10-K 1 dbd12312017-10k.htm FORM 10-K Document


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from    to
Commission file number 1-4879
Diebold Nixdorf, Incorporated
(Exact name of registrant as specified in its charter)
Ohio
34-0183970
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
5995 Mayfair Road,
P.O. Box 3077, North Canton, Ohio
44720-8077
(Address of principal
executive offices)
(Zip Code)
Registrants telephone number, including area code (330) 490-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Shares $1.25 Par Value
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x  No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o  No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
(do not check if a smaller reporting company)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o  No x
Approximate aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2017, based upon the closing price on the New York Stock Exchange on June 30, 2017, was $2,106,512,828.
Number of common shares outstanding as of February 23, 2018 was 75,940,277.
DOCUMENTS INCORPORATED BY REFERENCE
Listed hereunder are the documents, portions of which are incorporated by reference, and the parts of this Form 10-K into which such portions are incorporated:
Diebold Nixdorf, Incorporated Proxy Statement for 2018 Annual Meeting of Shareholders to be held on or about April 25, 2018, portions of which are incorporated by reference into Part III of this Form 10-K.




TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I

ITEM 1: BUSINESS
(dollars in millions)

GENERAL

Diebold Nixdorf, Incorporated (collectively with its subsidiaries, the Company) provides Connected Commerce solutions which enable millions of transactions each day. The Company’s approximately 23,000 employees design and deliver convenient, “always on” and highly secure solutions that bridge the physical and the digital worlds of transactions. Customers of the Company include nearly all of the world’s top 100 financial institutions and a majority of the top 25 global retailers.

In 2016, the Company changed its name from Diebold to Diebold Nixdorf, following the transformational acquisition of Wincor Nixdorf Aktiengesellschaft (now known as Diebold Nixdorf AG) (the Acquisition). As a result of this acquisition, the Company has significantly increased its presence around the world and now conducts business in more than 130 countries. The Company was founded in 1859 and is incorporated under the laws of the state of Ohio.

Strategy
The Company’s Connected Commerce strategy seeks to continually enhance the consumer experience at banking and retail locations while simultaneously streamlining cost structures and business processes through the smart integration of hardware, software and services. This business requires ongoing investment in the development of intelligent information technology (IT) solutions and in the further development of our industry-leading services organization. The Company will continuously refine its research and development (R&D) spend in support of a better transaction experience for consumers and additionally accelerate the development and integration of innovative technology including cloud computing technology, touch points, sensors and connectivity to the Internet of Things, as well as open and agile software.

Integration and Transformation Program

Commensurate with its strategy, the Company is executing a multi-year integration and transformation program, called DN2020, which aligns employee activities with the Company's goal of realizing $240 of operating profit savings by the year 2020. Additional objectives of the program are to deliver greater innovation for customers, career enrichment opportunities for employees, and enhanced value for shareholders. DN2020 consists of six inter-related elements:

Advancing the Company's Connected Commerce Strategy - the Company will continue to develop innovative technology and partner with external companies to deliver highly secure customer-centric solutions. This includes the application of cloud computing technology, mobile technology, sensors and the Internet of Things, as well as open and agile software delivered “as-a-service."

Pursuing Finance Excellence - the Company will continuously improve its financial reporting, analysis and controls by emulating best practices from similar business entities. The Company's initiatives are designed to improve forecasting accuracy, optimize working capital management and pursue prudent capital allocation strategies which enhance shareholder value. At present, the Company's capital allocation priorities are to reduce its leverage and accelerate the realization of its cost reductions and synergies.

Executing the Company's Integration Plan - the Company’s detailed integration plan is designed to harmonize legacy business practices and build upon the best practices from each legacy company. The integration plan will leverage the Company's global scale, reduce overlap and improve the profitability of the Company.

Pursuing Operational Excellence - to strengthen its market leading position, the Company will implement best practices to improve operational efficiency and increase customer satisfaction. Robust reporting and tracking tools will be used to achieve best-in-class service and manufacturing levels.

Establish an Innovative Culture, which Attracts Industry-Leading Talent - the Company aims to become an employer of choice in the Connected Commerce space. We are building a culture characterized by innovation, customer collaboration, accountability and strong ethical behavior. The Company encourages experiential learning and will invest in training resources for the purposes of developing a vibrant workforce and expanding its leadership in Connected Commerce. Performance-based rewards and recognition policies are aligned with Company objectives and market opportunities.

Pursuing Sales Excellence - a capable and progressive sales organization is vital to the future growth of the Company. The Company will invest in the sales organization to ensure it has the skills, resources, and processes needed to support customers in their digital transformation journey. At the country level, we will optimize sales staffing and invest in partner programs commensurate with overall market demand. As a result of these investments, the Company expects to increase its pipeline of opportunities and increase its win rate over time.


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The financial objective of DN2020 is to realize approximately $240 of cost savings through 2020, including improvements realized through the Acquisition. Cost savings include:

Realizing volume discounts on direct materials
Harmonizing the solutions set of platforms and components
Increasing utilization rates of the service technicians
Rationalizing facilities in the regions
Streamlining corporate and general and administrative functions
Harmonizing back office solutions.

In order to achieve these savings, the Company has and will continue to invest significant dollars to restructure the workforce, integrate and optimize systems, streamline legal entities and consolidate real estate holdings. By executing these activities, the Company expects to deliver greater innovation for customers, career enrichment opportunities for employees, and enhanced value for shareholders.

CONNECTED COMMERCE SOLUTIONS

Services line of business (LOB)

With approximately 15,000 highly-trained service employees and a global delivery network, Diebold Nixdorf is the global leader in servicing distributed digital and physical assets for banking and retail customers. These services enable customers to meet the growing demand for transaction availability at automated teller machines (ATMs), point of sale (POS), self-checkout systems (SCO) and other distributed assets in a cost-effective manner. The Company’s global customer care center offers around-the-clock availability and is proficient in supporting customers in more than 25 languages. Recent investments in additional service technicians, training and support systems is optimizing the Company's service delivery. The global service supply chain optimizes the process for obtaining replacement parts, making repairs, and implementing new features and functionalities. The Company also possesses deep experience in installing, maintaining and upgrading customer touchpoints manufactured by other vendors, also known as multi-vendor support.

Product-related services provided by the Company include rapid resolution of incidents through remote service capabilities or an on-site visit. First and second line maintenance, preventive maintenance and on-demand services leverage a standardized incident management process to increase uptime of distributed assets.

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, bank branch and retail store networks. Managed services is the integrator of our solutions by bringing together services, software and systems into a long-term, outcome-based solution. Offerings include store lifecycle management, self-service fleet management, branch lifecycle management, ATM as-a-service and managed mobility services. The Company also provides a full array of cash management services, which optimizes the availability and cost of physical currency across the enterprise through efficient forecasting, inventory and replenishment processes. These services mitigate customer risks by relying on proven monitoring and reporting processes, secure tools and partnerships with larger cash-in-transit companies. In 2017, the Company began to provide new managed mobility services which efficiently operate retailers’ network of handheld devices.

Under DN2020, the Services LOB has a dual mandate of delivering revenue growth while improving efficiency. Sources of top-line growth include 1) increasing the Company's service attach rate on any unserved ATMs, POS and SCO systems in use, 2) up-selling current customers on managed services and 3) increasing billed work revenue by leveraging best practices across different countries and regions. The Services LOB expects to improve operating efficiency by implementing standard service tools, optimizing business processes, increasing the market acceptance of remote connection and resolution, and streamlining global delivery centers and stocking facilities.

Software LOB

The Company provides front-end applications for consumer connection points and back-end platforms that manage channel transactions, operations and integration. These hardware-agnostic software applications facilitate millions of transactions via ATMs, POS terminals, kiosks, and other self-service devices. The Company's platform software is installed within bank and retail data centers to facilitate omnichannel transactions, endpoint monitoring, remote asset management, customer marketing, merchandise management and analytics. These offerings include highly configurable, application program interface (API) enabled software that automates banking and retail transactions across channels. This multi-vendor software portfolio is designed to meet the evolving demands of a customer's self-service network including:

Connection points
Transaction management
Operations and security
Customer engagement
Analytics and digital

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In October 2017, the Company introduced Vynamic, the first end-to-end Connected Commerce software portfolio in the banking and retail marketplace. This offering establishes the evolutionary path for the Company's current software offerings including Vista, Commander, Xpression, PCE, Procash and TP.net. The Vynamic suite's open API architecture is built to eliminate the traditional focus on internal silos and enable tomorrow's inter-connected partnerships between financial institutions, retailers and payment providers. The Vynamic portfolio leverages data analytics to enable businesses to make intuitive, predictive and adaptive data–driven decisions and can be delivered as-a-service using cloud computing. Built to enable seamless consumer experiences across mobile devices, ATMs, POS terminals, branches, stores, kiosks and online channels, Vynamic extends beyond omnichannel to enable banks and retailers to create seamless, secure, highly personal connections across numerous digital and physical channels.

In the retail business, the Company provides a comprehensive, modular solution suite which is capable of enabling the most advanced omnichannel retail use cases. Also sold under the Vynamic portfolio, retail software improves end-to-end store processes and provides continuous connected 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. Data from a number of sources, such as enterprise resource planning (ERP), POS, store systems and customer relationship management systems (CRM), may be integrated across all customer connection points to create differentiated consumer experiences. Recent innovations include:

Vynamic Engage: A new cloud-based, software-as-a-service solution that enables a 360-degree view of customer behavior at every touchpoint. Customers may use the software to offer targeted promotions and conduct real-time campaigns across all channels.
Vynamic Mobile Shopper: Offering mobile self-scanning capabilities via both retail-hardened devices and consumer smartphones.
Vynamic Mobile Retail: A mobile scan & go application built on the Kony platform and enriched with personalization features from Vynamic Engage.

An important enabler of the Company’s software business is the more than 1,900 professional service employees who provide systems integration, customization, consulting and project management. The Company's advisory services team collaborates with its customers to help define optimal user experience, improve business processes, refine existing staffing models and deploy technology to meet branch automation objectives.

Systems LOB

Through collaboration with customers, engineering excellence and an efficient supply chain, the Company delivers industry-leading customer touchpoints to banks, retailers and other customers. These systems enable highly secure physical and digital transactions around the world. The Company integrates component technologies according to customer specifications in order to optimize the total cost of ownership and maximize transaction availability while creating a positive impression on customers.

The systems portfolio for banking customers consists of cash recyclers and dispensers, intelligent deposit terminals, teller automation and kiosk technologies, as well as physical security solutions. Recent innovation concepts include the miniaturized Extreme ATM, Essence and Fusion. Extreme ATM is the smallest ATM ever developed at less than 10” wide, which allows customers to stage transactions on mobile phones and complete transactions using Bluetooth® devices or near-field communication. Essence is a highly-secure and miniaturized ATM that features a sleek, antimicrobial glass touchscreen display and enhanced user interface modeled after today’s smartphones and tablet computers. Fusion is a modular and dynamic self-service touchpoint consisting of three interchangeable user interfaces that can connect with three different cash handling platforms.

For retail customers, the checkout portfolio includes modular, integrated and mobile POS systems that meet evolving automation and omni-channel requirements of consumers. 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. The portfolio, the Company also provides self-checkout terminals and ordering kiosks which facilitate an efficient and user-friendly purchasing experience. The Company’s hybrid product line, the BEETLE iSCAN EASY eXpress, can alternate from attended operation to self-checkout with the press of a button as traffic conditions warrant. The K-Two Kiosk automates routine tasks and in-store transactions, offers order-taking abilities at quick service restaurants (QSR) and fast casual restaurants, provides customer service, supplies product information, sells tickets and presents functionality that furthers store digitalization.

Under the DN2020 program, the Systems LOB objectives include introducing new innovations which are aligned with changing consumer demands and delivering greater operating efficiencies. With respect to innovation, the Company will continue to spend significant R&D dollars on the latest technology, which includes:

Advanced security solutions including anti-skimming card readers, biometric authentication and a modular, scalable architecture suited for various threat environments and risk appetites;
Facilitating real-time monitoring activities through the use of advanced sensors;
Remote and assisted self-service solutions including in-store/branch tablet notifications and two-way video capabilities;

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Mobile connectivity to support contactless transactions; and
Miniaturization technologies needed for branch/store transformation.

With respect to operating efficiencies, the Company's activities include:

Leveraging the purchasing power of the Company through its procurement partnership program;
Streamlining the product portfolio - including terminals, core technologies and components;
Developing a partner ecosystem to complement the Company's core technologies; and
Consolidating manufacturing capacity to optimize fixed costs

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

Segment financial information can be found in note 22 to the consolidated financial statements, which is contained in Item 8 of this annual report on Form 10-K.

COMPETITION

The Company competes with global, regional and local competitors to provide Connected Commerce solutions to financial institutions and retailers. Changing customer demands require the Company's customers to transform their business processes by investing in innovative technology. The Company differentiates its offerings by providing a wide range of innovative solutions.

Based upon outside independent industry surveys from Retail Banking Research (RBR), the Company believes that it is a leading service provider and manufacturer of self-service solutions across the globe. The Company maintains a global service infrastructure that allows it to meet delivery deadlines. Many of the Company’s customers are beginning to adopt branch automation solutions which improve the customer experience and enhance efficiency. The complexity of new hardware, software and service solutions is resulting in longer sales and deployment cycles for large projects. As the trend towards branch and store automation continues, the traditional lines of “behind the counter” and “in front of the counter” solutions are eroding, which creates additional opportunity for the Company while increasing the number of competitors. The Company differentiates its offerings by leveraging innovations in advanced security, biometric authentication, mobile connectivity to support contactless transactions, advanced sensors, cloud computing and the Internet of Things to facilitate real-time monitoring activities, and miniaturization technologies. With regard to Microsoft’s plan to end support for Windows 7 in 2020, Diebold Nixdorf became the first ATM provider to ship Windows 10 ready products.

