NCR Voyix Corp: Form 10-Q for the period ended Sep 30, 2023

The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included under Item 1. Financial Statements of this Form 10-Q and our Consolidated Financial Statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”).

Our discussion within MD&A is organized as follows:

• Overview. This section contains background information on our company, summary of significant themes and events during the quarter as well as strategic initiatives and trends in order to provide context for management’s discussion and analysis of our financial condition and results of operations.
• Results of operations. This section contains an analysis of our results of operations presented in the accompanying condensed consolidated statements of income by comparing the results for the three and nine months ended September 30, 2023 to the results for the three and nine months ended September 30, 2022.
• Liquidity and capital resources. This section provides an analysis of our cash flows and a discussion of our contractual obligations at September 30, 2023.

OVERVIEW

BUSINESS OVERVIEW

NCR Voyix Corporation (“Voyix”, “NCR”, the “Company”, “we” or “us”), which, prior to its name change effective October 13, 2023 was known as NCR Corporation, was originally incorporated in 1884 and is a software- and services-led enterprise technology provider that runs stores, restaurants and self-directed banking for our customers, which includes businesses of all sizes. We are a global company that is headquartered in Atlanta, Georgia. Our software platform, which runs in the cloud and includes microservices and APIs that integrate with our customers’ systems, and our NCR-as-a-Service solutions bring together all of the capabilities and competencies to power the technology to run our customers’ operations. Our portfolio includes digital first software and services offerings for banking, retailers and restaurants, as well as payments processing and networks, multi-vendor connected device services, automated teller machines (“ATMs”), self-checkout (“SCO”) kiosks and related technologies, point of sale (“POS”) terminals and other self-service technologies. We also resell third-party networking products and provide related service offerings in the telecommunications and technology sector. Our solutions are designed to support our transition to becoming a software platform and payments company.

Completion of NCR Atleos Spin-Off Transaction

On September 15, 2022, we announced a plan to separate into two independent, publicly traded companies – one focused on digital commerce, the other on ATMs. On October 16, 2023, we completed our separation of our ATM-focused business, including our self-service banking, payments & network and telecommunications and technology businesses, through the spin-off of our wholly owned subsidiary, NCR Atleos Corporation (“Atleos”), (the “Spin-Off”). The Spin-Off was effected through a pro rata distribution of all outstanding shares of Atleos common stock to holders of Voyix common stock as of the close of business on October 2, 2023 (the “record date”). We distributed one share of Atleos common stock for every two common shares of Voyix outstanding as of the record date. Shareholders received cash in lieu of fractional shares of Atleos common stock. The Spin-Off is expected to qualify as a tax-free distribution for U.S. federal income tax purposes. Atleos is an independent, publicly traded company focused on providing self-directed banking solutions to a global customer base, including financial institutions, retailers and consumers, and Voyix retains no ownership interest. Atleos’s common stock is listed on the New York Stock Exchange under the ticker symbol “NATL”. The historical financial results of Atleos are included in these condensed consolidated financial statements. Subsequent to the Spin-Off, and in future filings, the historical results of Atleos will be reflected as discontinued operations in the Company’s consolidated financial statements. Disclosures pertaining to Atleos’s issuance of debt in connection with the Spin-Off are provided in Note 5, “Debt Obligations”. Refer to Note 6, “Trade Receivables Facility”, Note 7, “Income Taxes”, Note 8, “Stock Compensation Plans”, Note 9, “Employee Benefit Plans”, Note 10, “Commitments and Contingencies”, Note 11, “Series A Convertible Preferred Stock” and Note 13, “Derivatives and Hedging Instruments” for additional disclosures related to the Spin-Off.

In connection with the Spin-Off, the Company and Atleos entered into various agreements to effect the Spin-Off and provide a framework for the relationship between the Company and Atleos after the Spin-Off. Such agreements include the separation and distribution agreement, as well as the following ongoing agreements: a transition services agreement, tax matters agreement, employee matters agreement, patent and technology cross-license agreement, trademark license and use agreement, master services agreement, manufacturing services agreement and various other transaction agreements. Under these agreements, we will continue to provide certain products and services to Atleos following the Spin-Off.

Our Segments

Prior to the October 16, 2023 Spin-Off, and during the quarter ended September 30, 2023, we managed and reported our operations in the following segments: Retail, Hospitality, Digital Banking, Payments & Network, and Self-Service Banking.

• Retail - We offer software-led solutions to customers in the retail industry, leading with digital to connect retail operations end to end to integrate all aspects of a customer’s operations in indoor and outdoor settings from POS, to payments, inventory management, fraud and loss prevention applications, loyalty and consumer engagement. These solutions include retail-oriented technologies such as comprehensive API-point of sale retail software platforms and applications, hardware terminals, self-service kiosks including SCO, payment processing and merchant acquiring solutions, and bar-code scanners.
• Hospitality - We offer technology solutions to customers in the hospitality industry, including table-service, quick-service and fast casual restaurants of all sizes, that are designed to improve operational efficiency, increase customer satisfaction, streamline order and transaction processing and reduce operating costs. Our solutions include POS hardware and software solutions, payment processing and merchant acquiring services, installation, maintenance, as well as managed and professional services.
• Digital Banking - Digital Banking helps financial institutions implement their digital-first platform strategy by providing solutions for account opening, account management, transaction processing, imaging, and branch services to enable financial institutions to offer a compelling customer experience.
• Payments & Network - We provide a cost-effective way for financial institutions, fintechs, and neobanks to reach and serve their customers through our network of ATMs and multi-functioning financial services kiosks. We offer credit unions, banks, digital banks, fintechs, stored-value debit card issuers, and other consumer financial services providers access to our Allpoint retail-based ATM network, providing convenient and fee-free cash withdrawal and deposit access to their customers and cardholders as well as the ability to convert a digital value to cash, or vice versa, via NCRPay360. We also provide ATM branding solutions to financial institutions, ATM management and services to retailers and other businesses, as well as payment processing and merchant acquiring services in the retail, hospitality and other industries.
• Self-Service Banking - We offer solutions to enable customers in the financial services industry to reduce costs, generate new revenue streams and enhance customer loyalty. These solutions include a comprehensive line of ATM hardware and software, and related installation, maintenance, and managed and professional services. We also offer solutions to manage and run the ATM channel end-to-end for financial institutions that includes back office, cash management, software management and ATM deployment, among others.

Corporate and Other includes income and expenses related to corporate functions that are not specifically attributable to an individual reportable segment along with any immaterial operating segment(s).

Eliminations include revenues from contracts with customers and the related costs that are reported in the Payments & Network segment as well as in the Retail or Hospitality segments, including merchant acquiring services that are monetized via payments.

Concurrently with the Spin-Off on October 16, 2023, the Company made a number of changes to its organizational structure and management system, including the Company’s reportable segments. Following the Spin-Off, the Company will manage its reports and operations using three reportable segments - Retail, Restaurant (formerly reported as Hospitality) and Digital Banking. These changes will impact the Company’s reportable segments beginning in the fourth quarter of 2023.

Our reputation is founded upon over 139 years of providing quality products, services and solutions to our customers. At the heart of our customer and other business relationships is a commitment to acting responsibly, ethically and with the highest level of integrity. This commitment is reflected in our Code of Conduct, which is available on the Corporate Governance page of our website.

SIGNIFICANT THEMES AND EVENTS

The following were significant themes and events for the third quarter of 2023.

• Revenue of $2,017 million, up 2% compared to the prior year period
• Recurring revenue increased 7% from the prior year and comprised 65% of total consolidated revenue
• Continued strength in strategic initiatives
• Separation of NCR Corporation into two independent, publicly traded companies announced on September 15, 2022, completed on October 16, 2023

STRATEGIC INITIATIVES AND TRENDS

In order to provide long-term value to all our stakeholders, we set complementary business goals and financial strategies. We are continuing its transition to become a software platform and payments company with a shift to a higher level of recurring revenue. Our business goal is to be a leading enterprise technology provider that runs stores, restaurants and self-directed banking through our software platform and our NCR-as-a-Service solutions. Execution of our goals and strategy is driven by the following key pillars: (i) focus on our customers; (ii) take care of our employees; (iii) bring high-quality, innovative products to market; and (iv) leverage our brand. We also plan to continue to improve our execution to drive solid returns and to transform our business to enhance value for all stockholders.

