# NCR Atleos Corp (NATL) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from NCR Atleos Corp's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1974138/000197413824000022/ncr-20231231.htm
Accession: 0001974138-24-000022
Filing date: 2024-03-26
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/NATL/
All MD&A years: /company/NATL/mda/
Next year: /company/NATL/mda/fy2024/ (FY 2024)

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

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

Our discussion within MD&A is organized as follows:

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

•Results of operations. This section contains an analysis of our results of operations presented in the accompanying Consolidated Statements of Operations by comparing the results for the year ended December 31, 2023 to the results for the year ended December 31, 2022. Refer to the section below entitled “Spin-off from NCR” for additional information regarding the basis of presentation.

•Liquidity and capital resources. This section provides an analysis of our cash flows and a discussion of our contractual obligations at December 31, 2023.

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

For management’s discussion of our consolidated results for the year ended December 31, 2022 in comparison with the year ended December 31, 2021, and other financial information related to fiscal year 2022, refer to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in our Form 10 (as previously referred to as NCR ATMCo), and in our information statement, which is included as Exhibit 99.1 to Atleos’ Current Report on Form 8-K that was furnished with the SEC on August 15, 2023 (the “Information Statement”).

OVERVIEW

BUSINESS OVERVIEW

Atleos is an industry-leading financial technology company providing self-directed banking solutions to a global customer base including financial institutions, merchants, manufacturers, retailers and consumers. Self-directed banking is a rapidly growing, secular trend that allows banking customers to transact seamlessly between various channels all for the same transaction. Our comprehensive solutions enable the acceleration of self-directed banking through automated teller machine (“ATM”) and interactive teller machine (“ITM”) technology, including software, services, hardware and our proprietary Allpoint network. While we provide all our solutions on a modular basis, we have also assembled these capabilities into a turnkey, end-to-end platform which we have branded “ATM as a Service.”

Atleos operates two leading business segments focused on facilitating self-service banking through ATMs supported by a shared set of tools, systems and platforms. In addition, we operate a Telecommunications and Technology (“T&T”) segment offering managed network and infrastructure services to enterprise clients across all industries via direct relationships with communications service providers and technology manufacturers.

We manage our operations in the following segments: Self-Service Banking, Network, and T&T.

•Self-Service Banking - Offers solutions to enable customers in the financial services industry to reduce costs, generate new revenue streams and enhance customer loyalty. These solutions include a comprehensive line of ATM hardware and software, and related installation, maintenance, and managed and professional services. We also offer solutions to manage

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and run the ATM channel end-to-end for financial institutions that include back office, cash management, software management and ATM deployment, among others.

•Network - Provides a cost-effective way for financial institutions, fintechs, neobanks, and retailers to reach and serve their customers through our network of ATMs and multi-functioning financial services kiosks. We offer credit unions, banks, digital banks, fintechs, stored-value debit card issuers, and other consumer financial services providers access to our ATM network, including our proprietary Allpoint network, providing convenient and fee-free cash withdrawal and deposit access to their customers and cardholders as well as the ability to convert a digital value to cash, or vice versa, via ReadyCode (formerly Pay360). We also provide ATM branding solutions to financial institutions, ATM management and services to retailers and other businesses, and our LibertyX business gives consumers the ability to buy and sell Bitcoin.

•T&T - Offers managed network and infrastructure services to enterprise clients across all industries via direct relationships with communications service providers and technology manufacturers. Our customers rely on us as a strategic partner to help them reduce complexity, improve cost efficiency, and enable global geographical reach. We deliver expert professional, field, and remote services for modern network technologies including Software-Defined Wide Area Networking, Network Functions Virtualization, Wireless Local Area Networks, Optical Networking, and Edge Networks.

Spin-off from NCR

On September 15, 2022, NCR Corporation (now known as NCR Voyix Corporation or “Voyix,” and referred to as “NCR” prior to the Separation), announced its plan to separate its businesses into two distinct, publicly traded companies, whereby NCR would execute a Spin-off to NCR shareholders of its self-service banking, network, and telecommunications and technology businesses (the “Spin-off” or “Separation”). On September 22, 2023, the Board of Directors of NCR authorized the Spin-off of Atleos, which was completed on October 16, 2023.

The Spin-off was achieved by means of a pro-rata distribution of all of Atleos’ common stock to Voyix’s shareholders at the close of business on October 2, 2023 (“Record Date”) (collectively, the “Distribution”). Each holder of NCR’s common stock received one share of Atleos’ common stock for every two shares of NCR common stock held as of the Record Date. Upon completion of the Distribution, on October 17, 2023, the Company commenced trading as an independent public company under the ticker symbol “NATL” on the New York Stock Exchange (“NYSE”). Following the Distribution, Voyix does not beneficially own any shares of Atleos common stock and will no longer consolidate Atleos results with any Voyix results.

In connection with the Spin-off, we have incurred and expect to incur in the future one-time separation costs, which include one-time and non-recurring expenses associated with the Spin-off and stand up of functions required to operate as a stand-alone public entity. These non-recurring costs primarily relate to system implementation costs, business and facilities separation, applicable employee related costs, development of our brand and other matters. We expect the separation-related costs will continue through at least fiscal year 2024.

Periods prior to Separation

On October 16, 2023, the Company became a standalone publicly traded company, and its financial statements are now presented on a consolidated basis. Prior to the Separation, the Company’s historical combined financial statements were prepared on a standalone basis and were derived from NCR’s consolidated financial statements and accounting records. The financial statements for all periods presented, including the historical results of the Company prior to October 16, 2023, are now referred to as “Consolidated Financial Statements”, and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Prior to the Separation, the Consolidated Statements of Operations include all revenues and costs directly attributable to Atleos, including costs for facilities, functions and services used by Atleos. Atleos’ businesses have historically functioned together with the other businesses controlled by NCR. Accordingly, Atleos relied on NCR’s corporate overhead and other support functions for its business. Therefore, certain corporate overhead and shared costs have been allocated to Atleos including (i) certain general and administrative expenses related to NCR support functions that are provided on a centralized basis within NCR (e.g., expenses for corporate facilities, executive oversight, treasury, finance, legal, human resources, compliance, information technology, employee benefit plans, stock compensation plans, and other corporate functions) and (ii) certain operations support costs incurred by NCR, including product sourcing, maintenance and support services, and other supply chain functions. These expenses have been specifically identified, when possible, or allocated based on revenues, headcount, usage or other allocation methods that are considered to be a reasonable reflection of the utilization of services provided or benefit received. Management considers that such allocations have been made on a reasonable basis consistent with benefits received but may not necessarily be indicative of the costs that would have been incurred if Atleos had been operated on a standalone basis for the periods presented. All charges and

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allocations for facilities, functions and services performed by NCR have had been deemed settled in cash by Atleos to NCR in the period in which the cost was recorded in the Consolidated Statements of Operations.

Prior to the Separation, NCR utilized a centralized approach to managing its treasury operations. The cash and cash equivalents held by NCR at the corporate level were not specifically identifiable to Atleos; and therefore, had not been reflected in the Company’s Consolidated Balance Sheets prior to Separation. Cash and cash equivalents and restricted cash in the Consolidated Balance Sheets prior to Separation represent cash and cash equivalents and restricted cash held by legal entities of the Company that were specifically attributable to the Company.

