DIEBOLD NIXDORF, Inc: Form 10-Q for the period ended Sep 30, 2019

Significant Highlights

During the third quarter of 2019, Diebold Nixdorf:

• Successfully amended and extended the vast majority of the Company's $787 revolving credit facility and term A loans from December 23, 2020 to April 30, 2022
• Renewed a multi-year managed services contract with H&M, a global fashion retailer, providing an integrated solution supporting its global stores with an all-in-one POS system, DN Vynamic Software and DN AllConnect ServicesSM
• Secured a sizable new software contract to transform the debit platform of a top 10 U.S. financial institution
• Signed a $29 contract for cash recyclers and related services with a major financial institution based in Brazil
• Won a services, software and product solutions contract valued at nearly $8 with a large Asia bank
• Won a new account with one of the largest banks in the UAE for cash recyclers and Vynamic software
• Reached an agreement with Dave & Buster’s, a leading U.S.-based dining and entertainment chain, to provide a self-service solution at locations nationwide built around Diebold Nixdorf's newest K-two interactive kiosk

Overview

Management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and accompanying notes that appear within this quarterly report on Form 10-Q.

Introduction

The Company is a world leader in enabling Connected Commerce through automating, digitizing and transforming the way people bank and shop. The Company’s integrated solutions connect digital and physical channels conveniently, securely and efficiently for millions of consumers every day. As an innovation partner for nearly all of the world's top 100 financial institutions and a majority of the top 25 global retailers, the Company delivers unparalleled services and technology that power the daily operations and consumer experience of banks and retailers around the world. The Company has a presence in more than 100 countries with approximately 23,000 employees worldwide.

Strategy

The Company seeks to continually enhance the consumer experience at bank and retail locations while simultaneously streamlining cost structures and business processes through the smart integration of hardware, software and services. The Company partners with other leading technology companies and regularly refines its research and development (R&D) spend to advance its portfolio strategy and product road maps.

DN Now Transformation Activities

Commensurate with its strategy, the Company has evolved its multi-year transformation program called DN Now to relentlessly focus on its customers and improve operational excellence. Key activities underway include:

• Transitioning to a streamlined and customer-centric operating model
• Implementing a services modernization plan which focuses on upgrading certain customer touchpoints, automating incident reporting and response, and standardizing service offerings and internal processes
• Streamlining the product range of ATMs, introducing DN Series, and optimizing the manufacturing footprint
• Improving working capital management through greater focus and efficiency of payables, receivables and inventory
• Reducing selling, general and administrative expenses, including finance, IT and real estate
• Increasing sales productivity through improved solution selling, coverage and compensation models
• Standardizing back-office processes to automate reporting and better manage risks
• Optimizing the portfolio of businesses to improve overall profitability

These work streams are designed to improve the Company’s profitability and net leverage while establishing a foundation for future growth. The gross annualized savings target for DN Now is approximately $400 through 2021, of which $175 is anticipated to be realized during 2019. In order to achieve these savings, the Company has and will continue to restructure the workforce, integrate and optimize systems and processes, transition workloads to lower cost locations and consolidate real estate holdings.

(unaudited)

(in millions, except per share amounts)

By executing on these and other operational improvement activities, the Company expects to increase customer intimacy and satisfaction, while providing career enrichment opportunities for employees and enhancing value for shareholders.

Segments

The Company’s operating structure is focused on its two customer segments — Banking and Retail. Leveraging a broad portfolio of solutions, the Company offers its clients the flexibility to purchase the combination of services, software and systems that drive the most value to their business.

For example, the Company offers end-to-end branch and store automation solutions that consist of the complete value chain of consult, design, build and operate. Branch and store automation helps financial institutions and retailers grow revenue, reduce costs, and increase convenience and security for their customers by migrating routine transactions, typically done inside the branch or store, to lower-cost automated channels. The Company collaborates with its clients to define the ideal customer experience, modify processes, refine existing staffing models and deploy technologies that meet business objectives.

Banking

The Company provides integrated solutions for financial institutions of all sizes designed to help drive operational efficiencies, differentiate the consumer experience, grow revenue and manage risk. Banking operations are managed within two geographic regions. The Eurasia region includes the developed economies of Western Europe as well as the emerging economies of Eastern Europe, Asia, the Middle East and Africa. The Americas region encompasses the United States (U.S.), Canada, Mexico, Central and South America.

For banking clients, services represents the largest operational component of the Company. Diebold Nixdorf AllConnect ServicesSM was launched in 2018 to power the business operations of financial institutions of all sizes. This as-a-service offering provides financial institutions with the capabilities and technology needed to make physical distribution channels as agile, integrated, efficient and differentiated as their digital counterparts by leveraging a data-driven Internet of Things (IoT) infrastructure. The Company’s product-related services resolve incidents through remote service capabilities or an on-site visit. The portfolio includes first and second line maintenance, preventive maintenance, “on-demand” and total implementation services.

Managed services and outsourcing consists of managing the end-to-end business processes, technology integration and day-to-day operation of the self-service channel and the bank branch. Our integrated business solutions include self-service fleet management, branch life-cycle management and ATM as-a-service capabilities.

From a product perspective, the banking portfolio consists of cash recyclers and dispensers, intelligent deposit terminals, teller automation and kiosk technologies, as well as physical security solutions. The Company assists financial institutions to increase the functionality, availability and security within their ATM fleet.

