DIEBOLD NIXDORF, Inc: Form 10-Q for the period ended Jun 30, 2020

Significant Highlights

During the second quarter of 2020, Diebold Nixdorf:

• Continued to proactively manage the risks and impacts of the global COVID-19 pandemic, including:
• Delivering outstanding service to customers, even in hard-hit areas around the world, and received positive feedback from clients, including critical infrastructure providers such as supermarkets and financial institutions, in how effectively it has responded to the pandemic
• Actively managing its pandemic crisis management plan, with its team of service engineers adhering to strict hygiene protocols, using gloves and masks when and where appropriate and sanitizing equipment during servicing
• Taking steps to ensure that the Company’s global manufacturing and production facilities remain operational and continue to ship products in a timely manner
• Maintained the execution pace of the DN Now transformation program and leveraged its operational rigor to further reduce costs, manage net working capital and reduce risks
• Made significant progress with next-generation DN Series™ ATMs, including new orders with a top 10 and a top 25 financial institution in the United States. Also secured a new contract in Egypt for 350 DN Series ATMs plus remote monitoring and cash deposit software. Globally, DN Series certification projects nearly doubled since the beginning of the year to 475.
• Continued to lead the Americas region in deposit automation technology with a $13 million contract for cash recycling ATMs and related services at one of the largest financial institutions in Latin America.
• Signed a three-year contract with A.S. Watson, the world’s largest international health and beauty retailer with over 15,700 stores across 25 markets, to support its digital transformation strategy with point-of-sale and self-checkout systems – including managed services.
• Secured a new $17 million contract to deliver managed services, new point-of-sale and self-checkout solutions for one of the world’s largest home furnishing retailers.
• Extended a strategic relationship with Accenture to accelerate digital transformation and cloud migration activities.

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™. The Company automates, digitizes and transforms 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 22,000 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 support a better transaction experience for consumers.

DN Now Transformation Activities

Commensurate with its strategy, the Company is executing its multi-year transformation program called DN Now to relentlessly focus on its customers while improving operational excellence. Key activities include:

• Transitioning to a streamlined and customer-centric operating model

(unaudited)

(in millions, except per share amounts)

• 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 and manufacturing footprint
• Improving working capital management through greater focus and efficiency of payables, receivables and inventory
• Reducing administrative expenses, including finance, IT and real estate
• Increasing sales productivity through improved coverage and compensation arrangements
• Standardizing, digitizing and automating back-office finance, IT, human resources and sales support processes through a partnership with Accenture
• Optimizing the portfolio of businesses to improve overall profitability

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. Collectively, these work streams are designed to generate gross annual savings of approximately $470 through 2021. During 2019, the Company achieved approximately $175 in annualized gross run rate savings. In order to achieve these savings, the Company has and will continue to restructure the workforce globally, integrate and optimize systems and processes, transition workloads to lower cost locations, renegotiate and consolidate supplier agreements and streamline real estate holdings. The cash payments from inception to date needed to achieve these savings was approximately $240 and was largely due to restructuring and the implementation of DN Now transformational programs.

COVID-19 Response

The Company continues to prioritize the health and safety of its employees as a result of the global COVID-19 pandemic, adapting to the new global environment and continuing to serve customers as an essential service provider, all while taking steps to protect its operational foundation. The Company has taken multiple measures to protect its employees, and it continues to evolve those measures based on input from various health authorities. The Company is equipping its service technicians with the appropriate protective gear and training them on evolving hygiene practices and social distancing rules. For employees in manufacturing facilities, the Company has segmented its workers and has implemented daily temperature checks. The Company is providing the proper tools, resources and guidance for its support functions to safely and productively work from home during the crisis, including establishing an employee crisis reserve fund which is available for employees who need support. The Company has also focused on the stability of its suppliers and supply chain, as borders have shut and logistics have become more challenging.

The Company has been designated as providing “critical infrastructure” services by the majority of government entities including the United States Department of Homeland Security in order to promote public health and safety, as well as economic and national security during the COVID-19 outbreak. These designations recognize the vital role Diebold Nixdorf plays in allowing consumers to reliably and safely access financial services and essential retailers across more than 60 countries.

