 0.25% change in the discount rate used for the U.S. plan would have increased or decreased 2021 ongoing pension expense by approximately $4 million and would have had an immaterial impact on 2021 postretirement income. A 0.25% change in the expected rate of return on plan assets assumption for the U.S. pension plan would have increased or decreased 2021 ongoing pension expense by approximately $4 million. Our expected return on plan assets has historically been and will likely continue to be material to net income. For 2022, we intend to use discount rates of 2.1% and 1.9% in determining the U.S. pension and postretirement expense, respectively. We intend to use an expected rate of return on assets assumption of 5.0% for the U.S. pension plan.

We recognize additional changes in the fair value of plan assets and net actuarial gains or losses of our pension plans upon remeasurement, which occurs at least annually in the fourth quarter of each year. The remaining components of pension expense, primarily net service cost, interest cost, and the expected return on plan assets, are recorded on a quarterly basis as ongoing pension expense. While it is required that we review our actuarial assumptions each year at the measurement date, we generally do not change them between measurement dates. We use a measurement date of December 31 for all of our plans. Changes in assumptions or asset values may have a significant effect on the annual measurement of expense or income in the fourth quarter.

The most significant assumption used in developing our 2021 postemployment plan expense is the assumed rate of involuntary turnover of 3.8%. The involuntary turnover rate is based on historical trends and projections of involuntary turnover in the future. A 0.25% change in the rate of involuntary turnover would have increased or decreased 2021 expense by approximately $2 million. The sensitivity of the assumptions described above is specific to each individual plan and not to our pension, postretirement and postemployment plans in the aggregate. We intend to use an involuntary turnover assumption of 3.8% in determining the 2022 postemployment expense.

Environmental and Legal Contingencies Each quarter, we review the status of each claim and legal proceeding and assess our potential financial exposure. If the potential loss from any claim or legal proceeding would be material and is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. To the extent that the amount of such a probable loss is estimable only by reference to a range of equally likely outcomes, and no amount within the range appears to be a better estimate than any other amount, we accrue the amount at the low end of the range. Because of uncertainties related to these matters, the use of estimates, assumptions and judgments, and external factors beyond our control, accruals are based on the best information available at the time. At environmental sites, or portions of environmental sites, where liability is determined to be probable but a remedy has not yet been determined, we accrue for the costs of investigations and studies for the affected areas but not for the costs of remediation. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. Such revisions in the estimates of the potential liabilities could have a material impact on our results of operations and financial position. When insurance carriers or third parties have agreed to pay any amounts related to costs, and we believe that it is probable that we can collect such amounts, those amounts are reflected as receivables in our Consolidated Balance Sheet.

The most significant legal contingencies impacting our Company are the Fox River, Kalamazoo River, and Ebina matters, which are further described in detail in Note 10, “Commitments and Contingencies”, in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Report. NCR has been identified as a potentially responsible party (“PRP”) at both the Fox River and Kalamazoo River sites.

As described below and in Note 10, “Commitments and Contingencies”, in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Report, while litigation activities have largely concluded with respect to the Fox River and Kalamazoo River matters and while the Company has engaged in cooperative regulatory compliance activities with the government of Japan with respect to the Ebina matter, the extent of our potential liabilities continues to be subject to significant uncertainties. The uncertainties related to the Fox River and Kalamazoo River matters include the total cost of clean-up as well as the solvency and

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willingness of the co-obligors or indemnitors to pay. The uncertainties related to the Ebina matter include total cost of clean-up subject to approval by local agencies in Japan.

Our net reserves for the Fox River matter, the Kalamazoo River matter and the Ebina matter, as of December 31, 2021 were approximately $26 million, $99 million, and $16 million, respectively, as further discussed in Note 10, “Commitments and Contingencies”, in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Report. The Company regularly re-evaluates the assumptions used in determining the appropriate reserve for these matters as additional information becomes available and, when warranted, makes appropriate adjustments.

Income Taxes We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The deferred tax assets and liabilities are determined based on the enacted tax rates expected to apply in the periods in which the deferred tax assets or liabilities are anticipated to be settled or realized.

We regularly review our deferred tax assets for recoverability and establish a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized. The determination as to whether a deferred tax asset will be realized is made on a jurisdictional basis and is based on the evaluation of positive and negative evidence. This evidence includes historical taxable income, projected future taxable income, the expected timing of the reversal of existing temporary differences and the implementation of tax planning strategies. Projected future taxable income is based on our expected results and assumptions as to the jurisdiction in which the income will be earned. The expected timing of the reversals of existing temporary differences is based on current tax law and our tax methods of accounting. As a result of this determination, we had valuation allowances of $368 million as of December 31, 2021 and $341 million as of December 31, 2020, related to certain deferred income tax assets, primarily tax loss carryforwards, in jurisdictions where there is uncertainty as to the ultimate realization of a benefit from those tax assets.

If we are unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or the time period within which the underlying temporary differences become taxable or deductible, or if the tax laws change unfavorably, then we could be required to increase our valuation allowance against our deferred tax assets, resulting in an increase in our effective tax rate.

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon settlement. Interest and penalties related to uncertain tax positions are recognized as part of the provision for income taxes and are accrued beginning in the period that such interest and penalties would be applicable under relevant tax law until such time that the related tax benefits are recognized.

During 2019, we transferred certain intangible assets among our wholly-owned subsidiaries, which resulted in the establishment of deferred tax assets of $274 million. The establishment of deferred tax assets from intra-entity transfers of intangible assets required us to make significant estimates and assumptions to determine the fair value of such intangible assets. Critical estimates in valuing the intangible assets include, but are not limited to, internal revenue and expense forecasts, and discount rates. The sustainability of our future tax benefits is dependent upon the acceptance of these valuation estimates and assumptions by the taxing authorities.

The provision for income taxes may change period-to-period based on non-recurring events, such as the settlement of income tax audits and changes in tax laws, as well as recurring factors including the geographic mix of income before taxes, state and local taxes and the effects of various global income tax strategies. We maintain certain strategic management and operational activities in overseas subsidiaries and our foreign earnings are taxed at rates that are generally lower than in the United States. As of December 31, 2021, we did not provide for U.S. federal income taxes or foreign withholding taxes on approximately $3.5 billion of undistributed earnings of our foreign subsidiaries as such earnings are expected to be reinvested indefinitely. The amount of unrecognized deferred tax liability associated with these indefinitely reinvested earnings is approximately $145 million.

Refer to Note 7, “Income Taxes”, in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Report for disclosures related to foreign and domestic pretax income, foreign and domestic income tax (benefit) expense and the effect foreign taxes have on our overall effective tax rate.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

A discussion of recently issued accounting pronouncements is described in Note 1, “Basis of Presentation and Significant Accounting Policies”, of the Notes to Consolidated Financial Statements in Item 8 of Part II of this Report, and we incorporate by reference such discussion in this MD&A.

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