Prior to the Separation, NCR’s external debt and related interest expense had not been attributed to the Company for the periods presented because NCR’s borrowings were neither directly attributable to the Company nor was the Company the legal obligor of such borrowings.

Prior to the Separation, transactions historically settled in cash between the Company and NCR had been reflected in the Consolidated Balance Sheets as Related party receivable, Related party payable, or Borrowings from related party with the aggregate net effect of those related party transactions reflected in the Consolidated Statements of Cash Flows as Related party receivables and payables within operating activities, Amounts advanced for or Repayments received from related party notes receivable in investing activities, or Proceeds from or payments on related party borrowings within financing activities. Other balances between the Company and NCR were considered to be effectively settled in the Consolidated Financial Statements at the time the transactions were recorded. The aggregate net effect of transactions between the Company and NCR that were not historically settled in cash had been reflected in the Consolidated Balance Sheets as Net investment from NCR Corporation and in the Consolidated Statements of Cash Flows as Net transfers from (to) NCR Corporation within financing activities.

Prior to the Separation, income tax expense and tax balances were calculated on a separate tax return basis. The separate tax return method applies the accounting guidance for income taxes to the standalone financial statements as if the Company was a separate taxpayer and a standalone company even though the Company filed as part of NCR’s tax group in certain jurisdictions prior to Separation. The Company’s portion of income tax expense for domestic, and certain jurisdictions outside the United States (“U.S.”), were deemed to have been settled in the period the related tax expense was recorded.

Net investment from NCR Corporation in the Consolidated Balance Sheets represents NCR’s historical investment in the Company, the accumulated net earnings after taxes and the net effect of the transactions with and allocations from NCR.

Periods Post Separation

For the period subsequent to October 16, 2023, as a standalone publicly traded company, Atleos presents its financial statements on a consolidated basis. The Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K have been prepared in accordance with GAAP.

In connection with the Spin-off, we entered into a Separation and Distribution Agreement and various other agreements with Voyix. These agreements provide a framework for our relationship with Voyix and govern various interim and ongoing relationships between Atleos and Voyix. These agreements with Voyix are described in the section of the Information Statement titled “Certain Relationships and Related Transactions-Agreements with NCR.” Following the Separation, certain functions continue to be provided by or for Voyix under the Transition Services Agreements or are being performed using Atleos’ own resources or third-party service providers. Additionally, certain maintenance services, manufacturing services, product resale and other support services and supply chain operations will continue to be provided by or to Voyix under the Commercial Agreements.

STRATEGIC INITIATIVES AND TRENDS

Atleos is expected to be a cash-generative business positioned to focus on delivering ATM as a Service to a large, installed customer base across banks and retailers. We believe it will build on our leadership in self-service banking and ATM networks to meet global demand for ATM access and leverage new ATM transaction types, including digital currency solutions, to drive market growth. Atleos is expected to also continue shifting to a highly recurring revenue model to drive stable cash flow and capital returns to shareholders.

Additionally, we plan to capitalize on opportunities presented by the acquisitions of Cardtronics plc (“Cardtronics”) and LibertyX to accelerate our Network business as we go to market with a more robust offering in this segment. Cardtronics is expected to accelerate our ATM as a Service strategy by adding the Allpoint debit network, and LibertyX is expected to enable Atleos to provide a digital currency solutions, including the ability to buy and sell Bitcoin and conduct cross-border remittance using Bitcoin.

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We also plan to continue to improve our execution to drive solid returns and to transform our business to enhance value for all shareholders.

Impacts from Geopolitical and Macroeconomic Challenges    

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

The bank failures in 2023, in addition to other global macroeconomic conditions, have caused a degree of uncertainty in the investor community and among bank customers, and could significantly impact the national, regional and local banking industry and the global business environment in which Atleos operates. The Company does not believe that the circumstances of these bank failures are indicators of broader issues within the banking system. However, if there is a severe or prolonged economic downturn, it could result in a variety of risks to our business, including driving banking customers to tighten budgets and curtail spending, which would negatively impact our sales and business.

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

For further information on the risks posed to our business from geopolitical and macroeconomic factors, refer to Part I, Item 1A “Risk Factors”, of this Form 10-K, including the risk factor titled, “A major natural disaster or catastrophic event could have a materially adverse effect on our business, financial condition and results of operations, or have other adverse consequences.” For further information on exposures to interest rate and foreign exchange risk, refer to Item 7A, “Quantitative and Qualitative Disclosures about Market Risk”, in this Form 10-K.

Impacts from Seasonality and Tourism

Our business is generally seasonal, with lower revenue and fewer transactions occurring in the first quarter of each year. Transaction volumes at our ATMs located in regions affected by strong winter weather patterns typically experience declines in volume during winter months due to decreases in the amount of consumer traffic through such locations. We usually have an increase in transaction volume during the warmer summer months, aided by increased vacation and holiday travel. Such seasonality causes our working capital cash flow requirements to vary from quarter to quarter depending on variability in the volume, timing and mix of sales. We expect the fluctuations in transaction volume to continue. For further information on the seasonality of our business, refer to Part I, Item 1 “Business - Seasonality” of this Form 10-K.

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RESULTS OF OPERATIONS

Key Strategic Financial Metrics

The following tables show our key strategic financial metrics for the years ended December 31, the relative percentage that those amounts represent to total revenue, and the change in those amounts year-over-year.

Recurring revenue as a percentage of total revenue

[[GREPCENT_TABLE]]
[["","","","","","","","","Percentage of Total Revenue","","Increase (Decrease)"],["In millions","","2023","","2022","","2021","","2023","","2022","","2021","","2023 v 2022","","2022 v 2021"],["Recurring revenue (1)","","$","2,982","","","$","2,795","","","$","2,145","","","71.2","%","","67.7","%","","60.4","%","","7","%","","30","%"],["All other products and services","","1,209","","","1,336","","","1,404","","","28.8","%","","32.3","%","","39.6","%","","(10)","%","","(5)","%"],["Total Revenue","","$","4,191","","","$","4,131","","","$","3,549","","","100.0","%","","100.0","%","","100.0","%","","1","%","","16","%"]]
[[/GREPCENT_TABLE]]

(1) Refer to our definition of Recurring revenue in the section entitled “Non-GAAP Financial Measures and Use of Certain Terms” below.

Net income (loss) attributable to Atleos and Adjusted EBITDA(2) as a percentage of total revenue

[[GREPCENT_TABLE]]
[["","","","","","","","","Percentage of Total Revenue","","Increase (Decrease)"],["In millions","","2023","","2022","","2021","","2023","","2022","","2021","","2023 v 2022","","2022 v 2021"],["Net income (loss) attributable to Atleos","","$","(134)","","","$","108","","","$","186","","","(3.2)","%","","2.6","%","","5.2","%","","(224)","%","","(42)","%"],["Adjusted EBITDA (2)","","$","732","","","$","685","","","$","586","","","17.5","%","","16.6","%","","16.5","%","","7","%","","17","%"]]
[[/GREPCENT_TABLE]]

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

Non-GAAP Financial Measures and Use of Certain Terms:

Non-GAAP Financial Measures

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”) Atleos’ management uses the non-GAAP measure Adjusted EBITDA because it provides useful information to investors as an indicator of performance of the Company’s ongoing business operations. Atleos determines Adjusted EBITDA based on GAAP Net income attributable to Atleos plus interest expense, net; plus income tax expense (benefit); plus depreciation and amortization; plus acquisition-related costs; plus pension mark-to-market adjustments, pension settlements, pension curtailments and pension special termination benefits; plus separation-related costs; plus transformation and restructuring charges (which includes integration, severance and other exit and disposal costs); plus stock-based compensation expense; plus other special (expense) income items. These adjustments are considered non-operational or non-recurring in nature and are excluded from the Adjusted EBITDA metric utilized by our chief operating decision maker (“CODM”) in evaluating segment performance and are separately delineated to reconcile back to total reported income attributable to Atleos. This format is useful to investors because it allows analysis and comparability of operating trends. It also includes the same information that is used by Atleos management to make decisions regarding our segments and to assess our financial performance. Refer to the table below for the reconciliations of Net income attributable to Atleos (GAAP) to Adjusted EBITDA (non-GAAP).