In taking measures to strengthen its operations during this period of uncertainty, the Company continues to execute its DN Now transformation program according to plan, and is accelerating certain elements of the program. It has also added additional cost measures that are in the midst of execution — such as reducing the annual bonus plan, deferring merit pay increases and implementing a hiring freeze. With so many employees working remotely, the Company is accelerating plans to consolidate its real estate footprint. In selected areas, the Company will participate in government relief programs that facilitate labor and payroll tax savings. Taken together, Diebold Nixdorf is targeting an incremental $80 - $100 of annualized savings. Furthermore, the Company continues to carefully manage net working capital with the same discipline and governance put in place during 2019. During the first quarter of 2020, the Company fully borrowed its revolving credit facility, consistent with the practices of many large companies. This action was done out of an abundance of caution to ensure the Company has adequate financial flexibility during what is expected to be a more challenging near-term environment. The Company believes it has sufficient liquidity to fund its operations and DN Now transformation.

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 customers the flexibility to purchase the combination of services, software and products that drive the most value to their business.

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

(unaudited)

(in millions, except per share amounts)

within two geographic regions. The Eurasia region includes the economies of Western Europe, Eastern Europe, Asia, the Middle East and Africa. The Americas region encompasses the United States (U.S.), Canada, Mexico and Latin America.

For banking clients, services represents the largest operational component of the Company. Diebold Nixdorf AllConnect Services® 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.

In 2019, the Company introduced DN Series, a family of self-service solutions designed to meet the needs of a progressively transforming industry. These holistic, digitally-connected solutions are built upon an integrated software and services model and provide a modern and personalized experience for consumers, while delivering maximum efficiency and reliability for financial institutions.

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

• Improved ATM availability and performance through intelligent design, the use of sensor technology and machine learning via the AllConnect Data Engine
• 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
• 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 integration. These hardware-agnostic software 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 customer preferences, not the technology, at the heart of the experience.

An important enabler of the Company’s software offerings is the professional service employees who provide systems integration, customization, project management and consulting. The Company's advisory services team collaborates

(unaudited)

(in millions, except per share amounts)

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 and open solution ranging from the in-store check-out solution to solutions across multiple channels that improve end-to-end store processes and facilitate 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 optimize the performance and total cost of ownership of retail touchpoints, such as checkout, self-service and mobile devices, as well as critical store infrastructure. The solutions portfolio includes: implementation services to expand, modernize or upgrade store concepts; maintenance services for on-site incident resolution and restoration of multivendor solutions; support services for on-demand service desk support; operations services for remote monitoring of stationary and mobile endpoint hardware; as well as application services for remote monitoring of multivendor software and planned software deployments and data moves. As a single point of contact, service personnel plan and supervise store openings, renewals and transformation projects, with attention to local details and customers’ global IT infrastructure.

The retail systems portfolio includes modular and integrated, “all-in-one” POS and self-service terminals that meet evolving consumer shopping journeys, as well as retailers’ and store staff’s automation requirements. The Company’s self-checkout (SCO) systems and ordering kiosks facilitate a seamless and efficient transaction experience. The BEETLE®/iSCAN EASY eXpress™, hybrid products, can alternate from attended operation to SCO with the press of a button. The K-two Kiosk automates routine tasks and in-store transactions, offers order-taking abilities, particularly at quick service restaurants (QSRs) and fast casual restaurants 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.

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
• 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 COVID-19 pandemic adversely impacted revenue for the second quarter, but as a result of ongoing execution of our DN Now initiatives, as well as other mitigating actions, did not have a material adverse effect on the Company's reported results for the second quarter of 2020. The Company continues to actively monitor the impact of the COVID-19 pandemic, which impacts our banking and retail customers and consumers around the world, albeit in different ways depending on location and business profile. While we cannot predict the full extent of the impact, we currently expect that the COVID-19 pandemic will have relatively mild adverse impacts on revenues for our services and software business lines, but it will have a moderate negative impact on revenues for our products business line. The extent of the impact of the COVID-19 pandemic on our operations will depend largely on future developments, along with any new information that may emerge regarding the severity of the pandemic and the actions taken by government authorities to mitigate the spread of the virus, among other factors, all of which are highly uncertain and cannot be accurately predicted.