Competitors in the self-service banking market include NCR, Nautilus Hyosung, GRG Banking Equipment, Glory Global Solutions, Oki Data and Triton Systems, as well as a number of localized manufacturing and service providers such as Fujitsu and Hitachi-Omron in Asia Pacific (AP); Hantle/GenMega in North America (NA); KEBA in Europe, Middle East and Africa (EMEA); and Perto in Latin America (LA). In a number of markets, the Company sells to but also competes with independent ATM deployers such as Cardtronics, Payment Alliance International and Euronet.

In Brazil, the Company provides election systems, lottery terminals and product support to the Brazil government. Competition in this market segment is based upon technology pre-qualification demonstrations.

In the retail market, the Company is a market leader in helping retailers to transform their stores to a consumer-centric approach by providing electronic POS (ePOS), automated checkout solutions, cash management, a software suite and services for the majority of retailers headquartered in Europe. The Company, competes with the key players highlighted above plus other technology firms such as Toshiba and Fujitsu and specialized software players such a GK Software, Oracle, Aptos and PCMS. Many retailers also work with proprietary software solutions.

For its services offerings, the Company perceives competition to be fragmented, especially in the product related services segment. While other manufacturers provide basic levels of product support, the competition also includes local and regional third-party providers. With respect to higher value managed services, the Company competes with large IT service providers such as IBM, Atos, Fiserv and DXC Technology.

In the self-service software market, the Company, in addition to the key hardware players highlighted above, competes with several smaller, niche software companies like KAL, or with the internal software development teams of banks and retailers.


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OPERATIONS

The Company’s operating results and the amount and timing of revenue are affected by numerous factors, including production schedules, customer priorities, sales volume and sales mix. During the past several years, the Company has honed its offerings to become a total solutions provider with a focus on Connected Commerce. As a result of the emphasis on services and software, the nature of the Company's workforce is changing and new skill sets are required such as:

Advanced security and compliance measures,
Advanced sensors,
Modern field services operations,
Cloud computing,
Analytics, and
As-a-service software expertise.

The principal raw materials used by the Company in its manufacturing operations are steel, plastics, electronic parts and components, and spare parts, which are purchased from various major suppliers. These materials and components are generally available in ample quantities.

The Company carries working capital mainly related to trade receivables and inventories. Inventories generally are only manufactured or purchased as orders are received from customers. The Company’s normal and customary payment terms generally range from 30 to 90 days from date of invoice. The Company generally does not offer extended payment terms. The Company
also provides financing arrangements to customers that are largely classified and accounted for as sales-type leases. As of December 31, 2017, the Company’s net investment in finance lease receivables was $26.3.

PRODUCT BACKLOG

The Company's product backlog, was $1,026.7 and $1,060.0 as of December 31, 2017 and 2016, respectively. The backlog generally includes orders estimated or projected to be shipped or installed within 18 months. Although the Company believes the orders included in the backlog are firm, some orders may be canceled by customers without penalty, and the Company may elect to permit cancellation of orders without penalty where management believes it is in the Company's best interests to do so. Historically, the Company has not experienced significant cancellations within its product backlog. Additionally, over 50 percent of the Company's revenues are derived from its service business, for which backlog information is not measured. Therefore, the Company does not believe that its product backlog, as of any particular date, is necessarily indicative of revenues for any future period.

RESEARCH, DEVELOPMENT AND ENGINEERING

In order to meet growing customer demand for innovative Connected Commerce solutions, the Company continues to invest in technology solutions that enable customers to reduce costs, increase convenience and improve efficiency. Expenditures for research, development and engineering initiatives were $155.5, $110.2 and $86.9 in 2017, 2016 and 2015, respectively. The Company recently announced a number of new innovative solutions, such as the new Extreme ATM™ concept, biometric-enabled solutions, the responsive banking concept, Essence, Fusion, Vynamic and Cash Cube.

PATENTS, TRADEMARKS, LICENSES

The Company owns patents, trademarks and licenses relating to certain products across the globe. While the Company regards these as items of importance, it does not deem its business as a whole, or any industry segment, to be materially dependent upon any one item or group of items. The Company intends to protect and defend its intellectual property, including pursuit of infringing third parties for damages and other appropriate remedies.

ENVIRONMENTAL

Compliance with federal, state and local environmental protection laws during 2017 had no material effect upon the Company’s business, financial condition or results of operations.

EMPLOYEES

At December 31, 2017, the Company employed approximately 23,000 associates globally. As a result of the 2016 acquisition of Diebold Nixdorf AG, the Company has significantly increased its presence around the world and now conducts business in more than 130 countries.

EXECUTIVE OFFICERS

Refer to Part III, Item 10 of this annual report on Form 10-K for information on the Company's executive officers, which is incorporated herein by reference.

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AVAILABLE INFORMATION

The Company uses its Investor Relations web site, http://investors.dieboldnixdorf.com, as a channel for routine distribution of important information, including stock information, news releases, investor presentations and financial information. The Company posts filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the U.S. Securities and Exchange Commission (SEC), including its annual, quarterly, and current reports on Forms 10-K, 10-Q, and 8-K; its proxy statements; registration statements; and any amendments to those reports or statements. All such postings and filings are available on the Company’s Investor Relations web site free of charge. In addition, this web site allows investors and other interested persons to sign up to automatically receive e-mail alerts when the Company posts news releases and financial information on its web site. Investors and other interested persons can also follow the Company on Twitter at http://twitter.com/dieboldnixdorf. The SEC also maintains a web site, www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The content on any web site referred to in this annual report on Form 10-K is not incorporated by reference into this annual report unless expressly noted.


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ITEM 1A: RISK FACTORS
(dollars and euros in millions)

The following, including the risk factors relating to the integration of our acquisition of Diebold Nixdorf AG, are certain risk factors that could affect our business, financial condition, operating results and cash flows. These risk factors should be considered in connection with evaluating the forward-looking statements contained in this annual report on Form 10-K because they could cause actual results to differ materially from those expressed in any forward-looking statement. The risk factors highlighted below are not the only ones we face. If any of these events actually occur, our business, financial condition, operating results or cash flows could be negatively affected.

We caution the reader to keep these risk factors in mind and refrain from attributing undue certainty to any forward-looking statements, which speak only as of the date of this annual report on Form 10-K.

The Company may fail to realize the anticipated strategic and financial benefits sought from the Acquisition.

The Company may not realize all of the anticipated benefits of the Acquisition. The success of the Acquisition depends upon, among other things, the Company’s ability to combine its business with Diebold Nixdorf AG’s business in a manner that facilitates growth in the value-added services sector and realizes anticipated cost savings. The Company believes that the Acquisition will provide an opportunity for revenue growth in managed services, professional services, installation and maintenance services.

However, the Company must successfully combine the Acquisition in a manner that permits these anticipated benefits to be realized. In addition, the Company must achieve the anticipated growth and cost savings without adversely affecting current revenues and investments in future growth. Further, providing managed services, professional services, installation and maintenance services can be highly complex and can involve the design, development, implementation and operation of new solutions and the transitioning of clients from their existing systems and processes to a new environment. If the Company is not able to effectively provide value-added services and successfully achieve the growth and cost savings objectives, the anticipated benefits of the Acquisition may not be realized fully, or at all, or may take longer to realize than expected.

The Company may experience operational challenges, negative synergies and loss of customers.

Integrating the operations and personnel of the Acquisition involves complex operational, technological and personnel-related challenges. This process can be time-consuming and expensive, and it may disrupt the businesses of the Company. The Company may not realize all of the anticipated benefits of the Acquisition. Difficulties in the integration of the business, which may result in significant costs and delays, include:

managing a significantly larger company;
integrating and unifying the offerings and services available to customers and coordinating distribution and marketing efforts;
coordinating corporate and administrative infrastructures and harmonizing insurance coverages;
unanticipated issues in coordinating accounting, IT, communications, administration and other systems;
difficulty addressing possible differences in corporate cultures and management philosophies;
challenges associated with continuing to maintain the Acquisition's financial reporting in accordance with both accounting principles generally accepted in the U.S. (U.S GAAP) and International Financial Reporting Standards (IFRS) and the ongoing costs of compliance with the Sarbanes-Oxley Act of 2002, as amended, and the rules promulgated thereunder by the SEC;
legal and regulatory compliance;
creating and implementing uniform standards, controls, procedures and policies;
litigation relating to the transactions contemplated by a reorganization, including shareholder litigation;
diversion of management’s attention from other operations;
maintaining existing agreements and relationships with customers, distributors, providers and vendors and avoiding delays in entering into new agreements with prospective customers, distributors, providers and vendors;
realizing the benefits from the Company’s restructuring programs;
unforeseen and unexpected liabilities related to the Acquisition, including the risk that certain of the Company's executive officers may be subject to additional fiduciary duties and liability;
identifying and eliminating redundant and underperforming functions and assets; and
a deterioration of credit ratings.

The Company may lose customers or its share of customers’ business as entities that were customers of both Diebold, Incorporated and Diebold Nixdorf AG seek to diversify their suppliers of services and products. Following the Acquisition, customers may no longer distinguish between Diebold Nixdorf, Incorporated and Diebold Nixdorf AG and their respective services and products. Banking customers in particular may turn to competitors of the Company for products and services that they received from the Company prior to the Acquisition. As a result, the Company may lose customers and anticipated revenues may decrease following the Acquisition. In addition, third parties with whom the Company currently has relationships may terminate or otherwise reduce the scope of their relationship. Any such loss of business could limit the Company’s ability to achieve the anticipated benefits of the Acquisition.

9



The Company is exposed to additional litigation risk and uncertainty with respect to the remaining minority shareholders of Diebold Nixdorf AG.

As a result of the Acquisition, the Company continues to be exposed to litigation risk and uncertainty associated with the remaining minority shareholders of Diebold Nixdorf AG. The Company’s willingness and/or ability to acquire all issued and outstanding shares of Diebold Nixdorf AG, and the timing of any such potential acquisition, is uncertain. In addition, the adequacy of both forms of compensation payments to minority shareholders agreed under the terms of the Domination and Profit and Loss Transfer Agreement between Diebold Holding Germany Inc. & Co. KGaA (Diebold KGaA), a wholly-owned subsidiary of the Company and Diebold Nixdorf AG (the DPLTA) has been challenged by certain minority shareholders of Diebold Nixdorf AG, who have initiated court-led appraisal proceedings under German law. The Company cannot rule out that the competent court in such appraisal proceeding may adjudicate a higher exit compensation or recurring payment obligation (in each case, including interest thereon) than agreed upon in the DPLTA, the financial impact and timing of which is uncertain.

The Company’s failure to meet its debt service obligations could have a material adverse effect on the Company’s business, financial condition and results of operations.

The Company’s high level of indebtedness following the Acquisition could adversely affect the Company’s operations and liquidity. The Company’s level of indebtedness could, among other things:

make it more difficult for the Company to pay or refinance its debts as they become due during adverse economic and industry conditions because the Company may not have sufficient cash flows to make its scheduled debt payments;
cause the Company to use a larger portion of its cash flow to fund interest and principal payments, reducing the availability of cash to fund working capital, capital expenditures, research and development and other business activities;
limit the Company’s ability to take advantage of significant business opportunities, such as acquisition opportunities, and to react to changes in market or industry conditions;
cause the Company to be more vulnerable to general adverse economic and industry conditions;
cause the Company to be disadvantaged compared to competitors with less leverage;
result in a downgrade in the credit rating of the Company or indebtedness of the Company or its subsidiaries, which could increase the cost of borrowings; and
limit the Company’s ability to borrow additional monies in the future to fund working capital, capital expenditures, research and development and other business activities.

In addition, the agreements governing the Company's indebtedness contain restrictive covenants that limit our ability to engage in activities that may be in our long-term best interest. The Company's failure to comply with those covenants could result in an event of default that, if not cured or waived, could result in the acceleration of all its debt.

The Company may also incur additional long-term debt and working capital lines of credit to meet future financing needs, which would increase our total indebtedness. Although the terms of its existing and future credit agreements and of the indentures governing its debt contain restrictions on the incurrence of additional debt, including secured debt, these restrictions are subject to a number of important exceptions and debt incurred in compliance with these restrictions could be substantial. If the Company and its restricted subsidiaries incur significant additional debt, the related risks that the Company faces could intensify.

The Company may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

The Company's ability to make scheduled payments or refinance its debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. The Company may be unable to maintain a level of cash flows from operating activities sufficient to permit the payment of principal, premium, if any, and interest on its indebtedness.

If the Company's cash flows and capital resources are insufficient to fund its debt service obligations, the Company could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance its indebtedness. The Company may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow the Company to meet its scheduled debt service obligations. In addition, the terms of the Company's existing or future debt arrangements may restrict it from effecting any of these alternatives.

The Company's inability to generate sufficient cash flows to satisfy its debt obligations, or to refinance its indebtedness on commercially reasonable terms or at all, would materially and adversely affect its financial position and results of operations.


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The terms of the credit agreement governing our senior credit facility and the high-yield notes (the Indenture) restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.

The Indenture and the credit agreement governing our senior credit facility contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including restrictions on our ability to:

incur additional indebtedness and guarantee indebtedness;
pay dividends or make other distributions or repurchase or redeem capital stock;
prepay, redeem or repurchase certain debt;
issue certain preferred stock or similar equity securities;
make loans and investments;
sell assets;
incur liens;
enter into transactions with affiliates;
alter the businesses we conduct;
enter into agreements restricting our subsidiaries’ ability to pay dividends; and
consolidate, merge or sell all or substantially all of our assets.

