Diebold Nixdorf, Inc. — Q3 2020 Form 10-Q Summary
Business context and reporting period
Diebold Nixdorf provides connected commerce hardware, software and services to banking and retail customers globally. The filing covers the unaudited three and nine months ended September 30, 2020. Operations are reported through Eurasia Banking, Americas Banking and Retail. Management identified COVID-19 as a significant source of operational and market uncertainty.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $995.2 million | $1,078.8 million | $2,796.4 million | $3,257.1 million |
| Gross profit | $284.1 million | $271.4 million | $758.5 million | $796.7 million |
| Gross margin | 28.5% | 25.2% | 27.1% | 24.5% |
| Operating profit | $23.8 million | $23.2 million | $18.3 million | $6.0 million |
| Operating margin | 2.4% | 2.2% | 0.7% | 0.2% |
| Net loss attributable to Diebold Nixdorf | $(101.4) million | $(35.7) million | $(217.9) million | $(218.7) million |
| Basic and diluted loss per share | $(1.31) | $(0.46) | $(2.81) | $(2.86) |
- Services revenue was $588.9 million in Q3 and $1,736.4 million year to date; product revenue was $406.3 million in Q3 and $1,060.0 million year to date.
- Net cash used in operating activities was $209.4 million for the nine months, compared with $7.4 million provided in the prior-year period. Working capital uses included $68.6 million from receivables and $83.8 million from inventories.
- Capital expenditures were $12.2 million for the nine months. Net cash used in investing activities was $40.7 million, while financing activities provided $160.8 million.
- Cash, cash equivalents and restricted cash totaled $277.3 million at September 30, 2020, including $273.7 million of cash and cash equivalents excluding restricted cash. Total stated cash availability was $459.4 million.
- Total debt was approximately $2.45 billion, consisting of $18.3 million of notes payable and $2.43 billion of long-term debt, net of deferred financing fees. Net debt to trailing twelve-month adjusted EBITDA was 4.4 times.
- Shareholders’ equity was negative $806.6 million and total equity was negative $811.7 million at September 30, 2020.
Material changes versus the prior comparable period
- Q3 revenue declined 7.7%, or 8.2% in constant currency. Nine-month revenue declined 14.1%, or 12.6% in constant currency.
- Revenue reductions reflected COVID-19-related installation delays, prior-year non-recurring product refreshes and POS rollouts, divestitures, unfavorable regional currency effects and the deliberate reduction of lower-margin services business.
- Gross margin improved 330 basis points in Q3 and 260 basis points year to date, primarily from DN Now cost savings, services modernization, favorable mix and lower operating costs.
- Segment operating profit improved in every segment. Q3 margins were 13.7% for Eurasia Banking, 11.8% for Americas Banking and 8.7% for Retail, compared with 10.2%, 7.1% and 5.0%, respectively, in Q3 2019.
- Net loss increased substantially in Q3 because interest expense rose to $144.3 million from $52.5 million. The increase primarily reflected refinancing-related make-whole premiums and the write-off of deferred financing costs.
- Year-to-date debt activity included issuance of approximately $1.1 billion of 2025 senior secured notes, repayment of the Term Loan A and A-1 facilities and repayment of $193.8 million of revolving loans. The refinancing extended $330.0 million of revolving commitments to July 2023.
- Operating assets and liabilities changed materially: trade receivables increased to $668.1 million from $619.3 million and inventories increased to $542.6 million from $466.5 million at December 31, 2019.
Guidance, outlook, commentary, risks and unusual items
- Management did not provide a clear quantitative full-year revenue or earnings guidance figure in the filing. It stated that COVID-19 was expected to have relatively mild adverse effects on services and software revenue and a moderate negative effect on product revenue, subject to substantial uncertainty.
- DN Now targets approximately $500 million of gross annualized savings through 2021, including incremental and recurring savings. The company reported approximately $175 million of annualized gross run-rate savings achieved during 2019 and expects a similar amount in 2020. Additional restructuring costs of approximately $20 million to $40 million are expected through completion of the program.
- Restructuring charges were $13.8 million in Q3 and $35.3 million for the nine months, compared with $8.6 million and $19.8 million, respectively, in the prior-year periods. Cumulative DN Now restructuring costs were $144.4 million at September 30, 2020.
- Other unusual items included $13.0 million of year-to-date losses on divestitures, a $4.1 million Q3 asset impairment, $25.5 million of charges related to a loss-making contract tied to a discontinued offering, and a $7.2 million gain from surrendering company-owned life insurance policies.
- The company completed divestitures or deconsolidations involving Portavis, Cryptera and a portion of its China operations. It increased its ownership in Inspur to 48.1% following the China transaction.
- COVID-19 may disrupt customer demand, installations, supply chains, collections, inventory turnover and fair values. The ultimate effects on operations, cash flows and financial position could be material and cannot be reliably estimated.
- Other key risks include high leverage and increasing debt covenant requirements, foreign exchange and interest-rate exposure, execution of DN Now, reliance on suppliers, technology acceptance, cybersecurity, pension funding, divestiture execution and pending litigation.
- The company was in compliance with its debt covenants at September 30, 2020. Maximum leverage was 6.50 to 1.00 and minimum interest coverage was 1.375 to 1.00 at that date, with more stringent thresholds scheduled over time.
- Material contingencies include indirect tax matters with estimated aggregate risk of up to $68.0 million, German appraisal proceedings related to the former Diebold Nixdorf AG transactions, and consolidated U.S. securities litigation. Management stated that outcomes cannot be predicted.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2020, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile reported cash availability of $459.4 million with debt maturities, restricted cash, international cash restrictions and potential COVID-19 working-capital needs.
- Assess whether revenue stabilization and margin improvements can continue despite lower product demand, installation delays and divestitures.
- Track DN Now savings realization against the approximately $500 million through-2021 target and the remaining $20 million to $40 million of restructuring costs.
- Review refinancing terms, 2023–2025 maturities, variable-rate exposure and the scheduled tightening of leverage and interest-coverage covenants.
- Monitor operating cash flow, receivables collection, inventory levels and the company’s ability to convert improved segment profitability into cash.
- Evaluate potential outcomes and cash exposure from indirect tax claims, German appraisal proceedings and U.S. securities litigation.
- Confirm the duration and severity of COVID-19 effects on customers, suppliers, installations, product demand and global operations.