Earlier in the year, the Company introduced the DN Series of ATMs, a family of self-service solutions designed to anticipate the needs of a progressively transforming industry. These holistic, digitally-connected solutions are built upon an integrated software and services model and provided a modern and personalized experience for consumers, while delivering maximum efficiency and reliability for financial institutions.

The DN Series is the culmination of several years of investment in consumer research, design and engineering resources. Key benefits and features of the DN Series include:

• Improved ATM availability and performance;
• Higher note capacity and processing power with next-generation cash recycling technology;
• Improved security in a smaller footprint;
• Full integration with the DN Vynamic software suite;
• Technological capability that facilitates a streamlined, simplified product portfolio; and
• Modular and upgradeable design, enabling a simplified and streamlined internal supply chain

The Company’s software encompasses front-end applications for consumer connection points as well as back-end platforms which manage channel transactions, operations and channel integration. These hardware-agnostic software

(unaudited)

(in millions, except per share amounts)

applications facilitate millions of transactions via ATMs, kiosks, and other self-service devices, as well as via online and mobile digital channels.

The Company's DN Vynamic software is the first end-to-end Connected Commerce software portfolio in the banking marketplace designed to simplify and enhance the consumer experience. In addition, DN Vynamic suite's open application program interface (API) architecture is built to simplify operations by eliminating the traditional focus on internal silos and enabling tomorrow's inter-connected partnerships between financial institutions and payment providers. In addition, with a shared analytic and transaction engine, the DN Vynamic platform can generate new insights to enhance operations across any channel — putting consumer preferences, not the technology, at the heart of the experience.

An important enabler of the Company’s software offerings are the professional service employees who provide systems integration, customization, project management and consulting. The Company's advisory services team collaborates with customers to refine the end-user experience, improve business processes, refine existing staffing models and deploy technology to automate both branches and stores.

Retail

The Company’s comprehensive portfolio of retail solutions, software and services improves the checkout process for retailers while enhancing shopping experiences for consumers.

The DN Vynamic software suite for retailers provides a comprehensive, modular solution capable of enabling Connected Commerce across multiple channels, improving end-to-end store processes and facilitating continuous consumer engagements in support of a digital ecosystem. This includes click & collect, reserve & collect, in-store ordering and return-to-store processes across the retailers' physical and digital sales channels. Operational data from a number of sources, such as enterprise resource planning (ERP), point of sale (POS), store systems and customer relationship management systems (CRM), may be integrated across all customer connection points to create seamless and differentiated consumer experiences.

Diebold Nixdorf AllConnect Services for retailers include maintenance and availability services to continuously improve retail self-service fleet availability and performance. These include: total implementation services to support both current and new store concepts; managed mobility services to centralize asset management and ensure effective, tailored mobile capability; monitoring and advanced analytics providing operational insights to support new growth opportunities; and store life-cycle management to proactively monitor store IT endpoints and enable improved management of internal and external suppliers and delivery organizations. Service personnel supervise store openings, renewals and transformation projects, with attention to local details and customers’ global IT infrastructure.

The retail systems portfolio includes modular, integrated and mobile POS and self-checkout (SCO) terminals that meet evolving automation and omnichannel requirements of consumers. The Company also provides SCO terminals and ordering kiosks that facilitate an efficient and user-friendly purchasing experience. The BEETLE /iSCAN EASY eXpress, hybrid products, can alternate from attended operation to SCO with the press of a button as customer conditions warrant. The K-Two Kiosk automates routine tasks and in-store transactions, offers order-taking abilities at quick service restaurants (QSRs) and fast casual restaurants, displays product information, sells tickets and presents functionality that furthers store automation and digitalization. Supplementing the POS system is a broad range of peripherals, including printers, scales and mobile scanners, as well as the cash management portfolio, which offers a wide range of banknote and coin processing systems.

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Business Drivers

The business drivers of the Company's future performance include, but are not limited to:

• Demand for services on distributed IT assets such as ATMs, POS and SCO, including managed services and professional services;
• Timing of system upgrades and/or replacement cycles for ATMs, POS and SCO;
• Demand for software products and professional services;
• Demand for security products and services for the financial, retail and commercial sectors;
• Demand for innovative technology in connection with the Company's Connected Commerce strategy;
• Integration of sales force, business processes, procurement, and internal IT systems;
• Execution and risk management associated with DN Now transformational activities; and
• Realization of cost reductions, which leverage the Company's global scale, reduce overlap and improve operating efficiencies.

(unaudited)

(in millions, except per share amounts)

Results of Operations

The following discussion of the Company’s financial condition and results of operations provides information that will assist in understanding the financial statements and the changes in certain key items in those financial statements. The following discussion should be read in conjunction with the condensed consolidated financial statements and the accompanying notes that appear elsewhere in this quarterly report on Form 10-Q.

Net Sales

The following table represents information regarding the Company's net sales:

(1) The Company calculates constant currency by translating the prior-year period results at the current year exchange rate.