Cybersecurity Risk Management

Similar to most companies, the Company and its customers are subject to more frequent and increasingly sophisticated cybersecurity attacks (including the ransomware incident announced April 17, 2023). We maintain cybersecurity risk management policies and procedures including disclosure controls, which we regularly evaluate for updates, for handling and responding to cybersecurity events. These policies and procedures include internal notifications and engagements and, as necessary, cooperation with law enforcement. Personnel involved in handling and responding to cybersecurity events periodically undertake tabletop exercises to simulate an event. Our internal notification procedures include notifying the applicable Company attorneys, which, depending on the level of severity assigned to the event, may include direct notice to, among others, our General Counsel, Ethics & Compliance Officer, and Chief Privacy Officer. Our attorneys support efforts to evaluate the materiality of any incidents, determine whether notice to third parties such as customers or vendors is required, determine whether any prohibition on insider trading is appropriate, and assess whether disclosure to stockholders or governmental filings, including with the SEC, are required. Our internal notification procedures also include notifying various Information Technology Services managers, subject matter experts in our software department and Company leadership, depending on the level of severity assigned to the event.

For further information on potential risks and uncertainties, see Part 1, Item 1A “Risk Factors,” of the 2022 Form 10-K and Part II, Item 1A “Risk Factors,” of this Form 10-Q, as applicable.

Impacts from Geopolitical and Macroeconomic Challenges

We continue to be exposed to macroeconomic pressures as a result of supply chain challenges, foreign currency fluctuations, and spikes in interest rates, commodity and energy prices as a result of geopolitical challenges, including those due in part to the conflict between Israel and Hamas. We continue to navigate through these challenges with a sharp focus on and goal of safeguarding our employees, helping our customers and managing impacts on our supply chain. Despite the rapidly changing environment, our teams are executing at a high level and we are advancing our strategy.

We expect that these factors will continue to negatively impact our business at least in the short-term. The ultimate impact on our overall financial condition and operating results will depend on the duration and severity of these geopolitical and other macroeconomic pressures and any governmental and public actions taken in response. We continue to evaluate the long-term impact that these may have on our business model, however, there can be no assurance that the measures we have taken or will take will completely offset the negative impact.

For further information on the risks posed to our business from the COVID-19 pandemic and other geopolitical and macroeconomic factors, refer to Part I, Item 1A, “Risk Factors”, of the Company’s 2022 Form 10-K. For further information on exposures to foreign exchange risk, refer to Item 3, “Quantitative and Qualitative Disclosures about Market Risk”, in this Form 10-Q.

Results from Operations

For the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022

Consolidated Results

The following tables show our results for the three and nine months ended September 30, the relative percentage that those amounts represent to revenue, and the change in those amounts year-over-year.

In millions

In millions

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

Key Strategic Financial Metrics

The following tables show our key strategic financial metrics for the three and nine months ended September 30, the relative percentage that those amounts represent to total revenue, and the change in those amounts year-over-year.

Recurring revenue as a percentage of total revenue

In millions

48

In millions

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

Net income (loss) from continuing operations attributable to NCR and Adjusted EBITDA(2) as a percentage of total revenue

In millions

(2) Refer to our definition of Adjusted EBITDA in the section entitled “Non-GAAP Financial Measures and Use of Certain Terms.”

In millions

Non-GAAP Financial Measures and Use of Certain Terms:

Constant Currency We present certain financial measures, such as period-over-period revenue growth, on a constant currency basis, which excludes the effects of foreign currency translation by translating prior period results at current period monthly average exchange rates. Due to the overall variability of foreign exchange rates from period to period, our management uses constant currency measures to evaluate period-over-period operating performance on a more consistent and comparable basis. Our management believes that presentation of financial measures without this result may contribute to an understanding of the Company’s period-over-period operating performance and provides additional insight into historical and/or future performance, which may be helpful for investors.

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”) Our management uses the non-GAAP measure Adjusted EBITDA because it provides useful information to investors as an indicator of strength and performance of the Company’s ongoing business operations, including funding discretionary spending such as capital expenditures, strategic acquisitions, and other investments. We determine Adjusted EBITDA based on GAAP net income (loss) from continuing operations attributable to NCR plus interest expense, net; plus income tax expense (benefit); plus depreciation and amortization (excluding acquisition-related amortization of intangibles); plus stock-based compensation expense; plus other income (expense); plus pension mark-to-market adjustments and other special items, including amortization of acquisition-related intangibles, separation-related costs, cyber ransomware incident recovery costs, and transformation and restructuring charges (which includes integration, severance and other exit and disposal costs), among others. The special items are considered non-operational or non-recurring in nature, so are excluded from the Adjusted EBITDA metric utilized by our chief operating decision maker in evaluating segment performance and are separately delineated to reconcile back to total reported income (loss) from continuing operations attributable to NCR. This format is useful to investors because it allows analysis and comparability of operating trends. It also includes the same information that is used by our management to make decisions regarding the segments and to assess our financial performance. Refer to the table below for the reconciliations of net income (loss) from continuing operations attributable to NCR (GAAP) to Adjusted EBITDA (non-GAAP).

Special Item Related to Russia The war in Eastern Europe and related sanctions imposed on Russia and related actors by the United States and other jurisdictions required us to commence the orderly wind down of our operations in Russia in the first quarter of 2022. As of September 30, 2023, we have ceased operations in Russia and are in the process of dissolving our only subsidiary in Russia. As a result, for the three and nine months ended September 30, 2022, our presentation of segment revenue and Adjusted EBITDA exclude the immaterial impact of our operating results in Russia, as well as the impact of impairments taken to write down the carrying value of assets and liabilities, severance charges, and the assessment of collectability on revenue recognition. No charges have been recognized for the nine months ended September 30, 2023. We consider this to be a non-recurring special item and management has reviewed the results of its business segments excluding these impacts.

Our definitions and calculations of these non-GAAP measures may differ from similarly-titled measures reported by other companies and cannot, therefore, be compared with similarly-titled measures of other companies. These non-GAAP measures should not be considered as substitutes for, or superior to, results determined in accordance with GAAP.

In millions

(1) Represents integration, severance, and other exit and disposal costs, which are considered non-operational in nature.

(2) Represents professional fees, retention bonuses, and other costs incurred related to acquisitions, which are considered non-operational in nature.

(3) During the three months ended September 30, 2023, it was determined that the transactions underlying the unrealized gains on terminated interest rate swap and cap agreements reported in Accumulated other comprehensive income were probable of not occurring under ASC 815, Derivatives and Hedging. As such, $85 million of unrealized gains were recognized in Cost of services and $18 million of unrealized gains were recognized in Interest expense. Refer to Note 13, “Derivatives and Hedging Instruments”.

(4) Represents primarily professional fees specific to separation preparation including separation management, organizational design, and legal fees.

(5) Represents expenses to respond to, remediate and investigate the April 13, 2023 cyber ransomware incident, which is considered a non-recurring special item. Additional details regarding this cyber ransomware incident are discussed in Note 1, “Basis of Presentation and Summary of Significant Accounting Policies”.

Revenue

In millions

In millions

Product revenue includes our hardware and software license revenue streams as well as Bitcoin-related revenues. Service revenue includes hardware and software maintenance revenue, implementation services revenue, cloud revenue, payments processing revenue, interchange and network revenue, as well as professional services revenue.

For the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022

Total revenue increased 2% for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. Foreign currency fluctuations had no impact on the revenue comparison. Product revenue for the three months ended September 30, 2023 decreased 5% compared to the three months ended September 30, 2022 due to a decline in ATM, SCO and POS hardware revenues, partially offset by an increase in software license and Bitcoin-related revenues. Service revenue for the three months ended September 30, 2023 increased 5% due to growth in recurring banking services revenue, software maintenance, and other software related services, partially offset by a decline in hardware maintenance revenue. The decline in hardware and hardware maintenance was also impacted by our strategic shift to recurring service arrangements primarily in our Retail and Self-Service Banking segments.