In addition, the restrictive covenants in the credit agreement governing our senior credit facility require us to maintain specified financial ratios and satisfy other financial condition tests. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we may be unable to meet them.

A breach of the covenants or restrictions under the Indenture or under the credit agreement governing our senior credit facility could result in an event of default under the applicable indebtedness. Such a default may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In addition, an event of default under the credit agreement governing our senior credit facility would permit the lenders under our senior credit facility to terminate all commitments to extend further credit under that facility. Furthermore, if we were unable to repay the amounts due and payable under our senior credit facility, those lenders could proceed against the collateral granted them to secure that indebtedness. In the event our lenders or noteholders accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness. As a result of these restrictions, we may be:

limited in how we conduct our business;
unable to raise additional debt or equity financing to operate during general economic or business downturns; and
unable to compete effectively or to take advantage of new business opportunities.

These restrictions may affect our ability to grow in accordance with our strategy. In addition, our financial results, our substantial indebtedness and our credit ratings could adversely affect the availability and terms of our financing.

In addition to the Acquisition, the Company may be unable to successfully and effectively manage acquisitions, divestitures and other significant transactions, which could harm our operating results, business and prospects.

As part of our business strategy, including and in addition to the Acquisition, we frequently engage in discussions with third parties regarding possible investments, acquisitions, strategic alliances, joint ventures, divestitures and outsourcing arrangements, and we enter into agreements relating to such transactions in order to further our business objectives. In order to pursue this strategy successfully, we must identify suitable candidates, successfully complete transactions, some of which may be large and complex, and manage post-closing issues such as the integration of acquired companies or employees and the divestiture of combined businesses, operations and employees. Integration, divestiture and other risks of these transactions can be more pronounced in larger and more complicated transactions, or if multiple transactions are pursued simultaneously. If we fail to identify and successfully complete transactions that further our strategic objectives, we may be required to expend resources to develop products and technology internally. This may put us at a competitive disadvantage and we may be adversely affected by negative market perceptions, any of which may have a material adverse effect on our revenue, gross margin and profitability.

Integration and divestiture issues are complex, time-consuming and expensive and, without proper planning and implementation, could significantly disrupt our business. The challenges involved in integrating and divesting include:

combining service and product offerings and entering into new markets in which we are not experienced;
convincing customers and distributors that any such transaction will not diminish client service standards or business focus, preventing customers and distributors from deferring purchasing decisions or switching to other suppliers or service providers (which could result in additional obligations to address customer uncertainty), and coordinating service, sales, marketing and distribution efforts;
consolidating and rationalizing corporate IT infrastructure, which may include multiple systems from various acquisitions and integrating software code;
minimizing the diversion of management attention from ongoing business concerns;

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persuading employees that business cultures are compatible, maintaining employee morale and retaining key employees, integrating employees into our company, correctly estimating employee benefit costs and implementing restructuring programs;
coordinating and combining administrative, service, manufacturing, research and development and other operations, subsidiaries, facilities and relationships with third parties in accordance with local laws and other obligations while maintaining adequate standards, controls and procedures; 
achieving savings from supply chain and administration integration; and
efficiently divesting combined business operations which may cause increased costs as divested businesses are de-integrated from embedded systems and operations.

We evaluate and enter into these types of transactions on an ongoing basis. We may not fully realize all of the anticipated benefits of any transaction and the time frame for achieving benefits of a transaction may depend partially upon the actions of employees, suppliers or other third parties. In addition, the pricing and other terms of our contracts for these transactions require us to make estimates and assumptions at the time we enter into these contracts, and, during the course of our due diligence, we may not identify all of the factors necessary to estimate costs accurately. Any increased or unexpected costs, unanticipated delays or failure to achieve contractual obligations could make these agreements less profitable or unprofitable.

Managing these types of transactions requires varying levels of management resources, which may divert our attention from other business operations. These transactions could result in significant costs and expenses and charges to earnings, including those related to severance pay, early retirement costs, employee benefit costs, asset impairment charges, charges from the elimination of duplicative facilities and contracts, in-process research and development charges, inventory adjustments, assumed litigation, regulatory compliance and other liabilities, legal, accounting and financial advisory fees and required payments to executive officers and key employees under retention plans. Moreover, we could incur additional depreciation and amortization expense over the useful lives of certain assets acquired in connection with these transactions, and, to the extent that the value of goodwill or intangible assets with indefinite lives acquired in connection with a transaction becomes impaired, we may be required to incur additional material charges relating to the impairment of those assets. In order to complete an acquisition, we may issue common shares, potentially creating dilution for existing shareholders, or borrow funds, which could affect our financial condition, results of operations and potentially our credit ratings. Any prior or future downgrades in our credit rating associated with a transaction could adversely affect our ability to borrow and our borrowing cost, and result in more restrictive borrowing terms. In addition, our effective tax rate on an ongoing basis is uncertain, and such transactions could impact our effective tax rate. We also may experience risks relating to the challenges and costs of closing a transaction and the risk that an announced transaction may not close. As a result, any completed, pending or future transactions may contribute to financial results that differ materially from the investment community’s expectations.

Demand for and supply of our services and products may be adversely affected by numerous factors, some of which we cannot predict or control. This could adversely affect our operating results.

Numerous factors may affect the demand for and supply of our services and products, including:

changes in the market acceptance of our services and products;
customer and competitor consolidation;
changes in customer preferences;
declines in general economic conditions;
disruptive technologies;
changes in environmental regulations that would limit our ability to service and sell products in specific markets;
macro-economic factors affecting retail stores and banks, credit unions and other financial institutions may lead to cost-cutting efforts by customers, including branch closures, which could cause us to lose current or potential customers or achieve less revenue per customer; and
availability of purchased products.

If any of these factors occur, the demand for and supply of our services and products could suffer, and which could adversely affect our results of operations.

The Company’s ability to deliver products that satisfy customer requirements is dependent on the performance of its subcontractors and suppliers, as well as on the availability of raw materials and other components.

We rely on other companies, including subcontractors and suppliers, to provide and produce raw materials, integrated components and sub-assemblies and production commodities included in, or used in the production of, our products. If one or more of our subcontractors or suppliers experiences delivery delays or other performance problems, we may be unable to meet commitments to our customers or incur additional costs. In some instances, we depend upon a single source of supply. Any service disruption from one of these suppliers, either due to circumstances beyond the supplier’s control, such as geo-political developments, or as a result of performance problems or financial difficulties, could have a material adverse effect on our ability to meet commitments to our customers or increase our operating costs.


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Increased energy, raw material and labor costs could reduce our income.

Energy prices, particularly petroleum prices, are cost drivers for our business. In recent years, the price of petroleum has been highly volatile, particularly due to the unstable political conditions in the Middle East and increasing international demand from emerging markets. Price increases in fuel and electricity costs, such as those increases that may occur from climate change legislation or other environmental mandates, may continue to increase our cost of operations. Any increase in the costs of energy would also increase our transportation costs.

The primary raw materials in our services, software and systems solutions are steel, plastics, and electronic parts and components. The majority of our raw materials are purchased from various local, regional and global suppliers pursuant to supply contracts. However, the price of these materials can fluctuate under these contracts in tandem with the pricing of raw materials.

We cannot assure that our labor costs going forward will remain competitive or will not increase. In the future, our labor agreements may be amended, or become amendable, and new agreements could have terms with higher labor costs. In addition, our labor costs may increase in connection with our growth. We may also become subject to collective bargaining agreements in the future in the event that non-unionized workers may unionize.

Although we attempt to pass on higher energy, raw material and labor costs to our customers, it is often not possible given the competitive markets in which we operate.

Our business may be affected by general economic conditions, cyclicality and uncertainty and could be adversely affected during economic downturns.

Demand for our services and products is affected by general economic conditions and the business conditions of the industries in which we sell our services and products. The business of most of our customers, particularly our financial institution and retail customers, is, to varying degrees, cyclical and has historically experienced periodic downturns. Under difficult economic conditions, customers may seek to reduce discretionary spending by forgoing purchases of our services and products. This risk is magnified for capital goods purchases such as ATMs, retail systems and physical security products. In addition, downturns in our customers’ industries, even during periods of strong general economic conditions, could adversely affect the demand for our services and products, and our sales and operating results.

In particular, continuing economic difficulties in the global markets have led to an economic recession in many of the markets in which we operate. As a result of these difficulties and other factors, including new or increased regulatory burdens, financial institutions and retail customers have failed and may continue to fail, resulting in a loss of current or potential customers, or deferred or canceled orders, including orders previously placed. Any customer deferrals or cancellations could materially affect our sales and operating results.

We may be unable to achieve, or may be delayed in achieving, our cost-cutting initiatives, and this may adversely affect our operating results and cash flow.

We have launched a number of cost-cutting initiatives, including DN2020 initiatives, to improve operating efficiencies and reduce operating costs. Although we have achieved a substantial amount of annual cost savings associated with these cost-cutting initiatives, we may be unable to sustain the cost savings that we have achieved. In addition, if we are unable to achieve, or have any unexpected delays in achieving, additional cost savings, our results of operations and cash flows may be adversely affected. Even if we meet our goals as a result of these initiatives, we may not receive the expected financial benefits of these initiatives.

We face competition that could adversely affect our sales and financial condition.

All phases of our business are highly competitive. Some of our services and products are in direct competition with similar or alternative services or products provided by our competitors. We encounter competition in price, delivery, service, performance, product innovation, product recognition and quality.

Because of the potential for consolidation in any market, our competitors may become larger, which could make them more efficient and permit them to be more price-competitive. Increased size could also permit them to operate in wider geographic areas and enhance their abilities in other areas such as research and development and customer service. As a result, this could also reduce our profitability.

We expect that our competitors will continue to develop and introduce new and enhanced services and products. This could cause a decline in market acceptance of our services and products. In addition, our competitors could cause a reduction in the prices for some of our services and products as a result of intensified price competition. Also, we may be unable to effectively anticipate and react to new entrants in the marketplace competing with our services and products.

Competitive pressures can also result in the loss of major customers. An inability to compete successfully could have an adverse effect on our operating results, financial condition and cash flows in any given period.


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Additional tax expense or additional tax exposures could affect our future profitability.

We are subject to income taxes in both the United States (U.S.) and various non-U.S. jurisdictions, and our domestic and international tax liabilities are dependent upon the distribution of income among these different jurisdictions. If we decide to repatriate cash and cash equivalents and short-term investments residing in international tax jurisdictions, there could be further negative impact on foreign and domestic taxes. Our tax expense includes estimates of additional tax that may be incurred for tax exposures and reflects various estimates and assumptions, including assessments of future earnings of the Company that could affect the valuation of our net deferred tax assets. Our future results could be adversely affected by changes in the effective tax rate as a result of a change in the mix of earnings in countries with differing statutory tax rates, changes in the overall profitability of the Company, changes in tax legislation, changes in the valuation of deferred tax assets and liabilities, the results of audits and examinations of previously filed tax returns and continuing assessments of our income tax exposures.

Additionally, our future results could be adversely affected by the results of indirect tax audits and examinations, and continuing assessments of our indirect tax exposures. A loss contingency is reasonably possible if it has a more than remote but less than probable chance of occurring. Although management believes the Company has valid defenses with respect to its indirect tax positions, it is reasonably possible that a loss could occur in excess of the estimated accrual. The Company estimated the aggregate risk at December 31, 2017 to be up to $144.7 for its material indirect tax matters. The aggregate risk related to indirect taxes is adjusted as the applicable statutes of limitations expire. It is reasonably possible that we could be required to pay taxes, penalties and interest related to this matter or other open years, which could be material to our financial condition and results of operations.

On December 22, 2017, U.S. tax reform legislation informally known as the Tax Cuts and Jobs Act (the Tax Act) was signed into law. The Tax Act makes substantial changes to U.S. tax law, including a reduction in the corporate tax rate, a limitation on deductibility of interest expense, a limitation on the use of net operating losses to offset future taxable income, the allowance of immediate expensing of capital expenditures, deemed repatriation of foreign earnings and significant changes to the taxation of foreign earnings going forward. We expect the Tax Act to have significant effects on us, some of which may be adverse. We expect impacts on our financial statements to tax expense, deferred tax assets and liabilities and accrued taxes during the prescribed measurement period. The extent of the impact remains uncertain at this time and is subject to any other regulatory or administrative developments, including any regulations or other guidance promulgated by the U.S. Internal Revenue Service (IRS). The Tax Act contains numerous, complex provisions impacting U.S. multinational companies, and we continue to review and assess the legislative language and its potential impact on us.

In international markets, we compete with local service providers that may have competitive advantages.

In a number of international markets in each region where we operate, for instance in Brazil and China, we face substantial competition from local service providers that offer competing services and products. Some of these companies may have a dominant market share in their territories and may be owned by local stakeholders. This could give them a competitive advantage. Local providers of competing services and products may also have a substantial advantage in attracting customers in their countries due to more established branding in that country, greater knowledge with respect to the tastes and preferences of customers residing in that country and/or their focus on a single market. As a U.S. based multi-national corporation, we must ensure our compliance with both U.S. and foreign regulatory requirements.

Because our operations are conducted worldwide, they are affected by risks of doing business abroad.

We generate a significant percentage of revenue from operations conducted outside the U.S. Revenue from international operations amounted to approximately 77.5 percent in 2017, 69.2 percent in 2016 and 58.1 percent in 2015 of total revenue during these respective years. We expect more of our future revenue to be generated outside the U.S. with the integration of the Acquisition.