Special Item Related to Russia The war in Eastern Europe and related sanctions imposed on Russia and related actors by the United States and other jurisdictions required us to commence the orderly wind down of our operations in Russia beginning in the first quarter of 2022. As of December 31, 2023, we have ceased operations in Russia and have completed the liquidation of our only subsidiary in Russia. As a result, our presentation of segment revenue and Adjusted EBITDA for the years ending December 31, 2022 and 2021 exclude the immaterial impact of our operating results in Russia, as well as the impact of impairments taken to write down the carrying value of assets and liabilities, severance charges, and the assessment of collectability on revenue recognition. No charges have been recognized for the twelve months ended December 31, 2023. We consider this to be a non-recurring special item and management has reviewed the results of its business segments excluding these impacts.

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

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Use of Certain Terms

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

Reconciliation of Net income (loss) attributable to Atleos (GAAP) to Adjusted EBITDA (Non-GAAP)

[[GREPCENT_TABLE]]
[["In millions","2023","","2022","","2021"],["Net income (loss) attributable to Atleos (GAAP)","$","(134)","","","$","108","","","$","186"],["Interest expense, net(1)","90","","","31","","","49"],["Interest income","(5)","","","\u2014","","","\u2014"],["Income tax expense","239","","","50","","","64"],["Depreciation and amortization","151","","","159","","","104"],["Acquisition-related amortization of intangibles","98","","","100","","","55"],["Stock-based compensation expense","68","","","66","","","82"],["Separation costs","170","","","\u2014","","","\u2014"],["Acquisition-related costs","\u2014","","","8","","","95"],["Transformation and restructuring costs","28","","","63","","","25"],["Pension mark-to-market adjustments","27","","","78","","","(70)"],["Russia operations","\u2014","","","22","","","(4)"],["Adjusted EBITDA (Non-GAAP)","$","732","","","$","685","","","$","586"]]
[[/GREPCENT_TABLE]]

(1) Includes Related party interest expense, net, as presented in the Consolidated Statements of Operations.

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Consolidated Results

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

[[GREPCENT_TABLE]]
[["","","","","","","","Percentage of Revenue (1)","","Increase (Decrease)"],["In millions","2023","","2022","","2021","","2023","","2022","","2021","","2023 v 2022","","2022 v 2021"],["Product revenue","$","1,030","","","$","1,098","","","$","1,036","","","24.6","%","","26.6","%","","29.2","%","","(6)","%","","6","%"],["Service revenue","3,161","","","3,033","","","2,513","","","75.4","%","","73.4","%","","70.8","%","","4","%","","21","%"],["Total revenue","4,191","","","4,131","","","3,549","","","100.0","%","","100.0","%","","100.0","%","","1","%","","16","%"],["Product gross margin","184","","","126","","","164","","","17.9","%","","11.5","%","","15.8","%","","46","%","","(23)","%"],["Service gross margin","749","","","793","","","728","","","23.7","%","","26.1","%","","29.0","%","","(6)","%","","9","%"],["Total gross margin","933","","","919","","","892","","","22.3","%","","22.2","%","","25.1","%","","2","%","","3","%"],["Selling, general and administrative expenses","585","","","586","","","537","","","14.0","%","","14.2","%","","15.1","%","","\u2014","%","","9","%"],["Research and development expenses","77","","","64","","","107","","","1.8","%","","1.5","%","","3.0","%","","20","%","","(40)","%"],["Income from operations","271","","","269","","","248","","","6.5","%","","6.5","%","","7.0","%","","1","%","","8","%"],["Interest expense","(77)","","","\u2014","","","\u2014","","","(1.8)","%","","\u2014","%","","\u2014","%","","n/m","","n/m"],["Related party interest expense, net","(13)","","","(31)","","","(49)","","","(0.3)","%","","(0.8)","%","","(1.4)","%","","(58)","%","","(37)","%"],["Other (expense) income, net","(74)","","","(81)","","","52","","","(1.8)","%","","(2.0)","%","","1.5","%","","(9)","%","","(256)","%"],["Income before income taxes","107","","","157","","","251","","","2.6","%","","3.8","%","","7.1","%","","(32)","%","","(37)","%"],["Income tax expense","239","","","50","","","64","","","5.7","%","","1.2","%","","1.8","%","","378","%","","(22)","%"],["Net income (loss)","$","(132)","","","$","107","","","$","187","","","(3.1)","%","","2.6","%","","5.3","%","","(223)","%","","(43)","%"]]
[[/GREPCENT_TABLE]]

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

Revenue

[[GREPCENT_TABLE]]
[["","","","","","","","Percentage of Total Revenue","","Increase (Decrease)"],["In millions","2023","","2022","","2021","","2023","","2022","","2021","","2023 v 2022","","2022 v 2021"],["Product revenue","$","1,030","","","$","1,098","","","$","1,036","","","24.6","%","","26.6","%","","29.2","%","","(6)","%","","6","%"],["Service revenue","3,161","","","3,033","","","2,513","","","75.4","%","","73.4","%","","70.8","%","","4","%","","21","%"],["Total revenue","$","4,191","","","$","4,131","","","$","3,549","","","100.0","%","","100.0","%","","100.0","%","","1","%","","16","%"]]
[[/GREPCENT_TABLE]]

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

Revenue results in the fourth quarter of 2023 were negatively impacted by the delayed transfer of eleven legal entities to Atleos following our separation from Voyix, due to local processes of setting up Atleos legal entities. Prior to the Separation, the operating results of each of these entities were included within Atleos’ results under carve-out methodology as all entities were dedicated to the Atleos business. Of these eleven entities, four transferred during the fourth quarter of 2023 and the remaining entities are expected to transfer by the second quarter of 2024. We estimate the delayed transfer of these entities resulted in an approximately $40 million decline in revenue in 2023 compared to the prior year period.

Total revenue increased 1% for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily driven by our shift to recurring service revenue streams. Product revenue decreased 6% due to decreases of approximately $48 million in hardware revenue and $26 million in software license revenue, partially offset by an increase in Bitcoin-related revenue of $10 million. Declines in hardware and software license revenue are partially due to the shift in the business from one-time hardware and perpetual license sales to ATM as a Service and software subscriptions as well as a $12 million reduction due to the delayed legal entities described above.