Total revenue increased 1% for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. Foreign currency fluctuations had an unfavorable impact of 1% on the revenue comparison. Product revenue for the nine months ended September 30, 2023 decreased 4% compared to the nine months ended September 30, 2022 due to a decline in ATM, SCO and POS hardware revenues partially offset by an increase in software license and Bitcoin-related revenue. Service revenue for the nine months ended September 30, 2023 increased 3% compared to the nine months ended September 30, 2022 due to growth in recurring banking services revenue, payments processing, software maintenance and software related services, partially offset by a decline in hardware maintenance revenue. The decline in hardware and hardware maintenance was also impacted by our strategic shift to recurring service arrangements primarily in our Retail and Self-Service Banking segments.

Gross Margin

In millions

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

For the three months ended September 30, 2023 compared to the three months ended September 30, 2022

Gross margin as a percentage of revenue in the three months ended September 30, 2023 was 31.1% compared to 24.9% in the three months ended September 30, 2022. Gross margin for the three months ended September 30, 2023 included $1 million of transformation and restructuring costs, $3 million of stock-based compensation expense, $27 million of amortization of acquisition-related intangible assets, $1 million of separation-related costs, and $2 million related to the cyber ransomware incident recovery costs. Additionally, gross margin for the three months ended September 30, 2023 benefited from the recognition of $85 million of unrealized gains on terminated interest rate derivative contracts included in Accumulated other comprehensive loss due to the determination that the underlying transactions were no longer probable of occurring as a result of the Spin-Off of Atleos from the Company. Gross margin for the three months ended September 30, 2022 included $8 million of transformation and restructuring costs, $4 million of stock-based compensation expense and $27 million of amortization of acquisition-related intangible assets. Excluding these items, gross margin as a percentage of revenue increased from 26.9% to 28.6% due to reductions in fuel, shipping costs and component parts compared to prior year, the impact of cost mitigation actions implemented, and an increase in the favorable higher margin software and services revenue. These improvements were partially offset by increased interest rates driving higher cost on vault cash rental agreements.

In millions

For the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022

Gross margin as a percentage of revenue in the nine months ended September 30, 2023 was 27.7% compared to 23.5% in the nine months ended September 30, 2022. Gross margin in the nine months ended September 30, 2023 included $2 million of transformation and restructuring costs, $11 million of stock-based compensation expense, $80 million of amortization of acquisition-related intangible assets, $1 million of separation-related costs, and $8 million related to the cyber ransomware incident recovery costs. Additionally, gross margin for the nine months ended September 30, 2023 benefited from the recognition of $85 million of unrealized gains on terminated interest rate derivative contracts included in Accumulated other comprehensive loss due to the determination that the underlying transactions were no longer probable of occurring as a result of the Spin-Off of Atleos from the Company. Gross margin for the nine months ended September 30, 2022 included $29 million of transformation and restructuring costs, $12 million of stock-based compensation expense, $73 million of amortization of acquisition-related intangible assets, $1 million of acquisition-related costs and $10 million related to operating losses, impairments and other actions taken with respect to our operations in Russia. Excluding these items, gross margin as a percentage of revenue increased from 25.7% to 28.0% due to reductions in fuel, shipping costs and component parts compared to prior year, the impact of cost mitigation actions implemented, and an increase in the favorable higher margin software and services revenue. These improvements were partially offset by increased interest rates driving higher cost on vault cash rental agreements.

Selling, General and Administrative Expenses

In millions

For the three months ended September 30, 2023 compared to the three months ended September 30, 2022

Selling, general, and administrative expenses were $331 million in the three months ended September 30, 2023, compared to $264 million in the same period of 2022. As a percentage of revenue, selling, general and administrative expenses were 16.4% in the three months ended September 30, 2023 compared to 13.4% in the same period of 2022. In the three months ended September 30, 2023, selling, general and administrative expenses included $4 million of transformation and restructuring costs, $24 million of stock-based compensation expense, $16 million of amortization of acquisition-related intangible assets, $68 million of separation-related costs and $9 million related to the cyber ransomware incident recovery costs. In the three months ended September 30, 2022, selling, general and administrative expenses included $8 million of transformation and restructuring costs, $22 million of stock-based compensation expense, $17 million of amortization of acquisition-related intangible assets, and $1 million of acquisition-related costs. Excluding these items, selling, general and administrative expenses decreased slightly as a percentage of revenue from 11.0% to 10.4% primarily due to cost mitigation actions implemented, partially offset by an increase in employee benefit-related costs.

In millions

For the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022

Selling, general, and administrative expenses were $956 million compared to $886 million in the nine months ended September 30, 2023 and 2022, respectively. As a percentage of revenue, selling, general and administrative expenses were 16.2% and 15.2% in the nine months ended September 30, 2023 and 2022, respectively. In the nine months ended September 30, 2023, selling, general and administrative expenses included $12 million of transformation and restructuring costs, $78 million of stock-based compensation expense, $48 million of amortization of acquisition-related intangible assets, $1 million of acquisition related costs, $139 million of separation-related costs and $14 million related to the cyber ransomware incident recovery costs. In the nine months ended September 30, 2022, selling, general and administrative expenses included $54 million of transformation and restructuring costs, $77 million of stock-based compensation expense, $57 million of amortization of acquisition-related intangible assets, $8 million of acquisition-related costs and $6 million of costs related to actions taken with respect to our operations in Russia. Excluding these items, selling, general and administrative expenses decreased slightly as a percentage of revenue from 11.7% to 11.3% primarily due to cost mitigation actions implemented, partially offset by an increase in employee benefit-related costs.

Research and Development Expenses

In millions

For the three months ended September 30, 2023 compared to the three months ended September 30, 2022

Research and development expenses were $54 million in the three months ended September 30, 2023, compared to $40 million in the same period of 2022. As a percentage of revenue, research and development costs were 2.7% and 2.0% in the three months ended September 30, 2023 and 2022, respectively. In the three months ended September 30, 2023, research and development costs included $3 million of stock-based compensation expense and $1 million related to the cyber ransomware incident recovery costs. In the three months ended September 30, 2022, research and development expenses included $1 million of transformation costs and $2 million of stock-based compensation expense. Excluding these items, research and development expenses increased slightly as a percentage of revenue from 1.9% to 2.5% due to an increase in employee benefit-related costs.

In millions

For the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022

Research and development expenses were $175 million compared to $164 million in the nine months ended September 30, 2023 and 2022, respectively. As a percentage of revenue, these costs were 3.0% and 2.8% in the nine months ended September 30, 2023 and 2022, respectively. In the nine months ended September 30, 2023, research and development expenses included $9 million of stock-based compensation expense and $1 million related to the cyber ransomware incident recovery costs. In the nine months ended September 30, 2022, research and development expenses included $10 million of transformation and restructuring costs and $8 million of stock-based compensation expense. After considering these items, research and development expenses slightly increased as a percentage of revenue from 2.5% to 2.8% due to an increase in employee benefit-related costs.

Interest Expense

In millions

For the three months ended September 30, 2023 compared to the three months ended September 30, 2022

Interest expense was $85 million compared to $74 million in the three months ended September 30, 2023 and 2022, respectively. Interest expense is primarily related to our senior unsecured notes and borrowings under the Senior Secured Credit Facility. The increase in interest expense was primarily due to the significant increase in variable interest rates on the Senior Secured Credit Facility, partially offset by the recognition of $18 million of unrealized gains on terminated interest rate derivative contracts included in Accumulated other comprehensive loss due to the determination that the underlying transactions were no longer probable of occurring as a result of the Spin-Off of Atleos from the Company.