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 tables represent 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 June 30, 2020 compared with three months ended June 30, 2019

Net sales decreased $259.7, or 22.6 percent, including a net unfavorable currency impact of $38.7 primarily related to the euro and Brazil real, resulting in a constant currency decrease of $221.0. The following results include the impact of foreign currency:

(unaudited)

(in millions, except per share amounts)

Segments

• Eurasia Banking net sales decreased $92.5, including a net unfavorable currency impact of $12.5, related primarily to the euro, and divestitures of $23.3. Excluding currency and the impact of divestitures, net sales decreased $56.7 driven by delays related to the COVID-19 pandemic, non-recurring prior year refresh projects and reducing low margin services business.
• Americas Banking net sales decreased $88.5, including a net unfavorable currency impact of $17.7, related primarily to the Brazil real. Excluding the impact of currency, net sales decreased $70.8 mostly from large non-recurring product refresh projects in Canada and U.S. National accounts as well as the Company's initiative to reduce lower margin services business. This decrease was partially offset by increased U.S. regional Windows 10 upgrades and software growth.
• Retail net sales decreased $78.7, including a net unfavorable currency impact of $8.5 mostly related to the euro. Excluding the impact of currency, net sales decreased $70.2 primarily from prior year non-recurring POS roll-outs in Europe. Additionally, overall revenue was unfavorably impacted by delays related to the COVID-19 pandemic.

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

Six months ended June 30, 2020 compared with six months ended June 30, 2019

Net sales decreased $377.1, or 17.3 percent, including a net unfavorable currency impact of $62.1 primarily related to the euro and Brazil real, resulting in a constant currency decrease of $315.0. The following results include the impact of foreign currency:

Segments

• Eurasia Banking net sales decreased $164.6, including a net unfavorable currency impact of $22.0, related primarily to the euro, and divestitures of $36.7. Excluding currency and the impact of divestitures, net sales decreased $105.9 driven by delays related to the COVID-19 pandemic, non-recurring prior year refresh projects and reducing low margin services business.
• Americas Banking net sales decreased $106.5, including a net unfavorable currency impact of $24.1, related primarily to the Brazil real. Excluding the impact of currency, net sales decreased $82.4 mostly from large non-recurring product

(unaudited)

(in millions, except per share amounts)

refresh projects in Canada and U.S. National accounts as well as the Company's initiative to reduce lower margin services business. This decrease was partially offset by increased U.S. regional Windows 10 upgrades and software growth.

• Retail net sales decreased $106.0, including a net unfavorable currency impact of $16.0 mostly related to the euro. Excluding the impact of currency, net sales decreased $90.0 primarily from prior year non-recurring POS roll-outs in Europe. Additionally, overall revenue was unfavorably impacted by delays related to the COVID-19 pandemic.

Gross Profit

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

Services gross margin increased 4.6 percent and 2.5 percent in three and six months ended June 30, 2020, respectively, including higher non-routine charges of $11.4 and $30.8, respectively, consisting primarily of charges related to certain onerous contracts, spare parts inventory provision, and incremental payments to essential service technicians for their contributions during the COVID-19 pandemic, partially offset by subsidies received for certain wages related to the COVID-19 pandemic. Restructuring charges decreased $1.0 and $1.7 in the three and six months ended June 30, 2020, respectively. Excluding the impact of non-routine and restructuring expense, services gross margin increased 6.6 percent and 5.1 percent in the three and six months ended June 30, 2020, respectively, due in part to sustainable savings brought about by the Company’s service modernization plan as well as exiting low margin maintenance contracts, and lower professional services cost in the Americas Banking and Retail segments. Additionally, interim cost benefits related to lower economic activity during the initial phases of the COVID-19 pandemic also contributed to the increased service gross margin.

