Diebold Nixdorf, Incorporated — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017; filed October 31, 2017. Financial statements are unaudited and presented in millions, except per-share amounts. The company operates through Services, Software and Systems lines of business and includes the results of the August 2016 Diebold Nixdorf AG acquisition.
Financial performance
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net sales | $1,122.7 | $983.3 | $3,359.4 | $2,072.9 |
| Gross profit | $241.0 | $197.6 | $721.3 | $491.5 |
| Gross margin | 21.5% | 20.1% | 21.5% | 23.7% |
| Operating profit (loss) | $(7.6) | $(86.7) | $(86.3) | $(82.1) |
| Operating margin | (0.7)% | (8.8)% | (2.6)% | (4.0)% |
| Net income (loss) | $(28.8) | $(101.8) | $(104.6) | $46.4 |
| Net income (loss) attributable to Diebold Nixdorf | $(35.4) | $(102.3) | $(124.8) | $44.8 |
| Diluted EPS | $(0.47) | $(1.44) | $(1.66) | $0.66 |
- Q3 sales increased 14.2%, including $258.3 of incremental acquisition revenue and a $25.1 favorable currency impact. Nine-month sales increased 62.1%, including $1,517.7 of incremental acquisition revenue and a $33.0 favorable currency impact.
- Q3 Services revenue rose 25.0% to $605.9, Software revenue rose 38.7% to $119.8, and Systems revenue declined 3.7% to $397.0. Nine-month revenue increased 55.5% in Services, 142.4% in Software and 57.3% in Systems.
- Q3 gross profit improved primarily because of higher revenue and lower operating expenses. Nine-month gross margin declined because of acquisition-related purchase accounting, restructuring, a higher third-party labor model and increased technician labor investments.
- Q3 operating loss narrowed substantially as selling and administrative expense declined 17.6% and operating expenses represented 22.1% of sales versus 28.9% in the prior-year quarter. Nine-month operating loss remained slightly higher because of acquisition amortization, restructuring and other integration costs.
- Interest expense was $27.7 in Q3 and $90.7 for nine months, compared with $32.4 and $68.2, respectively, in the comparable periods. The nine-month increase reflects acquisition financing.
Cash flow, balance sheet and liquidity
- Cash and cash equivalents were $380.7 at September 30, 2017, down from $652.7 at December 31, 2016. Short-term investments were $64.0.
- Cash used in operating activities was $235.3 for the first nine months, compared with $186.4 in the prior-year continuing operations period. The use reflected working-capital investment, restructuring payments, taxes, interest and increased inventory.
- Cash used in investing activities was $78.7, including $41.7 of capital expenditures, $5.6 of acquisitions and $7.9 placed into restricted cash. Cash provided by financing activities was $22.7.
- Total reported cash availability was $1,011.9, consisting of cash and short-term investments of $444.7, $167.2 available under international uncommitted lines and $400.0 available under the revolving facility.
- Notes payable were $71.9 and long-term debt, net of deferred financing fees, was $1,834.5. Total debt instruments had a carrying value of approximately $1,906.4, excluding the separate presentation of certain current notes payable in the balance-sheet classification.
- The company was in compliance with its debt covenants at September 30, 2017. The disclosed covenants include maximum total net debt to adjusted EBITDA of 4.50 to 1.00 and minimum adjusted EBITDA to net interest expense of 3.00 to 1.00. Debt facilities are substantially secured by company and domestic subsidiary assets.
- Total assets were $5,361.4, compared with $5,270.3 at year-end. Redeemable noncontrolling interests increased to $485.7 from $44.1, primarily because of the Diebold Nixdorf AG domination and profit-and-loss transfer agreement.
Material changes versus the prior comparable period
- The acquisition of Diebold Nixdorf AG materially increased reported revenue, assets, debt, amortization, noncontrolling interests and operating complexity. Acquisition-related revenue included in 2017 results was $587.2 for Q3 and $1,846.6 for nine months.
- Q3 attributable loss improved to $35.4 from $102.3, while the nine-month attributable result changed to a loss of $124.8 from income of $44.8. The 2016 nine-month result included $143.7 of after-tax income from discontinued operations, including the electronic security divestiture.
- Segment operating profit increased to $98.6 in Q3 and $263.0 for nine months, compared with $80.1 and $176.9, respectively. Services remained the largest contributor, Software turned profitable for the nine-month period, and Systems remained loss-making at the segment level.
- Restructuring charges increased to $17.4 in Q3 and $44.7 for nine months, compared with $7.4 and $12.8. The charges primarily related to the DN2020 integration and transformation program.
- Depreciation and amortization increased to $185.4 for nine months from $74.3, primarily because of acquired intangible assets. Total amortization expense was $121.6 versus $34.2.
- The company completed small acquisitions of Moxx Group B.V. and certain Visio Objekt GmbH assets for $5.6 in aggregate and divested its legacy U.K. business and electronic security operations in Mexico and Chile.
- The quarterly common dividend was reduced to $0.10 per share from $0.2875 in the prior-year quarter; nine-month dividends paid were $22.9 versus $57.0.
Outlook, management commentary and unusual items
- Management’s DN2020 program targets approximately $240 of net operating profit savings by 2020. The company expects approximately $50 of additional restructuring costs through completion of the integration and transformation plans and describes total restructuring and integration-related costs of approximately $240.
- Management’s capital allocation priorities are to reduce leverage and accelerate synergies. Management expects available capital resources to fund working capital, research and development, restructuring, pension contributions, debt repayment, redeemable noncontrolling-interest payments, dividends and potential share repurchases for at least the next 12 months.
- No formal revenue or earnings guidance is provided in the filing. Management highlights growth opportunities in managed services, software-as-a-service, mobility, analytics, connected commerce and customer contracts, including more than $300 of services contracts won during Q3 based on total contract value.
- The company adopted or early adopted certain accounting updates without material impact. It plans to adopt the new revenue standard using the modified retrospective method on January 1, 2018 and currently expects no material impact, although contract evaluations remain in progress.
- Material contingencies include indirect-tax matters with estimated aggregate risk of up to approximately $168.1. The Brazil matter had an accrual of $7.5 and a potential exposure of approximately $48.5; the Thailand customs matter had potential exposure of approximately $26.0 and no accrual.
- Guarantees and standby letters of credit had maximum future payment obligations of $192.3, with no associated liability recorded. Purchase commitments due within one year totaled $7.2.
- The company identifies risks related to acquisition integration, realization of synergies, leverage and covenant compliance, DPLTA appraisal and redemption obligations, foreign currency and interest rates, market demand, technology changes, competition, regulation, cybersecurity, operational failures and strategic alliances in China.
Important facts for investors to verify
- Whether DN2020 savings and integration milestones are achieved while the company continues to generate negative operating and operating cash flow.
- The pace of debt reduction, leverage covenant headroom, variable-rate exposure and the timing and amount of potential DPLTA minority-shareholder redemptions.
- Whether reported revenue growth converts into organic growth, given that acquisition contributions and favorable currency effects accounted for a substantial portion of the increase.
- The sustainability of Services and Software profitability and the timing of a consistent return to profitability in Systems.
- The effect of purchase accounting, acquired-intangible amortization, restructuring charges and other non-routine items on underlying margins and cash generation.
- The resolution and potential financial impact of the Brazil indirect-tax matter and other tax contingencies.
- The filing contains an apparent presentation inconsistency regarding whether the 4.50-to-1.00 leverage covenant is measured for the three-month or nine-month period; investors should verify the governing credit agreement and applicable calculation.