In millions

For the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022

Interest expense was $259 million compared to $204 million in the nine months ended September 30, 2023 and 2022, respectively. Interest expense is primarily related to our senior unsecured notes and borrowings under the Senior Secured Credit Facility. The increase in interest expense was primarily due to the significant increase in variable interest rates on the Senior Secured Credit Facility, partially offset by the recognition of $18 million of unrealized gains on terminated interest rate derivative contracts included in Accumulated other comprehensive loss due to the determination that the underlying transactions were no longer probable of occurring as a result of the Spin-Off of Atleos from the Company.

Other Income (Expense), net

Other income (expense), net was expense of $44 million and $1 million in the three months ended September 30, 2023 and 2022, respectively, and expense of $55 million and income of $9 million in the nine months ended September 30, 2023 and 2022, respectively, with the components reflected in the following table:

In millions

Employee benefit plans within other income (expense) net for the three and nine months ended September 30, 2023 consists of net actuarial losses from pension mark-to-market adjustments of $19 million.

Income Taxes

In millions

For the three months ended September 30, 2023 compared to the three months ended September 30, 2022

Income tax provisions for interim (quarterly) periods are based on an estimated annual effective income tax rate calculated separately from the effect of significant, infrequent or unusual items. Income tax expense was $236 million for the three months ended September 30, 2023 compared to income tax expense of $43 million for the three months ended September 30, 2022. In the three months ended September 30, 2023, the Company completed certain internal restructuring transactions in connection with the Spin-Off, resulting in a net of $195 million discrete tax expenses. Approximately $171 million of the discrete tax expense is for non-cash deferred tax items, primarily related to the tax effects upon the transfer of certain intangible assets among our wholly-owned subsidiaries prior to the Spin-Off. In the three months ended September 30, 2022, the Company did not recognize any material discrete tax expenses or benefits.

For the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022

Income tax expense was $280 million for the nine months ended September 30, 2023 compared to income tax expense of $56 million for the nine months ended September 30, 2022. In the nine months ended September 30, 2023, the Company completed certain internal restructuring transactions in connection with the Spin-Off, resulting in a net of $195 million discrete tax expenses. Approximately $171 million of the discrete tax expense is for non-cash deferred tax items, primarily related to the tax effects upon the transfer of certain intangible assets among our wholly-owned subsidiaries prior to the Spin-Off. In addition, the increase in tax expense was impacted by the increase in the income from continuing operations. In the nine months ended September 30, 2022, the Company recognized a $7 million benefit from provision to return adjustments and a $7 million benefit related to uncertain tax position settlements and statute of limitation lapses.

The Company is subject to numerous federal, state and foreign tax audits. While we believe that appropriate reserves exist for issues that might arise from these audits, should these audits be settled, the resulting tax effect could impact the tax provision and cash flows in 2023 or future periods.

Income (Loss) from Discontinued Operations

The Company recognized a loss from discontinued operations, net of tax, of $1 million in the the nine months ended September 30, 2023 primarily driven by immaterial updates to various environmental remediation matters. The Company recognized income from discontinued operations, net of tax, of $5 million in the nine months ended September 30, 2022 primarily driven by insurance recoveries partially offset by immaterial updates to various environmental remediation matters.

Revenue and Adjusted EBITDA by Segment

The Company manages and reports its businesses in the following segments: Retail, Hospitality, Digital Banking, Payments & Network, and Self-Service Banking.

Concurrently with the Spin-Off on October 16, 2023, the Company made a number of changes to its organizational structure and management system, including the Company’s reportable segments. Following the Spin-Off, the Company will manage its reports and operations using three reportable segments - Retail, Restaurant (formerly reported as Hospitality) and Digital Banking. These changes will impact the Company’s reportable segments beginning in the fourth quarter of 2023.

Segments are measured for profitability by the Company’s chief operating decision maker based on revenue and segment Adjusted EBITDA. Refer to our definition of Adjusted EBITDA in the section entitled “Non-GAAP Financial Measures and Use of Certain Terms.”

The following tables show our segment revenue and Adjusted EBITDA for the three and nine months ended September 30, the relative percentage that those amounts represent to segment revenue, and the change in those amounts year-over-year.

In millions

(1) The percentage of revenue is calculated for each line item divided by total revenue, except for Adjusted EBITDA, which are divided by the related component of revenue.

(2) Other immaterial business operations that do not represent a reportable segment.

(3) Eliminations include revenues from contracts with customers and the related costs that are reported in the Payments & Network segment as well as in the Retail or Hospitality segments, including merchant acquiring services that are monetized via payments.

In millions

(1) The percentage of revenue is calculated for each line item divided by total revenue, except for Adjusted EBITDA, which are divided by the related component of revenue.

(2) Other immaterial business operations that do not represent a reportable segment.

(3) Eliminations include revenues from contracts with customers and the related costs that are reported in the Payments & Network segment as well as in the Retail or Hospitality segments, including merchant acquiring services that are monetized via payments.

(4) Other adjustment reflects the revenue attributable to the Company’s operations in Russia for the nine months ended September 30, 2022 that were excluded from management’s measure of revenue due to our previous announcement to suspend sales to Russia and orderly wind down of our operations in Russia beginning in the first quarter of 2022.

The following table provides a reconciliation of segment and total revenue percentage growth (GAAP) to revenue percentage growth constant currency (non-GAAP) for the three and nine months ended September 30, 2023.

$ in millions

57

Segment Revenue

For the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022

Retail revenue decreased 1% for the three months ended September 30, 2023 compared to the prior year period and increased 1% for the nine months ended September 30, 2023 compared to the prior year period. For the three months ended September 30, 2023, the decrease in revenue is due to a decrease in hardware revenue partially offset by increases in software and services revenues. For the nine months ended September 30, 2023, the increase in revenue of 1% compared to the prior year period was primarily due to increases in software and services revenues partially offset by a decrease in hardware revenue.

Hospitality revenue remained flat for the three months ended September 30, 2023 compared to the prior year period and increased 1% for the nine months ended September 30, 2023 compared to the prior year period. For the nine months ended September 30, 2023, the increase in revenue is due to an increase in services and software revenues, including growth in cloud services and payment processing, partially offset by a decrease in POS hardware.

Digital Banking revenue increased 7% and 5% for the three and nine months ended September 30, 2023, respectively, compared to the prior year periods, due to an increase in recurring cloud services and software maintenance revenues.

Payments & Network revenue increased 6% and 5% for the three and nine months ended September 30, 2023, respectively, compared to the prior year periods, due to an increase in payment processing and Bitcoin-related revenue driven by an increase in higher margin ATM transactions and merchant acquiring services.

Self-Service Banking revenue increased 4% and 1% for the three and nine months ended September 30, 2023, respectively, compared to the prior year periods. The increases in revenue is due to an increase in recurring ATM as-a-Service arrangements. These increases are offset by declines in ATM hardware and software license revenues during the nine months ended September 30, 2023. Software and services revenue as a percent of total Self-Service Banking segment revenue were 70% and 69% in the third quarter of 2023 and 2022, respectively.

Segment Adjusted EBITDA

For the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022

Retail Adjusted EBITDA increased 3% and 18% for the three and nine months ended September 30, 2023, respectively, compared to the prior year periods, primarily due to favorable software and services revenue mix and improvements in component, labor and freight costs as well as other cost mitigation and pricing actions taken in the latter part of 2022 and into 2023. These improvements were partially offset by an increase in employee benefit-related costs.

Hospitality Adjusted EBITDA increased 16% and 25% for the three and nine months ended September 30, 2023, respectively, compared to the prior year periods, primarily driven by favorable software and services revenue mix, pricing and cost mitigation actions taken in the latter part of 2022 and into 2023 as well as improvements in component and fuel costs. These improvements were partially offset by an increase in employee benefit-related costs.

Digital Banking Adjusted EBITDA decreased 3% and 7% for the three and nine months ended September 30, 2023, respectively, compared to the prior year periods, primarily driven by investment in selling expenses and research and development expenses, and an increase in employee benefit-related costs.

