Diebold Nixdorf, Inc. Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2020; filed July 31, 2020. The interim financial statements are unaudited. Diebold Nixdorf provides connected commerce technology, software and services for financial institutions and retailers across more than 100 countries.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $890.5 million | $1,150.2 million | $1,801.2 million | $2,178.3 million |
| Gross profit | $247.6 million | $279.2 million | $474.4 million | $525.3 million |
| Gross margin | 27.8% | 24.3% | 26.3% | 24.1% |
| Operating profit (loss) | $20.5 million | $7.3 million | $(5.5) million | $(17.2) million |
| Operating margin | 2.3% | 0.6% | (0.3)% | (0.8)% |
| Net loss attributable to Diebold Nixdorf | $(23.7) million | $(50.3) million | $(116.5) million | $(183.0) million |
| Loss per share | $(0.31) | $(0.66) | $(1.51) | $(2.39) |
| Cash used in operating activities | — | — | $(170.6) million | $(67.6) million |
Q2 revenue declined 22.6% year over year, or 19.9% on a constant-currency basis. Six-month revenue declined 17.3%, or 14.9% on a constant-currency basis. Services revenue fell less sharply than products revenue, while improved mix, cost reductions and DN Now initiatives increased gross margins.
- Q2 services revenue was $559.7 million and products revenue was $330.8 million.
- Q2 selling and administrative expense declined 19.0% to $181.6 million; research, development and engineering expense declined 15.0% to $30.7 million.
- Q2 interest expense was $48.3 million; six-month interest expense was $96.3 million.
- Cash, cash equivalents and restricted cash totaled $446.4 million at June 30, 2020, including $442.8 million of unrestricted cash and cash equivalents.
- Total debt was approximately $2.46 billion, consisting of $102.1 million of current notes payable and $2.362 billion of long-term debt, net of deferred financing fees.
- Total equity was negative $708.5 million at June 30, 2020, compared with negative $506.3 million at December 31, 2019.
Material changes versus the prior comparable period
- COVID-19-related delays, prior-year nonrecurring refresh and point-of-sale projects, currency movements and the planned reduction of lower-margin services reduced revenue across all segments.
- Americas Banking segment operating profit increased to $58.0 million from $32.5 million in Q2, while Eurasia Banking increased to $40.1 million from $38.8 million. Retail operating profit declined to $13.1 million from $15.6 million.
- Services gross margin increased to 30.4% from 25.8%; product gross margin increased to 23.5% from 22.3%.
- Operating cash use increased by $103.0 million year over year, primarily due to inventory purchases and other working-capital movements, despite the lower net loss.
- Financing activities provided $306.1 million, principally from net revolver borrowings of $385.9 million. The Company drew substantially all available revolving capacity as a precaution during the pandemic.
- Inventories increased to $513.4 million from $466.5 million at year-end 2019, while current assets held for sale declined to $56.3 million from $233.3 million.
Guidance, outlook, risks and unusual items
- Management expected COVID-19 to have relatively mild adverse effects on services and software revenue and a moderate negative effect on products revenue, but stated that the duration and ultimate impact were highly uncertain.
- DN Now targets approximately $470 million of gross annualized savings through 2021. The Company reported approximately $175 million of annualized gross run-rate savings achieved during 2019 and approximately $240 million of cumulative cash payments to implement the program.
- Additional pandemic-related measures, including bonus reductions, deferred merit increases, a hiring freeze, real-estate consolidation and government relief programs, were expected to generate an incremental $80 million to $100 million of annualized savings.
- The Company recorded $21.5 million of restructuring charges in the first six months and expected additional DN Now restructuring costs of approximately $29 million to $49 million through plan completion.
- Q2 included a $14.8 million loss on asset sales, primarily from divestitures in China and Denmark. The Company also recorded $7.2 million of proceeds from surrendering a company-owned life insurance plan and expected to surrender additional plans in Q3.
- Goodwill totaled $775.1 million. COVID-19-related uncertainty could adversely affect reporting-unit valuations and trigger future impairment charges.
- The Company was in compliance with its debt covenants at June 30, 2020. The reported net debt to trailing twelve-month adjusted EBITDA ratio was 4.3 times, compared with a maximum covenant leverage ratio of 6.50 times.
- On July 20, 2020, after the reporting date, the Company issued $700 million of 9.375% senior secured notes due 2025 and €350 million of 9.000% senior secured notes due 2025. Proceeds and cash on hand were used to repay portions of the Credit Agreement, including all Term Loan A and Term Loan A-1 balances and $193.8 million of revolving loans.
- The July 2020 refinancing extended $330 million of revolving commitments to July 2023; approximately $39 million of commitments remained scheduled to mature in April 2022. Management stated that the post-refinancing structure had no significant maturities until 2023.
- Material matters to monitor include COVID-19 effects, supply-chain disruption, foreign exchange and interest-rate exposure, covenant compliance, appraisal proceedings related to former Diebold Nixdorf AG shareholders, securities litigation and up to $57.5 million of estimated aggregate risk for material indirect-tax matters.
Investor verification items
- Verify the post-June 30 refinancing, including final debt balances, interest costs, collateral and amended covenant requirements.
- Assess whether DN Now savings and the incremental $80 million to $100 million of pandemic-related savings are recurring and achievable without impairing revenue or service quality.
- Monitor operating cash flow, inventory levels and working-capital conversion, given $170.6 million of operating cash use in the first six months.
- Evaluate liquidity after the refinancing, including unrestricted cash, remaining revolver capacity, international cash restrictions and near-term debt maturities.
- Track COVID-19 effects on product demand, customer project timing, supply chains, goodwill valuations and credit losses.
- Review the potential financial impact of German appraisal proceedings, securities litigation, indirect-tax claims and guarantees totaling up to $97.2 million of maximum future obligations.