Three months ended September 30, 2019 compared with three months ended September 30, 2018

Net sales decreased $40.2, or 3.6 percent, including a net unfavorable currency impact of $26.2 primarily related to the euro and Brazil real, resulting in a constant currency decrease of $14.0. The following results include the impact of foreign currency:

Segments

• Eurasia Banking net sales decreased $29.1, including a net unfavorable currency impact of $14.0, related primarily to the euro, and divestitures of $7.9. Excluding currency and the impact of divestitures, net sales decreased $7.3 largely driven by services revenue decreased primarily due to lower installation services activity. Partially offsetting the services decrease, higher product revenue from increased volume in Germany, the Middle East and South Africa as a result of Windows 10 upgrades and other product enhancements.
• Americas Banking net sales increased $21.2, including a net unfavorable currency impact of $0.4 related to the Canada dollar and Brazil real. Excluding currency and the impact of a small divestiture, net sales increased $22.4 primarily due to increased product volume and related service installation revenue from unit replacements from Windows 10 upgrades in Brazil, Mexico and Canada slightly offset by lower maintenance revenue in the U.S.
• Retail net sales decreased $32.3, including a net unfavorable currency impact of $11.8 mostly related to the euro and divestitures of $4.3. Excluding currency and the impact of divestitures, net sales decreased $16.1 primarily from lower POS volume in Europe which was partially offset by growth in SCO.

(unaudited)

(in millions, except per share amounts)

(1) The Company calculates constant currency by translating the prior-year period results at the current year exchange rate.

Nine months ended September 30, 2019 compared with nine months ended September 30, 2018

Net sales decreased $31.7, or 1.0 percent, including a net unfavorable currency impact of $132.5 primarily related to the euro and Brazil real, resulting in a constant currency increase of $100.8. The following results include the impact of foreign currency:

Segments

• Eurasia Banking net sales decreased $88.9, including a net unfavorable currency impact of $71.6 related primarily to the euro and divestitures of $18.2. Excluding currency and the impact of divestitures, net sales increased $0.9 primarily due to higher product volume in Germany, the Middle East and South Africa related to unit replacements from Windows 10 upgrades. These increases were partially offset by decreased services revenue from a low-margin maintenance contract roll off with a particular customer in India as well as lower professional services activity in Germany and lower service volume in the U.K.
• Americas Banking net sales increased $99.5, including a net unfavorable currency impact of $9.5 related to the Brazil real. Excluding currency and a small divestiture, net sales increased $112.0 driven primarily by product sales in Canada, Brazil, Mexico and the U.S regional customers related to unit replacements from Windows 10 upgrades. Partially offsetting the increases, services revenue declined from lower maintenance contract volume and billed work activity in the U.S.
• Retail net sales decreased $42.3, including a net unfavorable currency impact of $51.4 mostly related to the euro and divestitures of $14.1. Excluding currency and the impact of divestitures, net sales increased $23.2 primarily from higher product volume driven by incremental reverse vending and SCO projects.

(unaudited)

(in millions, except per share amounts)

Gross Profit

The following table represents information regarding the Company's gross profit:

Services gross margin increased 5.1 percent and 3.5 percent in the three and nine months ended September 30, 2019, respectively. Both the three and nine months ended September 30, 2019 were favorably impacted by lower restructuring charges of $2.8 and $0.4, respectively, and lower non-routine charges of $0.8 and $2.4, respectively. Excluding restructuring and non-routine charges, services gross margin increased 5.5 percent and 3.6 percent for the three and nine months ended September 30, 2019, respectively, as services margin increased in the Eurasia banking segment related to the favorable impact of the services modernization initiatives and favorable mix of higher margin installation activity. The nine months ended September 30, 2018, was unfavorably impacted by one-time banking services cost in Brazil.

Product gross margin increased 4.2 percent and 3.9 percent in the three and nine months ended September 30, 2019, respectively. Both the three and nine months ended September 30, 2019 were favorably impacted by lower restructuring charges of $3.8 and $3.9, respectively. Both the three and nine months ended September 30, 2019 were favorably impacted by lower non-routine charges of $5.7 and $19.0, respectively, primarily related to lower purchase accounting amortization and gain on a product inventory provision, partially offset by the reversal of a Brazil indirect tax accrual in the first quarter of 2018. Excluding the impact of restructuring and non-routine charges, products gross margin increased 2.0 percent and 2.1 percent in the three and nine months ended September 30, 2019, respectively. The increase was primarily due to higher volume and a more favorable solution mix in Brazil and Canada along with higher margin Windows 10 upgrades in parts of Europe. Additionally, product gross margin improved from the Company's focus on higher margin product mix in Eurasia and Latin America as well as improved supply chain management and lower expedited freight costs in the Americas.

Operating Expenses

The following table represents information regarding the Company's operating expenses:

N/M = Not Meaningful

Selling and administrative expense increased in both the three and nine months ended September 30, 2019 by $1.9 and $4.5, respectively. Excluding lower incremental restructuring of $22.2 and lower non-routine charges of $0.8, the three months ended September 30, 2019 expense increase $24.2. For the nine months ended September 30, 2019, excluding lower incremental

(unaudited)

(in millions, except per share amounts)

restructuring of $19.6 and higher non-routine charges of $16.4, the expense increased $7.0. The increase in selling and administrative expense for both the three and nine months ended September 30, 2019 is primarily attributable to an increase in annual incentive plan cost and an unfavorable impact of the mark-to-market adjustment of the legacy Wincor Nixdorf stock option program partially offset by the cost reduction initiatives tied to the DN Now program.