Payments & Network Adjusted EBITDA increased 5% and decreased 2% for the three and nine months ended September 30, 2023, respectively, compared to the prior year periods. The increase in Adjusted EBITDA for the three months ended September 30, 2023 compared to the prior year period was primarily due to increases in higher margin transaction revenue and cost optimization initiatives. These improvements were partially offset by an increase in interest rates, which increases the cost of our vault cash rental obligations, and employee benefit-related costs. The decline in Adjusted EBITDA for the nine months ended September 30, 2023 compared to prior year period was primarily due to significantly higher interest rates on our vault cash agreements, as well as higher cash-in-transit costs driven by the higher volume of cash dispensed in the period, and an increase in employee benefit-related costs. This was partially offset by the increase in higher margin transaction revenue described above.

Self-Service Banking Adjusted EBITDA increased 13% and 18% for the three and nine months ended September 30, 2023, respectively, compared to the prior year period primarily due to improvement in component and fuel costs, particularly in ATM hardware, as well as increases in higher margin recurring revenue streams. These improvements were partially offset by an increase in employee benefit-related costs.

Financial Condition, Liquidity, and Capital Resources

Historically, our principal sources of cash are cash generated from operations, borrowings under our revolving credit facility and issuances of debt. We continually evaluate our liquidity requirements in light of our operating needs, growth initiatives and capital resources.

Our management uses a non-GAAP measure called “Adjusted free cash flow-unrestricted” to assess the financial performance of the Company. We define Adjusted free cash flow-unrestricted as net cash provided by (used in) operating activities less capital expenditures for property, plant and equipment, less additions to capitalized software, plus/minus the change in restricted cash settlement activity, plus acquisition-related items, plus/minus net reductions or reinvestments in the trade receivables facility established in the third quarter of 2021 due to fluctuations in the outstanding balance of receivables sold, and plus pension contributions and settlements. Restricted cash settlement activity represents the net change in amounts collected on behalf of, but not yet remitted to, certain of the Company’s merchant customers or third-party service providers that are pledged for a particular use or restricted to support these obligations. These amounts can fluctuate significantly period to period based on the number of days for which settlement to the merchant has not yet occurred or day of the week on which a reporting period ends. We believe Adjusted free cash flow-unrestricted information is useful for investors because it relates the operating cash flows from the Company’s continuing and discontinued operations to the capital that is spent to continue and improve business operations. In particular, Adjusted free cash flow-unrestricted indicates the amount of cash available after these adjustments for, among other things, investments in the Company’s existing businesses, strategic acquisitions, repurchases of the Company’s stock and repayment of debt obligations. Adjusted free cash flow-unrestricted does not represent the residual cash flow available for discretionary expenditures, since there may be other non-discretionary expenditures that are not deducted from the measure. Adjusted free cash flow-unrestricted does not have a uniform definition under GAAP, and therefore our definition may differ from other companies’ definitions of this measure. This non-GAAP measure should not be considered a substitute for, or superior to, cash flows from operating activities under GAAP.

Summarized cash flow information for the nine months ended September 30 is as follows:

In millions

Cash provided by operating activities was $728 million in the nine months ended September 30, 2023 compared to cash provided by operating activities of $245 million in the nine months ended September 30, 2022. The increase in cash provided by operating activities in the nine months ended September 30, 2023 was driven by the favorable movement in net working capital accounts of $570 million. Net cash provided by financing activities was $1,879 million in the nine months ended September 30, 2023 compared to cash provided by financing activities of $93 million in the nine months ended September 30, 2022. The increase is mainly related to the net proceeds of certain debt balances that were held in escrow pending consummation of the Spin-Off, and such proceeds were included in Restricted cash, non-current on the Condensed Consolidated Balance Sheets. Refer to Note 5, “Debt Obligations” for additional information.

The table below reconciles net cash provided by operating activities, the most directly comparable GAAP measure, to the Company’s non-GAAP measure of Adjusted free cash flow-unrestricted for the nine months ended September 30:

In millions

For the nine months ended September 30, 2023, net cash provided by operating activities increased $483 million, which contributed to a net increase in Adjusted free cash flow-unrestricted of $459 million in comparison to the nine months ended September 30, 2022. The increase in net cash provided by operating activities was offset by an increase in restricted cash settlement activity of $14 million and an increase in capital expenditures for property, plant and equipment of $40 million.

Financing activities and certain other investing activities are not included in our calculation of Adjusted free cash flow-unrestricted. Other investing activities primarily include business acquisitions, divestitures and investments, which were not significant in the nine months ended September 30, 2023 and September 30, 2022.

Our financing activities include borrowings and repayments of credit facilities and notes. Financing activities during the nine months ended September 30, 2023 also included dividends paid on the Series A preferred stock of $11 million, proceeds from employee stock plans of $23 million as well as tax withholding payments on behalf of employees for stock based awards that vested of $16 million. Financing activities during the nine months ended September 30, 2022 included dividends paid on the Series A preferred stock of $11 million, proceeds from stock employee plans of $19 million, and tax withholding payments on behalf of employees for stock based awards that vested of $38 million.

Long Term Borrowings The Senior Secured Credit Facility consisted of term loan facilities in an aggregate principal amount of $2.055 billion, of which $1.801 billion was outstanding as of September 30, 2023. Additionally, the Senior Secured Credit Facility provided for a five-year Revolving Credit Facility with an aggregate principal amount of $1.3 billion, of which $438 million was outstanding as of September 30, 2023. The Revolving Credit Facility also contained a sub-facility to be used for letters of credit, and as of September 30, 2023, there were $29 million letters of credit outstanding.

As of September 30, 2023, we had outstanding $1.2 billion in aggregate principal balance of 5.125% senior unsecured notes due in 2029 (the “2029 Notes”), $500 million in aggregate principal balance of 5.750% senior unsecured notes due in 2027 (the “2027 Notes”), $650 million aggregate principal balance of 5.000% senior unsecured notes due in 2028, $500 million in aggregate principal balance of 6.125% senior unsecured notes due in 2029, and $450 million in aggregate principal balance of 5.250% senior unsecured notes due in 2030.

On October 17, 2023 (the “Redemption Date”), the $500 million 2027 Notes were redeemed, at a redemption premium of 101.438% of the aggregate principal amount. Also on the Redemption Date, the $500 million 2029 Notes were redeemed, at a redemption premium of 103.074% of the aggregate principal amount.

On September 27, 2023, Atleos entered into a credit agreement (the “Atleos Credit Agreement”) which provides for new senior secured credit facilities in an aggregate principal amount of $2,085 million. As of September 30, 2023, the net proceeds of the Atleos Term Loan B Facility, together with certain other amounts (collectively, the “TLB Escrow Amounts”) were held in escrow pending consummation of the Spin-Off and such proceeds are included in restricted cash on the Condensed Consolidated Balance Sheets. As of September 30, 2023, the Atleos Term Loan A Facility and the Atleos Revolving Credit Facility had been committed to by the lenders providing such facilities, but drawings thereunder were not permitted until the effective date of the Spin-Off. Additionally, as of September 30, 2023, there was no balance outstanding under the Atleos Revolving Credit Facility and no outstanding letters of credit issued under the sub-facility.

Additionally, on September 27, 2023, $1,350 million aggregate principal amount of 9.500% senior secured notes due 2029 (the “Atleos Notes”) were issued. As of September 30, 2023, the proceeds of the Atleos Notes were held in escrow pending consummation of the Spin-Off and are included in restricted cash on the Condensed Consolidated Balance Sheets. Upon the completion of the merger of NCR Atleos Escrow Corporation with and into Atleos on October 16, 2023, the Atleos Notes became jointly and severally and unconditionally guaranteed on a senior secured basis by Atleos’s wholly-owned domestic subsidiaries, subject to certain limitations. As of the Spin-Off, the Atleos Notes are not obligations of the Company and beginning with the fourth fiscal quarter of 2023 will not be reported as obligations of the Company.

On October 16, 2023, Atleos used a portion of the proceeds from the financing transactions discussed above to make a cash distribution of approximately $3.0 billion to the Company. The Company used such cash distribution on October 16, 2023 to repay all accrued and unpaid loans and other amounts due under the Senior Secured Credit Facility and terminated all commitments thereunder. Additionally, on October 16, 2023, the Company and certain of its subsidiaries entered into a new credit agreement providing for new senior secured credit facilities in an aggregate principal amount of $700 million, which are comprised of (i) a five-year multicurrency $500 million revolving credit facility, and (ii) a five-year term loan “A” facility in the aggregate principal amount of $200 million (together, the “New Credit Facilities”).

