Diebold Nixdorf, Inc. — FY2019 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2019, with quarterly information including the fourth quarter. Diebold Nixdorf provides connected banking and retail technology, including ATMs, point-of-sale and self-checkout systems, software, managed services and maintenance. The company operates in more than 100 countries with approximately 22,000 employees; approximately 76.8% of 2019 revenue was generated outside the United States.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $4,408.7 million | $4,578.6 million | Down 3.7% |
| Gross profit | $1,067.1 million | $898.8 million | Up 18.7% |
| Gross margin | 24.2% | 19.6% | Up 4.6 points |
| Operating loss | $(26.6) million | $(325.6) million | Improved $299.0 million |
| Operating margin | (0.6)% | (7.1)% | Improved 6.5 points |
| Net loss | $(344.6) million | $(528.7) million | Improved $184.1 million |
| Loss per share | $(4.45) | $(6.99) | Improved |
| Operating cash flow | $135.8 million | $(104.1) million | Improved $239.9 million |
Services revenue was $2,608.0 million and product revenue was $1,800.7 million. Services gross margin was 26.3%, compared with 22.7% in 2018; product gross margin was 21.1%, compared with 14.9%. Fourth-quarter 2019 net sales were $1,151.6 million, gross profit was $270.4 million and net loss was $122.6 million.
Cash, cash equivalents and restricted cash totaled $280.9 million at year-end, including $277.3 million of cash and cash equivalents excluding restricted cash. Total cash availability, including short-term investments, uncommitted lines and the revolving facility, was $711.3 million. Inventories declined to $466.5 million from $610.1 million, while trade receivables declined to $619.3 million from $737.2 million.
Total debt was $2,141.2 million, comprising $32.5 million of current notes payable and $2,108.7 million of long-term debt net of deferred financing fees. Long-term debt maturities include approximately $966.5 million in 2022 and $780.5 million in 2023. The company reported compliance with its debt covenants at December 31, 2019. The revolving facility had $387.3 million of availability after letters of credit.
Material changes versus the prior comparable period
- Revenue declined primarily because of unfavorable foreign currency translation, divestitures, lower Eurasia Banking activity and lower Retail installations. Americas Banking revenue increased 5.8%, while Eurasia Banking declined 8.4% and Retail declined 8.5%.
- Profitability improved substantially from higher-margin product and service mix, services modernization, supply-chain improvements and DN Now cost reductions.
- The company recorded $30.2 million of impairment charges in 2019, compared with $180.2 million of goodwill impairment in 2018.
- DN Now generated approximately $175 million of annualized gross run-rate savings in 2019. The company targets approximately $440 million of annualized gross savings through 2021, including approximately $130 million expected in 2020. Costs to achieve the program were approximately $115 million in 2019, and additional restructuring costs of approximately $50 million to $70 million are anticipated through completion.
- The company completed the merger squeeze-out of Diebold Nixdorf AG, acquired the remaining shares for approximately $97.5 million and simplified its corporate structure. It also divested or exited several non-core businesses and classified $233.3 million of current assets and $113.4 million of current liabilities as held for sale.
- Interest expense increased to $202.9 million from $154.9 million, primarily due to additional higher-cost Term Loan A-1 debt. The company paid no dividend in 2019 and continues to prioritize debt reduction and capital needs.
- Previously reported material weaknesses in information technology controls, inventory valuation and non-routine transaction controls were remediated. A deferred-tax accounting weakness identified in the fourth quarter was also remediated; the related prior-period error was deemed immaterial and corrected.
Guidance, outlook, commentary and risks
Management expects capital resources to fund planned working capital, research and development, capital investments and pension contributions for at least the next 12 months. Planned 2020 capital expenditures are approximately $70 million, mandatory debt repayment is approximately $60 million, and expected pension and benefit contributions are approximately $23 million. The company was seeking lender consent to incur new debt and potentially refinance certain term loans, but stated that refinancing may not be available on acceptable terms or at all.
Key risks include substantial leverage and restrictive debt covenants, variable LIBOR-based borrowing costs and the transition away from LIBOR, execution risk under DN Now, continued operating losses, foreign-exchange exposure, supply-chain disruption, tariffs and international economic conditions, cybersecurity and data-privacy obligations, competition, pension funding requirements and potential future impairment charges.
Material contingencies include two German appraisal proceedings challenging compensation paid to former Diebold Nixdorf AG minority shareholders, securities class-action litigation and a shareholder demand concerning historical disclosures. The company estimated reasonably possible exposure for material indirect tax matters of up to $102.5 million, including $30.5 million related to Thailand customs matters. The filing does not provide a clear quantified potential liability for the German appraisal proceedings or securities litigation.
The filing identifies the coronavirus outbreak beginning in early 2020 as a potential supply-chain and operating risk, but states that its overall impact was difficult to predict at the filing date.
Investor verification priorities
- Verify the company’s ability to convert DN Now savings into sustainable operating profit and positive free cash flow after restructuring costs.
- Review debt maturities, covenant thresholds, interest-rate exposure and the outcome of any refinancing or credit-agreement amendments.
- Assess liquidity after debt service, held-for-sale transactions, pension funding and potential litigation, tax or appraisal-related payments.
- Monitor revenue trends in Eurasia Banking and Retail, including the effects of currency, divestitures, Windows 10 upgrade cycles and lower-margin contract roll-offs.
- Reconcile reported net loss with non-routine charges, impairment, tax effects and other adjustments when evaluating underlying earnings.
- Confirm remediation of internal-control weaknesses and the reliability of inventory valuation, deferred-tax accounting and financial reporting systems.