Non-routine cost in selling and administrative expense was $34.5 and $126.3 in the three and nine months ended September 30, 2019, respectively, a decrease of $0.8 and and an increase of $16.4, respectively, compared to the prior-year periods. The lower non-routine costs in the three months ended September 30, 2019 consisted of lower integration expense and purchase accounting adjustments partially offset by increased DN Now transformation expense. The nine months ended September 30, 2019 consisted of increased DN Now transformation expense, a one-time non-cash item in Brazil and $5.6 related to the German real estate tax from the squeeze out in the first quarter of 2019. These increases were partially offset by lower integration expense and purchase accounting adjustments. Selling and administrative expense included restructuring charges of $6.4 and $13.4 for the three and nine months ended September 30, 2019, respectively, or $22.2 and $19.6, respectively, lower than the prior-year periods, related to the workforce alignment under the DN Now plan.

Research, development and engineering expense in the three months ended September 30, 2019 decreased $0.2 including a net favorable currency impact of $0.9, primarily related to the euro. In the nine months ended September 30, 2019, research, development and engineering expense decreased $9.1 including a net favorable currency impact of $4.7. Excluding the impact of currency, research, development and engineering expense decreased $1.1 and $13.8, respectively, due primarily to lower headcount tied to the Company’s DN Now restructuring program, partially offset by increased software development cost.

The Company recorded goodwill impairment charges of $134.4 and $217.5 for the three and nine months ended September 30, 2018, respectively.

In the three months ended September 30, 2019, the gain on sale of assets primarily relates to the Kony transaction. The nine months ended September 30, 2019 included the loss of the Venezuela business and losses from the divestiture and liquidation of non-core businesses in Eurasia. The gain of $6.8 in the prior-year period was primarily related to the sale of a building in North America and the liquidation of the Barbados operating entity.

Operating expense as a percent of net sales in the three months ended September 30, 2019 decreased 11.8 percent to 23.0 percent compared to the same period in 2018 and decreased 6.1 percent to 24.3 percent for the nine months ended September 30, 2019 compared to the same period in 2018. The decreases were due primarily from the impairment charges in 2018.

Operating Profit (Loss)

The following table represents information regarding the Company's operating profit (loss):

N/M = Not Meaningful

The operating profit increased in the three and nine months ended September 30, 2019 compared to the same periods in 2018. The change is primarily due to higher product gross profit in the Americas and Eurasia banking segments from large roll out and upgrade projects and the higher impairment charges in 2018, partially offset by the increase in the loss on sale of assets in 2019.

(unaudited)

(in millions, except per share amounts)

Other Income (Expense)

The following table represents information regarding the Company's other income (expense), net:

Interest income was relatively flat for the three and nine months ended September 30, 2019. Interest expense increased $7.3 and $53.7 in the three and nine months ended September 30, 2019, respectively, compared to the same prior-year periods due to the incurrence of the additional $650.0 of Term Loan A-1 Facility debt with higher incremental interest rates and related fee amortization. Miscellaneous net, decreased $0.5 and $1.5 in the three and nine months ended September 30, 2019, respectively, impacted by lower costs associated with the company owned life insurance.

Net Loss

The following table represents information regarding the Company's net income loss:

The loss before taxes and net loss decreased primarily due to the reasons described above. Net loss was also impacted by the change in the income tax expense.

The effective tax rate on the loss from continuing operations was (17.2) percent for the three months ended September 30, 2019 and (50.8) percent for the nine months ended September 30, 2019. The expense on the loss was primarily due to the tax impacts of the Tax Act on the estimated projected tax rate, more specifically, the impacts related to GILTI and BEAT. In addition, during the first quarter the Company collapsed its Barbados structure to meet the covenant requirements under its credit agreement, which resulted in additional discrete tax expense of $48.4 inclusive of the offsetting valuation allowance release relating to the Company’s nondeductible interest expense that was carried forward from December 31, 2018. No taxes are currently payable related to the collapse of the Barbados structure. The above items noted as well as the Company’s jurisdictional income (loss) mix and varying statutory rates are the primary drivers of the estimated projected tax rate.

The Company’s actual effective tax rate for the three and nine months ended September 30, 2019 included the U.S. federal tax effects attributable to tax provision to return adjustments related to the Company’s 2018 U.S. federal tax return and the amendment of the 2015 U.S. federal return. As of September 30, 2019, the Company has not completed the 2018 U.S. federal tax return filing. However, upon further analysis of certain aspects of the Tax Act and refinements to the Company’s calculations, the Company recognized a tax expense of $6.4 related to the 2018 tax year. Additionally, during Q3 2019 the Company amended its 2015 U.S. federal tax return and recognized tax expense of $2.8 related to the reduction of various foreign tax credit carryforwards. Both increases to U.S. federal tax expense have been reported as discrete items for the period ended September 30, 2019. The Company will finalize its 2018 tax provision to return adjustments in the periods in which the Company files its tax returns on foreign and state jurisdictions. The final impact of the tax provision to return adjustments may differ as additional guidance and information becomes available.

(unaudited)

(in millions, except per share amounts)

Also included in tax expense is $2.3 of anticipated taxes related to the Company’s change in indefinite reinvestment assertion on undistributed earnings of a certain subsidiary.