On October 16, 2023, the Company borrowed the full amount under the Term Loan A facility and drew $63 million in revolving loans under the New Credit Facilities.

Refer to Note 5, “Debt Obligations” for additional information regarding these debt transactions.

Employee Benefit Plans In 2023, we expect to make contributions of $17 million to our international pension plans, $75 million to our postemployment plan and $2 million to our postretirement plan. In accordance with the Employee Matters Agreement, Atleos will make an additional $136 million contribution to the U.S. pension plan following the Spin-Off for total contributions of $150 million in 2023. For additional information, refer to Note 9, “Employee Benefit Plans”, of the Notes to Condensed Consolidated Financial Statements.

Series A Convertible Preferred Stock As of September 30, 2023, the redemption value of the Series A Preferred Stock was approximately $276 million. Holders of Series A Convertible Preferred Stock are entitled to a cumulative dividend at the rate of 5.5% per annum, payable quarterly in arrears. Beginning in the first quarter of 2020, dividends are payable in cash or in-kind at the option of the Company. During the nine months ended September 30, 2023 and 2022, the Company paid cash dividends of $11 million.

The Series A Convertible Preferred Stock is convertible at the option of the holders at any time into shares of common stock at a conversion price of $30.00 per share, or a conversion rate of 33.333 shares of common stock per share of the Series A Convertible Preferred Stock. As of September 30, 2023 and December 31, 2022, the maximum number of common shares that could be required to be issued upon conversion of the outstanding shares of Series A Convertible Preferred Stock was 9.2 million shares. As a result of the Spin-Off and pursuant to the Company’s Articles of Amendment and Restatement, the adjusted conversion ratio is 57.5601 shares of common stock per share of Series A Convertible Preferred Stock.

Cash and Cash Equivalents Held by Foreign Subsidiaries Cash and cash equivalents held by the Company’s foreign subsidiaries at September 30, 2023 and December 31, 2022 were $418 million and $419 million, respectively. Under current tax laws and regulations, if cash and cash equivalents and short-term investments held outside the U.S. are distributed to the U.S. in the form of dividends or otherwise, we may be subject to additional U.S. income taxes and foreign withholding taxes, which could be significant.

Summary As of September 30, 2023, our cash and cash equivalents totaled $675 million and our total debt was $7.65 billion, excluding deferred fees. As of September 30, 2023, our borrowing capacity under the Revolving Credit Facility was approximately $833 million. Our ability to generate positive cash flows from operations is dependent on general economic conditions, the competitive environment in our industry, and is subject to the business and other risk factors described in Item 1A of Part I of the Company’s 2022 Annual Report on Form 10-K and Item 1A of Part II of this Quarterly Report on Form 10-Q (as applicable). If we are unable to generate sufficient cash flows from operations, or otherwise comply with the terms of our credit facilities, we may be required to seek additional financing alternatives.

We believe that we have sufficient liquidity based on our current cash position, cash flows from operations and existing financing to meet our expected pension, postemployment, and postretirement plan contributions, remediation payments related to environmental matters, debt servicing obligations, payments related to separation, transformation and restructuring initiatives, and in the long-term (i.e., beyond September 30, 2024) to meet our material cash requirements.

Material Cash Requirements from Contractual and Other Obligations

Other than the transactions discussed above in relation to the Spin-Off, there have been no significant changes in our contractual and other commercial obligations as described in our Form 10-K for the year ended December 31, 2022.

Critical Accounting Policies and Estimates

Critical accounting policies are those that are most important to the portrayal of our financial position and results of operations. These policies require highly subjective or complex judgments, often employing the use of estimates about the effect of matters that are inherently uncertain. Our most critical accounting estimates pertain to revenue recognition, inventory valuation, goodwill and intangible assets, pension, postretirement and postemployment benefits, environmental and legal contingencies, and income taxes, which are described in Item 7. of our 2022 Form 10-K.

New Accounting Pronouncements

See discussion in Note 1, “Basis of Presentation and Summary of Significant Accounting Policies”, of the Notes to Condensed Consolidated Financial Statements for new accounting pronouncements.

Forward-Looking Statements

This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the “Act”). Forward-looking statements use words such as “expect,” “anticipate,” “outlook,” “intend,” “plan,” “confident,” “believe,” “will,” “should,” “would,” “potential,” “positioning,” “proposed,” “planned,” “objective,” “likely,” “could,” “may,” and words of similar meaning, as well as other words or expressions referencing future events, conditions or circumstances. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Act. Statements that describe or relate to the Company’s plans, goals, intentions, strategies, or financial outlook, and statements that do not relate to historical or current fact, are examples of forward-looking statements. Examples of forward-looking statements in this report include, without limitation, statements regarding: our expectations of demand for our solutions and execution and the impact thereof on our financial results in 2023; the Company’s focus on advancing our strategic growth initiatives and transforming the Company into a software-led as-a-service company with a higher mix of recurring revenue streams; our expectations of the Company’s ability to deliver increased value to customers and stockholders; and statements regarding the separation of NCR Corporation into two separate companies, including, but not limited to, statements regarding the future commercial or financial performance of the Company following such transaction, and value creation and ability to innovate and drive growth generally as a result of such transaction. Forward-looking statements are based on our current beliefs, expectations and assumptions, which may not prove to be accurate, and involve a number of known and unknown risks and uncertainties, many of which are out of the Company’s control. Forward-looking statements are not guarantees of future performance, and there are a number of important factors that could cause actual outcomes and results to differ materially from the results contemplated by such forward-looking statements, including those factors relating to:

• Strategy and Technology: transforming our business model; development and introduction of new solutions; competition in the technology industry; integration of acquisitions and management of alliance activities; and our multinational operations;
• Business Operations: domestic and global economic and credit conditions; risks and uncertainties from the payments-related business and industry; disruptions in our data center hosting and public cloud facilities; retention and attraction of key employees; defects, errors, installation difficulties or development delays; failure of third-party suppliers; a major natural disaster or catastrophic event, including the impact of the coronavirus (COVID-19) pandemic and geopolitical and macroeconomic challenges (such as the Israel-Hamas conflict); environmental exposures from historical and ongoing manufacturing activities; and climate change;
• Data Privacy & Security: impact of data protection, cybersecurity and data privacy including any related issues, including the April 2023 ransomware incident;
• Finance and Accounting: our level of indebtedness; the terms governing our indebtedness; incurrence of additional debt or similar liabilities or obligations; access or renewal of financing sources; our cash flow sufficiency to service our indebtedness; interest rate risks; the terms governing our trade receivables facility; the impact of certain changes in control relating to acceleration of our indebtedness, our obligations under other financing arrangements, or required repurchase of our senior unsecured notes; any lowering or withdrawal of the ratings assigned to our debt securities by rating agencies; our pension liabilities; and write down of the value of certain significant assets;
• Law and Compliance: allegations or claims by third parties that our products or services infringe on intellectual property rights of others, including claims against our customers and claims by our customers to defend and indemnify them with respect to such claims; protection of our intellectual property; changes to our tax rates and additional income tax liabilities; and uncertainties regarding regulations, lawsuits and other related matters;
• Governance: impact of the terms of our Series A Convertible Preferred (“Series A”) Stock relating to voting power, share dilution and market price of our common stock; rights, preferences and privileges of Series A stockholders compared to the rights of our common stockholders; and actions or proposals from stockholders that do not align with our business strategies or the interests of our other stockholders;
• Separation: the potential strategic benefits, synergies or opportunities expected from the separation may not be realized or may take longer to realize than expected; the potential inability to access, or reduced access, to the capital markets or increased cost of borrowings, including as a result of a credit rating downgrade; the incurrence of significant costs in connection with the separation; the potential adverse reactions to the separation by customers, suppliers, strategic partners or key personnel and potential difficulties in maintaining relationships with such persons and risks associated with third party contracts containing consent, and/or other provisions that may be triggered by the separation; unforeseen tax liabilities or changes in tax law; non-compete restrictions in the separation agreement entered into in connection with the separation; and requests, requirements or penalties imposed by any governmental authorities related to certain existing liabilities.

Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those set forth in the forward-looking statements. There can be no guarantee that stockholders will achieve any particular level of stockholder returns. Nor can there be any guarantee that, following the separation, the Company and Atleos will be able to realize any of the potential strategic benefits, synergies or opportunities or that the separation will maximize value for stockholders, or that Company or any of its divisions will be commercially successful in the future, or achieve any particular credit rating or financial results. Additional information concerning these and other factors can be found in the Company’s filings with the U.S. Securities and Exchange Commission, including the Company’s most recent annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Any forward-looking statement speaks only as of the date on which it is made. The Company does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Information About the Company

The Company encourages investors to visit its web site (http://www.ncrvoyix.com), which is updated regularly with financial and other important information about the Company. The contents of the Company’s web site are not incorporated into this quarterly report or the Company’s other filings with the U.S. Securities and Exchange Commission.

Market Risk

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

Foreign Exchange Risk

Since a substantial portion of our operations and revenue occur outside the United States, and in currencies other than the U.S. Dollar, our results can be significantly impacted by changes in foreign currency exchange rates. We have exposure to approximately 45 functional currencies and are exposed to foreign currency exchange risk with respect to our sales, profits and assets and liabilities denominated in currencies other than the U.S. Dollar. Although we use financial instruments to hedge certain foreign currency risks, we are not fully protected against foreign currency fluctuations and our reported results of operations could be affected by changes in foreign currency exchange rates. To manage our exposures and mitigate the impact of currency fluctuations on the operations of our foreign subsidiaries, we hedge our main transactional exposures through the use of foreign exchange forward and option contracts. This is primarily done through the hedging of foreign currency denominated inter-company inventory purchases by the marketing units and the foreign currency denominated inputs to our manufacturing units. All of these transactions are forecasted. If these contracts are designated as highly effective cash flow hedges, the gains or losses are deferred into accumulated other comprehensive income (“AOCI”). The gains or losses from derivative contracts that are designated as highly effective cash flow hedges related to inventory purchases are recorded in cost of products when the inventory is sold to an unrelated third party. Otherwise, the gains or losses from these contracts are recognized in earnings as exchange rates change. We also use derivatives not designated as hedging instruments consisting primarily of forward contracts to hedge foreign currency denominated balance sheet exposures. For these derivatives we recognize gains and losses in the same period as the remeasurement losses and gains of the related foreign currency-denominated exposures.

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

For purposes of analyzing potential risk, we use sensitivity analysis to quantify potential impacts that market rate changes may have on the fair values of our hedge portfolio related to firmly committed or forecasted transactions. The sensitivity analysis represents the hypothetical changes in value of the hedge position and does not reflect the related gain or loss on the forecasted underlying transaction. A 10% appreciation in the value of the U.S. Dollar against foreign currencies from the prevailing market rates would have resulted in a corresponding decrease in the fair value of the hedge portfolio of $32 million as of September 30, 2023. A 10% depreciation in the value of the U.S. Dollar against foreign currencies from the prevailing market rates would have resulted in a corresponding increase in the fair value of the hedge portfolio of $32 million as of September 30, 2023. The Company expects that any increase or decrease in the fair value of the portfolio would be substantially offset by increases or decreases in the underlying exposures being hedged.

The U.S. Dollar was stronger in the third quarter of 2023 compared to the third quarter of 2022 based on comparable weighted averages for our functional currencies. This excludes the effects of our hedging activities and, therefore, does not reflect the actual impact of fluctuations in exchange rates on our operating income.

Interest Rate Risk

We are subject to interest rate risk principally in relation to variable-rate debt. Approximately 44% of our borrowings were on a fixed rate basis as of September 30, 2023. The increase in pre-tax interest expense for the nine months ended September 30, 2023 from a hypothetical 100 basis point increase in variable interest rates would be approximately $19 million. As of September 30, 2023, we do not have any outstanding interest rate derivative contracts related to our variable rate debt.

Additionally, as our ATM vault cash rental expense is based on market rates of interest, it is sensitive to changes in applicable interest rates in the respective countries in which we operate. We pay a monthly fee on the average outstanding vault cash balances in our ATMs under floating rate formulas based on a spread above various interbank offered rates. The increase in vault cash rental expense for the three months ended September 30, 2023 from a hypothetical 100 basis point increase in variable interest rates would be approximately $9 million, excluding the impact from outstanding interest rate swap agreements.

We utilize interest rate swap contracts and interest rate cap agreements to add stability to interest expense and to manage exposure to interest rate movements as part of our interest rate risk management strategy. Payments and receipts related to interest rate cap agreements and interest rate swap contracts are included in cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows. Refer to Note 13, “Derivatives and Hedging Instruments”, for further information on our interest rate derivative contracts in effect as of September 30, 2023.

Concentrations of Credit Risk

We are potentially subject to concentrations of credit risk on accounts receivable and financial instruments, such as hedging instruments and cash and cash equivalents. Credit risk includes the risk of nonperformance by counterparties. The maximum potential loss may exceed the amount recognized on the balance sheet. Exposure to credit risk is managed through credit approvals, credit limits, selecting major international financial institutions as counterparties to hedging transactions, and monitoring procedures. Our business often involves large transactions with customers for which we do not require collateral. If one or more of those customers were to default in its obligations under applicable contractual arrangements, we could be exposed to potentially significant losses. Moreover, a prolonged downturn in the global economy could have an adverse impact on the ability of our customers to pay their obligations on a timely basis. We believe that the reserves for potential losses are adequate. As of September 30, 2023, we did not have any significant concentration of credit risk related to financial instruments.

Evaluation of Disclosure Controls and Procedures

NCR has established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the Exchange Act)) to provide reasonable assurance that information required to be disclosed by NCR in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by NCR in the reports that it files or submits under the Exchange Act is accumulated and communicated to NCR’s management, including its Chief Executive and Chief Financial Officers, as appropriate to allow timely decisions regarding required disclosure. Based on their evaluation as of the end of the third quarter of 2023, conducted under their supervision and with the participation of management, the Company’s Chief Executive and Chief Financial Officers have concluded that NCR’s disclosure controls and procedures are effective to meet such objectives and that NCR’s disclosure controls and procedures adequately alert them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in NCR’s Exchange Act filings.

Changes in Internal Control over Financial Reporting

In September 2023, we implemented a new enterprise resource planning (“ERP”) system for Atleos that was duplicated from our ERP system. ERP systems are designed to accurately maintain our financial records used to report operating results.

Other than the Atleos ERP implementation, there have been no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The following information supplements the disclosure set forth under Part I, Item IA (“Risk Factors”) of the Company’s 2022 Annual Report on Form 10-K (“Form 10-K”). Additional risks and uncertainties not presently known to us or that are currently not believed to be significant to our business may also affect our actual results and could harm our business, financial conditions and results of operations. If any additional risks and uncertainties actually occur, our business, results of operations and financial condition could be materially and adversely affected.

Risks related to achieving the expected benefits of Atleos’ separation from the Company. We may not realize the anticipated strategic, financial, operational, or other benefits from the Spin-Off on October 16, 2023. We cannot predict with certainty when the benefits expected from the Spin-Off will occur or the extent to which they will be achieved, or that the costs or dis-synergies of the transaction will not exceed the anticipated amounts. The Spin-Off resulted in the digital commerce company and the ATM company being smaller, less diversified companies with more limited businesses concentrated in their respective industries than the Company as a whole. As a result, the Company may be more vulnerable to changing market conditions, which could have a material adverse effect on our business, financial condition and results of operations. In addition, the diversification of revenues, costs, and cash flows will diminish, such that the Company’s results of operations, cash flows, working capital, effective tax rate, and financing requirements may be subject to increased volatility and its ability to fund capital expenditures and investments, pay dividends and service debt may be diminished. The Spin-Off may cause uncertainty for or disruptions with our customers, partners, suppliers, and employees, which may negatively impact these relationships or our operations. In addition, we will incur one-time costs and ongoing costs in connection with, or as a result of, the Spin-Off, including costs of operating as independent, publicly-traded companies that the Company will no longer be able to share with Atleos. Those costs may exceed our estimates or could negate some of the benefits we expect to realize. If we do not realize the intended benefits or if our costs exceed our estimates, we could suffer a material adverse effect on the business, financial condition, results of operations, and trading price of the Company.