Product gross margin increased 1.2 percent and 1.3 percent in the three and six months ended June 30, 2020, respectively, including higher non-routine charges of $2.5 and $9.6, respectively, primarily consisting of a $4.8 charge for certain benefits related to a previously divested business and $3.4 inventory provision reversal in the prior year. Excluding non-routine charges, products gross profit increased 1.9 percent and 2.7 percent, respectively, due primarily to a favorable solution and geography mix in the Americas and Eurasia Banking segments as well as lower Americas Banking and Retail amortization of certain capitalized software that was impaired in December 2019.

Operating Expenses

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

N/M = Not Meaningful

(unaudited)

(in millions, except per share amounts)

Selling and administrative expense decreased $42.5 in the three months ended June 30, 2020, or $31.3 excluding a $4.6 favorable currency impact and $6.5 lower non-routine and restructuring expenses, and decreased $50.7 in the six months ended June 30, 2020, or $51.0 excluding a $8.2 favorable currency impact and $8.6 incremental non-routine and restructuring expenses. Lower selling and administrative expense was due primarily to the Company's planned DN Now actions, including lower costs resulting from finance transformation, as well as lower expense related to the legacy Wincor Nixdorf stock option program and decreased stock and cash bonus compensation.

Non-routine cost in selling and administrative expense was $36.6 and $90.9 in the three and six months ended June 30, 2020, respectively, a decrease of $10.6 and $0.8, respectively, compared to the prior-year periods. The lower non-routine costs in the three and six months ended June 30, 2020 related primarily to lower legal and deal expenses and lower amortization of purchase accounting adjustments. The six months ended June 30, 2020 was partially offset by increased DN Now transformation expense. Restructuring expense was $8.9 and $16.5 in the three and six months ended June 30, 2020, respectively, an increase of $4.1 and $9.5, respectively, compared to the prior-year periods related to the Company's DN Now actions.

Research, development and engineering expense in the three and six months ended June 30, 2020 decreased $5.4 and $9.8, respectively, including a net favorable currency impact of $0.9 and $1.8, respectively, primarily related to the euro and Brazil real. Excluding currency and higher restructuring expense of $1.2 and $2.6 for the three and six months ended June 30, 2020, respectively, research, development and engineering expense decreased primarily from lower bonus expense, lower product development cost and software cost management actions.

In the three months ended June 30, 2020, the Company recorded a loss on sale of assets of $14.8 primarily related to the divestitures of the Company's operations in China and Denmark. The six months ended June 30, 2020 includes a gain on sale of assets of $1.8 related primarily to the sale of Portavis GmbH. In the three months ended June 30, 2019, the loss on sale of assets consists mainly of the loss on the finalization of divestitures in the retail and banking SecurCash businesses. The six months ended June 30, 2019 included the loss on sale of assets primarily related to the divestitures of the Venezuela business of $4.1 and Projective NV of $2.8.

Operating expense as a percent of net sales in the three months ended June 30, 2020 increased 1.9 percent to 25.5 percent compared to the same period in 2019 primarily from lower revenue. Operating expense as a percent of net sales in the six months ended June 30, 2020 increased 1.7 percent to 26.6 percent compared to the same period in 2019.

Operating Profit (Loss)

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

The operating profit increased in the three months ended June 30, 2020 compared to the prior-year period and operating loss decreased in the six months ended June 30, 2020 compared to the prior-year period. The change is primarily due to DN Now initiatives which improved gross margin and lowered selling and administrative expense partially mitigating lower revenues, and decreased research, development and engineering expense.

(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 in the three and six months ended June 30, 2020, increased $0.2 and decreased $1.6, respectively, mostly from lower market returns on non-qualified plans, in addition to lower cash balances in Brazil. Interest expense decreased $1.6 and $4.5, respectively, from the pay down of debt and reduced interest rates. Miscellaneous, net includes proceeds of $7.2 for the close and surrender of one of its Company-owned life insurance (COLI) plans. During the second quarter of 2020, the Company created a plan to close and surrender several of its COLI plans.