The effective tax rate on the loss before taxes was (22.3) percent for the three months ended September 30, 2018 and (8.5) percent for the nine months ended September 30, 2018. The expense on the loss for the three months ended and nine months ended was primarily due to a goodwill impairment charge, the impacts of the Tax Act and the higher interest expense burden resulting from the debt restructuring. More specifically, the expense on the loss reflects refinement of the transition tax, the impacts related to GILTI and the business interest deduction limitation which, as a result of the Company’s debt restructuring activities during the quarter, required a full valuation allowance on the current year nondeductible business interest expense. In addition, the benefit on the losses for the nine months is reduced by the goodwill impairment charge, which for tax purposes is primarily nondeductible, of $134.4 and $83.1 incurred in the third and second quarter, respectively.

Segment Net Sales and Operating Profit Summary

The following tables represent information regarding the segment operating profit metrics excluding the impact of restructuring and non-routine charges, by reporting segment. Refer to note 20 of the condensed consolidated financial statements for further details of net sales and segment operating profit:

N/M = Not Meaningful

For the three months ended September 30, 2019, Eurasia Banking net sales decreased $29.1, including a net unfavorable currency impact of $14.0, related primarily to the euro, and divestitures of $7.9. Excluding currency and the impact of divestitures, net sales decreased $7.3 largely driven by services revenue decreased primarily due to lower installation services activity. Partially offsetting the services decrease, higher product revenue from increased volume in Germany, the Middle East and South Africa as a result of Windows 10 upgrades and other product enhancements.

For the nine months ended September 30, 2019, Eurasia Banking net sales decreased $88.9, including a net unfavorable currency impact of $71.6 related primarily to the euro and divestitures of $18.2. Excluding currency and the impact of divestitures, net sales increased $0.9 primarily due to higher product volume in Germany, the Middle East and South Africa related to unit replacements from Windows 10 upgrades. These increases were partially offset by decreased services revenue from a low-margin maintenance contract roll off with a particular customer in India as well as lower professional services activity in Germany and lower service volume in the U.K.

Segment operating profit decreased $2.6 in the three months ended September 30, 2019 including a net unfavorable currency impact of $2.2. Excluding the impact of currency, operating profit decreased $0.4 for the three months September 30, 2019 related to lower project volume. Segment operating profit increased $32.2 for the nine months ended September 30, 2019 including a net unfavorable currency impact of $9.1, primarily due to the euro. Excluding the impact of currency, operating profit increased $41.3 for the nine months September 30, 2019 due in part to higher gross margins on services and products as well as lower selling and administrative expenses. The favorable services margin was primarily attributable to the services modernization program which benefited numerous countries in Europe and Asia, while products margin also benefited from DN Now initiatives, higher volume as well as favorable country and product mix. Additionally, segment operating profit benefited from lower operating expenses tied to DN Now initiatives, restructuring programs and the phase out of non-profitable service contracts in India.

Segment operating profit margin remained flat for the three months. Segment operating profit increased 3.1 percent for the nine months ended September 30, 2019, despite lower net sales, as a result of higher services and products gross margin and lower operating expense primarily attributable to DN Now initiatives.

(unaudited)

(in millions, except per share amounts)

N/M = Not Meaningful

For the three months ended September 30, 2019, Americas Banking net sales increased $21.2, including a net unfavorable currency impact of $0.4 related to the Canada dollar and Brazil real. Excluding currency and the impact of a small divestiture, net sales increased $22.4 primarily due to increased product volume and related service installation revenue from unit replacements from Windows 10 upgrades in Brazil, Mexico and Canada slightly offset by lower maintenance revenue in the U.S. For the nine months ended September 30, 2019, Americas Banking net sales increased $99.5, including a net unfavorable currency impact of $9.5 related to the Brazil real. Excluding currency and a small divestiture, net sales increased $112.0 driven primarily by product sales in Canada, Brazil, Mexico and the U.S regional customers related to unit replacements from Windows 10 upgrades. Partially offsetting the increases, services revenue declined from lower maintenance contract volume and billed work activity in the U.S.

Segment operating profit increased $27.2 and $76.5 for the three and nine months ended September 30, 2019, respectively, mostly from DN Now initiatives favorably impacting both cost of sales and operating expense. Gross profit was favorably impacted by current large product refresh projects in Canada and favorable solution mix in the U.S., Brazil and Latin America. Additionally, the Company made improvements to supply chain management resulting in lower expedited freight costs. The three and nine months ended September 30, 2018 were unfavorably impacted by one-time banking services cost in Brazil.

Segment operating profit margin increased 6.7 percent and 6.4 percent for the three and nine months ended September 30, 2019, respectively, primarily as a result of higher product gross margin, in addition to lower cost related to the DN Now initiatives.

For the three months ended September 30, 2019, Retail net sales decreased $32.3, including a net unfavorable currency impact of $11.8 mostly related to the euro and divestitures of $4.3. Excluding currency and the impact of divestitures, net sales decreased $16.1 primarily from lower POS volume in Europe which was partially offset by growth in SCO. For the nine months ended September 30, 2019, Retail net sales decreased $42.3, including a net unfavorable currency impact of $51.4 mostly related to the euro and divestitures of $14.1. Excluding currency and the impact of divestitures, net sales increased $23.2 primarily from higher product volume driven by incremental reverse vending and SCO projects.

