Business context and reporting period
Diebold Nixdorf, Incorporated filed its Form 10-K for the fiscal year ended December 31, 2017. The company provides connected commerce solutions through Services, Software and Systems businesses for financial institutions, retailers and other customers in more than 130 countries. The 2017 results include a full year of operations from the August 2016 acquisition of Diebold Nixdorf AG, making comparisons with 2016 less comparable.
During 2017, the company reorganized its reporting structure into Services, Software and Systems and launched the DN2020 integration and transformation program.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | $4,609.3 million | $3,316.3 million | Up 39.0% |
| Gross profit | $1,009.7 million | $721.7 million | Up 39.9% |
| Gross margin | 21.9% | 21.8% | Broadly stable |
| Operating profit (loss) | $(83.6) million | $(159.8) million | Improved by $76.2 million |
| Operating margin | (1.8)% | (4.8)% | Improved 3.0 percentage points |
| Loss from continuing operations, net of tax | $(205.5) million | $(170.7) million | Loss increased |
| Net loss attributable to Diebold Nixdorf | $(233.1) million | $(33.0) million | Loss increased |
| Basic and diluted loss per share | $(3.09) | $(0.48) | Declined |
| Cash flow from continuing operations | $37.1 million | $39.3 million | Down $2.2 million |
Services revenue was $2,397.3 million, Software revenue was $476.6 million and Systems revenue was $1,735.4 million. Segment operating profit was $344.8 million for Services, $33.7 million for Software and a loss of $24.2 million for Systems.
2017 selling and administrative expense was $933.7 million, research, development and engineering expense was $155.5 million, interest expense was $117.3 million and income tax expense was $29.8 million. Research and development spending increased from $110.2 million in 2016.
At December 31, 2017, cash and cash equivalents were $535.2 million, short-term investments were $81.4 million, and total cash availability was $1,278.5 million, including revolving and uncommitted credit facilities. Total debt carrying value was approximately $1,853.8 million, consisting of $66.7 million of current notes payable and $1,787.1 million of long-term debt. Total equity was $506.8 million, compared with $1,024.8 million in 2016.
Capital expenditures were $69.4 million in 2017. The company expects approximately $85 million of capital expenditures in 2018. Product backlog was $1,026.7 million at year-end, compared with $1,060.0 million in 2016, although backlog excludes the service business, which generates more than half of revenue.
Material changes versus the prior comparable period
- Revenue growth primarily reflected the full-year contribution of the Diebold Nixdorf AG acquisition, favorable currency effects and expanded EMEA activity. Acquisition-related revenue included in 2017 was $2,467.6 million.
- Excluding acquisition and currency effects, Services revenue declined $22.0 million and Systems revenue declined $297.7 million. Systems was affected by lower banking project activity, lower Americas retail activity and structural changes in Asia Pacific.
- EMEA revenue increased 101.2%, while Americas revenue declined 3.4% and Asia Pacific revenue increased 32.4%.
- Operating loss improved because higher gross profit and DN2020 cost reductions more than offset higher operating expenses. The company realized more than $100 million of cost savings during 2017.
- Net loss attributable to the company worsened because 2016 included $143.7 million of income from discontinued operations, primarily a $145.0 million after-tax gain from the sale of the North American electronic security business. No discontinued-operations income was recorded in 2017.
- Services and software gross margin declined to 24.8% from 29.3%, partly because the acquired business uses more third-party labor and incurred higher restructuring and non-routine costs. Systems gross margin improved to 17.1% from 10.6% as 2016 included significant acquisition-related inventory valuation charges.
- Cash and cash equivalents declined by $117.5 million during 2017. Cash uses included $72.1 million for integration initiatives, $77.1 million for restructuring, $99.9 million of interest and $78.2 million of income taxes.
Guidance, outlook, commentary, risks and unusual items
Management’s DN2020 objective is to achieve approximately $240 million of operating profit savings by 2020. The company expects approximately $50 million of additional DN2020 restructuring costs through the end of the plan. Management’s stated capital allocation priorities are to reduce leverage and realize cost reductions and acquisition synergies.
The company expects to contribute $49.6 million to retirement plans in 2018, receive approximately $14 million of reimbursement for certain benefits, and pay approximately $24.6 million in guaranteed dividends to remaining Diebold Nixdorf AG minority shareholders. The first quarterly 2018 dividend was declared at $0.10 per share. Annualized dividends declined to $0.40 per share in 2017 from $0.96 in 2016.
- 2017 included $255.3 million of net non-routine expense, including acquisition integration costs, purchase accounting charges, deferred revenue adjustments and amortization of acquired intangible assets.
- The Tax Cuts and Jobs Act resulted in an estimated $45.1 million reduction to deferred income taxes and a $36.6 million one-time non-cash charge related to deemed repatriation of foreign earnings. The estimates remained subject to refinement through 2018.
- Goodwill was $1,117.1 million. No goodwill impairment was recorded, but Services-AP had only $15.4 million of excess fair value and Software-EMEA had only $1.3 million, making these reporting units particularly sensitive to changes in forecasts, discount rates or execution.
- The company was in compliance with its debt covenants at year-end. The credit agreement required a maximum total net debt to adjusted EBITDA ratio of 4.25 to 1.00 and minimum adjusted EBITDA interest coverage of 3.00 to 1.00; the leverage limit declines to 4.00 in December 2018 and 3.75 in June 2019.
- Material contingencies included appraisal proceedings by Diebold Nixdorf AG minority shareholders, indirect tax matters with aggregate reasonably possible exposure of up to $144.7 million, and a Brazil indirect tax assessment with an estimated risk of $25.7 million. The company also reported maximum guarantee obligations of $195.1 million without an associated recorded liability.
- Key risks include high leverage and refinancing requirements, acquisition integration, customer and project delays, systems and cybersecurity failures, foreign exchange exposure, competition, supply-chain disruption, pension funding, tax audits and possible goodwill impairment.
- The company reported effective disclosure controls and internal control over financial reporting as of December 31, 2017, and KPMG issued unqualified audit opinions.
For the fourth quarter of 2017, net sales were $1,249.9 million, gross profit was $288.4 million, loss from continuing operations was $100.9 million and basic and diluted loss per share was $1.43.
Most important facts for investors to verify
- Whether DN2020 delivers the targeted approximately $240 million of operating profit savings and whether the remaining restructuring costs remain within management’s estimate.
- The company’s ability to generate materially higher operating cash flow and reduce debt before scheduled maturities and covenant thresholds tighten.
- The sustainability of Services and Software margins, particularly given the acquired business’s third-party labor model and ongoing integration costs.
- The performance and valuation cushion of the Services-AP and Software-EMEA goodwill reporting units.
- The ultimate cost and timing of the Diebold Nixdorf AG minority shareholder appraisal proceedings and guaranteed dividend obligations.
- The resolution of Brazil and other indirect tax contingencies, including potential exposure of up to $144.7 million.
- The final impact of the Tax Cuts and Jobs Act and any subsequent accounting adjustments during the 2018 measurement period.
- Whether the company can maintain dividends and fund approximately $49.6 million of pension contributions while continuing capital investment and debt reduction.