Diebold Nixdorf, Inc. — Q3 2019 Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2019; filed October 29, 2019. Results are unaudited and cover the Company’s Banking and Retail businesses, reported through Eurasia Banking, Americas Banking and Retail segments. The Company provides connected commerce, ATM, banking, point-of-sale, self-checkout, software and managed services solutions in more than 100 countries.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $1,078.8 million | $1,119.0 million | $3,257.1 million | $3,288.8 million |
| Gross profit | $271.5 million | $228.9 million | $796.7 million | $689.0 million |
| Gross margin | 25.2% | 20.5% | 24.5% | 20.9% |
| Operating profit (loss) | $23.2 million | $(160.3) million | $6.0 million | $(310.4) million |
| Operating margin | 2.2% | (14.3)% | 0.2% | (9.4)% |
| Net loss attributable to Diebold Nixdorf | $(35.7) million | $(238.5) million | $(218.7) million | $(445.1) million |
| Loss per share | $(0.46) | $(3.13) | $(2.86) | $(5.86) |
| Cash flow from operations | Not separately provided | Not separately provided | $7.4 million | $(372.1) million |
- Services revenue was $643.0 million in Q3 and $1,931.0 million for nine months; product revenue was $435.8 million and $1,326.1 million, respectively.
- Q3 sales declined 3.6% year over year, or 1.3% on a constant-currency basis. Nine-month sales declined 1.0% reported but increased 3.2% in constant currency.
- Q3 gross profit increased 18.6%, while nine-month gross profit increased 15.6%, reflecting better service and product mix, cost reductions, lower restructuring costs and fewer non-routine charges.
- Interest expense increased to $52.5 million in Q3 and $153.3 million for nine months, compared with $45.2 million and $99.6 million, respectively, primarily because of higher-cost Term Loan A-1 debt.
- Cash, cash equivalents and restricted cash were $252.3 million at September 30, 2019, down from $458.4 million at December 31, 2018. Total reported cash availability was $716.4 million, including revolver availability of $385.8 million, uncommitted credit lines of $34.8 million and short-term investments of $8.2 million.
- Total debt was approximately $2.15 billion, consisting of $53.1 million of notes payable and $2.10 billion of long-term debt. Net debt to trailing twelve-month adjusted EBITDA was 4.7 times.
- Shareholders’ equity attributable to Diebold Nixdorf was negative $449.9 million at September 30, 2019, compared with negative $186.4 million at year-end 2018.
Material changes versus the prior comparable period
- Americas Banking revenue increased 5.5% in Q3 and 9.2% for nine months, driven largely by product replacement and Windows 10 upgrade activity. Its segment operating margin improved to 7.1% in Q3 from 0.4%.
- Eurasia Banking revenue decreased 6.7% in Q3 and 6.8% for nine months, primarily from currency effects, divestitures and lower services activity. Nine-month segment operating margin nevertheless increased to 9.4% from 6.3%.
- Retail revenue decreased 10.7% in Q3 and 4.7% for nine months. Q3 results reflected lower European point-of-sale volume, partly offset by self-checkout growth; nine-month performance benefited from reverse-vending and self-checkout projects.
- The prior-year periods included goodwill impairment charges of $134.4 million in Q3 2018 and $217.5 million for nine months. No impairment charge was recorded in 2019.
- Operating cash flow improved by $379.5 million year over year, principally because of the lower reported loss, improved receivables collections and better inventory management.
- The Company amended and extended most of its revolving credit and Term A facilities from December 2020 to April 2022. It also raised $116.7 million of new 2022 Term A financing and had $374.3 million outstanding under that facility.
- The Company completed the squeeze-out of minority shareholders of Diebold Nixdorf AG, paid $88.6 million to acquire remaining shares during the first six months, and reduced redeemable noncontrolling interests from $130.4 million to $21.5 million.
- The Company sold its interest in Kony for $21.3 million of cash proceeds and recorded a $7.3 million gain in Q3.
Outlook, management commentary, risks and unusual items
- Management expects the DN Now transformation program to generate approximately $400 million of gross annualized savings through 2021, including approximately $175 million during 2019. Additional restructuring costs of approximately $125 million to $175 million were anticipated through completion of the plan.
- DN Now initiatives include workforce restructuring, services modernization, product portfolio rationalization, lower-cost delivery locations, real estate consolidation, improved working capital management and reduced selling and administrative expense.
- Management stated that available capital resources should be sufficient for planned needs for at least the next 12 months. No dividends were paid in 2019; the Company had previously redirected dividend funding toward debt reduction and other capital needs.
- Tax expense included material discrete and structural items, including $48.4 million related to the collapse of the Barbados structure, $6.4 million related to 2018 tax-return adjustments, $2.8 million related to an amended 2015 U.S. tax return and $2.3 million related to a change in the indefinite reinvestment assertion. The final tax impact may change as filings and guidance are completed.
- The Company entered into interest-rate swaps with an aggregate notional amount of $500.0 million in September 2019 to hedge variable-rate debt exposure.
- Material risks include high leverage and rising interest expense, refinancing and covenant compliance, foreign currency exposure, execution of DN Now savings, supply-chain disruption, customer demand and technology adoption, cybersecurity and operational failures, pension obligations, litigation and tax matters.
- Potential contingencies include up to $109.4 million of aggregate estimated exposure for material indirect tax matters, including $28.0 million related to Thailand customs proceedings. The Company also faces German appraisal proceedings concerning compensation paid in the Diebold Nixdorf AG transaction and securities-law class actions filed in the United States.
- Management concluded that disclosure controls and procedures were not effective as of September 30, 2019. Three material weaknesses remained unremediated: information-technology and user-access controls, inventory valuation controls, and controls over non-routine transactions.
Most important facts for investors to verify
- Whether DN Now achieves the targeted savings and whether the remaining $125 million to $175 million of restructuring costs are sufficient to complete the transformation.
- The Company’s ability to reduce leverage while servicing approximately $2.15 billion of debt and absorbing elevated interest expense.
- Compliance with progressively tighter leverage and interest-coverage covenants, including the Company’s stated compliance at September 30, 2019.
- Whether operating cash flow remains positive and supports debt reduction, pension funding, restructuring payments and capital expenditures.
- Remediation and auditor validation of the three material weaknesses in internal control over financial reporting.
- The durability of gross-margin improvements after excluding currency effects, restructuring benefits and other non-routine items.
- The outcome and potential cash impact of German appraisal proceedings, U.S. securities litigation and indirect tax contingencies.
- The final tax effects of the Barbados restructuring and pending U.S., foreign and state tax-return filings.