Segment operating profit decreased $4.9 for the three months ended September 30, 2019 including a net unfavorable currency impact of $0.8. Excluding the impact of currency, segment operating profit decreased $4.1 due to lower product volume in the U.S. and Brazil. Segment operating profit increased $3.1 for the nine months ended September 30, 2019 including a net unfavorable currency impact of $3.7. Excluding the impact of currency, segment operating profit increased $6.8 as lower costs and expenses tied to DN Now initiatives as well as higher volume and favorable service mix related to maintenance and support activities in Europe.

Segment operating profit margin decreased 1.1 percent for the three months ended September 30, 2019 primarily related to lower product volume. Segment operating profit increased 0.6 percent for the nine months ended September 30, 2019 primarily from lower costs and expenses tied to DN Now initiatives as well as higher volume and favorable service mix related to maintenance and support activities in Europe.

(unaudited)

(in millions, except per share amounts)

Liquidity and Capital Resources

The Company's total cash and cash availability as of September 30, 2019 and December 31, 2018 was as follows:

Capital resources are obtained from income retained in the business, borrowings under the Company’s committed and uncommitted credit facilities and operating and capital leasing arrangements. Management expects that the Company’s capital resources will be sufficient to finance planned working capital needs, R&D activities, investments in facilities or equipment, pension contributions and any repurchases of the Company’s common shares for at least the next 12 months. The Company had $3.6 and $105.3 of restricted cash at September 30, 2019 and December 31, 2018, respectively. As of September 30, 2019, $237.8 or 92.6 percent of the Company's cash and cash equivalents and short-term investments reside in international tax jurisdictions. Repatriation of certain international funds could be negatively impacted by potential payments for foreign taxes. The Company has approximately $1,300 of earnings that are available for repatriation with no additional tax expense. The Company estimates it will pay approximately $50 of cash income taxes in 2019. The Company has made acquisitions in the past and may make acquisitions in the future. Part of the Company’s strategy is to optimize the business portfolio through divestitures and complementary acquisitions. The Company intends to finance any future acquisitions with cash and short-term investments, cash provided from operations, borrowings under available credit facilities, proceeds from debt or equity offerings and/or the issuance of common shares.

The following table summarizes the results of the Company's condensed consolidated statement of cash flows for the nine months ended September 30:

Operating Activities

Cash flows from operating activities can fluctuate significantly from period to period as working capital needs and the timing of payments for income taxes, restructuring and integration activities, pension funding and other items impact reported cash flows. Net cash provided by operating activities was $7.4 for the nine months ended September 30, 2019, a decrease in use of $379.5 from $372.1 for the same period in 2018.

• Cash flows from operating activities during the nine months ended September 30, 2019 compared to the same period in 2018 were impacted by a $216.5 decrease in net loss inclusive of the 2018 non-cash goodwill impairment of $217.5. Refer to the Results of Operations discussed above for further discussion of the Company's net loss.
• The net aggregate of trade receivables, inventories and accounts payable provided $100.3 and used $160.2 in operating cash flows during the nine months ended September 30, 2019 and 2018, respectively. Trade receivables cash provided $110.1 for the nine months ended September 30, 2019 compared to a usage of $20.6 for the same period in the prior-year primarily due to improvement in collections in America and EMEA. Inventory cash use decreased $144.1 compared to the same period in the prior year primarily due to improved product inventory management in EMEA and North America related to management's initiative of streamlining the product portfolio and harvesting inventory. Cash provided by accounts payable decreased primarily related to reduced spending in the Americas as a result of cost savings initiatives.

(unaudited)

(in millions, except per share amounts)

• In the aggregate, the other combined certain assets and liabilities used $71.4 for the nine months ended September 30, 2019 compared to $142.4 during the same period in 2018. The decrease in use was primarily due to lower income taxes paid and increased non-cash deferred income taxes due to the results of operations as well as lower net value added tax payments as a result of improved refundable utilization.

Depreciation and amortization expense decreased $15.3 to $171.3 during the nine months ended September 30, 2019 compared to $186.6 during the same period in 2018 primarily due to a reduction in capital spend. Share-based compensation decreased $7.8 to $19.4 for the nine months ended September 30, 2019 primarily due to a reduction in shares awarded in 2019.

Investing Activities

The maturities and purchases of investments primarily relate to short-term investment activity in Brazil. The $79.9 change was primarily due to the monetization of the Company's investment in the company owned life insurance plans in the third quarter of 2018 and a reduction in utilization of short-term investments in Brazil for cash needs as well as a reduction in the Company's capital spend.

Financing Activities

Net cash used by financing activities was $184.9 for the nine months ended September 30, 2019 compared to net cash provided by financing activities of $196.9 for the nine months ended 2018, an increase in use of $381.8. The change was primarily related to the Term Loan A-1 Facility proceeds in August 2018 partially offset by the redemption of shares and cash compensation to Diebold Nixdorf AG minority shareholders of $98.1 for the nine months ended September 30, 2019 compared to $337.8 in the prior-year period. Additionally, there was a decrease in net borrowings (repayments) under the Company's revolving facility as a result of favorable operating cash flow in the nine-month period ending September 30, 2019 compared to the prior year.

Refer to note 11 for additional information regarding the Company's debt obligations. The Company paid cash for interest related to its debt of $130.5 and $66.8 in the nine months ended September 2019 and 2018, respectively. As defined by the Company's credit agreement, the ratio of net debt to trailing 12 months adjusted EBITDA was 4.7 times as of September 30, 2019. As of September 30, 2019, the Company was in compliance with the financial and other covenants in its debt agreements.