Accordingly, international operations are subject to the risks of doing business abroad, including, among other things, the following:

fluctuations in currency exchange rates, particularly in EMEA (primarily the euro (EUR) and Great Britain pound sterling (GBP)), China (renminbi) and Brazil (real);
transportation delays and interruptions;
political and economic instability and disruptions, including the impact on trade agreements;
the failure of foreign governments to abide by international agreements and treaties;
restrictions on the transfer of funds;
the imposition of duties, tariffs and other taxes;
import and export controls;
changes in governmental policies and regulatory environments;
ensuring our compliance with U.S. laws and regulations and applicable laws and regulations in other jurisdictions, including the Foreign Corrupt Practices Act (FCPA), the U.K. Bribery Act, and applicable laws and regulations in other jurisdictions;
increasingly complex laws and regulations concerning privacy and data security, including the European Union’s General Data Protection Regulation;
labor unrest and current and changing regulatory environments;
the uncertainty of product acceptance by different cultures;

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the risks of divergent business expectations or cultural incompatibility inherent in establishing strategic alliances with foreign partners;
difficulties in staffing and managing multi-national operations;
limitations on the ability to enforce legal rights and remedies;
reduced protection for intellectual property rights in some countries; and
potentially adverse tax consequences, including repatriation of profits.

Any of these events could have an adverse effect on our international operations by reducing the demand for our services and products or decreasing the prices at which we can sell our services and products, thereby adversely affecting our financial condition or operating results. We may not be able to continue to operate in compliance with applicable customs, currency exchange control regulations, transfer pricing regulations or any other laws or regulations to which we may be subject. In addition, these laws or regulations may be modified in the future, and we may not be able to operate in compliance with those modifications.

Additionally, there are ongoing concerns regarding the short- and long-term stability of the euro and its ability to serve as a single currency for a variety of individual countries. These concerns could lead individual countries to revert, or threaten to revert, to their former local currencies, which could lead to the dissolution of the euro. Should this occur, the assets we hold in a country that re-introduces its local currency could be significantly devalued. Furthermore, the dissolution of the euro could cause significant volatility and disruption to the global economy, which could impact our financial results. Finally, if it were necessary for us to conduct our business in additional currencies, we would be subjected to additional earnings volatility as amounts in these currencies are translated into U.S. dollar (USD).

We may be exposed to liabilities under the FCPA, which could harm our reputation and have a material adverse effect on our business.

We are subject to compliance with various laws and regulations, including the FCPA and similar worldwide anti-bribery laws, which generally prohibit companies and their intermediaries from engaging in bribery or making other improper payments to foreign officials for the purpose of obtaining or retaining business or gaining an unfair business advantage. The FCPA also requires proper record keeping and characterization of such payments in our reports filed with the SEC.

Our employees and agents are required to comply with these laws. We operate in many parts of the world that have experienced governmental and commercial corruption to some degree, and strict compliance with anti-bribery laws may conflict with local customs and practices. Foreign companies, including some that may compete with us, may not be subject to the FCPA and may follow local customs and practices. Accordingly, such companies may be more likely to engage in activities prohibited by the FCPA, which could have a significant adverse impact on our ability to compete for business in such countries.

Despite our commitment to legal compliance and corporate ethics, we cannot ensure that our policies and procedures will always protect us from intentional, reckless or negligent acts committed by our employees or agents. Violations of these laws, or allegations of such violations, could disrupt our business and result in financial penalties, debarment from government contracts and other consequences that may have a material adverse effect on our reputation, business, financial condition or results of operations. Future changes in anti-bribery or economic sanctions laws and enforcement could also result in increased compliance requirements and related expenses that may also have a material adverse effect on our business, financial condition or results of operations.

In addition, our business opportunities in select geographies have been or may be adversely affected by the settlement of the FCPA matter that we settled with the U.S. government in late 2013. Some countries in which we do business may also initiate their own reviews and impose penalties, including prohibition of our participating in or curtailment of business operations in those jurisdictions. We could also face third-party claims in connection with this matter or as a result of the outcome of the current or any future government reviews. Our disclosure, internal review and any current or future governmental review of this matter could, individually or in the aggregate, have a material adverse effect on our reputation and our ability to obtain new business or retain existing business from our current clients and potential clients, to attract and retain employees and to access the capital markets.

We may expand operations into international markets in which we may have limited experience or rely on business partners.

We continually look to expand our services and products into international markets. We have currently developed, through strategic alliances, investments, subsidiaries and branch offices, service and product offerings in more than 130 countries outside of the U.S. As we expand into new international markets, we will have only limited experience in marketing and operating services and products in such markets. In other instances, we may rely on the efforts and abilities of foreign business partners in such markets. Certain international markets may be slower than domestic markets in adopting our services and products, and our operations in international markets may not develop at a rate that supports our level of investment. Further, violations of laws by our foreign business partners, or allegations of such violations, could disrupt our business and result in financial penalties and other consequences that may have a material adverse effect on our business, financial condition or results of operations.


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We have a significant amount of long-term assets, including goodwill and other intangible assets, and any future impairment charges could adversely impact our results of operations.

We review long-lived assets, including property, plant and equipment and identifiable amortizing intangible assets, for impairment whenever changes in circumstances or events may indicate that the carrying amounts are not recoverable. If the fair value is less than the carrying amount of the asset, a loss is recognized for the difference. Factors which may cause an impairment of long-lived assets include significant changes in the manner of use of these assets, negative industry or market trends, a significant under-performance relative to historical or projected future operating results, or a likely sale or disposal of the asset before the end of its estimated useful life.

As of December 31, 2017, we had $1,117.1 of goodwill. We assess all existing goodwill at least annually for impairment on a reporting unit basis. Beginning with the first quarter of 2017, the Company’s reportable operating segments are the following lines of business: Software, Systems, and Services. The techniques used in our qualitative and quantitative assessment and goodwill impairment tests incorporate a number of estimates and assumptions that are subject to change. Although we believe these estimates and assumptions are reasonable and reflect market conditions forecast at the assessment date, any changes to these assumptions and estimates due to market conditions or otherwise may lead to an outcome where impairment charges would be required in future periods.

System security risks, systems integration and cybersecurity issues could disrupt our internal operations or services provided to customers, and any such disruption could adversely affect revenue, increase costs, and harm our reputation and stock price.

Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate our own confidential information or those of our customers, corrupt data, create system disruptions or cause shutdowns. A network security breach could be particularly harmful if it remains undetected for an extended period of time. Groups of hackers may also act in a coordinated manner to launch distributed denial of service attacks, or other coordinated attacks, that may cause service outages or other interruptions. We could incur significant expenses in addressing problems created by network security breaches, such as the expenses of deploying additional personnel, enhancing or implementing new protection measures, training employees or hiring consultants. Further, such corrective measures may later prove inadequate. Moreover, actual or perceived security vulnerabilities in our services and products could cause significant reputational harm, causing us to lose existing or potential customers. Reputational damage could also result in diminished investor confidence. Actual or perceived vulnerabilities may also lead to claims against us. Although our license agreements typically contain provisions that eliminate or limit our exposure to such liability, there is no assurance these provisions will withstand legal challenges. We could also incur significant expenses in connection with customers’ system failures.

In addition, sophisticated hardware and operating system software and applications that we produce or procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of the system. The costs to eliminate or alleviate security problems, viruses and bugs could be significant, and the efforts to address these problems could result in interruptions, delays or cessation of service that could impede sales, manufacturing, distribution or other critical functions.

Portions of our IT infrastructure also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems, and transitioning data and other aspects of the process could be expensive, time consuming, disruptive and resource-intensive. Such disruptions could adversely impact the ability to fulfill orders, service customers and interrupt other processes and, in addition, could adversely impact our ability to maintain effective internal control over financial reporting. Delayed sales, lower margins, lost customers or diminished investor confidence resulting from these disruptions could adversely affect our financial results, stock price and reputation.

An inability to attract, retain and motivate key employees could harm current and future operations.

In order to be successful, we must attract, retain and motivate executives and other key employees, including those in managerial, professional, administrative, technical, sales, marketing and IT support positions. We also must keep employees focused on our strategies and goals. Hiring and retaining qualified executives, engineers and qualified sales representatives are critical to our future, and competition for experienced employees in these areas can be intense. The failure to hire or loss of key employees could have a significant impact on our operations.


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We may not be able to generate sufficient cash flows to fund our operations and make adequate capital investments, or to pay dividends.

Our cash flows from operations depend primarily on sales and service margins. To develop new service and product technologies, support future growth, achieve operating efficiencies and maintain service and product quality, we must make significant capital investments in manufacturing technology, facilities and capital equipment, research and development, and service and product technology. In addition to cash provided from operations, we have from time to time utilized external sources of financing. Depending upon general market conditions or other factors, we may not be able to generate sufficient cash flows to fund our operations and make adequate capital investments, or to continue to pay dividends, either in whole or in part. In addition, any tightening of the credit markets may limit our ability to obtain alternative sources of cash to fund our operations.

Although the Company has paid dividends on its common shares in the past, the declaration and payment of future dividends, as well as the amount thereof, are subject to the declaration by the Company’s board of directors. The amount and size of any future dividends will depend on the Company’s results of operations, financial condition, capital levels, cash requirements, future prospects and other factors.

New service and product developments may be unsuccessful.

We are constantly looking to develop new services and products that complement or leverage the underlying design or process technology of our traditional service and product offerings. We make significant investments in service and product technologies and anticipate expending significant resources for new software-led services and product development over the next several years. There can be no assurance that our service and product development efforts will be successful, that we will be able to cost effectively develop or manufacture these new services and products, that we will be able to successfully market these services and products or that margins generated from sales of these services and products will recover costs of development efforts.

Our ability to maintain effective internal control over financial reporting may be insufficient to allow us to accurately report our financial results or prevent fraud, and this could cause our financial statements to become materially misleading and adversely affect the trading price of our common shares.

We require effective internal control over financial reporting in order to provide reasonable assurance with respect to our financial reports and to effectively prevent fraud. Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If the Company cannot provide reasonable assurance with respect to our financial statements and effectively prevent fraud, our financial statements could become materially misleading, which could adversely affect the trading price of our common shares.

If the Company is not able to maintain the adequacy of our internal control over financial reporting, including any failure to implement required new or improved controls, or if the Company experiences difficulties in the implementation of or the implemented controls required in connection with the Acquisition, our business, financial condition and operating results could be harmed. Any material weakness could affect investor confidence in the accuracy and completeness of our financial statements. As a result, our ability to obtain any additional financing, or additional financing on favorable terms, could be materially and adversely affected. This, in turn, could materially and adversely affect our business, financial condition and the market value of our securities and require us to incur additional costs to improve our internal control systems and procedures. In addition, perceptions of the Company among customers, lenders, investors, securities analysts and others could also be adversely affected.

The Company had material weaknesses in its internal control over financial reporting in the past, and can give no assurances that any additional material weaknesses will not arise in the future due to our failure to implement and maintain adequate internal control over financial reporting. In addition, although the Company has been successful historically in strengthening our controls and procedures, those controls and procedures may not be adequate to prevent or identify irregularities or ensure the fair presentation of our financial statements included in our periodic reports filed with the SEC.

Low investment performance by our pension plan assets may result in an increase to our net pension liability and expense, which may require us to fund a portion of our pension obligations and divert funds from other potential uses.

We sponsor several defined benefit pension plans that cover certain eligible employees across the globe. Our pension expense and required contributions to our pension plans are directly affected by the value of plan assets, the projected rate of return on plan assets, the actual rate of return on plan assets and the actuarial assumptions we use to measure the defined benefit pension plan obligations.

A significant market downturn could occur in future periods resulting in a decline in the funded status of our pension plans and causing actual asset returns to be below the assumed rate of return used to determine pension expense. If return on plan assets in future periods perform below expectations, future pension expense will increase.


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We establish the discount rate used to determine the present value of the projected and accumulated benefit obligations at the end of each year based upon the available market rates for high quality, fixed income investments. We match the projected cash flows of our pension plans against those generated by high-quality corporate bonds. The yield of the resulting bond portfolio provides a basis for the selected discount rate. An increase in the discount rate would reduce the future pension expense and, conversely, a decrease in the discount rate would increase the future pension expense.

Based on current guidelines, assumptions and estimates, including investment returns and interest rates, we plan to make contributions to our pension plans of $49.6 in 2018. The Company anticipates reimbursement of approximately $14 certain benefits paid from its trustee in 2018. Changes in the current assumptions and estimates could result in contributions in years beyond 2018 that are greater than the projected 2018 contributions required. We cannot predict whether changing market or economic conditions, regulatory changes or other factors will further increase our pension expenses or funding obligations, diverting funds we would otherwise apply to other uses.

Our businesses are subject to inherent risks, some for which we maintain third-party insurance and some for which we self-insure. We may incur losses and be subject to liability claims that could have a material adverse effect on our financial condition, results of operations or cash flows.

We maintain insurance policies that provide limited coverage for some, but not all, of the potential risks and liabilities associated with our businesses. The policies are subject to deductibles and exclusions that result in our retention of a level of risk on a self-insurance basis. For some risks, we may not obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented. As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially, and in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. As a result, we may not be able to renew our existing insurance policies or procure other desirable insurance on commercially reasonable terms, if at all. Even where insurance coverage applies, insurers may contest their obligations to make payments. Our financial condition, results of operations and cash flows could be materially and adversely affected by losses and liabilities from uninsured or under-insured events, as well as by delays in the payment of insurance proceeds, or the failure by insurers to make payments. We also may incur costs and liabilities resulting from claims for damages to property or injury to persons arising from our operations.

Our assumptions used to determine our self-insurance liability could be wrong and materially impact our business.

We evaluate our self-insurance liability based on historical claims experience, demographic factors, severity factors and other actuarial assumptions. However, if future occurrences and claims differ from these assumptions and historical trends, our business, financial results and financial condition could be materially impacted by claims and other expenses.

