Business Context and Reporting Period
Diebold, Incorporated filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2013. The company provides financial self-service, security, software and related services globally, with approximately 16,000 employees in nearly 90 countries. Reporting segments are Diebold North America (DNA) and Diebold International (DI). Unless otherwise noted, amounts are in thousands.
Key Financial Metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $707,113, down 4.9% | $1,340,624, down 7.0% |
| Gross profit | $157,416; 22.3% margin | $287,430; 21.4% margin |
| Operating income/(loss) | $(23,622); (3.3%) margin | $(37,538); (2.8%) margin |
| Net income/(loss) | $(103,852) | $(117,734) |
| Net income/(loss) attributable to Diebold | $(105,035), or $(1.65) per diluted share | $(118,481), or $(1.87) per diluted share |
| Cash flow from operations | Not separately presented | $(63,425) |
- Service revenue increased 4.1% in the second quarter but declined 0.2% for the first six months. Product revenue declined 15.1% in the quarter and 15.9% year to date.
- Six-month gross profit declined 23.5%, primarily due to lower volumes, unfavorable customer mix and weaker service utilization. Product gross margin declined to 19.5% from 24.9%; service gross margin declined to 22.8% from 27.0%.
- Cash and cash equivalents were $282,569 at June 30, 2013, compared with $368,792 at December 31, 2012. Short-term investments were $243,439.
- Total debt was $681,912, comprising $65,051 of notes payable and $616,861 of long-term debt, compared with $651,746 at year-end 2012.
- Total global liquidity, including cash, short-term investments and available credit, was $696,209, down from $908,099 at December 31, 2012.
- Capital expenditures were $18,156 for the first six months, compared with $20,669 in the prior-year period. Dividends paid were $36,919.
Material Changes Versus the Prior Comparable Period
- DNA sales declined 7.6% in the quarter and 12.5% year to date, mainly because of lower U.S. regional-bank volume following expiration of the 2012 Americans with Disabilities Act compliance deadline.
- DI sales were down 1.6% in the quarter and essentially flat year to date. Asia Pacific growth was offset by lower Latin American, particularly Brazilian, volume and unfavorable currency effects.
- Security revenue increased 3.9% in the quarter and 2.9% year to date, while financial self-service revenue declined 5.5% and 8.5%, respectively. Election and lottery revenue declined sharply from the prior year.
- Operating expenses increased 24.3% in the quarter and 14.3% year to date. Selling and administrative expense included higher restructuring, legal, compliance and executive severance costs.
- Operating results included $17,058 of restructuring charges in the first six months, compared with $2,440 in the prior-year period. Management expects an additional $10,000 to $20,000 of restructuring costs, subject to change.
- Net cash used in operating activities increased to $63,425 from $33,970, reflecting the net loss and unfavorable working-capital changes, partly offset by higher deferred-tax and legal-related accruals.
- The company repaid $75,000 of senior notes at maturity in March 2013 using its revolving credit facility, increasing credit-facility borrowings.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide a clear consolidated revenue or earnings forecast in the filing. It targeted $150,000 of cumulative cost savings from its multi-year realignment plan, expected to be fully realized by the end of 2015.
- The realignment plan is intended to globalize service operations, centralize research and development and reduce general and administrative costs. Management continues to focus on services, software, branch transformation, security and emerging-market opportunities.
- The second quarter included approximately $47,000 of deferred tax liability from changing the indefinite-reinvestment assertion for certain foreign earnings and approximately $39,200 of valuation allowance on Brazilian deferred tax assets. These items contributed to effective tax rates of negative 307.6% for the quarter and negative 177.0% year to date.
- The company recorded $28,000 of additional estimated FCPA-related losses and a $17,500 net charge related to an agreement in principle to settle a securities class action. Proposed FCPA settlement payments were $48,000, subject to final approval, with an independent compliance monitor for at least 18 months.
- A Brazilian federal indirect-tax assessment was approximately $133,000, with management estimating a possible loss range of $0 to $236,000. The aggregate risk for material indirect-tax matters was estimated at up to approximately $381,000. The SEC requested related documents in May 2013.
- Management identified a material weakness in internal control over financial reporting involving Brazilian manufacturing and supply-chain processes, indirect tax incentives and related reporting responsibilities. Remediation was in process, with implementation planned during the quarter ending September 30, 2013.
- In July 2013, the board approved an early-retirement program for approximately 1,200 U.S. employees, expected to produce a $40,000 to $70,000 pretax charge in the fourth quarter of 2013. The U.S. defined-benefit pension plan will be frozen effective December 31, 2013, expected to reduce 2014 pension expense by approximately $30,000 versus 2013.
- Management stated that available capital resources should fund planned needs for at least the next 12 months. Debt covenants were in compliance at June 30, 2013, but liquidity declined materially and international jurisdictions held 97.8% of cash and short-term investments.
Important Facts for Investors to Verify
- Progress and effectiveness of remediation for the Brazilian internal-control material weakness.
- Final resolution and cash costs of the FCPA investigation, securities action and Brazilian indirect-tax assessment.
- Actual timing and realization of the $150,000 cost-savings target and additional restructuring charges.
- DNA demand recovery after the ADA-related comparison and the sustainability of DI growth in Asia Pacific and security services.
- Liquidity, foreign cash repatriation taxes, debt maturities and compliance with credit-facility covenants.
- Fourth-quarter early-retirement costs and the longer-term effect of freezing the U.S. pension plan.