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Service revenue increased 4% due to increases of approximately $74 million in ATM as a Service revenue and $55 million of transaction processing services revenue as well as $11 million in other software-related revenues, partially offset by a decline in hardware maintenance and installation revenue of $23 million. The increase in transaction processing services was driven by the favorable mix of payments transactions year-over-year, while the growth in ATM as a Service revenue and declines in hardware maintenance and installation revenues were partially due to the continued shift to our ATM as a Service offering, whereby we own the ATMs and charge per ATM for the service. The delayed transfer of legal entities resulted in a reduction of hardware maintenance and installation revenue and other software-related services revenue of approximately $19 million and $9 million, respectively.

Gross Margin

[[GREPCENT_TABLE]]
[["","","","","","","","Percentage of Revenue (1)","","Increase (Decrease)"],["In millions","2023","","2022","","2021","","2023","","2022","","2021","","2023 v 2022","","2022 v 2021"],["Product gross margin","$","184","","","$","126","","","$","164","","","17.9","%","","11.5","%","","15.8","%","","46","%","","(23)","%"],["Service gross margin","749","","","793","","","728","","","23.7","%","","26.1","%","","29.0","%","","(6)","%","","9","%"],["Total gross margin","$","933","","","$","919","","","$","892","","","22.3","%","","22.2","%","","25.1","%","","2","%","","3","%"]]
[[/GREPCENT_TABLE]]

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

Gross margin as a percentage of revenue was 22.3% in 2023 compared to 22.2% in 2022. Gross margin for the year ended December 31, 2023 included $51 million of reserves on net assets transferred and incremental retention costs paid out as part of the Spin-off from Voyix, $65 million related to amortization of acquisition-related intangible assets, $20 million of stock-based compensation expense, and $1 million related to transformation and restructuring costs. Gross margin for the year ended December 31, 2022 included $60 million related to amortization of acquisition-related intangible assets, $27 million of stock-based compensation expense, $17 million related to transformation and restructuring costs, and $10 million related to operating losses, impairments and other actions taken with respect to our operations in Russia. Excluding these items, gross margin as a percentage of revenue increased slightly from 25.0% to 25.5%. Following the series of geopolitical and macroeconomic challenges that had a significant impact on costs in the first and second quarters of 2022, we took action to mitigate these impacts and have had reductions in fuel, shipping costs and component parts cost compared to prior year which has improved our product gross margins by approximately $64 million. These improvements were partially offset in our services gross margin by increased interest rates driving $46 million of higher rental cost on our vault cash agreements.

Selling, General and Administrative Expenses

[[GREPCENT_TABLE]]
[["","","","","","","","Percentage of Total Revenue","","Increase (Decrease)"],["In millions","2023","","2022","","2021","","2023","","2022","","2021","","2023 v 2022","","2022 v 2021"],["Selling, general and administrative expenses","$","585","","","$","586","","","$","537","","","14.0","%","","14.2","%","","15.1","%","","\u2014","%","","9","%"]]
[[/GREPCENT_TABLE]]

Selling, general, and administrative expenses were $585 million in 2023, compared to $586 million in 2022. As a percentage of revenue, selling, general and administrative expenses were 14.0% in 2023 and 14.2% in 2022. In 2023, selling, general and administrative expenses included $8 million of transformation and restructuring costs, $43 million of stock-based compensation expense, $33 million of acquisition-related amortization of intangibles, and $97 million in IT separation, consulting, audit, legal, and incremental retention costs related to the Company’s Spin-off from Voyix. In 2022, selling, general and administrative expenses included $38 million of transformation and restructuring costs, $35 million of stock-based compensation expense, $40 million of acquisition-related amortization of intangibles, $8 million of acquisition-related costs, and $3 million of costs related to actions taken with respect to our operations in Russia. Excluding these items, selling, general and administrative expenses decreased as a percentage of revenue from 11.2% in 2022 to 9.6% in 2023, due to higher allocated IT infrastructure costs of $13 million in the second quarter of 2022 related to the enterprise resource planning (“ERP”) system conversion as well as lower real estate costs compared to prior year driven by cost mitigation actions implemented.

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Research and Development Expenses

[[GREPCENT_TABLE]]
[["","","","","","","","Percentage of Total Revenue","","Increase (Decrease)"],["In millions","2023","","2022","","2021","","2023","","2022","","2021","","2023 v 2022","","2022 v 2021"],["Research and development expenses","$","77","","","$","64","","","$","107","","","1.8","%","","1.5","%","","3.0","%","","20","%","","(40)","%"]]
[[/GREPCENT_TABLE]]

Research and development expenses were $77 million in 2023, compared to $64 million in 2022. As a percentage of revenue, these costs were 1.8% in 2023 and 1.5% in 2022. In 2023, research and development expenses included $5 million of stock-based compensation expense and $3 million of costs related to the Company’s separation from Voyix. In 2022, research and development expenses included $8 million of transformation and restructuring costs and $4 million of stock-based compensation expense. After considering these items, research and development expenses increased as a percentage of revenue from 1.3% in 2022 to 1.6% in 2023 due to higher employee benefit related costs in 2023.

Interest Expense and Related Party Interest Expense, Net

[[GREPCENT_TABLE]]
[["","","","","","","","Increase (Decrease)"],["In millions","2023","","2022","","2021","","2023 v 2022","","2022 v 2021"],["Interest expense","$","77","","","$","\u2014","","","$","\u2014","","","n/m","","n/m"],["Related party interest expense, net","$","13","","","$","31","","","$","49","","","(58)","%","","(37)","%"]]
[[/GREPCENT_TABLE]]

Interest expense was $77 million in 2023. Interest expense is primarily related to the Company’s senior unsecured notes and borrowings under the Company’s Senior Secured Credit Facility entered into in connection with the Spin-off. The Company had no external interest expense in 2022. Refer to Note 5, “Debt Obligations”, for further details regarding the issuance of debt.

Related party interest expense, net was $13 million in 2023 compared to $31 million in 2022. The decrease was related to repayment of certain related party borrowings during the period.

Other (Expense) Income, net

Other (expense) income, net was expense of $74 million in 2023 and expense of $81 million in 2022, with the components reflected in the following table:

[[GREPCENT_TABLE]]
[["In millions","2023","","2022","","2021"],["Interest income","$","5","","","$","\u2014","","","$","\u2014"],["Foreign currency fluctuations and foreign exchange contracts","(33)","","","(9)","","","(17)"],["Bank-related fees","(14)","","","\u2014","","","\u2014"],["Employee benefit plans","(22)","","","(63)","","","85"],["Other, net","(10)","","","(9)","","","(16)"],["Other (expense) income, net","$","(74)","","","$","(81)","","","$","52"]]
[[/GREPCENT_TABLE]]

Employee benefit plans within Other (expense) income, net includes the components of pension, postemployment and postretirement expense, other than service cost, as well as actuarial gains and losses from the annual pension mark-to-market adjustment. In 2023, there was a net actuarial loss of $27 million compared to a net actuarial loss of $78 million in 2022. The net actuarial loss in 2023 was primarily due to a decrease in discount rates in measuring the benefit obligation, partially offset by the impact of economic improvements on the value of plan assets. The actuarial loss in 2022 was primarily due to the impact of economic downturns on the value of plan assets, partially offset by an increase in discount rates in measuring the benefit obligation.

In 2023, the Company incurred bank-related fees of $14 million related to certain structuring and commitment fees as a result of the financing transactions entered into in connection with the Separation.