An adverse determination that our services, products or manufacturing processes infringe the intellectual property rights of others, an adverse determination that a competitor has infringed our intellectual property rights, or our failure to enforce our intellectual property rights could have a materially adverse effect on our business, operating results or financial condition.

As is common in any high technology industry, others have asserted from time to time, and may assert in the future, that our services, products or manufacturing processes infringe their intellectual property rights. A court determination that our services, products or manufacturing processes infringe the intellectual property rights of others could result in significant liability and/or require us to make material changes to our services, products and/or manufacturing processes. We are unable to predict the outcome of assertions of infringement made against us.

The Company also seeks to enforce our intellectual property rights against infringement. In October 2015, the Company filed a complaint with the U.S. International Trade Commission (ITC) and the U.S. District Court for the Northern District of Ohio alleging that Nautilus Hyosung Inc., and its subsidiary Nautilus Hyosung America Inc., infringed upon the Company's patents. The ITC instituted an investigation and, in February 2017, issued a final determination that Nautilus Hyosung products infringe two of the Company's patents. The ITC further issued an exclusion order and cease and desist order which bar the importation and sale of certain Nautilus Hyosung deposit automation enabled ATMs and modules in the U.S. In response to these actions taken by the Company, in February 2016 Nautilus Hyosung filed complaints against the Company in front of the ITC and U.S. District Court for the Northern District of Texas alleging the Company infringes certain Nautilus Hyosung patents. In July 2017, the ITC dismissed three of theses retaliatory claims and ruled that a legacy Wincor product technically infringes one Nautilus Hyosung patent. The Company has appealed this one ruling and will continue to vindicate its intellectual property against infringement by others.

The Company cannot predict the outcome of actions to enforce our intellectual property rights, and, although we seek to enforce our intellectual property rights, we cannot guarantee that we will be successful in doing so. Any of the foregoing could have a materially adverse effect on our business, operating results or financial condition.


18


Changes in laws or regulations or the manner of their interpretation or enforcement could adversely impact our financial performance and restrict our ability to operate our business or execute our strategies.

New laws or regulations, or changes in existing laws or regulations or the manner of their interpretation or enforcement, could increase our cost of doing business and restrict our ability to operate our business or execute our strategies. This includes, among other things, the possible taxation under U.S. law of certain income from foreign operations, compliance costs and enforcement under applicable securities laws, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the German Securities Trading Act (Wertpapierhandelsgesetz) and Regulation (EU) No 596/2014 of the European Parliament and of the Council of April 16, 2014 as well as costs associated with complying with the Patient Protection and Affordable Care Act of 2010 and the regulations promulgated thereunder. For example, under Section 1502 of the Dodd-Frank Act, the SEC has adopted additional disclosure requirements related to the source of certain “conflict minerals” for issuers for which such “conflict minerals” are necessary to the functionality or product manufactured, or contracted to be manufactured, by that issuer. The metals covered by the rules include tin, tantalum, tungsten and gold, commonly referred to as “3TG.” Our suppliers may use some or all of these materials in their production processes. The SEC’s rules require us to perform supply chain due diligence on our supply chain, including the mine owner and operator. Global supply chains can have multiple layers, thus the costs of complying with these requirements could be substantial. These requirements may also reduce the number of suppliers who provide conflict free metals, and may affect our ability to obtain products in sufficient quantities or at competitive prices. Compliance costs and the unavailability of raw materials could have a material adverse effect on our results of operations. In addition, the Company’s business is subject to the U.K. Modern Slavery Act 2015 and the California Transparency in Supply Chain Act and similar laws and regulations, which relate to human trafficking, anti-slavery and impose compliance requirements on businesses and their suppliers.

Economic conditions and regulatory changes leading up to and following the United Kingdom’s likely exit from the European Union (EU) could have a material adverse effect on our business and results of operations.

Following a referendum in June 2016 in which voters in the U.K. approved an exit from the EU, it is expected that the U.K. government will initiate a process to leave the EU (often referred to as Brexit) and begin negotiating the terms of the U.K.’s future relationship with the EU. The Company faces uncertainty regarding the impact of the likely exit of the U.K. from the EU. Adverse consequences such as deterioration in global economic conditions, stability in global financial markets, volatility in currency exchange rates or adverse changes in regulation of the cross-border agreements could have a negative impact on our financial condition and results of operations.

Our actual operating results may differ significantly from our guidance.

From time to time, we release guidance, including and guidance that we may include in the reports that we file with the SEC regarding our future performance. This guidance, which consists of forward-looking statements, is prepared by our management and is qualified by, and subject to, the assumptions and the other information included in this Annual Report on Form 10-K, as well as the factors described under “Management's Discussion and Analysis of Financial Condition and Results of Operation - Forward-Looking Statement Disclosure.” Our guidance is not prepared with a view toward compliance with published guidelines of the American Institute of Certified Public Accountants, and neither our independent registered public accounting firm nor any other independent or outside party compiles or examines the guidance and, accordingly, no such person expresses any opinion or any other form of assurance with respect thereto.

Guidance is based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to business, economic and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change. The principal reason that we release such data is to provide a basis for our management to discuss our business outlook with analysts and investors. We do not accept any responsibility for any projections or reports published by any such persons.

Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions of the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results will vary from the guidance. Investors should also recognize that the reliability of any forecasted financial data diminishes the farther in the future that the data are forecast. In light of the foregoing, investors are urged to put the guidance in context and not to place undue reliance on it.


19


Anti-takeover provisions could make it more difficult for a third party to acquire us.

Certain provisions of our charter documents, including provisions limiting the ability of shareholders to raise matters at a meeting of shareholders without giving advance notice, may make it more difficult for a third party to gain control of our board of directors and may have the effect of delaying or preventing changes in our control or management. This could have an adverse effect on the market price of our common shares. Additionally, Ohio corporate law provides that certain notice and informational filings and special shareholder meeting and voting procedures must be followed prior to consummation of a proposed control share acquisition, as defined in the Ohio Revised Code. Assuming compliance with the prescribed notice and information filings, a proposed control share acquisition may be made only if, at a special meeting of shareholders, the acquisition is approved by both a majority of our voting power represented at the meeting and a majority of the voting power remaining after excluding the combined voting power of the interested shares, as defined in the Ohio Revised Code. The application of these provisions of the Ohio Revised Code also could have the effect of delaying or preventing a change of control.


20


ITEM 1B: UNRESOLVED STAFF COMMENTS

None.

ITEM 2: PROPERTIES

The Company's corporate offices are located in North Canton, Ohio and Paderborn, Germany. The Company owns or leases and operates manufacturing facilities primarily related to our Systems LOB in Greensboro, North Carolina, Brazil, China, India and Germany. The Company leases a software development center in Canada related to our Software LOB. The following are our principal locations in which the Company owns or leases and operates selling, service and administrative offices in its three lines of business Services, Software and Systems:
Americas
 
EMEA
 
AP
Barbados
 
Haiti
 
Algeria
 
Israel
 
Russia
 
Australia
Belize
 
Honduras
 
Austria
 
Italy
 
Slovakia
 
China
Bolivia
 
Jamaica
 
Belgium
 
Luxembourg
 
South Africa
 
Hong Kong
Brazil
 
Mexico
 
Czech Republic
 
Malta
 
Spain
 
India
Canada
 
Nicaragua
 
Denmark
 
Morocco
 
Sweden
 
Indonesia
Chile
 
Panama
 
Finland
 
Namibia
 
Switzerland
 
Malaysia
Colombia
 
Paraguay
 
France
 
Netherlands
 
Turkey
 
Philippines
Costa Rica
 
Peru
 
Germany
 
Nigeria
 
Uganda
 
Singapore
Dominican Republic
 
Uruguay
 
Greece
 
Norway
 
Ukraine
 
Taiwan
Ecuador
 
Venezuela
 
Hungary
 
Poland
 
United Arab Emirates
 
Thailand
El Salvador
 
United States
 
Ireland
 
Portugal
 
United Kingdom
 
Vietnam
Guatemala
 
 
 
 
 
 
 
 
 
 

The Company considers that its properties are generally in good condition, are well maintained, and are generally suitable and adequate to carry on the Company's business.

ITEM 3: LEGAL PROCEEDINGS
(dollars in millions)

At December 31, 2017, the Company was a party to several lawsuits that were incurred in the normal course of business, none of which individually or in the aggregate is considered material by management in relation to the Company's financial position or results of operations. In management's opinion, the Company's consolidated financial statements would not be materially affected by the outcome of those legal proceedings, commitments, or asserted claims.

In addition to the routine legal proceedings noted above, the Company was a party to the legal proceedings described below at December 31, 2017:

Indirect Tax Contingencies

The Company accrues non-income tax liabilities for indirect tax matters when management believes that a loss is probable and the amounts can be reasonably estimated, while contingent gains are recognized only when realized. In the event any losses are sustained in excess of accruals, they are charged against income. In evaluating indirect tax matters, management takes into consideration factors such as historical experience with matters of similar nature, specific facts and circumstances, and the likelihood of prevailing. Management evaluates and updates accruals as matters progress over time. It is reasonably possible that some of the matters for which accruals have not been established could be decided unfavorably to the Company and could require recognizing future expenditures. Also, statutes of limitations could expire without the Company paying the taxes for matters for which accruals have been established, which could result in the recognition of future gains upon reversal of these accruals at that time.

At December 31, 2017, the Company was a party to several routine indirect tax claims from various taxing authorities globally that were incurred in the normal course of business, none of which individually or in the aggregate is considered material by management in relation to the Company’s financial position or results of operations. In management’s opinion, the consolidated financial statements would not be materially affected by the outcome of these indirect tax claims and/or proceedings or asserted claims.


21


In addition to these routine indirect tax matters, the Company was a party to the proceedings described below:

In August 2012, one of the Company's Brazil subsidiaries was notified of a tax assessment of approximately R$270, including penalties and interest, regarding certain Brazil federal indirect taxes (Industrialized Products Tax, Import Tax, Programa de Integração Social and Contribution to Social Security Financing) for 2008 and 2009. The assessment alleges improper importation of certain components into Brazil's free trade zone that would nullify certain indirect tax incentives. On September 10, 2012, the Company filed its administrative defenses with the tax authorities.

In March 2017, the administrative proceedings concluded and the assessment was reduced approximately 95 percent to a total of R$17.3 including penalties and interest as of March 2017. The Company is pursuing its remedies in the judicial sphere and management continues to believe that it has valid legal positions. In addition, this matter could negatively impact Brazil federal indirect taxes in other years that remain open under statute. It is reasonably possible that the Company could be required to pay taxes, penalties and interest related to this matter, which could be material to the Company's consolidated financial statements.

Additionally, the Company has challenged the customs rulings in Thailand seeking to retroactively collect customs duties on previous imports of ATMs. Management believes that the customs authority’s attempt to retroactively assess customs duties is in contravention of World Trade Organization agreements and, accordingly, challenged the rulings. In the third quarter of 2015, the Company received a prospective ruling from the U.S. Customs Border Protection which is consistent with the Company's interpretation of the treaty in question. In August 2017, the Supreme Court of Thailand ruled in the Company's favor, finding that Customs' attempt to collect duties for importation of ATMs is improper. In addition, in August 2016 and February 2017, the tax court of appeals rendered decisions in favor of the Company related to more than half of the assessments at issue. The surviving matters remain at various stages of the appeals process and the Company will use the Supreme Court's decision in support of its position in those matters. Management remains confident that the Company has a valid legal position in these appeals. Accordingly, the Company does not have any amount accrued for this contingency.

At December 31, 2017 and 2016, the Company had an accrual related to the Brazil indirect tax matter disclosed above of $4.9 and $7.3, respectively. The reduction in the accrual is due to the expiration of the statute of limitations related to years subject to audit and foreign currency fluctuations in the Brazil real.

A loss contingency is reasonably possible if it has a more than remote but less than probable chance of occurring. Although management believes the Company has valid defenses with respect to its indirect tax positions, it is reasonably possible that a loss could occur in excess of the estimated accrual. The Company estimated the aggregate risk at December 31, 2017 to be up to $144.7 for its material indirect tax matters, of which $25.7 and $27.0, respectively, relates to the Brazil indirect tax matter and Thailand customs matter disclosed above. The aggregate risk related to indirect taxes is adjusted as the applicable statutes of limitations expire.

ITEM 4: MINE SAFETY DISCLOSURES

Not applicable.

22


PART II

ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The common shares of the Company are listed on the New York Stock Exchange with a symbol of “DBD.” The price ranges of common shares of the Company for the periods indicated below are as follows:
 
2017
 
2016
 
2015
 
High
 
Low
 
High
 
Low
 
High
 
Low
1st Quarter
$
31.85

 
$
24.90

 
$
29.80

 
$
22.84

 
$
36.49

 
$
30.63

2nd Quarter
$
30.70

 
$
25.50

 
$
28.81

 
$
23.10

 
$
38.94

 
$
33.21

3rd Quarter
$
28.50

 
$
17.95

 
$
29.01

 
$
23.95

 
$
35.79

 
$
29.16

4th Quarter
$
23.50

 
$
16.00

 
$
25.90

 
$
21.05

 
$
37.98

 
$
29.60

Full Year
$
31.85

 
$
16.00

 
$
29.80

 
$
21.05

 
$
38.94

 
$
29.16


There were 51,968 shareholders of the Company at December 31, 2017, which includes an estimated number of shareholders who have shares held in their accounts by banks, brokers, and trustees for benefit plans and the agent for the dividend reinvestment plan.

On the basis of amounts paid and declared quarterly, the annualized dividends per share were $0.40, $0.96 and $1.15 in 2017, 2016 and 2015, respectively.

