Diebold, Incorporated — Form 10-Q Summary
Reporting period: Three months ended March 31, 2011. The filing identifies the registrant as Diebold, Incorporated and subsidiaries; it is not labeled Diebold Nixdorf. Financial statements are unaudited and presented in thousands, except per-share amounts.
Business Context and Reporting Period
Diebold provides financial self-service, security, services, and certain election and lottery solutions. Reporting segments are Diebold North America (DNA) and Diebold International (DI). Services represented more than 50% of revenue. Management described the quarter as a slow start and expected an unusually strong second half, supported by pending orders in China and Brazil and later-year Brazilian voting revenue.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $614.2 million | $619.0 million | Down 0.8% |
| Gross profit | $149.4 million | $158.0 million | Down 5.4% |
| Gross margin | 24.3% | 25.5% | Down 1.2 points |
| Operating profit | $8.9 million | $40.6 million | Down 78.1% |
| Operating margin | 1.4% | 6.6% | Down 5.2 points |
| Income from continuing operations | $4.1 million | $25.2 million | Down 83.5% |
| Net income attributable to Diebold | $2.5 million | $23.9 million | Down 89.5% |
| Diluted EPS | $0.04 | $0.36 | Down $0.32 |
| Net cash used in operating activities | $90.2 million | $56.2 million | Use increased $33.9 million |
- Revenue mix: Product revenue was $249.8 million and services revenue was $364.4 million. North America revenue increased 3.3% to $306.0 million, while International revenue declined 4.5% to $308.2 million.
- Segment profitability: DNA operating profit increased 87.5% to $17.4 million. DI swung to an $8.5 million operating loss from $31.3 million of profit.
- Liquidity: Cash and cash equivalents were $279.6 million and short-term investments were $272.6 million at March 31, 2011. Total current assets were $1.72 billion versus current liabilities of $788.1 million.
- Debt: Current notes payable were $21.9 million and long-term debt was $615.0 million, for reported debt of $636.9 million. Cash and short-term investments exceeded $552.2 million, implying approximate net debt of $84.7 million before considering other investments or restricted funds. The company was in compliance with its debt covenants.
- Available borrowing capacity: $78.9 million remained available under international short-term lines and $206.3 million under the revolving credit facility.
- Capital allocation: The company paid $18.7 million in dividends, repurchased $21.5 million of common stock, and reported a quarterly dividend of $0.28 per share.
Material Changes Versus the Prior Comparable Period
- Revenue declined modestly, but gross profit fell more substantially because of unfavorable geographic and product mix, weaker Asia Pacific volume, lower EMEA margins, and higher restructuring costs.
- Operating expenses increased 19.7% to $140.5 million. Selling and administrative expense increased 22.4%, partly because Q1 2011 included $5.8 million of non-routine expense, primarily FCPA-related legal and compliance costs, whereas Q1 2010 included $4.1 million of non-routine income largely from D&O insurance reimbursements.
- Restructuring charges increased to $11.8 million from $1.1 million, primarily for the EMEA reorganization. Management expected an additional $9 million to $14 million of EMEA restructuring costs through 2012.
- The effective tax rate increased to 58.8% from 28.2%, primarily because tax benefits were not recognized for operating losses in certain EMEA jurisdictions and because of foreign tax assessments and interest on uncertain tax positions.
- Operating cash flow deteriorated because of lower earnings, higher inventories ahead of anticipated second-half orders, higher pension contributions, and changes in accounts payable and other assets and liabilities.
- Other income improved to $1.2 million from a $5.5 million expense, reflecting higher investment income and lower foreign-exchange losses. The prior-year period included the impact of Venezuelan currency devaluation.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management expected a strong second half of 2011, citing stronger U.S. regional-bank orders, pending China and Brazil orders, and Brazilian voting revenue expected in the third and fourth quarters.
- North America orders benefited from financial self-service growth exceeding 30% in the U.S. regional-bank market. EMEA orders increased 43.9% against a weak prior-year comparison, while Latin America orders were affected by the timing of major Brazilian bank orders and Asia Pacific began slowly because of China-related declines.
- The company signed approximately $50 million of integrated services contracts during the quarter, compared with approximately $150 million for all of 2010.
- Management continued the SB 300 cost-reduction program, targeting an additional $100 million of efficiencies over three years, while also investing in software, services, security, and emerging markets.
- The company’s global FCPA review remained ongoing. It voluntarily self-reported matters to the SEC and Department of Justice, and the SEC inquiry had become a formal, non-public investigation. The company could not predict the scope, duration, outcome, or financial impact.
- Pending securities class-action and shareholder derivative litigation related to prior SEC matters had an undetermined potential financial impact. Other legal proceedings were generally considered immaterial by management; settlement discussions continued regarding Butler County election-related claims.
- Guarantees and standby letters of credit had maximum future payment obligations of $76.2 million, with no associated liability recorded. The warranty liability was $77.5 million at March 31, 2011.
- Key risks included competitive and pricing pressure, foreign exchange and country risks, customer capital-spending weakness, EMEA restructuring execution, FCPA investigations, pension funding requirements, technology acceptance, cybersecurity, litigation, and possible tax costs from repatriating overseas cash.
Important Facts for Investors to Verify
- Whether the anticipated second-half orders in China and Brazil materialize and convert into revenue and cash flow.
- The extent and timing of additional EMEA restructuring costs and whether the program improves DI profitability.
- The outcome and potential financial or operational consequences of the FCPA review and related SEC and DOJ investigations.
- Whether negative operating cash flow reverses as inventory is converted into revenue and whether working-capital requirements remain elevated.
- The sustainability of dividends and share repurchases given operating cash usage, debt maturities, and variable-rate borrowings.
- The company’s ability to restore gross and operating margins after restructuring, non-routine legal costs, and unfavorable international mix.