Net Loss

The following table represents information regarding the Company's net 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 was 12.8 percent and (16.6) percent for the three and six months ended June 30, 2020, respectively. The tax benefit for the three months ended June 30, 2020 was attributable to current quarter pre-tax losses. The tax expense for the six months ended June 30, 2020, is primarily attributable to gain recognized for tax purposes on the surrender of COLI plans, partially offset by release of valuation allowance against U.S. foreign tax credits expected to be utilized against current year income tax. Also as a result of the tax gain on the surrender of COLI policies, it is not expected that a valuation allowance will be required against carryforwards of disallowed interest.

The effective tax rate on the loss was (20.0) percent and (59.5) percent for the three and six months ended June 30, 2019. The tax expense on the loss is due primarily to the tax impacts of the Tax Act on the estimated projected tax rate, more specifically, the impacts of the GILTI and BEAT. The tax expense for the six months ended June 30, 2019, in addition, is impacted by the Barbados structure collapse which the Company executed during the first quarter and resulted in additional tax discrete expense which was offset in part by the valuation allowance release relating to the Company’s nondeductible interest expense which was carried forward from December 31, 2018. The above items noted as well as the Company’s jurisdictional income (loss) mix and varying respective statutory rates are the primary drivers of the quarterly tax rate.

(unaudited)

(in millions, except per share amounts)

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:

For the three months ended June 30, 2020, Eurasia Banking net sales decreased $92.5, including a net unfavorable currency impact of $12.5, related primarily to the euro, and divestitures of $23.3. Excluding currency and the impact of divestitures, net sales decreased $56.6 driven by delays related to the COVID-19 pandemic, non-recurring prior year refresh projects and reducing low margin services business.

For the six months ended June 30, 2020, Eurasia Banking net sales decreased $164.6, including a net unfavorable currency impact of $22.0, related primarily to the euro, and divestitures of $36.7. Excluding currency and the impact of divestitures, net sales decreased $105.9 driven by delays related to the COVID-19 pandemic, non-recurring prior year refresh projects and reducing low margin services business.

Segment operating profit increased $1.3 and decreased $2.5 in the three and six months ended June 30, 2020, respectively, including a net unfavorable currency impact of $0.9 and $3.2, respectively. Excluding the impact of currency, operating profit increased $2.2 and $0.7 for the three and six months ended June 30, 2020, respectively, due primarily to lower operating expense resulting from the execution of DN Now initiatives and lower bonus expense.

Segment operating profit margin increased 2.9 percent and 1.9 percent for the three and six months ended June 30, 2020, respectively, mostly from lower operating expense as noted above.

N/M = Not Meaningful

For the three months ended June 30, 2020, Americas Banking net sales decreased $88.5, including a net unfavorable currency impact of $17.7, related primarily to the Brazil real. Excluding the impact of currency, net sales decreased $70.9 mostly from large non-recurring product refresh projects in Canada and U.S. National accounts as well as reducing lower margin services business. This decrease was partially offset by increased U.S. regional Windows 10 upgrades and software growth.

For the six months ended June 30, 2020, Americas Banking net sales decreased $106.5, including a net unfavorable currency impact of $24.1, related primarily to the Brazil real. Excluding the impact of currency, net sales decreased $82.4 mostly from

(unaudited)

(in millions, except per share amounts)

large non-recurring product refresh projects in Canada and U.S. National accounts as well as the Company's initiative to reduce lower margin services business. This decrease was partially offset by increased U.S. regional Windows 10 upgrades and software growth.

Segment operating profit increased $25.5 and $58.6 in the three and six months ended June 30, 2020, respectively, including a net unfavorable currency impact of $1.2 and $1.8, respectively. Higher operating profit was driven primarily by the Company's DN Now initiatives, which include Services Modernization and Software Excellence, as well as a favorable product mix in the U.S. Additionally, the DN Now work streams are driving lower operating expense versus the prior-year period.