Information concerning the Company’s share repurchases made during the fourth quarter of 2017:
Period
 
Total Number of Shares Purchased (1)
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans (2)
October
 
4,117

 
$
23.21

 

 
2,426,177

November
 

 
$

 

 
2,426,177

December
 
8,084

 
$
17.76

 

 
2,426,177

Total
 
12,201

 
$
19.60

 

 
 

(1)
All shares were surrendered or deemed surrendered to the Company in connection with the Company’s stock-based compensation plans.

(2)
The total number of shares repurchased as part of the publicly announced share repurchase plan was 13,450,772 as of December 31, 2017. The plan was approved by the Board of Directors in April 1997. The Company may purchase shares from time to time in open market purchases or privately negotiated transactions. The Company may make all or part of the purchases pursuant to accelerated share repurchases or Rule 10b5-1 plans. The plan has no expiration date. The following table provides a summary of Board of Director approvals to repurchase the Company's outstanding common shares:

 
 
Total Number of Shares
Approved for Repurchase
1997
 
2,000,000

2004
 
2,000,000

2005
 
6,000,000

2007
 
2,000,000

2011
 
1,876,949

2012
 
2,000,000

 
 
15,876,949


23


PERFORMANCE GRAPH

The graph below compares the cumulative five-year total return provided shareholders on Diebold Nixdorf, Inc.'s common shares relative to the cumulative total returns of the S&P 500 index, the S&P Midcap 400 index and two customized peer groups consisting of twenty-three companies and sixteen companies, respectively, whose individual companies are listed in footnotes 1 and 2 below. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common shares, in each index and in each of the peer groups on December 31, 2012 and its relative performance is tracked through December 31, 2017.

The Compensation Committee of our Board of Directors annually reviews and approves the selection of Peer Group companies, adjusting the group from year to year based on changes in our industry and our Company’s operations, the current Peer Group and the comparability of our Peer Group companies. In addition, for fiscal year 2017, the Compensation Committee, with the advice and support of Aon Hewitt as the Compensation Committee consultant, established a new Peer Group in order to support comparable companies more closely aligned with the Company’s operations following the Acquisition. Specifically, the criteria used to select the Peer Group included comparable global companies that design manufacture and service products based on market capitalization and revenues, direct competitors, among others.
dbd2017linecolorchange.jpg
(1)
There are twenty-three companies included in the Company's 2016 peer group, which are: Actuant Corp, Allegion PLC, Benchmark Electronics Inc., Brady Corp., Brinks Co., Convergys Corp., DST Systems Inc., Fidelity National Information Services Inc., Fiserv Inc., Global Payments Inc., Harris Corp, International Game Technology PLC, Intuit Inc., Logitech International SA, Mettler-Toledo International Inc., NCR Corp., Netapp Inc., Pitney Bowes Inc., Sensata Technologies Holding NV, Timken Co., Unisys Corp., Western Union Co. and Woodward Inc.

(2)
The sixteen companies included in the Company's 2017 peer group are: Alliance Data Systems Corp., Benchmark Electronics Inc., Convergys Corp., DST Systems Inc., DXC Technology Co., Global Payments Inc., Harris Corp., Juniper Networks Inc., Logitech International SA, Motorola Solutions Inc., NCR Corp., Netapp Inc., Pitney Bowes Inc., Unisys Corp., Western Union Co. and Zebra Technologies Corp.

24


ITEM 6: SELECTED FINANCIAL DATA

The following table should be read in conjunction with “Part II - Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II - Item 8 - Financial Statements and Supplementary Data” of this Form 10-K.
 
Years Ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
(in millions, except per share data)
Results of operations
 
 
 
 
 
 
 
 
 
Net sales
$
4,609.3

 
$
3,316.3

 
$
2,419.3

 
$
2,734.8

 
$
2,582.7

Cost of sales
3,599.6

 
2,594.6

 
1,767.3

 
2,008.6

 
1,996.7

Gross profit
$
1,009.7

 
$
721.7

 
$
652.0

 
$
726.2

 
$
586.0

 
 
 
 
 
 
 
 
 
 
Amounts attributable to Diebold Nixdorf, Incorporated
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations, net of tax
$
(233.1
)
 
$
(176.7
)
 
$
57.8

 
$
104.7

 
$
(195.3
)
Income from discontinued operations, net of tax

 
143.7

 
15.9

 
9.7

 
13.7

Net income (loss) attributable to Diebold Nixdorf, Incorporated
$
(233.1
)
 
$
(33.0
)
 
$
73.7

 
$
114.4

 
$
(181.6
)
 
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per common share
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations, net of tax
$
(3.09
)
 
$
(2.56
)
 
$
0.89

 
$
1.62

 
$
(3.06
)
Income from discontinued operations, net of tax

 
2.08

 
0.24

 
0.15

 
0.21

Net income (loss) attributable to Diebold Nixdorf, Incorporated
$
(3.09
)
 
$
(0.48
)
 
$
1.13

 
$
1.77

 
$
(2.85
)
 
 
 
 
 
 
 
 
 
 
Diluted earnings (loss) per common share
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations, net of tax
$
(3.09
)
 
$
(2.56
)
 
$
0.88

 
$
1.61

 
$
(3.06
)
Income from discontinued operations, net of tax

 
2.08

 
0.24

 
0.15

 
0.21

Net income (loss) attributable to Diebold Nixdorf, Incorporated
$
(3.09
)
 
$
(0.48
)
 
$
1.12

 
$
1.76

 
$
(2.85
)
 
 
 
 
 
 
 
 
 
 
Number of weighted-average shares outstanding
 
 
 
 
 
 
 
 
 
Basic shares
75.5

 
69.1

 
64.9

 
64.5

 
63.7

Diluted shares
75.5

 
69.1

 
65.6

 
65.2

 
63.7

 
 
 
 
 
 
 
 
 
 
Dividends
 
 
 
 
 
 
 
 
 
Common dividends paid
$
30.6

 
$
64.6

 
$
75.6

 
$
74.9

 
$
74.0

Common dividends paid per share
$
0.40

 
$
0.96

 
$
1.15

 
$
1.15

 
$
1.15

 
 
 
 
 
 
 
 
 
 
Consolidated balance sheet data (as of period end)
 
 
 
 
 
 
 
 
(unaudited)
Current assets
$
2,508.4

 
$
2,619.6

 
$
1,643.6

 
$
1,655.5

 
$
1,555.4

Current liabilities
$
1,799.4

 
$
1,824.5

 
$
955.8

 
$
1,027.8

 
$
893.8

Net working capital
$
709.0

 
$
795.1

 
$
687.8

 
$
627.7

 
$
661.6

Property, plant and equipment, net
$
364.5

 
$
387.0

 
$
175.3

 
$
165.7

 
$
160.9

Total long-term liabilities
$
2,451.9

 
$
2,376.9

 
$
851.1

 
$
759.5

 
$
668.9

Redeemable noncontrolling interests
$
492.1

 
$
44.1

 
$

 
$

 
$

Total assets
$
5,250.2

 
$
5,270.3

 
$
2,242.4

 
$
2,342.1

 
$
2,183.5

Total equity
$
506.8

 
$
1,024.8

 
$
435.5

 
$
554.8

 
$
620.8



25

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2017
DIEBOLD NIXDORF, INCORPORATED AND SUBSIDIARIES
(unaudited)
(in millions, except per share amounts)

ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Significant Highlights

During 2017, Diebold Nixdorf:

Launched the DN2020 integration and transformation program and realized more than $100 of cost savings during the year.
Rationalized the manufacturing footprint from a capacity of approximately 180,000 ATMs per year to approximately 100,000 ATMs per year and consolidated approximately 25 percent of service parts depots across the globe.
Shifted production to the manufacturing facility in Suzhou, China operated by its strategic alliance partner, Inspur Group. This strategic alliance is enabling the Company to realize procurement advancements through better access to local suppliers and is enhancing our ability to adapt to market conditions.
Consolidated legal entities in order to simplify sales, service operations and business processes through a single entity in each country.
Was named as the largest manufacturer of ATMs by Retail Banking Research's report "Global ATM Market and Forecasts to 2022."
Introduced new mobility management services offering with as-a-service, security and data analytics offerings.
Won a number of retail contracts to modernize checkout solutions and implement omni-channel retailing, including a $53.0 store lifecycle management deal with a European fashion retailer.
Introduced Vynamic, the first end-to-end Connected Commerce software portfolio in the marketplace.
Announced strategic partnership with Kony, Inc. (Kony) to white label mobile application solutions for financial institutions and retailers.
Received the "Global Self-Checkout Systems Growth Excellence Leadership Award" from Frost & Sullivan in recognition of the Company's product innovation, growth, channel partnership strategies, and ability to serve multiple retailer segments.
Announced product readiness to support the Microsoft® Windows 10 operating system.

OVERVIEW

Management’s discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes that appear elsewhere in this annual report on Form 10-K. For additional information regarding general information regarding the Company, its business, strategy, competitors and operations, refer to Item 1. Business.

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 our Connected Commerce strategy;
Integration of legacy salesforce, business processes, procurement, and internal IT systems; and
Realization of cost reductions and synergies, which leverage the Company's global scale, reduce overlap and improve operating efficiencies.

During the first quarter of 2017, the Company reorganized the management team reporting to the Chief Operating Decision Maker (CODM) based on the following three LOBs: Services, Systems, and Software. As a result, the Company reclassified comparative periods for consistency, which were previously reported as four geographical segments of: NA, AP, EMEA and LA. The presentation of comparative periods also reflects the reclassification of certain global manufacturing administration expenses from corporate charges not allocated to segments.


26

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2017
DIEBOLD NIXDORF, INCORPORATED AND SUBSIDIARIES
(unaudited)
(in millions, except per share amounts)

The table below presents the changes in comparative financial data for the years ended December 31, 2017, 2016 and 2015. Comments on significant year-to-year fluctuations follow the table. In August 2016, the Company completed the Acquisition. In February 2016, the Company recognized a gain in discontinued operations related to the divestiture of its NA ES business. These events resulted in a significant impact in the comparative information discussed below.

The following discussion should be read in conjunction with the consolidated financial statements and the accompanying notes that appear elsewhere in this annual report on Form 10-K.
 
Years ended December 31,
 
2017
 
2016
 
2015
 
 
 
% of Net Sales
 
% Change
 
 
 
% of Net Sales
 
% Change
 
 
 
% of Net Sales
Net sales
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Services and software
$
2,873.9

 
62.4
 
44.9
 
$
1,983.0

 
59.8
 
38.2
 
$
1,434.8

 
59.3
Systems
1,735.4

 
37.6
 
30.2
 
1,333.3

 
40.2
 
35.4
 
984.5

 
40.7
 
4,609.3

 
100.0
 
39.0
 
3,316.3

 
100.0
 
37.1
 
2,419.3

 
100.0
Cost of sales
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Services and software
2,161.0

 
46.9
 
54.1
 
1,402.2

 
42.3
 
48.1
 
946.8

 
39.1
Systems
1,438.6

 
31.2
 
20.6
 
1,192.4

 
36.0
 
45.3
 
820.5

 
33.9
 
3,599.6

 
78.1
 
38.7
 
2,594.6

 
78.3
 
46.8
 
1,767.3

 
73.0
Gross profit
1,009.7

 
21.9
 
39.9
 
721.7

 
21.8
 
10.7
 
652.0

 
26.9
Selling and administrative expense
933.7

 
20.3
 
22.7
 
761.2

 
23.0
 
55.9
 
488.2

 
20.2
Research, development and engineering expense
155.5

 
3.4
 
41.1
 
110.2

 
3.3
 
26.8
 
86.9

 
3.6
Impairment of assets
3.1

 
0.1
 
(68.4)
 
9.8

 
0.3
 
(48.1)
 
18.9

 
0.8
(Gain) loss on sale of assets, net
1.0

 
 
N/M
 
0.3

 
 
N/M
 
(0.6
)
 
 
1,093.3

 
23.8
 
24.0
 
881.5

 
26.6
 
48.6
 
593.4

 
24.5
Operating profit (loss)
(83.6
)
 
(1.8)
 
(47.7)
 
(159.8
)
 
(4.8)
 
N/M
 
58.6

 
2.4
Other income (expense)
(92.1
)
 
(2.0)
 
17.3
 
(78.5
)
 
(2.4)
 
N/M
 
(12.8
)
 
(0.5)
Income (loss) from continuing operations before taxes
(175.7
)
 
(3.8)
 
(26.3)
 
(238.3
)
 
(7.2)
 
N/M
 
45.8

 
1.9
Income tax (benefit) expense
29.8

 
0.6
 
N/M
 
(67.6
)
 
(2.0)
 
N/M
 
(13.7
)
 
(0.6)
Income (loss) from continuing operations, net of tax
(205.5
)
 
(4.5)
 
20.4
 
(170.7
)
 
(5.1)
 
N/M
 
59.5

 
2.5
Income from discontinued operations, net of tax

 
 
N/M
 
143.7

 
4.3
 
N/M
 
15.9

 
0.6
Net income (loss)
(205.5
)
 
(4.5)
 
N/M
 
(27.0
)
 
(0.8)
 
N/M
 
75.4

 
3.1
Net income attributable to noncontrolling interests, net of tax
27.6

 
0.6
 
N/M
 
6.0

 
0.2
 
N/M
 
1.7

 
0.1
Net income (loss) attributable to Diebold Nixdorf, Incorporated
$
(233.1
)
 
(5.1)
 
N/M
 
$
(33.0
)
 
(1.0)
 
N/M
 
$
73.7

 
3.0
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amounts attributable to Diebold Nixdorf, Incorporated
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before discontinued operations, net of tax
$
(233.1
)
 
(5.1)
 
31.9
 
$
(176.7
)
 
(5.3)
 
N/M
 
$
57.8

 
2.4
Income from discontinued operations, net of tax

 
 