Refer to note 17 for additional information regarding the Company's hedging and derivative instruments.

Dividends The Company paid dividends of $7.7 in the nine months ended September 30, 2018. In May 2018, the Company announced its decision to reallocate future dividend funds towards debt reduction and other capital resource needs. As a result, there was no dividend for the three and nine months ended September 30, 2019.

Contractual Obligations In the first half of 2019, the Company entered into purchase commitments due within one year for materials through contract manufacturing agreements for a total negotiated price. At September 30, 2019, the Company had purchase commitments due within one year totaling $0.1 for materials through contract manufacturing agreements at negotiated prices.

Except for the items noted above, all contractual cash obligations with initial and remaining terms in excess of one year and contingent liabilities remained generally unchanged at September 30, 2019 compared to December 31, 2018.

Off-Balance Sheet Arrangements The Company enters into various arrangements not recognized in the condensed consolidated balance sheets that have or could have an effect on its financial condition, results of operations, liquidity, capital expenditures or capital resources. The principal off-balance sheet arrangements that the Company enters into are guarantees, operating leases and sales of finance receivables. The Company provides its global operations guarantees and standby letters of credit through various financial institutions to suppliers, customers, regulatory agencies and insurance providers. If the Company is not able to make payment, the suppliers, customers, regulatory agencies and insurance providers may draw on the pertinent bank. Refer to note 9 for further details of guarantees. The Company has sold finance receivables to financial institutions while continuing to service the receivables. The Company records these sales by removing finance receivables from the condensed consolidated balance sheets and recording gains and losses in the condensed consolidated statements of operations.

(unaudited)

(in millions, except per share amounts)

Critical Accounting Policies and Estimates

Management’s discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s condensed consolidated financial statements. The preparation of these financial statements requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities and reported amounts of revenues and expenses. Such estimates include revenue recognition, the valuation of trade, finance lease receivables, inventories, goodwill, intangible assets, other long-lived assets, legal contingencies, guarantee obligations and assumptions used in the calculation of income taxes, pension and post-retirement benefits and customer incentives, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors. Management monitors the economic conditions and other factors and will adjust such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.

In addition to the items that the Company disclosed as its critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s annual report on Form 10-K for the year ended December 31, 2018, the Company adopted ASU 2016-02 and its subsequent amendments related to lease accounting. The standard requires that a lessee recognize on its balance sheet ROU assets and corresponding liabilities resulting from leasing transactions, as well as additional financial statement disclosures. Previously, U.S. GAAP only required balance sheet recognition for leases classified as capital leases. The provisions of this update apply to substantially all leased assets. Subsequent ASUs related to this standard are updates, which prescribe a practical expedient for implementation and narrow-scope improvements for lessors. For more information regarding the implementation of this standard, refer to note 2.

Forward-Looking Statement Disclosure

In this quarterly report on Form 10-Q, statements that are not reported financial results or other historical information are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give current expectations or forecasts of future events and are not guarantees of future performance. These forward-looking statements relate to, among other things, the Company's future operating performance, the Company's share of new and existing markets, the Company's short- and long-term revenue and earnings growth rates, and the Company's implementation of cost-reduction initiatives and measures to improve pricing, including the optimization of the Company's manufacturing capacity.

The use of the words “will,” “believes,” “anticipates,” “expects,” “intends” and similar expressions is intended to identify forward-looking statements that have been made and may in the future be made by or on behalf of the Company. Although the Company believes that these forward-looking statements are based upon reasonable assumptions regarding, among other things, the economy, its knowledge of its business, and on key performance indicators that impact the Company, these forward-looking statements involve risks, uncertainties and other factors that may cause actual results to differ materially from those expressed in or implied by the forward-looking statements. The Company is not obligated to update forward-looking statements, whether as a result of new information, future events or otherwise.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Some of the risks, uncertainties and other factors that could cause actual results to differ materially from those expressed in or implied by the forward-looking statements include, but are not limited to:

• the ultimate impact of the appraisal proceedings initiated in connection with the implementation of the DPLTA with Diebold Nixdorf AG and the merger squeeze-out of the remaining shareholders of Diebold Nixdorf AG;
• the ultimate outcome and results of integrating the operations of the Company and former Diebold Nixdorf AG;
• the Company's ability to successfully operate its strategic alliances in China;
• changes in political, economic or other factors such as interest rates, currency exchange rates, inflation rates, recessionary or expansive trends, taxes and regulations and laws affecting the worldwide business in each of the Company's operations;
• the Company’s reliance on suppliers and any potential disruption to the Company’s global supply chain;
• changes in the Company's relationships with customers, suppliers, distributors and/or partners in its business ventures;
• the impact of market and economic conditions on the financial services and retail industries, including any additional deterioration and disruption in the financial and service markets, including the bankruptcies, restructurings or

(unaudited)

(in millions, except per share amounts)

consolidations of financial institutions, which could reduce our customer base and/or adversely affect our customers' ability to make capital expenditures, as well as adversely impact the availability and cost of credit;

