Diebold Nixdorf, Incorporated: Q2 2019 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2019. Diebold Nixdorf provides connected banking and retail automation solutions, including ATMs, point-of-sale and self-checkout systems, software, managed services and professional services, across more than 100 countries. Reportable segments are Eurasia Banking, Americas Banking and Retail.
- The company launched its DN Series self-service solutions and completed the merger squeeze-out of Diebold Nixdorf AG, resulting in 100% ownership and no longer having publicly traded subsidiary shares in Germany.
- Management continued executing the DN Now transformation program, focused on cost reduction, services modernization, product rationalization, working-capital improvement and portfolio optimization.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $1,150.2 million | $1,105.6 million | $2,178.3 million | $2,169.8 million |
| Gross profit | $277.2 million | $217.7 million | $521.3 million | $456.1 million |
| Gross margin | 24.1% | 19.7% | 23.9% | 21.0% |
| Operating profit (loss) | $7.3 million | $(126.6) million | $(17.2) million | $(150.1) million |
| Operating margin | 0.6% | (11.5)% | (0.8)% | (6.9)% |
| Net loss | $(55.3) million | $(128.3) million | $(187.2) million | $(193.9) million |
| Net loss attributable to Diebold Nixdorf | $(50.3) million | $(133.4) million | $(183.0) million | $(206.6) million |
| Loss per share | $(0.66) | $(1.76) | $(2.39) | $(2.72) |
- Q2 revenue increased 4.0% reported and 8.0% in constant currency. Six-month revenue increased 0.4% reported and 5.6% in constant currency. Currency effects were unfavorable by approximately $40.8 million in Q2 and $106.4 million year to date.
- Q2 segment revenue was $430.2 million in Eurasia Banking, $419.9 million in Americas Banking and $300.1 million in Retail. Americas Banking produced the strongest reported growth, while all segments improved operating profit.
- Q2 gross profit increased 27.3%, supported by higher services and product margins, favorable mix, higher project volume and DN Now initiatives. Six-month gross profit increased 14.3%.
- Interest expense increased to $49.9 million in Q2 and $100.8 million year to date, compared with $28.4 million and $54.4 million, respectively, in the prior-year periods, primarily because of higher rates and the additional Term Loan A-1 debt.
- Cash flow from operations was $(67.6) million for the first six months, an improvement from $(256.6) million in the prior-year period. Capital expenditures were $20.3 million.
- Cash, cash equivalents and restricted cash were $259.8 million at June 30, 2019, including $255.2 million of unrestricted cash and $4.6 million of restricted cash. Total stated cash availability, including investments and credit facilities, was $669.8 million.
- Total debt was approximately $2.216 billion, consisting of $42.2 million of notes payable and $2.174 billion of long-term debt after deferred financing fees. Net debt to trailing twelve-month adjusted EBITDA was 4.8 times.
- The company was in compliance with its debt covenants at June 30, 2019. The revolving facility had $357.5 million available after letters of credit.
- Shareholders’ equity attributable to Diebold Nixdorf was negative $328.8 million, and total equity was negative $304.0 million.
Material changes versus the prior comparable period
- Profitability improved substantially as the prior-year periods included an $83.1 million goodwill impairment charge; no comparable impairment charge was recorded in 2019.
- Operating results also benefited from higher product volumes related to Windows 10 replacement programs, stronger cash-recycler demand, self-checkout growth, improved product and service mix, and DN Now cost reductions.
- Reported services revenue declined in several regions, including lower maintenance and professional-services activity, while product revenue increased significantly in the Americas.
- Reported interest expense increased materially because of the high-cost Term Loan A-1 Facility and higher domestic interest rates.
- Cash declined by $201.8 million during the first six months, primarily due to $132.9 million of financing cash outflows, including $98.0 million paid to acquire the remaining Diebold Nixdorf AG shares. No dividends were paid in 2019.
- The company adopted the new lease standard effective January 1, 2019. At June 30, 2019, it reported $165.3 million of operating lease right-of-use assets and $165.9 million of operating lease liabilities.
- The company recorded $15.1 million of losses on asset sales and divestitures in the first six months, including a $9.5 million Q2 charge correcting an immaterial prior-quarter error related to a divestiture.
Guidance, outlook, commentary and risks
- DN Now targets approximately $400 million of gross annualized savings through 2021, with approximately $175 million expected to be realized during 2019. Management expects additional restructuring costs of approximately $125 million to $175 million through completion of the plan.
- The filing does not provide clear formal full-year revenue, earnings or cash-flow guidance. Management stated that available capital resources are expected to fund planned needs for at least the next 12 months.
- In July 2019, the company initiated a formal process to amend and extend senior secured revolving and term-loan debt maturing in December 2020. Successful refinancing is important given the company’s leverage and continuing operating losses.
- Approximately 95.6% of cash and short-term investments were held in international tax jurisdictions. Management estimated approximately $60 million of cash income-tax payments for 2019.
- Material risks include execution of DN Now, realization of cost savings, high leverage and interest costs, debt covenant compliance and refinancing, foreign-exchange volatility, supply-chain disruptions, customer spending cycles, technology and cybersecurity risks, and the ability to integrate or divest businesses.
- Indirect tax matters had an estimated aggregate risk of up to $120.4 million, including $28.0 million relating to Thailand customs matters. The company had not accrued amounts for the Thailand contingency because management believed its legal position was valid.
- Two German appraisal proceedings challenge compensation offered in connection with the Diebold Nixdorf AG domination agreement and 2019 squeeze-out. In July 2019, two U.S. securities class-action lawsuits were also filed concerning alleged historical misstatements before a 2017 reduction in guidance. The company denies liability and intends to defend the matters.
- Disclosure controls and procedures were deemed ineffective because three material weaknesses in internal control over financial reporting remained unremediated: information-technology general controls and access, inventory valuation controls, and controls over non-routine transactions.
Important facts for investors to verify
- Progress toward the $400 million DN Now savings target and the related $125 million to $175 million remaining restructuring-cost estimate.
- Status and terms of the proposed amendment or extension of debt maturing in December 2020, including interest rates, covenants and refinancing conditions.
- Whether improving gross margins and segment operating profit can offset continuing net losses, elevated interest expense and negative shareholders’ equity.
- Conversion of reported operating improvements into positive operating cash flow and sustainable free cash flow.
- Remediation of the three material weaknesses in internal control over financial reporting.
- Potential exposure from the German appraisal proceedings, U.S. securities litigation and indirect tax contingencies.
- Cash availability and repatriation restrictions, given the concentration of liquidity outside the United States.