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Income Taxes

[[GREPCENT_TABLE]]
[["","","","","","","","Increase (Decrease)"],["In millions","2023","","2022","","2021","","2023 v 2022","","2022 v 2021"],["Income tax expense","$","239","","","$","50","","","$","64","","","378","%","","(22)","%"]]
[[/GREPCENT_TABLE]]

Our effective tax rate was 223% in 2023, 32% in 2022, and 25% in 2021. In 2023, the Company completed certain internal restructuring transactions in connection with the Spin-off, resulting in a net of $120 million discrete tax expenses. Approximately $105 million of the discrete tax expense is for non-cash deferred tax items, primarily related to the tax effects upon the transfer of certain intangible assets among our wholly-owned subsidiaries prior to the Spin-off. The 2023 tax rate was also impacted by the establishment of a $44 million valuation allowance from recording a valuation allowance against deferred tax assets in the United Kingdom, Canada, Cyprus, Austria and other jurisdictions. During 2022, our tax rate was impacted by a $1 million benefit from the reversal of valuation allowances against changes in deferred tax assets in certain foreign jurisdictions and a $10 million expense attributable to U.S. and foreign return-to-provision true-up adjustments.

While we are subject to numerous federal, state and foreign tax audits, we believe that appropriate reserves exist for issues that might arise from these audits. Should these audits be settled, the resulting tax effect could impact the tax provision and cash flows in future periods. During 2024, the Company may resolve certain tax matters in foreign jurisdictions that could have an impact on the effective tax rate in 2024.

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

Revenue and Adjusted EBITDA by Segment

The Company manages and reports its businesses in the following segments: Self-Service Banking, Network and Technology & Telecommunications (T&T). Segments are measured for profitability by the Company’s chief operating decision maker (CODM) based on revenue and segment Adjusted EBITDA. Refer to the section above entitled “Non-GAAP Financial Measures and Use of Certain Terms” for our definition of Adjusted EBITDA and the reconciliation of Net income (loss) attributable to Atleos (GAAP) to Adjusted EBITDA (non-GAAP).

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

[[GREPCENT_TABLE]]
[["","","","","","","","","Percentage of Revenue (1)","","Increase (Decrease)"],["In millions","2023","","2022","","2021","","","2023","","2022","","2021","","","","2023 v 2022","","2022 v 2021"],["Revenue"],["Self-Service Banking","$","2,581","","","$","2,582","","","$","2,530","","","","61.6","%","","62.5","%","","71.3","%","","","","\u2014","%","","2","%"],["Network","1,267","","","1,198","","","600","","","","30.2","%","","29.0","%","","16.9","%","","","","6","%","","100","%"],["T&T","196","","","219","","","253","","","","4.7","%","","5.3","%","","7.1","%","","","","(11)","%","","(13)","%"],["Total Segment Revenue","$","4,044","","","$","3,999","","","$","3,383","","","","96.5","%","","96.8","%","","95.3","%","","","","1","%","","18","%"],["Other (2)","147","","","123","","","118","","","","3.5","%","","3.0","%","","3.3","%","","","","20","%","","4","%"],["Other adjustment (3)","\u2014","","","9","","","48","","","","\u2014","%","","0.2","%","","1.4","%","","","","(100)","%","","(81)","%"],["Consolidated Revenue","$","4,191","","","$","4,131","","","$","3,549","","","","100.0","%","","100.0","%","","100.0","%","","","","1","%","","16","%"],["Adjusted EBITDA by segment"],["Self-Service Banking","$","630","","","$","549","","","$","600","","","","24.4","%","","21.3","%","","23.7","%","","","","15","%","","(9)","%"],["Network","$","379","","","$","352","","","$","214","","","","29.9","%","","29.4","%","","35.7","%","","","","8","%","","64","%"],["T&T","$","33","","","$","47","","","$","57","","","","16.8","%","","21.5","%","","22.5","%","","","","(30)","%","","(18)","%"]]
[[/GREPCENT_TABLE]]

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

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(2) Other immaterial business operations, including commerce-related operations in countries that Voyix exited that are aligned to Atleos, that do not represent a reportable segment. For periods after the Separation, Other also includes revenues from commercial agreements with Voyix.

(3) Other adjustment reflects the revenue attributable to the Company’s operations in Russia that were excluded from management’s measure of revenue due to our announcement in Q1 of 2022 to suspend sales to Russia and anticipated orderly wind down of our operations in the country.

Segment Revenue

For the year ended December 31, 2023 compared to the year ended December 31, 2022

Self-Service Banking revenue for the year ended December 31, 2023 was flat in comparison to the prior year period. ATM as a Service revenue increased approximately $74 million compared to the prior year period. These increases were partially offset by declines in ATM hardware of $46 million, hardware maintenance and installation of $24 million, and software-related revenue of $6 million compared to the prior year period. Revenue results for the periods were primarily due to the shift from non-recurring revenues to recurring ATM as a Service arrangements whereby we own the ATMs and charge per ATM for the service, as well as the shift to recurring software subscriptions. The delayed transfer of legal entities drove a reduction of approximately $34 million. Software and services revenue as a percent of total Self-Service Banking segment revenue were 70% and 68% in the twelve months ended December 31, 2023 and 2022, respectively.

Network revenue increased 6% for the year ended December 31, 2023 compared to the prior year period. The increase in revenue was due to an approximately $55 million increase in transaction processing services revenue driven by an increase in higher value ATM transactions and a $10 million increase in Bitcoin-related revenue.

T&T revenue decreased 11% for the year ended December 31, 2023 compared to the prior year period. The decrease was due to declines in hardware and software license revenue of $10 million and hardware maintenance and installation service revenue of $13 million, driven by a reduction in activity for some of our larger customers and approximately $2 million related to the delayed transfer of legal entities.

Segment Adjusted EBITDA

For the year ended December 31, 2023 compared to the year ended December 31, 2022

Self-Service Banking Adjusted EBITDA increased 15% for the year ended December 31, 2023 compared to the prior year period. The margin expansion is due to improvement in component and fuel costs, particularly in ATM hardware, as well as an increase in higher margin recurring revenue streams. These improvements were partially offset by an increase in employee benefit-related costs and approximately $12 million decline due to the delayed transfer of legal entities.

Network Adjusted EBITDA increased by 8% for the year ended December 31, 2023 compared to the prior year period due to the increase in higher margin transaction revenue described above. These improvements were partially offset by significantly higher interest rates on our vault cash agreements driving additional cost of $46 million, as well as higher cash-in-transit costs driven by the higher volume of cash dispensed in the period, and an increase in employee benefit-related costs.

T&T Adjusted EBITDA decreased 30% for the year ended December 31, 2023 compared to the prior year period. The decrease in Adjusted EBITDA was driven by the decrease in revenue.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

As part of NCR, our principal sources of cash were cash generated from operations and funding from NCR as Atleos historically participated in NCR’s centralized treasury management and overall financing arrangements. Following the completion of the Spin-off on October 16, 2023, the Company’s capital structure and sources of liquidity changed significantly from our historical capital structure because we are no longer part of NCR’s centralized treasury management and centralized funding programs. We continually evaluate our liquidity requirements in light of our operating needs, growth initiatives and capital resources.

