Business Context and Reporting Period
Diebold, Incorporated, now associated with Diebold Nixdorf, filed this unaudited Form 10-Q for the quarter ended March 31, 2016. The company provides financial self-service, ATM, software, security and related services through four segments: North America, Asia Pacific, Europe, Middle East and Africa, and Latin America. Management’s strategy, “Diebold 2.0,” emphasizes cost reduction, cash generation, talent and growth, with a greater focus on services and software.
The company completed the sale of its North American electronic security business on February 1, 2016 and was pursuing the acquisition of Wincor Nixdorf, subject to regulatory approval. The filing states that approximately 15,000 associates remained after the divestiture.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $509.6 million | $574.8 million | Down 11.3% |
| Gross profit | $138.8 million | $159.3 million | Down 12.9% |
| Gross margin | 27.2% | 27.7% | Down 50 basis points |
| Operating loss | $(5.7) million | $(3.0) million | Worsened |
| Operating margin | (1.1)% | (0.5)% | Down 60 basis points |
| Income from continuing operations | $20.7 million | $(10.1) million | Improved |
| Net income attributable to Diebold | $168.2 million | $(2.8) million | Improved |
| Diluted EPS | $2.56 | $(0.04) | Improved |
| Cash flow from operating activities | $(115.2) million | $(62.2) million | Greater use of cash |
| Cash flow from continuing operations | $(109.9) million | $(64.6) million | Greater use of cash |
| Capital expenditures | $4.7 million | $10.5 million | Down |
Reported net income was dominated by the $149.1 million after-tax gain on the sale of the North American electronic security business. Continuing operations remained operationally loss-making. Income from continuing operations also benefited from a $36.5 million mark-to-market gain on foreign-currency options related to the proposed Wincor Nixdorf acquisition.
Revenue and Segment Trends
- Financial self-service revenue declined 9.8% to $446.5 million, including a $27.9 million unfavorable currency impact.
- Security revenue declined 12.1% to $61.1 million.
- North America revenue declined 2.9% to $251.7 million; segment operating margin fell to 21.2% from 23.6%.
- Asia Pacific revenue declined 27.1% to $80.5 million; segment operating margin fell to 10.8% from 16.5%, reflecting weaker China and India activity.
- EMEA revenue declined 1.4% to $85.6 million; segment operating margin fell to 12.1% from 14.3%.
- Latin America revenue declined 22.4% to $91.8 million, primarily due to currency and economic conditions, while segment operating margin improved to 7.6% from 2.6%.
- Services gross margin was 32.1%, compared with 32.7% in the prior-year quarter. Product gross margin declined to 17.7% from 20.4%, mainly due to product and geographic mix.
Liquidity, Debt and Cash Flow
| Balance-sheet item | March 31, 2016 | December 31, 2015 |
|---|---|---|
| Cash and cash equivalents | $304.6 million | $313.6 million |
| Restricted cash | $116.1 million | — |
| Short-term investments | $49.7 million | $39.9 million |
| Notes payable | $103.7 million | $32.0 million |
| Long-term debt | $428.9 million | $606.2 million |
| Total debt instruments | $532.6 million | $638.2 million carrying value |
| Total equity | $619.1 million | $435.5 million |
Total cash availability, including cash, short-term investments, restricted cash and available credit facilities, was $838.1 million at quarter-end. This included $68.8 million available under international short-term lines and $298.9 million available under the revolving credit facility. Management stated that capital resources were expected to be sufficient for at least the next 12 months, although $341.1 million, or 96.3% of unrestricted cash and short-term investments, was held in international tax jurisdictions.
Operating cash flow was negatively affected by working-capital needs, including receivables, inventory and accounts payable. Financing cash flow used $247.0 million, principally reflecting repayment of $175.0 million of senior notes and placement of $116.1 million into restricted cash. The company paid $18.8 million of dividends, or $0.2875 per share.
Material Changes Versus the Prior Comparable Period
- Revenue fell $65.2 million, with declines across financial self-service, security and Brazil other operations.
- Gross profit declined $20.5 million and operating loss widened by $2.7 million despite the absence of the $19.4 million of asset impairment charges recorded in Q1 2015.
- Selling and administrative expense increased 4.2% to $125.6 million, primarily due to acquisition and divestiture costs, Phoenix acquisition-related expenses and legal and professional fees.
- Research, development and engineering expense decreased 17.0% to $18.5 million.
- Income from continuing operations improved from a $10.1 million loss to $20.7 million, primarily because of the foreign-currency option gain and lower prior-year impairment and Venezuela-related charges.
- Net income increased to $168.5 million from a $5.6 million loss, almost entirely because of the electronic security divestiture gain.
- Cash flow from operating activities deteriorated by $53.0 million, while investing cash flow improved because Q1 2015 included the $59.4 million cash payment for the Phoenix acquisition.
Guidance, Outlook, Commentary, Risks and Unusual Items
Wincor Nixdorf Acquisition
The company reported that the tender offer had received shares representing 69.9% of total Wincor Nixdorf shares issued, including treasury shares, and 77.5% of shares outstanding. The transaction remained subject to regulatory approval and was targeted to close in summer 2016. Subsequent to quarter-end, the company issued $400.0 million of 8.50% senior notes and arranged anticipated dollar and euro Term Loan B facilities totaling $1.0 billion and €350.0 million. If the acquisition did not close by November 21, 2016, the notes were required to be redeemed at par plus accrued interest.
Transformation and Restructuring
The company recorded $0.4 million of restructuring charges in Q1 2016 and anticipated approximately $7.0 million to $10.0 million of additional restructuring costs through year-end 2016. Cumulative restructuring costs under the multi-year transformation plan were $101.2 million as of March 31, 2016.
Risks and Contingencies
- Operating performance remained pressured by weak product demand, competitive pricing, China market conditions, Brazil and other emerging-market weakness, unfavorable foreign exchange and product mix.
- The company had material indirect-tax contingencies, with aggregate estimated risk of up to approximately $196.7 million, including estimated exposure of $160.2 million related to Brazil and $24.0 million related to Thailand. The company had accrued $8.3 million for the Brazil matter.
- Guarantees and standby letters of credit had maximum future payment obligations of $92.6 million, with no associated liability recorded.
- The company had $7.5 million of purchase commitments due within one year.
- Debt agreements included leverage and interest-coverage covenants; the company stated it was in compliance at March 31, 2016.
- Foreign-currency options had a notional amount of €1.416 billion and generated substantial fair-value volatility; their fair value was $43.5 million at March 31, 2016 and $27.6 million as of April 25, 2016.
- Management identified foreign exchange, acquisition execution and integration, stranded costs from the divestiture, customer and supplier relationships, technology acceptance, cybersecurity, pensions, litigation, taxes and global economic conditions as key risks.
The filing does not provide specific full-year revenue or earnings guidance. Management stated that quarterly results are not necessarily indicative of full-year performance.
Investor Verification Checklist
- Verify the closing, financing, leverage impact and integration results of the Wincor Nixdorf acquisition.
- Assess whether services and software growth can offset declining product revenue and weaker international markets.
- Separate recurring operating performance from the $149.1 million divestiture gain and the $36.5 million foreign-currency option gain.
- Monitor operating cash flow, working-capital requirements, restricted cash usage and post-acquisition liquidity.
- Review the expected reduction in the dividend rate following the acquisition.
- Track the Brazil and Thailand tax contingencies and any related cash settlement or accrual changes.
- Evaluate the effect of the planned Term Loan B and senior notes on interest expense, leverage and covenant compliance.
- Confirm the final working-capital adjustment for the electronic security divestiture.