Data protection, cybersecurity and data privacy issues could negatively impact our business. Our products and services, including our cloud and hosted solutions as well as our payments and networking solutions, facilitate financial and other transactions for the customers in the industries we serve. As a result, we collect, use, transmit and store certain of the transaction, cryptocurrency, private keys, and personal data of our customers and end-users. We also have access to transaction and personal data of our customers and their customers through or in the course of servicing our products or third-party products. Additionally, we collect, use and store personal data of our employees and the personnel of our business partners, such as resellers, suppliers and contractors, in the ordinary course of business. While we have programs and measures in place designed to protect and safeguard this data, and while we have implemented access controls designed to limit the risk of unauthorized use or disclosure by employees and contractors, the techniques used to obtain unauthorized access to this data are complex and changing, as are the underlying objectives of the attacker, like targeted business disruption, financial impact, intellectual property theft, political motives, or sophisticated nation-state sponsored and organized cyber-criminal activity, and may be difficult to detect for long periods of time. An attack, disruption, intrusion, denial of service, theft or other breach, or an inadvertent act by an employee or contractor, could result in unauthorized access to, or disclosure of, this data, resulting in claims, costs and reputational harm that could negatively affect our operating results. We may also detect, or may receive notice from third parties (including governmental agencies) regarding, potential vulnerabilities in our information technology systems, our products, or third-party products used in conjunction with our products or our business. In the course of our business activities, NCR contracts with numerous suppliers, vendors and resellers who may experience a cybersecurity, data protection or privacy issue that could negatively affect our operating results. Even if these potential vulnerabilities do not result in a data breach, their existence can adversely affect marketplace confidence and reputation. To the extent such vulnerabilities require remediation, such remedial measures could require significant resources and may not be implemented before such vulnerabilities are exploited. As the landscape evolves, we may also find it necessary to make significant further investments to protect information and infrastructure.

Like most companies, NCR is regularly the subject of attempted cyberattacks, which may involve personal data. Most attempted cyberattacks are detected and prevented by the Company’s various information technology and data protections, including but not limited to firewalls, intrusion prevention systems, denial of service detection, anomaly based detection, anti-virus/anti-malware, endpoint encryption and detection and response software, Security Information and Event Management

(“SIEM”) system, identity management technology, security analytics, multi-factor authentication and encryption. There can be no assurance that our protections will be successful.

On April 13, 2023, NCR determined that a single data center outage impacting certain of its customers in its Retail and Hospitality segments was caused by a cyber ransomware incident. Upon such determination, NCR immediately started contacting customers, enacted its cybersecurity protocol and engaged outside experts to contain the incident and begin the recovery process. NCR disclosed this incident publicly on April 17, 2023. Following an extensive investigation which included NCR experts, external forensic cybersecurity experts and federal law enforcement, among others, the Company concluded that this incident impacted operations for some customers only with respect to specific Aloha cloud-based services and Counterpoint. Functionality has been fully restored to customers and the Company built a new cloud environment to host the affected applications.

We have incurred certain expenses related to the cyber ransomware incident, including expenses to respond to, remediate and investigate this matter and payments made to customers in connection with the incident. See Note 1, “Basis of Presentation and Summary of Significant Accounting Policies” for additional detail. We may incur additional costs relating to this incident in the future, including payment of damages or other costs to customers or others, any of which could materially and adversely impact our business, financial condition or results of operations. We continue to assess the incident and cannot definitively determine, at this time, the full extent of the impact from such event on our business, results of operations or financial condition or whether such impact will ultimately have a material adverse effect. With regard to this incident, factors that could cause actual results to differ materially from those expressed or implied include (i) future claims from customers or other third parties, (ii) legal, reputational and financial risks resulting from the incident, (iii) the effectiveness of business continuity plans and cybersecurity risk management policies during the incident, (iv) the possibility that we will identify materially adverse findings arising from this incident that are not known to us on the date hereof.

The Company has established relationships with cybersecurity firms and internal cybersecurity experts, which it engages in connection with certain suspected incidents. The costs arising from those engagements, which depending on the incident may include both investigatory and remedial efforts, have not to date been material to the Company. The Company also regularly undergoes evaluation of its protections against incidents, including both self-assessments and expert third-party assessments, and it regularly enhances those protections, both in response to specific threats and as part of the Company’s efforts to stay current with advances in cybersecurity defense. When the Company experiences a confirmed cybersecurity incident, it generally performs root cause analyses and in appropriate instances will implement additional controls based on those analyses. In 2022, Company spending on cybersecurity efforts represented approximately 10% of its overall IT spend. There can be no assurance that the Company or its cybersecurity consultants will be able to prevent or remediate all future incidents or that the cost associated with responding to any such incident will not be significant.

The personal information and other data that we process and store also are subject to data security and data privacy obligations and laws of many jurisdictions, which are growing in complexity and sophistication as data becomes more enriched and technology and the global data protection landscape evolves. These laws may provide a private right of action for individuals alleging a breach of privacy rights, including for example the Illinois Biometric Information Privacy Act (“BIPA”). These laws may also conflict with one another, and many of them are subject to frequent modification and differing interpretations. The laws impose a significant compliance burden and include, for example, the European Union’s (“EU”) General Data Protection Regulation (“GDPR”), the California Consumer Privacy Act and the Brazilian General Data Protection Law. Complying with these evolving and varying standards could require significant expense and effort, and could require us to change our business practices or the functionality of our products and services in a manner adverse to our customers and our business. In addition, violations of these laws can result in significant fines, penalties, claims by regulators or other third-party lawsuits alleging significant damages, and damage to our brand and business. The GDPR, for example, includes fines of up to €20 million or up to 4% of the annual global revenues of the infringer for failure to comply, and grants corrective powers to supervisory authorities including the ability to impose a limit on processing of personal data. The laws also cover the transfer of personal, financial and business information, including transfers of employee information between us and our subsidiaries, across international borders. As another example, the Illinois BIPA provides aggrieved plaintiffs the ability to recover $1,000 for each unauthorized scan of biometric data, and $5,000 for each scan found to be in willful disregard of the statute.

Disruptions in our data center hosting and public cloud facilities could adversely affect our business. Our software products are increasingly being offered and provided on a cloud or other hosted basis through data centers operated by the Company or third parties in the United States and other countries. In addition, certain applications and data that we use in our services offerings and our operations may be hosted or stored at such facilities. These facilities may be vulnerable to natural disasters, including those exacerbated by the effects of climate change, telecommunications failures and similar events, or to intentional acts of misconduct, such as security incidents (including the ransomware incident announced April 17, 2023) or interference (including by disgruntled employees, former employees or contractors). The occurrence of these events or acts, or any other unanticipated problems, at these facilities could result in damage to or the unavailability of these cloud hosting facilities. Such damage or unavailability could, despite existing disaster recovery and business continuity arrangements, interrupt the availability of our cloud offerings for our customers. We have experienced such interruptions and damage or unavailability which interrupt the availability of applications or data necessary to provide services or conduct critical operations. Interruptions in the availability of our data center or cloud offerings or our ability to service our customers could result in the failure to meet contracted up-time or service levels, which could cause us to issue credits or pay damages or penalties or cause customers to terminate or not renew subscriptions. Interruptions could also expose us to liability claims from customers and others, payment of damages or other amounts, negative publicity and the need to engage in costly remediation efforts, any of which could have a material adverse effect on our business, financial condition or results of operations.