Atleos’ management uses a non-GAAP measure called “Adjusted free cash flow-unrestricted” to assess the financial performance and liquidity of Atleos. We define Adjusted free cash flow-unrestricted as net cash provided by operating activities less capital expenditures for property, plant and equipment, less additions to capitalized software, plus/minus the change in restricted cash settlement activity, plus/minus net reductions or reinvestment in the trade receivables facility established in the fourth quarter of

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2023 due to fluctuations in the outstanding balance of receivables sold, and plus pension contributions and settlements. Restricted cash settlement activity represents the net change in amounts collected on behalf of, but not yet remitted to, certain of the Company’s merchant customers or third-party service providers that are pledged for a particular use or restricted to support these obligations. These amounts can fluctuate significantly period to period based on the number of days for which settlement to the merchant has not yet occurred or day of the week on which a reporting period ends. We believe Adjusted free cash flow-unrestricted information is useful for investors because it indicates the amount of cash available after these adjustments for, among other things, investments in Atleos’ existing businesses, strategic acquisitions, and repayment of debt obligations. Adjusted free cash flow-unrestricted does not represent the residual cash flow available, since there may be other non-discretionary expenditures that are not deducted from the measure. Adjusted free cash flow-unrestricted does not have a uniform definition under GAAP, and therefore Atleos’ definition may differ from other companies’ definitions of this measure. This non-GAAP measure should not be considered a substitute for, or superior to, cash flows from operating activities under GAAP.

Summarized cash flow information for the twelve months ended December 31 is as follows:

[[GREPCENT_TABLE]]
[["In millions","2023","","2022","","2021"],["Net cash provided by operating activities","$","355","","","$","274","","","$","449"],["Net cash used in investing activities","$","(316)","","","$","(417)","","","$","(2,493)"],["Net cash provided by (used in) financing activities","$","31","","","$","183","","","$","2,345"]]
[[/GREPCENT_TABLE]]

Cash provided by operating activities was $355 million in 2023 compared to cash provided by operating activities of $274 million in 2022. The increase in cash provided by operating activities of $81 million in 2023 was primarily driven by the favorable movement in net working capital accounts of $218 million and an increase in non-cash charges of $102 million offset by a decline in net income of $239 million. The increase in net working capital accounts includes the impact of the agreement entered into during the fourth quarter of 2023 to sell short term receivables from certain trade accounts to an unaffiliated financial institution which provided a $166 million benefit to operating cash flows, offset by contributions to the U.S. pension plan pursuant to the Employee Matters and Separation and Distribution agreements of $150 million.

Financing activities for 2023 primarily include financing arrangements entered into in connection with the Spin-off. On September 27, 2023, the Company issued $1,350 million of senior secured 9.50% notes due in 2029. In addition to the senior secured notes, the Company entered into a senior secured $835 million Term Loan A due in 2028, a senior secured $750 million Term Loan B facility due in 2029 and a $500 million senior secured revolving credit facility, of which $155 million was drawn as of December 31, 2023. Refer to Note 5, “Debt Obligations”, for further details regarding the issuance of debt. Prior to the Spin-off, financing activities also include short-term borrowings with, and transfers to and from, NCR, consisting of, among other things, cash transfers and changes in receivables and payables and other transactions between Atleos and NCR. See Note 12, “Related Parties”, in the Notes to Consolidated Financial Statements for further discussion on transactions with NCR. Other investing activities primarily include business acquisitions and investments.

The Company used the aggregate proceeds received from the issuance of senior secured notes and drawings under the senior secured credit facility, in addition to cash on-hand, to make a net distribution payment of $2,996 million to Voyix in connection with the Spin-off as consideration for the net assets contributed to Atleos.

See Note 5, “Debt Obligations”, of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Report for further information on the Senior Secured Credit Facility and senior secured notes.

The table below reconciles net cash provided by operating activities, the most directly comparable GAAP measure, to Atleos’ non-GAAP measure of Adjusted free cash flow-unrestricted for the years ended December 31:

[[GREPCENT_TABLE]]
[["In millions","2023","","2022","","2021"],["Net cash provided by operating activities (GAAP)","$","355","","","$","274","","","$","449"],["Capital expenditures for property, plant and equipment","(108)","","","(58)","","","(80)"],["Additions to capitalized software","(24)","","","(39)","","","(31)"],["Change in restricted cash settlement activity","(27)","","","27","","","(41)"],["Initial sale of trade account receivables","(166)","","","\u2014","","","\u2014"],["Pension contributions","154","","","4","","","3"],["Adjusted free cash flow-unrestricted (non-GAAP)","$","184","","","$","208","","","$","300"]]
[[/GREPCENT_TABLE]]

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Employee Benefit Plans In September 2023, as part of the Spin-off, Atleos assumed the U.S. and certain international pension plan assets and liabilities, along with the associated deferred costs in Accumulated other comprehensive income (loss), which were previously sponsored by Voyix. Pursuant to the Employee Matters and Separation and Distribution agreements, the Company contributed $150 million to the U.S. pension plan in 2023. The Company also contributed $4 million to its international pension plans in 2023. In 2024, we expect to make contributions of $3 million to our international pension plans, $18 million to our postemployment plan and $2 million to our postretirement plan. See Note 9, “Employee Benefit Plans”, of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Report for additional discussion on our pension, postemployment and postretirement plans.

Cash and Cash Equivalents Held by Foreign Subsidiaries Cash and cash equivalents held by the Company’s foreign subsidiaries were $285 million and $266 million at December 31, 2023 and 2022, respectively. Under current tax laws and regulations, if cash and cash equivalents and short-term investments held outside the U.S. are distributed to the U.S. in the form of dividends or otherwise, we may be subject to additional U.S. income taxes and foreign withholding taxes, which could be significant.

Summary As of December 31, 2023, our cash and cash equivalents totaled $339 million and our total debt was $3,099 million. Our borrowing capacity under our senior secured credit facility was $337 million at December 31, 2023. Our ability to generate positive cash flows from operations is dependent on general economic conditions, and the competitive environment in our industry, and is subject to the business and other risk factors described in Item 1A of Part I of this Report. If we are unable to generate sufficient cash flows from operations, or otherwise comply with the terms of our credit facilities, we may be required to seek additional financing alternatives. However, we cannot assure that we will be able to obtain additional debt or equity financing on acceptable terms in the future.

Management believes that our cash balances and funds provided by operating activities, along with our borrowing capacity under the senior secured credit facility and access to capital markets, taken as a whole, provide (i) adequate liquidity to meet all of our current and long-term (i.e., beyond December 31, 2024) material cash requirements when due, including third-party debt that we incurred in connection with the Spin-off, (ii) adequate liquidity to fund capital expenditures and (iii) flexibility to meet investment opportunities that may arise. We expect to utilize our cash flows to continue to invest in our business, growth strategies, people and the communities we operate in as well as to repay our indebtedness over time.

Material Cash Requirements from Contractual and Other Obligations In the normal course of business, we enter into various contractual obligations that impact, or could impact, the liquidity of our operations. The following table and discussion outlines our material obligations as of December 31, 2023 on an undiscounted basis, with projected cash payments in the years shown:

[[GREPCENT_TABLE]]
[["In millions","Total Amounts","2024","2025-2026","2027-2028","2029 & Thereafter"],["Debt obligations","$","3,099","","$","76","","$","210","","$","934","","$","1,879"],["Interest on debt obligations","1,307","","277","","490","","454","","86"],["Lease obligations","176","","40","","53","","32","","51"],["Purchase obligations","728","","728","","\u2014","","\u2014","","\u2014"],["Total obligations","$","5,310","","$","1,121","","$","753","","$","1,420","","$","2,016"]]
[[/GREPCENT_TABLE]]

For purposes of this table, we used interest rates as of December 31, 2023 to estimate the future interest on debt obligations outstanding as of December 31, 2023 and have assumed no voluntary prepayments of existing debt. See Note 5, “Debt Obligations”, of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Report for additional disclosure related to our debt obligations and the related interest rate terms.