N/M
 
143.7

 
4.3
 
N/M
 
15.9

 
0.6
Net income (loss) attributable to Diebold Nixdorf, Incorporated
$
(233.1
)
 
(5.1)
 
N/M
 
$
(33.0
)
 
(1.0)
 
N/M
 
$
73.7

 
3.0

27

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2017
DIEBOLD NIXDORF, INCORPORATED AND SUBSIDIARIES
(unaudited)
(in millions, except per share amounts)

RESULTS OF OPERATIONS

2017 comparison with 2016

Net Sales

The following table represents information regarding our net sales for the years ended December 31:
 
 
 
 
 
 
 
Percent of Total Net Sales for the Year Ended
 
2017
 
2016
 
% Change
 
% Change in CC (1)
 
2017
 
2016
Segments
 
 
 
 
 
 
 
 
 
 
 
Services
$
2,397.3

 
$
1,726.7

 
38.8

 
35.7

 
52.0
 
52.1
Software
476.6

 
256.3

 
86.0

 
78.2

 
10.3
 
7.7
Systems
1,735.4

 
1,333.3

 
30.2

 
26.6

 
37.7
 
40.2
Net sales
$
4,609.3

 
$
3,316.3

 
39.0

 
35.4

 
100.0
 
100.0
 
 
 
 
 
 
 
 
 
 
 
 
Geographic regions
 
 
 
 
 
 
 
 
 
 
 
Americas
$
1,605.8

 
$
1,662.3

 
(3.4
)
 
(4.5
)
 
34.8
 
50.1
EMEA
2,380.1

 
1,183.2

 
101.2

 
90.4

 
51.6
 
35.7
AP
623.4

 
470.8

 
32.4

 
31.5

 
13.6
 
14.2
Net sales
$
4,609.3

 
$
3,316.3

 
39.0

 
35.4

 
100.0
 
100.0
 
 
 
 
 
 
 
 
 
 
 
 
Solutions
 
 
 
 
 
 
 
 
 
 
 
Banking
$
3,429.0

 
$
2,799.9

 
22.5

 
20.0

 
74.4
 
84.4
Retail
1,180.3

 
516.4

 
128.6

 
115.3

 
25.6
 
15.6
Net sales
$
4,609.3

 
$
3,316.3

 
39.0

 
35.4

 
100.0
 
100.0
(1) The Company calculates constant currency by translating the prior-year period results at the current year exchange rate. 

Net sales increased $1,293.0 or 39.0 percent including incremental net sales from the Acquisition of $1,517.7 and a net favorable currency impact of $88.3 primarily related to the euro and the Brazil real. Net sales were adversely impacted by $30.4 related to deferred revenue purchase accounting adjustments. The amounts attributable to the Acquisition are impacted by the alignment and integration of customer portfolios, solution offerings and operations between the legacy companies, which may result in unfavorable comparisons to prior year. The following results include the impact of foreign currency and purchase accounting adjustments:

Segments

Services net sales increased $670.6, which included incremental net sales from the Acquisition of $652.5 and a net favorable currency impact of $40.1. Excluding the incremental net sales from the Acquisition and currency, net sales decreased $22.0 attributable to the run-off of multi-vendor service contracts as well as lower installation revenue tied to decreased systems volumes in the Americas. This was partially offset by higher managed services net sales in AP. Services net sales in 2017 also included an unfavorable impact of $15.2 related to purchase accounting adjustments, which was an increase of $7.1 compared to the prior year.

Software net sales increased $220.3, which included incremental net sales from the Acquisition of $202.5 and a net favorable currency impact of $11.1. Excluding the incremental net sales from the Acquisition and currency, net sales increased $6.7 primarily related to higher volume and project activity in EMEA. This increase was partially offset by lower volume in the Americas and AP as noted below.

Systems net sales increased $402.1, including incremental net sales from the Acquisition of $662.7 and a net favorable currency impact of $37.1. Excluding the incremental net sales from the Acquisition and currency, net sales decreased $297.7 as systems net sales were adversely impacted by lower banking solutions activity across the Company and lower retail solutions activity in the Americas. The banking volume declines were primarily due to lower banking project activity in the Americas and EMEA and from structural changes in the AP market. Systems net sales in 2017 also included an unfavorable impact of $15.2 related to purchase accounting adjustments, which was an increase of $7.1 compared to the prior year.



28

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2017
DIEBOLD NIXDORF, INCORPORATED AND SUBSIDIARIES
(unaudited)
(in millions, except per share amounts)


Geographic Regions

Americas net sales decreased $56.5 or 3.4 percent. The incremental net sales from the Acquisition accounted for $105.8. Excluding the incremental net sales from the Acquisition, net sales decreased $162.3 as a result of fewer large systems projects across the Americas, including Brazil voting solutions which was down $54.3 and Mexico banking solutions. In addition, lower services revenue in North America related to a decrease in multi-vendor service contract volume and lower installations resulting from the decrease in large systems projects.

EMEA net sales increased $1,196.9 or 101.2 percent. The incremental net sales from the Acquisition accounted for $1,228.2. Excluding the incremental net sales from the Acquisition, net sales decreased $31.3 primarily attributable to a large prior year systems project in Turkey that was not replicated in 2017 as well as lower systems volume in Germany. Additionally, lower sales in the U.K. also contributed to the decrease related to the Competition and Markets Authority (CMA) review and ultimate divestiture of the Company’s legacy banking business on June 30, 2017. The systems decrease was offset in part by services as a result of higher retail solutions activity and software which benefited from increased volume across the geographic region.

AP net sales increased $152.6 or 32.4 percent. The incremental net sales from the Acquisition accounted for $183.7. Excluding the incremental net sales from the Acquisition, net sales decreased $31.1 primarily due to lower systems volume related to the market structure change in China, partially offset by higher services sales in India.

Solutions

Banking net sales increased $629.1 or 22.5 percent . The incremental net sales from the Acquisition accounted for $836.4. Excluding the incremental net sales from the Acquisition, net sales decreased $207.3 primarily due to lower systems volumes and the associated installation activity across the Company, with lower large project activity impacting all regions. Additionally, banking services decreased primarily due to the run-off of multi-vendor service contracts in the Americas and an incremental $8.5 related to purchase accounting adjustments. These decreases were partially offset by higher banking services sales in AP.

Retail net sales increased $663.9 or 128.6 percent. The incremental net sales from the Acquisition accounted for $681.3. Excluding the incremental net sales from the Acquisition, net sales decreased $17.4 due to lower demand for voting solutions in Brazil of $54.3. Lower voting solutions volume was partially offset by increased services and software revenue in EMEA and higher systems volume and the associated services in AP.

Gross Profit

The following table represents information regarding our gross profit for the years ended December 31:
 
2017
 
2016
 
$ Change
 
% Change
Gross profit - services and software
$
712.9

 
$
580.8

 
$
132.1

 
22.7
Gross profit - systems
296.8

 
140.9

 
155.9

 
N/M
Total gross profit
$
1,009.7

 
$
721.7

 
$
288.0

 
39.9
 
 
 
 
 
 
 
 
Gross margin - services and software
24.8
%
 
29.3
%
 

 
 
Gross margin - systems
17.1
%
 
10.6
%
 


 
 
Total gross margin
21.9
%
 
21.8
%
 


 
 

Services and software gross margin was lower in 2017 due in part to the impact of the Acquisition, which utilizes a third-party labor model to support its service and software revenue stream, resulting in a dilutive effect on margins. Services and software gross margin was adversely impacted by higher non-routine and restructuring costs compared to the prior year, as 2017 included non-routine charges of $41.5 primarily related to restructuring charges of $27.4 and purchase accounting adjustments associated with the Acquisition. Additionally, gross margin was also impacted by lower contract maintenance revenue in Americas combined with increased labor costs and investments. The labor investments are a result of higher turnover rates of technicians and the associated training to support additional product lines.

Systems gross margin in 2017 increased primarily as a result of higher non-routine costs in the prior year of $90.1 compared to $39.8 in 2017. The higher non–routine costs in the prior year primarily relate to purchase accounting adjustments to record inventory

29

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2017
DIEBOLD NIXDORF, INCORPORATED AND SUBSIDIARIES
(unaudited)
(in millions, except per share amounts)

acquired in the Acquisition at fair value. Additionally, the incremental gross profit associated with the Acquisition includes higher margin business across both banking and retail solutions.

Operating Expenses

The following table represents information regarding our operating expenses for the years ended December 31:
 
2017
 
2016
 
$ Change
 
% Change
Selling and administrative expense
$
933.7

 
$
761.2

 
$
172.5

 
22.7
Research, development and engineering expense
155.5

 
110.2

 
45.3

 
41.1
Impairment of assets
3.1

 
9.8

 
(6.7
)
 
(68.4)
(Gain) loss on sale of assets, net
1.0

 
0.3

 
0.7

 
N/M
Total operating expenses
$
1,093.3

 
$
881.5

 
$
211.8

 
24.0

The selling and administrative expense in 2017 increased $172.5 inclusive of incremental expenses from the Acquisition of $272.4 and an unfavorable currency impact of $17.9. Excluding the impact of currency and the Acquisition, selling and administrative expense decreased $117.8 from the overall cost reductions tied to DN2020 as well as lower incentive compensation expense related to the Company's annual incentive plans. Additionally, there were decreases noted in restructuring and non-routine costs primarily related to legal, acquisition and divestiture expenses.

Selling and administrative non-routine expenses were $175.4 and $150.8 in 2017 and 2016, respectively. The primary components of the non-routine expenses in 2017 pertained to acquisition and divestiture costs, including related integration activities, totaling $85.0, purchase accounting adjustments of $85.0 related to intangible asset amortization and executive severance of $5.4. The year-over-year increase was primarily related to incremental purchase accounting and integration expenses offset by a decrease in legal, acquisition and divestiture costs. Selling and administrative expense included restructuring charges of $21.3 and $28.8 in 2017 and 2016, respectively.

Research, development and engineering expense increased by $45.3 to $155.5 in 2017 due primarily to incremental expense associated with the Acquisition of $62.7. Excluding the incremental impact of the Acquisition, expense was favorably impacted by the benefits of streamlining the cost structure as part of the Company's integration activities. Research, development and engineering expense included restructuring reversals of $(1.1) in 2017 compared to $5.1 of restructuring costs in 2016.

In 2017, the Company recorded impairments totaling $3.1 related to IT transformation and integration activities.

In 2017, the loss on sale of assets was primarily related to the divestiture of the Company's electronic security (ES) business in Chile and from building closures in EMEA due to integration efforts. These losses were partially offset by a gain on sale of assets primarily related to the Company's divestiture of its business in the U.K. and its ES business in Mexico.

Operating expense as a percent of net sales in 2017 was 23.7 percent compared with 26.6 percent in 2016 due to increased revenue and overall cost reductions tied to DN2020 which more than offset the incremental operating costs from the Acquisition.

Operating Profit (Loss)

The following table represents information regarding our operating profit (loss) for the years ended December 31:
 
2017
 
2016
 
$ Change
 
% Change
Operating profit (loss)
$
(83.6
)
 
$
(159.8
)
 
$
76.2

 
(47.7)
Operating margin
(1.8
)%
 
(4.8
)%
 

 
 

The operating loss decreased in 2017 compared to 2016 primarily due to higher gross margin that more than offset an increase in operating expense, which included amortization of acquired intangible assets, restructuring and non-routine costs related to acquisitions and divestitures.



30

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2017
DIEBOLD NIXDORF, INCORPORATED AND SUBSIDIARIES
(unaudited)
(in millions, except per share amounts)

Other Income (Expense)

The following table represents information regarding our other income (expense) for the years ended December 31:
 
2017
 
2016
 
$ Change
 
% Change
Interest income
$
20.3

 
$
21.5

 
$
(1.2
)
 
(5.6)
Interest expense
(117.3
)
 
(101.4
)
 
(15.9
)
 
15.7
Foreign exchange gain (loss), net
(3.9
)
 
(2.1
)
 
(1.8
)
 
(85.7)
Miscellaneous, net
8.8

 
3.5

 
5.3

 
N/M
Other income (expense)
$
(92.1
)
 
$
(78.5
)
 
$
(13.6
)
 
17.3

The decrease in interest income in 2017 compared with 2016, was a result of lower interest income of the Company's marketable securities, which are primarily held for cash management in Brazil. Interest expense was higher in 2017 associated with the financing required for the Acquisition, offset by improved interest rates from the Company's repricing certain of its debt in May 2017. Foreign exchange gain (loss), net in 2017 was unfavorable as a result of the incremental impact of the Acquisition. Miscellaneous, net in 2017 consisted primarily of income from the Aisino and Inspur strategic alliances in China. Miscellaneous, net in 2016 included a mark-to-market net gain of $9.2 associated with the Company's foreign currency option contracts entered and foreign currency forward contract and $6.3 in financing fees related to the Company’s bridge financing required for the Acquisition.

Income (Loss) from Continuing Operations, net of tax

The following table represents information regarding our net income from continuing operations, net of tax for the years ended December 31:
 
2017
 
2016
 
$ Change
 
% Change
Income (loss) from continuing operations, net of tax
$
(205.5
)
 
$
(170.7
)
 
$
(34.8
)
 
20.4
Percent of net sales
(4.5
)%
 
(5.1
)%
 

 
 
Effective tax rate (benefit)
(17.0
)%
 
(28.4
)%
 


 
 

Income (loss) from continuing operations, net of tax was $(205.5). The increase is primarily due to the reasons described above and the change in income tax (benefit) expense.

The effective tax rate for 2017 (17.0) percent on the overall loss from continuing operations. The U.S. enacted the Tax Act that was signed into law by the President on December 22, 2017. The Tax Act changed many aspects of U.S. corporate income taxation and included a reduction of the corporate income tax rate from 35% to 21%, implementation of a territorial tax system and imposition of a tax on deemed repatriated earnings of foreign subsidiaries. The resulting impact to the Company is an estimated $45.1 reduction to deferred income taxes for the income tax rate change and an estimated one-time non-cash charge of $36.6 related to deferred foreign earnings.