Segment operating profit margin increased 9.8 percent and 9.7 percent for the three and six months ended June 30, 2020, respectively, primarily as a result of higher products and services gross margin, in addition to lower cost resulting from the execution of DN Now initiatives and lower bonus expense.

For the three months ended June 30, 2020, Retail net sales decreased $78.7, including a net unfavorable currency impact of $8.5 mostly related to the euro. Excluding the impact of currency, net sales decreased $70.2 primarily from prior year non-recurring POS roll-outs in Europe. Additionally, overall revenue was unfavorably impacted by delays related to the COVID-19 pandemic.

For the six months ended June 30, 2020, Retail net sales decreased $106.0, including a net unfavorable currency impact of $16.0 mostly related to the euro. Excluding the impact of currency, net sales decreased $90.0 primarily from prior year non-recurring POS roll-outs in Europe. Additionally, overall revenue was unfavorably impacted by delays related to the COVID-19 pandemic.

Segment operating profit decreased $2.5 and increased $3.1 for the three and six months ended June 30, 2020, respectively, including a nominal unfavorable currency impact, due primarily to higher gross margin mostly from the Company's DN Now initiatives which include Software Excellence and Services Modernization, as well as a favorable services solution and country mix in EMEA, and lower bonus and software cost.

Segment operating profit margin increased 1.5 percent for the six months ended June 30, 2020, primarily from higher gross margin on favorable mix and lower software amortization and operating expenses. Segment operating profit margin was flat for the three months ended June 30, 2020.

(unaudited)

(in millions, except per share amounts)

Liquidity and Capital Resources

The Company's total cash and cash availability as of June 30, 2020 and December 31, 2019 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. While the Company believes it has sufficient liquidity, it has increased its cash position out of an abundance of caution in light of the evolving COVID-19 pandemic and related macroeconomic implications. The Company is enhancing its financial flexibility as a critical provider of Connected Commerce solutions to financial institutions, supermarkets, pharmacies and fuel stations through its industry-leading ATMs, AllConnect Services, retail SCO and POS solutions. The additional borrowings under the Revolving Facility may be used for general corporate purposes. The Company cannot predict the duration or full extent of the COVID-19 pandemic, or its impact on our customers and suppliers. The Company is actively managing the business to maintain sufficient liquidity. The Company had $3.6 of restricted cash at June 30, 2020 and December 31, 2019. As of June 30, 2020, $262.4 or 57.6 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 $1,500 of earnings that are available for repatriation with no additional tax expense. 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 six months ended June 30, 2020:

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 used by operating activities was $170.6 for the six months ended June 30, 2020, an increase in use of $103.0 from $67.6 for the same period in June 30, 2019.

• Cash flows from operating activities during the six months ended June 30, 2020 compared to the same period in 2019 were primarily impacted by the change in the net aggregate of trade receivables, inventories, and accounts payable as well as other combined certain assets and liabilities. This was partially offset by a $70.7 decrease in net loss as a result of DN Now cost saving initiatives. Refer to the Results of Operations discussed above for further discussion of the Company's net loss.

(unaudited)

(in millions, except per share amounts)

• The net aggregate of trade receivables, inventories and accounts payable used $36.1 and provided $23.3 in operating cash flows during the six months ended June 30, 2020 and 2019, respectively. Trade receivables cash provided $7.4 for the six months ended June 30, 2020 compared to $23.1 for the same period in the prior-year primarily due to improvement in collections in 2019 as a result of the Company's working capital improvement initiatives and normal operational spending during the first quarter of 2020. For the six months ended June 30, 2020, inventory cash use increased $63.8 compared to the same period in the prior year primarily due to increased purchases for normal operations in 2020 as well as efforts in 2019 to improve inventory management as a result of streamlining the product portfolio and implementing better governance. Accounts payable provided $21.5 for the six months ended June 30, 2020 compared to $1.4 for the same period in the prior year primarily related to DN Now initiatives.
• In the aggregate, the other combined certain assets and liabilities used $82.1 for the three months ended June 30, 2020 compared to $35.9 during the same period in 2019. The change was primarily due to increased cash bonuses paid, along with cash usage by assets held for sale in the first quarter of 2020 and decreased non-cash deferred income taxes due to the results of operations.