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

Purchase obligations represent committed purchase orders and other contractual commitments for goods or services. The purchase obligation amounts were determined through information in our procurement systems and payment schedules for significant contracts, including the Commercial Agreements with Voyix.

We have a liability related to our uncertain tax positions. Due to the nature of the underlying liabilities and the extended time often needed to resolve income tax uncertainties, we cannot make reliable estimates of the amount or timing of cash payments that may be

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required to settle these liabilities. For additional information, refer to Note 7, “Income Taxes”, of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Report.

The above table excludes Atleos’ obligations pursuant to the Separation and Distribution Agreement whereby Atleos will indemnify Voyix for retained environmental remediation obligations. Atleos’ obligations regarding these environmental remediation matters are subject to significant uncertainties, many of which are out of Atleos’ control and will not be resolved for many years. As such, we are not able to estimate our future contractual obligation with respect to these obligations. For additional information, refer to Note 10, “Commitments and Contingencies”, of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Report.

Our U.S. and international employee benefit plans, which are described in Note 9, “Employee Benefit Plans”, of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Report, could require significant future cash payments. In 2023, we made contributions of $150 million to our U.S. pension plan. We do not expect mandatory contributions until 2026 based on current funding requirements and assuming the Company does not complete any further actions, including, but not limited to, a further pre-fund or de-risking action. The funded status of Atleos’ U.S. pension plan is an underfunded position of $333 million as of December 31, 2023. The Company’s international pension plans were in a net funded position of $162 million as of December 31, 2023, and contributions to these international plans of $4 million were made in 2023.

Our senior secured credit facility and the indenture for our senior unsecured notes include affirmative and negative covenants that restrict or limit our ability to, among other things, incur indebtedness; create liens on assets; engage in certain fundamental corporate changes or changes to our business activities; make investments; sell or otherwise dispose of assets; engage in sale-leaseback or hedging transactions; pay dividends or make similar distributions; repay other indebtedness; engage in certain affiliate transactions; or enter into agreements that restrict our ability to create liens, pay dividends or make loan repayments. Our senior secured credit facility also includes financial covenants that require us to maintain a consolidated leverage ratio not to exceed 4.75 to 1.00 on the last day of any fiscal quarter ending on or prior to September 30, 2024.

CRITICAL ACCOUNTING ESTIMATES

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

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

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

Our estimates of SSP for each performance obligation require judgment that considers multiple factors, including, but not limited to, historical discounting trends for products and services, pricing practices in different geographies and industries, gross margin objectives, and internal costs. Our estimates for rebates are based on specific criteria outlined in customer contracts or rebate

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agreements, and other factors known at the time. Our estimates for expected penalties and other price concessions are based on historical trends and expectations regarding future occurrence.

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

Inventory Valuation We assess the valuation of our inventory on a periodic basis and make adjustments to the value to properly provide for potential exposure due to slow-moving, excess, obsolete or unusable inventory. Inventories are written down to net realizable value based on forecasted usage of parts, sales orders, technological obsolescence and inventory aging. These factors can be impacted by market conditions, technology changes, changes in strategic direction, and customer demand and require estimates and management judgment that may include elements that are uncertain. On a quarterly basis, we review the current net realizable value of inventory and adjust for any inventory exposure due to age, obsolescence, or excess of cost over net realizable value.

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

In the evaluation of Goodwill for impairment, we have the option to perform a qualitative assessment to determine whether further impairment testing is necessary or to perform a quantitative assessment by comparing the fair value of a reporting unit to its carrying amount, including Goodwill. Under the qualitative assessment, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. If under the quantitative assessment the fair value of a reporting unit is less than its carrying amount, then the amount of the impairment loss, if any, is determined based on the amount by which the carrying amount exceeds the fair value up to the total value of goodwill assigned to the reporting unit. Fair values of the reporting units are estimated using a weighted methodology considering the output from both the income and market approaches. The income approach incorporates the use of a discounted cash flow (“DCF”) analysis. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including revenue growth rates, EBITDA margins and discount rates. Several of these assumptions vary among reporting units. The cash flow forecasts are generally based on approved strategic operating plans. The market approach is performed using the Guideline Public Companies (“GPC”) method which is based on earnings multiple data.

Based on the quantitative assessment completed for the annual goodwill impairment test, the Company determined the fair value of all three reporting units was greater than their carrying value. However, the Network reporting unit, which has goodwill of $1,696 million as of December 31, 2023, had fair value in excess of carrying value of less than 10%. Accordingly, this reporting unit has a heightened risk of future impairment if any assumptions, estimates, or market factors change in the future. Assumptions used in impairment testing are made at a point in time and require significant judgment; therefore, they are subject to change based on the facts and circumstances present at each annual and interim impairment test date. Additionally, these assumptions are generally interdependent and do not change in isolation. However, as it is reasonably possible that changes in assumptions could occur, as a sensitivity measure, we have presented the estimated effects of isolated changes in the revenue growth rates, EBITDA margin rates, and discount rate on the fair value of our Network reporting unit. These estimated changes in fair value are not necessarily representative of the actual impairment that would be recorded in the event of a fair value decline.

The following table illustrates the sensitivity to a hypothetical 100 basis points change in certain of our key assumptions (a reduction in the revenue growth rates, reduction in EBITDA margin rates, and an increase in the discount rate) used in the application of the DCF model used to forecast operating cash flows for the Network reporting unit.

[[GREPCENT_TABLE]]
[["In millions","Revenue Growth (1)","EBITDA Margin(2)","Discount Rate (3)","","Fair value in excess/(deficit) of carrying value"],["Impact to Fair Value from a One-Percentage decrease in Revenue Growth","1.5","%","29.8","%","15.0","%","","$","(205)"],["Impact to Fair Value from a One-Percentage decrease in EBITDA Margin Rate","2.5","%","28.8","%","15.0","%","","$","(85)"],["Impact to Fair Value from a One-Percentage increase in Discount rate","2.5","%","29.8","%","16.0","%","","$","(165)"]]
[[/GREPCENT_TABLE]]

(1) The Revenue growth rates used in the application of the DCF model used to forecast operating cash flow for the Network reporting unit ranged from 4.9% to 9.1% in the discrete period, with a terminal growth rate of 2.5%.

(2) The EBITDA margin rates used in the application of the DCF model used to forecast operating cash flow for the Network reporting unit ranged from 27.4% to 30.1% in the discrete period, with a terminal growth rate of 29.8%.

(3) The discount rate used in the application of the DCF model used to forecast operating cash flow for the Network reporting unit was 15.0%.

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Some of the inherent estimates and assumptions used in determining fair value of the reporting units are outside the control of management, including interest rates, cost of capital, tax rates, market revenue and EBITDA comparables and credit ratings. While we believe we have made reasonable estimates and assumptions to calculate the fair value of the reporting units, it is possible a material change could occur. If our actual results are not consistent with our estimates and assumptions used to calculate fair value, it could result in material impairments of our goodwill.