Due to the complexities involved in accounting for the recently enacted Tax Act, the U.S. SEC’s Staff Accounting Bulletin (SAB) 118 requires that the Company include in its financial statements the reasonable estimate of the impact of the Tax Act on earnings to the extent such reasonable estimate has been determined. The Company recorded a reasonable estimate of such effects, the net one-time charge related to the Tax Act may differ, possibly materially, due to, among other things, further refinement of its calculations, changes in interpretations and assumptions, additional guidance that may be issued by the U.S. Government, and actions and related accounting policy decisions the Company may take as a result of the Tax Act. The Company will complete its analysis over a one-year measurement period ending December 31, 2018 and any adjustments during this measurement period will be included in net earnings from continuing operations as an adjustment to income tax expense in the reporting period when such adjustments are determined.

The effective tax rate for 2016 of 28.4 percent on the overall loss from continued operations. The benefit on the overall loss was negatively impacted by the Acquisition including a valuation allowance for certain post-acquisition losses and non-deductible acquisition related expenses. The overall effective tax rate was decreased further by the jurisdictional income (loss) and varying respective statutory rates within the acquired entities.

Refer to note 7 Income Taxes included in Item 8. Financial Statements and Supplementary Data of this Annual Report for further details regarding the reconciliation of the effective tax rate.


31

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2017
DIEBOLD NIXDORF, INCORPORATED AND SUBSIDIARIES
(unaudited)
(in millions, except per share amounts)

Income from Discontinued Operations, Net of Tax

The closing of the NA ES divestiture occurred on February 1, 2016 and the Company recorded a gain (loss) on sale, net of tax, of 145.0 in 2016. Additionally, the income from discontinued operations, net of tax includes a net loss of 1.3 as a result of the operations included through February 1, 2016.

Segment Net Sales and Operating Profit Summary

The following tables represent information regarding the Company's net sales and operating profit by reporting segment:
Services:
2017
 
2016
 
$ Change
 
% Change
Net sales
$
2,397.3

 
$
1,726.7

 
$
670.6

 
38.8
Segment operating profit (loss)
$
344.8

 
$
298.7

 
$
46.1

 
15.4
Segment operating profit margin
14.4
%
 
17.3
%
 
 
 
 

Services net sales increased $670.6 including incremental net sales from the Acquisition of $652.5 and a net favorable currency impact of $40.1. Excluding the incremental net sales from the Acquisition and currency, net sales decreased $22.0 attributable to the run-off of multi-vendor service contracts as well as lower installation revenue tied to decreased systems volumes in the Americas. This was partially offset by higher managed services net sales in AP. Services net sales in 2017 also included an unfavorable impact of $15.2 related to purchase accounting adjustments, which was an increase of $7.1 compared to the prior year.

Segment operating profit increased $46.1 in 2017 compared to 2016. The incremental portion from the Acquisition accounted for $27.2 in operating profit inclusive of restructuring and non-routine items of $39.4 in 2017. Excluding the incremental portion from the Acquisition in addition to restructuring and non-routine items, segment operating profit decreased $20.5 in 2017 driven by lower gross profit partially offset by lower operating expense. Gross profit decreased as a result of contract maintenance revenue declines in the Americas combined with increased labor investments. The labor investments are a result of higher turnover rates of technicians and the associated training to support additional product lines. Additionally, 2017 was adversely impacted by lower installation gross profit as a result of decreased systems volumes. The segment benefited from lower operating expense related to cost reduction activities.

Segment operating profit margin decreased primarily due to the impact of the Acquisition, which utilizes a higher third-party labor model to support its service and software revenue stream, resulting in a dilutive effect on margins in 2017.
Software:
2017
 
2016
 
$ Change
 
% Change
Net sales
$
476.6

 
$
256.3

 
$
220.3

 
86.0
Segment operating profit (loss)
$
33.7

 
$
9.6

 
$
24.1

 
N/M
Segment operating profit margin
7.1
%
 
3.7
%
 
 
 
 

Software net sales increased $220.3 including incremental net sales from the Acquisition of $202.5 and a net favorable currency impact of $11.1. Excluding the incremental net sales from the Acquisition and currency, net sales increased $6.7 primarily related to higher volume and project activity in EMEA. This increase was partially offset by lower volume in the Americas and AP as noted earlier.

Segment operating profit increased $24.1 in 2017. The Acquisition contributed an incremental $16.9 segment operating profit in 2017. Excluding the incremental portion from the Acquisition, operating profit increased $7.2 driven by higher gross profit and lower operating expense in EMEA.

Segment operating profit margin increased due to the positive incremental impact of the acquired software business as well as lower operating expense resulting from the cost reduction activities in 2017.
Systems:
2017
 
2016
 
$ Change
 
% Change
Net sales
$
1,735.4

 
$
1,333.3

 
$
402.1

 
30.2

Segment operating profit (loss)
$
(24.2
)
 
$
(24.7
)
 
$
0.5

 
(2.0
)
Segment operating profit margin
(1.4
)%
 
(1.9
)%
 
 
 
 

Systems net sales increased $402.1, including incremental net sales from the Acquisition of $662.7 and a net favorable currency impact of $37.1. Excluding the incremental net sales from the Acquisition and currency, net sales decreased $297.7 as systems net sales were adversely impacted by lower banking solutions activity across the Company, including structural changes in the AP

32

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2017
DIEBOLD NIXDORF, INCORPORATED AND SUBSIDIARIES
(unaudited)
(in millions, except per share amounts)

market and lower retail solutions activity in the Americas. Systems net sales in 2017 also included an unfavorable impact of $15.2 related to purchase accounting adjustments, which was an increase of $7.1 compared to the prior year.

Segment operating loss in 2017 remained flat compared to the prior year. The incremental portion from the Acquisition was a $16.5 operating profit, inclusive of restructuring and non-routine items of $41.5 in 2017.Excluding the incremental portion from the Acquisition in addition to restructuring and non-routine items, operating profit decreased 57.8 in 2017. The decrease in segment operating profit was derived from lower gross profit due to volume declines in the Americas, higher project activity in EMEA during the prior year and structural market changes in AP. Lower gross profit was partially offset by favorable operating expense in EMEA.

Segment operating profit margin was flat to prior year due to the incremental benefit of the Acquisition and lower operating expense resulting from the cost reduction integration activities offset by lower banking solution activity across the Company.

Refer to note 22 to the consolidated financial statements, which is contained in Item 8 of this annual report on Form 10-K, for further details of segment revenue and operating profit.

2016 comparison with 2015

Net Sales

The following table represents information regarding our net sales for the years ended December 31:
 
 
 
 
 
 
 
Percent of Total Net Sales for the Year Ended
 
2016
 
2015
 
% Change
 
% Change in CC (1)
 
2016
 
2015
Segments
 
 
 
 
 
 
 
 
 
 
 
Services
$
1,726.7

 
$
1,295.7

 
33.3
 
35.5
 
52.1
 
53.6
Software
256.3

 
139.1

 
84.3
 
87.9
 
7.7
 
5.7
Systems
1,333.3

 
984.5

 
35.4
 
39.4
 
40.2
 
40.7
Net sales
$
3,316.3

 
$
2,419.3

 
37.1
 
40.1
 
100.0
 
100.0
 
 
 
 
 
 
 
 
 
 
 
 
Geographic regions
 
 
 
 
 
 
 
 
 
 
 
Americas
$
1,662.3

 
$
1,573.4

 
5.7
 
6.9
 
50.1
 
65.0
EMEA
1,183.2

 
406.3

 
191.2
 
202.8
 
35.7
 
16.8
AP
470.8

 
439.6

 
7.1
 
12.0
 
14.2
 
18.2
Net sales
$
3,316.3

 
$
2,419.3

 
37.1
 
40.1
 
100.0
 
100.0
 
 
 
 
 
 
 
 
 
 
 
 
Solutions
 
 
 
 
 
 
 
 
 
 
 
Banking
$
2,799.9

 
$
2,401.5

 
16.6
 
19.1
 
84.4
 
99.3
Retail
516.4

 
17.8

 
N/M
 
N/M
 
15.6
 
0.7
Net sales
$
3,316.3

 
$
2,419.3

 
37.1
 
40.1
 
100.0
 
100.0
(1) The Company calculates constant currency by translating the prior-year period results at the current year exchange rate. 

Net sales increased $897.0 or 37.1 percent including incremental net sales from the Acquisition of $1,054.8 and a net unfavorable currency impact of $52.5 primarily related to the Brazil real, China renminbi, India rupee and South Africa rand. In addition, net sales was adversely impacted $16.2 related to deferred revenue purchase accounting adjustments. The following results include the impact of foreign currency and purchase accounting adjustments:

Segments

Services net sales increased $431.0 including incremental net sales from the Acquisition of $434.6 and a net unfavorable currency impact of $21.6. Excluding the incremental net sales from the Acquisition and currency, net sales increased $26.7 attributable to higher maintenance service revenue related to an increase in multi-vendor service contracts in the Americas. This was partially offset by lower net sales across service business lines in AP resulting from market structure changes in the region. Services net sales also included an unfavorable impact of $8.1 related to purchase accounting adjustments.

Software net sales increased $117.2 including incremental net sales from the Acquisition of $146.0 and a net unfavorable currency impact of $2.7. Excluding the incremental net sales from the Acquisition and currency, net sales decreased $26.1 primarily related to lower volumes in the Americas and EMEA.

33

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2017
DIEBOLD NIXDORF, INCORPORATED AND SUBSIDIARIES
(unaudited)
(in millions, except per share amounts)


Systems net sales increased $348.8, including incremental net sales from the Acquisition of $474.2 and a net unfavorable currency impact of $28.2. Excluding the incremental net sales from the Acquisition and currency, net sales decreased $105.9 as systems net sales were adversely impacted by lower banking solution activity across the Company. In the Americas and EMEA, the volume declines were primarily due to lower banking project activity and in AP mainly due to structural changes in the market. This was partially offset by higher retail solutions activity in the Americas. Systems net sales also included an unfavorable impact of $8.1 related to purchase accounting adjustments.

A more detailed discussion of segment net sales is included under "Segment Net Sales and Operating Profit Summary" below.

Geographic Regions

Americas net sales increased $88.9 or 5.7 percent. The incremental net sales from the Acquisition accounted for $89.4. Excluding the incremental net sales from the Acquisition, net sales was flat. The Americas benefited from higher systems retail solutions in Brazil and higher services revenue related to an increase in multi-vendor service contract volume. This was offset by fewer large systems banking projects across the region and a decrease in software revenue associated with the conclusion of Agilis 3/Windows 7 upgrade activity.

EMEA net sales increased $776.9 or 191.2 percent. The incremental net sales from the Acquisition accounted for $822.1. Excluding the incremental net sales from the Acquisition, net sales decreased $45.2 primarily attributable to fewer large projects in the Middle East, United Kingdom and Poland in conjunction with lower overall software volume.

AP net sales increased $31.2 or 7.1 percent. The incremental net sales from the Acquisition accounted for $143.3. Excluding the incremental net sales from the Acquisition, net sales decreased $112.1 primarily due to lower systems and services volume related to the market structure changes in China and the local government's demonetization program in India.

Solutions

Banking net sales increased $398.4 or 16.6 percent. The incremental net sales from the Acquisition accounted for $616.7. Excluding the incremental net sales from the Acquisition, net sales decreased $218.3 primarily due to lower systems volumes across the Company with lower large project activity impacting all regions. In addition, banking software decreased primarily due to the completion of the Agilis 3/Windows 7 upgrade activity in the Americas. Banking net sales was also unfavorably impacted by $9.8 related to purchase accounting adjustments.

Retail net sales increased $498.6. The incremental net sales from the Acquisition accounted for $438.1. Excluding the incremental net sales from the Acquisition, net sales increased $60.5 due to higher demand in Brazil for voting solutions and was unfavorably impacted by $6.4 related to purchase accounting adjustments.

Gross Profit

The following table represents information regarding our gross profit for the years ended December 31:
 
2016
 
2015
 
$ Change
 
% Change
Gross profit - services and software
$
580.8

 
$
488.0

 
$
92.8

 
19.0
Gross profit - systems
140.9

 
164.0

 
(23.1
)
 
(14.1)
Total gross profit
$
721.7

 
$
652.0

 
$
69.7

 
10.7
 
 
 
 
 
 
 
 
Gross margin - services and software
29.3
%
 
34.0
%
 

 
 
Gross margin - systems
10.6
%
 
16.7
%
 

 
 
Total gross margin
21.8
%
 
26.9
%
 

 
 

Services and software gross margin was lower in the year ended December 31, 2016 due in part to the impact of the Acquisition, which utilizes a higher third-party labor model to support its service and software revenue stream, resulting in a dilutive effect on margins. Services and software gross margin was also adversely impacted by higher restructuring and non-routine costs compared to the prior year. In the year ended December 31, 2016, services and software gross profit was adversely impacted by a non-routine revenue reduction of $8.1 related to purchase accounting adjustments associated with the Acquisition. Services and software gross profit also included restructuring charges of $20.8 and $3.1 in 2016 and 2015, respectively. In addition, the Americas was unfavorably impacted due to retro-active contract adjustments and customer service level agreement penalties.

34

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2017
DIEBOLD NIXDORF, INCORPORATED AND SUBSIDIARIES
(unaudited)
(in millions, except per share amounts)


Systems gross margin decreased as a result of purchase accounting valuation adjustments associated with the Acquisition, primarily related to inventory revaluation. Purchase