Depreciation and amortization expense decreased $9.3 to $106.5 during the six months ended June 30, 2020 compared to $115.8 during the same period in June 30, 2019, primarily due to reduction in amortization related to acquired intangibles and capitalized software, along with a reduction in capital spend. Changes in deferred income taxes during the six months ended June 30, 2020 compared to the same period in 2019 resulted in increased usage of $42.4, primarily related to the tax effects of the 2019 Barbados structure collapse partially offset by a reduction in the deferred liabilities released on certain acquired intangible assets. Share-based compensation decreased $6.5 to $7.6 for the six months ended June 30, 2020 compared to the same period in June 30, 2019, primarily due to a reduction in shares awarded. The loss (gain) on sale of assets, net were primarily a result of the Portavis GmbH divestiture during the first quarter of 2020 as well as the divestiture of a portion of the Company's operations in China during the second quarter of 2020 and the divestiture of non-core businesses during the first and second quarters of 2019.

Investing Activities

Cash flows from investing activities during the six months ended June 30, 2020 compared to the same period in 2019 were primarily impacted by a $56.1 decrease in proceeds from divestitures, net of cash divested as a result of the Portavis GmbH divestiture during the first quarter of 2020, the divestiture of a portion of the Company's operations in China during the second quarter of 2020 and the Projective NV divestiture during the first quarter of 2019. Additionally, the maturities and purchases of investments primarily relate to short-term investment activity in Brazil resulted in an $21.3 decrease in cash proceeds. The Company also reduced its capital expenditures and investments in certain other assets primarily related to software to be sold when compared to the same period in the prior year.

Financing Activities

Net cash provided by financing activities was $306.1 for the six months ended June 30, 2020 compared to the $132.9 usage for the same period in 2019, which resulted in an increase of $439.0. The change was primarily a result of the Company drawing down its entire availability under the Revolving Facility in response to the uncertainty of the circumstances surrounding the COVID-19 pandemic. The Company also had $11.8 net borrowings from uncommitted lines of credit in connection with international projects. During the six months ended June 30, 2020, the Company paid $71.9 towards its term loans primarily due to certain mandatory repayment provisions pursuant to the Credit Agreement compared to the $12.9 during the same period in the prior year. During the first quarter of 2019, the Company paid $98.0 for the redemption of shares and cash compensation to Diebold Nixdorf AG minority shareholders.

Refer to note 11 for additional information regarding the Company's debt obligations. The Company paid cash for interest related to its debt of $51.0 and $53.5 for the three months ended June 30, 2020 and June 30, 2019, respectively, and $85.0 and $93.0 for the six months ended June 30, 2020 and June 30, 2019, respectively. As defined by the Company's credit agreement, the ratio of net debt to trailing 12 months adjusted EBITDA was 4.3 times as of June 30, 2020. As of June 30, 2020, 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.

(unaudited)

(in millions, except per share amounts)

On July 20, 2020, the Company issued approximately $1,100.0 aggregate principal amount of senior secured notes consisting of $700 aggregate principal amount of Diebold Nixdorf, Incorporated’s 9.375% Senior Secured Notes due 2025 and €350.0 aggregate principal amount of 9.000% Senior Secured Notes due 2025 issued by its wholly-owned subsidiary, Diebold Nixdorf, Dutch Holding B.V. in private offerings exempt from registration under the Securities Act of 1933. The net proceeds from the offerings, along with cash on hand, was used to repay a portion of the amounts outstanding under the Credit Agreement, including all amounts outstanding under the Term Loan A Facility and Term Loan A-1 Facility and $193.8 of revolving credit loans, including all of the revolving credit loans due in December 2020, as well as all related fees and expenses. On July 20, 2020, the Company also amended the Credit Agreement to, among other things, extend the maturity of $330.0 of its revolving credit commitments and revolving credit loans from April 30, 2022 to July 20, 2023 (and, effective as of July 20, 2020, the Company terminated its other revolving credit commitments under the Revolving Facility other than approximately $39.0 of revolving credit commitments that still mature April 30, 2022). The Company’s current capital structure includes no significant maturities until 2023.