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

We make strategic acquisitions that may have a material impact on our consolidated results of operations or financial position. We allocate the purchase price of acquired businesses to the assets acquired and liabilities assumed in the transaction at their estimated fair values. The estimates used to determine the fair value of long-lived assets, such as intangible assets, can be complex and require significant judgments. We use information available to us to make fair value determinations and engage independent valuation specialists, when necessary, to assist in the fair value determination of significant acquired long-lived assets. The determination of fair value requires estimates about cash flow forecasts, discount rates, revenue growth rates, EBITDA margin, customer attrition rate, and other future events that are judgmental in nature. While we use our best estimates and assumptions as a part of the purchase price allocation process, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Any adjustments subsequent to the measurement period are recorded to our consolidated statements of income. We are also required to estimate the useful lives of intangible assets to determine the amount of acquisition-related intangible asset amortization expense to record in future periods. Additional information regarding our acquisitions is included in Note 2, “Business Combinations”, in Notes to Consolidated Financial Statements.

Pension, Postemployment and Postretirement Benefits We sponsor domestic and foreign defined benefit pension and postemployment plans as well as domestic postretirement plans. As a result, we have significant pension, postemployment and postretirement benefit costs, which are developed from actuarial valuations. Actuarial assumptions attempt to anticipate future events and are used in calculating the expense and liability relating to these plans. These factors include assumptions we make about interest rates, expected investment return on plan assets, involuntary turnover rates, and rates of future compensation increases. In addition, our actuarial consultants advise us about subjective factors such as withdrawal rates and mortality rates to use in our valuations. We generally review and update these assumptions on an annual basis at the end of each fiscal year. We are required to consider current market conditions, including changes in interest rates, in making these assumptions. The actuarial assumptions that we use may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates, or longer or shorter life spans of participants. These differences may result in a significant impact to the amount of pension, postemployment and postretirement benefits expense we have recorded or may record. Ongoing pension, postemployment and postretirement expense impacts all of our segments. Pension mark-to-market adjustments, settlements, curtailments and special termination benefits are excluded from our segment results as those items are not included in the evaluation of segment performance. See Note 4, “Segment Information and Concentrations”, in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Report for a reconciliation of our segment results to Net income (loss) attributable to Atleos.

The key assumptions used in developing our 2023 expense were discount rates of 5.39% for our U.S. pension plan, and an expected return on assets assumption of 7.00% for our U.S. pension plan in 2023. The U.S. plan represented 70% of the pension obligation as of December 31, 2023. Holding all other assumptions constant, a 0.25% change in the discount rate used for the U.S. pension plan would have increased or decreased 2023 ongoing pension expense by approximately $1 million. A 0.25% change in the expected rate of return on plan assets assumption for the U.S. pension plan would have increased or decreased 2023 ongoing pension expense by approximately $1 million. Our expected return on plan assets has historically been and will likely continue to be material to net income. For 2024, we intend to use a discount rates of 4.95% in determining the U.S. pension expense. We intend to use an expected rate of return on assets assumption of 7.5% for the U.S. pension plan.

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

The most significant assumption used in developing our 2023 postemployment plan expense is the assumed rate of involuntary turnover of 3.8%. The involuntary turnover rate is based on historical trends and projections of involuntary turnover in the future. A 0.25% change in the rate of involuntary turnover would have increased or decreased 2023 expense by an immaterial amount. The sensitivity of the assumptions described above is specific to each individual plan and not to our pension, postemployment and postretirement plans in the aggregate. We intend to use an involuntary turnover assumption of 3.8% in determining the 2024 postemployment expense.

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

We regularly review our deferred tax assets for recoverability and establish a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized. The determination as to whether a deferred tax asset will be realized is made on a jurisdictional basis and is based on the evaluation of positive and negative evidence. This evidence includes historical taxable income, projected future taxable income, the expected timing of the reversal of existing temporary differences and the implementation of tax planning strategies. Projected future taxable income is based on our expected results and assumptions as to the jurisdiction in which the income will be earned. The expected timing of the reversals of existing temporary differences is based on current tax law and our tax methods of accounting. As a result of this determination, we had valuation allowances of $263 million as of December 31, 2023 and $169 million as of December 31, 2022, related to certain deferred income tax assets, primarily tax loss carryforwards, in jurisdictions where there is uncertainty as to the ultimate realization of a benefit from those tax assets.

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

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

Income taxes as presented in the Consolidated Financial Statements of the Company for periods prior to the Separation attribute current and deferred income taxes of NCR to the Company’s stand-alone financial statements in a manner that is systematic, rational and consistent with the asset and liability method prescribed by Financial Accounting Standards Board Accounting Standards Codification Topic 740: Income Taxes (“ASC 740”). Accordingly, the Company’s income tax provision for periods prior to the Separation was prepared following the separate return method. The separate return method applies ASC 740 to the stand-alone financial statements of each member of the consolidated group as if the group members were a separate taxpayer and a stand-alone enterprise. The calculation of our income taxes on a separate return basis requires a considerable amount of judgment and use of both estimates and allocations. As a result, actual transactions included in the Consolidated Financial Statements of NCR may not be included in the Consolidated Financial Statements of the Company. Similarly, the tax treatment of certain items reflected in the Consolidated Financial Statements of the Company may not be reflected in the Consolidated Financial Statements and tax returns of NCR. Therefore, such items as net operating losses, credit carry-forwards and valuation allowances may exist in the stand-alone financial statements that may or may not exist in NCR’s Consolidated Financial Statements. As such, the income taxes of the Company as presented in the Consolidated Financial Statements prior to the Separation may not be indicative of the income taxes that the Company will report in the future.

The provision for income taxes may change period-to-period based on non-recurring events, such as the settlement of income tax audits and changes in tax laws, as well as recurring factors including the geographic mix of income before taxes, state and local taxes and the effects of various global income tax strategies. We maintain certain strategic management and operational activities in overseas subsidiaries and our foreign earnings are taxed at rates that are generally lower than in the United States. As of December

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31, 2023, we did not provide for U.S. federal income taxes or foreign withholding taxes on approximately $2.9 billion of undistributed earnings of our foreign subsidiaries as such earnings are expected to be reinvested indefinitely. The amount of unrecognized deferred tax liability associated with these indefinitely reinvested earnings is approximately $118 million.

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

Cost Allocations For periods prior to the Separation from Voyix, the Consolidated Financial Statements include certain overhead and shared costs allocated to Atleos including: (i) certain general and administrative expenses related to NCR support functions that are provided on a centralized basis within NCR, including expenses for corporate facilities, executive oversight, treasury, finance, legal, human resources, compliance, information technology, employee benefit plans, stock compensation plans, and other corporate functions and (ii) certain operations support costs incurred by NCR, including professional services, product maintenance and services, product sourcing, warehousing, distribution and other supply chain support functions. These expenses have been allocated to Atleos based on a specific identification basis or, when specific identification is not practicable, a proportional cost allocation method primarily based on sales, directly identifiable actual costs, headcount, usage or other allocation methods that are considered to be a reasonable reflection of the utilization of services provided or benefit received by Atleos during the periods presented, depending on the nature of the services received.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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