• the acceptance of the Company's product and technology introductions in the marketplace;
• the capacity of the Company's technology to keep pace with a rapidly evolving marketplace;
• competitive pressures, including pricing pressures and technological developments;
• the effect of legislative and regulatory actions in the U.S. and internationally;
• the Company’s ability to comply with government regulations;
• the impact of a security breach or operational failure on the Company's business;
• the Company's ability to achieve benefits from its cost-reduction initiatives and other strategic initiatives, such as DN Now, including its planned restructuring actions, as well as its business process outsourcing initiative;
• unanticipated litigation, claims or assessments, as well as the outcome/impact of any current/pending litigation, claims or assessments;
• the Company's success in divesting, reorganizing or exiting non-core and/or non-accretive businesses;
• changes in the Company's intention to further repatriate cash and cash equivalents and short-term investments residing in international tax jurisdictions, which could negatively impact foreign and domestic taxes;
• the Company's ability to maintain effective internal controls;
• the Company's ability to comply with the covenants contained in the agreements governing its debt;
• the investment performance of the Company's pension plan assets, which could require the Company to increase its pension contributions, and significant changes in healthcare costs, including those that may result from government action;
• the amount and timing of repurchases of the Company's common shares, if any; and
• the Company's ability to refinance its debt when necessary or desirable.

Except to the extent required by applicable law or regulation, the Company undertakes no obligation to update these forward-looking statements to reflect future events or circumstances or to reflect the occurrence of unanticipated events.

Refer to the Company’s annual report on Form 10-K for the year ended December 31, 2018 for a discussion of market risk exposures. There have been no material changes in this information since December 31, 2018.

(in millions, except share and per share amounts)

This quarterly report on Form 10-Q includes the certifications of the Company's Chief Executive Officer (CEO) and Chief Financial Officer (CFO) required by Rule 13a-14 of the Securities Exchange Act of 1934 (the Exchange Act). See Exhibits 31.1 and 31.2. This Item 4 includes information concerning the controls and control evaluations referred to in those certifications.

Based on the performance of procedures by management, designed to ensure the reliability of financial reporting, management believes that the unaudited condensed consolidated financial statements fairly present, in all material respects, the Company's financial position, results of operations and cash flows as of the dates, and for the periods presented.

Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) are designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's (SEC) rules and forms and that such information is accumulated and communicated to management, including the CEO and CFO as appropriate, to allow timely decisions regarding required disclosures.

In connection with the preparation of this quarterly report on Form 10-Q, the Company's management, under the supervision and with the participation of the CEO and CFO, conducted an evaluation of disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the CEO and CFO have concluded that such disclosure controls and procedures were not effective as of September 30, 2019 due to the material weaknesses in the Company's internal control over financial reporting as described below.

A material weakness in internal control over financial reporting is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management identified the following material weaknesses in our internal control over financial reporting as of December 31, 2018 and notes that the material weaknesses were not remediated as of September 30, 2019.

The Company’s risk assessment process was not effective in considering changes to the business operations, personnel and other factors affecting certain financial reporting processes and design of related controls on a timely basis. Accordingly,

• The Company had ineffective information technology general controls (ITGCs) related to IT systems used for financial reporting by certain entities throughout the organization. The Company did not establish effective IT and financial user access controls commensurate with certain job responsibilities. Consequently, automated and manual process level controls over financial reporting which were dependent upon these ITGCs were also ineffective.
• The Company had ineffective implementation and operation of controls over inventory valuation related to spare parts and finished goods from canceled orders as the Company did not effectively communicate information to certain locations to allow for the effective operations or implementation of these controls.
• The Company had ineffective controls over non-routine transactions as certain controls were not designed at the appropriate level of precision to ensure calculations supporting non-routine transactions were calculated correctly.

Because of the material weaknesses identified above, a reasonable possibility exists that a material misstatement in the Company’s condensed consolidated financial statements will not be prevented or detected on a timely basis.

(in millions, except share and per share amounts)

The Company is implementing the following remediation plan in order to remediate the three material weaknesses described above:

• Improving our continuous risk assessment process to be responsive to changes in the business operations, personnel and IT developments affecting our financial reporting and related controls;
• Improving our timely written communication of changes in financial reporting and related controls affecting both business and financial users;
• Revoking the access to IT systems of those individuals that were identified as inappropriate;
• Implementing more frequent and improved periodic access reviews that include: all sensitive access and the identification of additional business process owners to be part of the review process and providing the owners with guidance on the key data elements of the review to enhance the precision of the review process;
• Implementing consistent inventory valuation controls at all locations and communicating the requirements for effectively operating such controls to all businesses; and
• Implementing controls over calculations associated with non-routine transactions at a more precise level of operation.

Change in Internal Controls

During the third quarter, certain advancements were made in our efforts to remediate the material weaknesses in internal control over financial reporting at December 31, 2018. The actions included the following:

• We performed a full user access review of IT users, and as a result, revoked access that was concluded to be inappropriate;
• We refined our accounting policy and procedures related to inventory valuation, communicated the changes to the impacted finance personnel at our global locations, and conducted training to emphasize and reinforce the changes that were made; and
• We refined our procedures around calculations associated with non-routine transactions, including the related underlying inputs and assumptions utilized in making the calculations.

Further execution of key controls and testing to be conducted through the balance of 2019 and early 2020 will determine whether these changes will prove effective in remediating the respective underlying material weaknesses.

There have been no other changes in the Company’s internal control over financial reporting during the three months ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

(in millions, except share and per share amounts)

Refer to the Company’s annual report on Form 10-K for the year ended December 31, 2018. There has been no material change to this information since December 31, 2018.