Refer to note 22 for additional information regarding the July 2020 refinancing transactions.

Contractual Obligations During 2020, the Company entered into purchase commitments due within one year for materials through contract manufacturing agreements for a total negotiated price. At June 30, 2020, the Company had minimal purchase commitments due within one year for materials through contract manufacturing agreements at negotiated prices.

During the first quarter of 2020, the Company drew down its entire availability under the Revolving Facility and as a result, $68.8 included in notes payable mature on December 23, 2020.

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 June 30, 2020 compared to December 31, 2019.

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.

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.

The COVID-19 pandemic adversely impacted revenue for the second quarter, but as a result of ongoing execution of our DN Now initiatives, as well as other mitigating actions, did not have a material adverse effect on the Company's reported results for the second quarter of 2020. The Company continues to actively monitor the impact of the COVID-19 pandemic, which impacts

(unaudited)

(in millions, except per share amounts)

our banking and retail customers and consumers around the world, albeit in different ways depending on location and business profile. While we cannot predict the full extent of the impact, we currently expect that the COVID-19 pandemic will have relatively mild adverse impacts on revenues for our services and software business lines, but it will have a moderate negative impact on revenues for our products business line. The extent of the impact of the COVID-19 pandemic on our operations will depend largely on future developments, along with any new information that may emerge regarding the severity of the pandemic and the actions taken by government authorities to mitigate the spread of the virus, among other factors, all of which are highly uncertain and cannot be accurately predicted.

Management believes there have been no other significant changes during the six months ended June 30, 2020 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, 2019.

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 include, but are not limited to, statements regarding the Company's expected future performance (including expected results of operations and financial guidance) future financial condition, operating results, strategy and plans.

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 ongoing COVID-19 pandemic;
• the outcome of the appraisal proceedings initiated in connection with the implementation of the DPLTA with the former Diebold Nixdorf AG and the merger/squeeze-out;
• the Company's ability to continue 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;
• the success of the Company’s new products, including its DN Series line;
• the Company's ability to comply with the covenants contained in the agreements governing its debt;
• the ultimate outcome of the Company’s pricing, operating and tax strategies applied to former Diebold Nixdorf AG and the ultimate ability to realize cost reductions and synergies;
• changes in political, economic or other factors such as 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;
• the impact of market and economic conditions, including any additional deterioration and disruption in the financial and service markets, including the bankruptcies, restructurings or 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;
• interest rate and foreign currency exchange rate fluctuations, including the impact of possible currency devaluations in countries experiencing high inflation rates;
• the acceptance of the Company's product and technology introductions in the marketplace;
• competitive pressures, including pricing pressures and technological developments;
• changes in the Company's relationships with customers, suppliers, distributors and/or partners in its business ventures;

(unaudited)

(in millions, except per share amounts)

• the effect of legislative and regulatory actions in the U.S. and internationally and 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 successfully integrate other acquisitions into its operations;
• the Company's success in divesting, reorganizing or exiting non-core and/or non-accretive businesses;
• the Company's ability to maintain effective internal controls;
• 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;
• unanticipated litigation, claims or assessments, as well as the outcome/impact of any current/pending litigation, claims or assessments;
• 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; and
• the amount and timing of repurchases of the Company's common shares, if any.

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.

(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, 2019 for a discussion of market risk exposures. As discussed elsewhere in this report, the COVID-19 pandemic will negatively impact our business and results of operations. As the Company cannot predict the duration or extent of the pandemic, the future impact on the results of operations, financial position and cash flows, among others, cannot be reasonably estimated, but could be material. There have been no other material changes in this information since December 31, 2019.

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 effective as of June 30, 2020.

Change in Internal Controls

During the second quarter ended June 30, 2020, there have been no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, its 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, 2019 and the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020. There has been no other material change to this information since December 31, 2019.