Diebold, Incorporated — FY2011 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2011, including fourth-quarter results. Diebold provides self-service, security, software and integrated services primarily to financial, commercial, government and retail customers. Services represented 54.7% of 2011 revenue, reflecting management’s strategy to become a more software-led services provider. The company reported through Diebold North America (DNA) and Diebold International (DI), with 52.7% of revenue generated outside the United States.
Key financial metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $2.836 billion | $2.824 billion | 0.4% |
| Gross profit | $735.9 million | $719.6 million | 2.3% |
| Gross margin | 26.0% | 25.5% | +50 bps |
| Operating profit | $155.6 million | $(1.8) million | Improved |
| Operating margin | 5.5% | (0.1)% | +560 bps |
| Income from continuing operations attributable to Diebold | $144.3 million | $(20.5) million | Improved |
| Diluted EPS from continuing operations | $2.23 | $(0.31) | Improved |
| Net income attributable to Diebold | $144.8 million | $(20.3) million | Improved |
| Cash flow from operations | $215.4 million | $273.4 million | Down $58.0 million |
Products revenue declined 3.5% to $1.283 billion, while services revenue increased 3.9% to $1.552 billion. Product gross margin increased to 25.1% from 24.5%; service gross margin increased to 26.7% from 26.3%.
Fourth-quarter 2011 net sales were $850.0 million versus $791.0 million in the prior-year quarter. Fourth-quarter gross profit was $222.6 million versus $189.5 million, and income from continuing operations attributable to Diebold was $83.0 million versus a $118.7 million loss in fourth-quarter 2010. Fourth-quarter 2011 results included an approximately $28 million release of a Brazilian deferred-tax valuation allowance.
Balance sheet, debt and liquidity
| Balance-sheet metric at December 31 | 2011 | 2010 |
|---|---|---|
| Cash and cash equivalents | $333.9 million | $328.7 million |
| Short-term investments | $286.9 million | $273.1 million |
| Total current assets | $1.732 billion | $1.714 billion |
| Total debt | $627.9 million | $565.4 million |
| Total equity | $858.3 million | $989.8 million |
| Finance lease receivables, net | $98.3 million | $122.6 million |
Management stated that available capital resources should fund working capital, research and development, capital investments, pension contributions, dividends and planned share repurchases for at least the next 12 months. Approximately $597.5 million, or 96.2% of cash and cash equivalents and short-term investments, was held in international tax jurisdictions.
The company entered into a new five-year $500 million revolving credit facility in June 2011; $209 million remained available at year-end. Long-term debt included $291 million under the credit facility, $300 million of senior notes and $11.9 million of industrial development revenue bonds. Debt agreements contained financial covenants, and the company reported compliance at year-end. Contractual obligations totaled approximately $868.9 million, including $627.9 million of debt, $94.1 million of estimated debt interest and $143.8 million of operating leases.
Material changes versus prior comparable periods
- DNA revenue increased 6.4% to $1.405 billion and operating profit increased 57.3% to $128.2 million, supported by financial self-service volume, installation activity and service efficiencies.
- DI revenue declined 4.8% to $1.431 billion, primarily because of lower Brazil financial self-service and election-system volumes; DI operating profit improved to $27.4 million from an $83.2 million loss.
- Operating results benefited substantially from the absence of the $168.7 million non-cash EMEA goodwill impairment recorded in 2010.
- 2011 restructuring charges increased to $26.2 million from $4.2 million, primarily for the EMEA reorganization. The company expected an additional $4 million to $6 million of EMEA restructuring costs in 2012.
- Net non-routine expenses were $15.0 million, primarily legal and compliance costs related to the FCPA investigation.
- Operating cash flow declined despite improved earnings, partly because significant 2010 income-tax refunds did not recur and working-capital changes were unfavorable.
- Cash used in financing increased to $123.5 million, including $111.8 million of share repurchases and $72.9 million of dividends. The annualized dividend increased to $1.12 per share, and the company announced a $1.14 annualized quarterly dividend for 2012.
Guidance, outlook, risks and unusual items
Management expressed optimism about continued momentum in 2012 from software, services, security solutions, deposit automation and emerging-market demand, while acknowledging macroeconomic uncertainty and market headwinds. The SmartBusiness 300 program targeted an additional $100 million of efficiencies by the end of 2013; the filing does not provide a formal 2012 revenue or EPS forecast.
- The SEC and Department of Justice were conducting ongoing investigations into transactions and payments in Russia and Asia Pacific that potentially implicated the Foreign Corrupt Practices Act. The company self-reported the matters and was cooperating, but could not predict the outcome or estimate potential incremental losses.
- A putative securities class action sought unspecified damages, and management stated that any possible loss or range of loss could not be estimated. A shareholder derivative action had a proposed settlement subject to court approval and was not expected to be material.
- International exposure creates foreign-exchange, political, regulatory, tax, currency-repatriation and economic risks. A hypothetical 10% currency movement would have affected 2011 operating profit by approximately $7.9 million.
- Debt is exposed to LIBOR-based variable rates; a one-percentage-point rate movement would have changed 2011 interest expense by approximately $2.9 million.
- Pension obligations increased materially, with a year-end funded status deficit of $150.7 million. Planned 2012 pension contributions were $15.8 million, and management noted that future statutory funding requirements could become significant.
- Goodwill was $253.1 million at year-end. No goodwill impairment was recorded in 2011, but future impairment remains possible if operating results or valuation assumptions deteriorate.
- Management and KPMG concluded that internal control over financial reporting was effective as of December 31, 2011. KPMG issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether services growth and the software-led strategy can offset declining product and cyclical Brazil election-system revenue.
- The eventual resolution, financial exposure and business impact of the FCPA investigations and related litigation.
- Execution of the EMEA reorganization, including the additional $4 million to $6 million of expected 2012 restructuring costs.
- Debt maturities, refinancing needs and compliance with credit-facility covenants, particularly the approximately $466.7 million of debt scheduled to mature in 2016.
- The sustainability of operating cash flow after the unusually favorable 2010 tax-refund comparison and the funding requirements for pensions, dividends and repurchases.
- Whether future goodwill or other intangible-asset impairments arise from weaker international performance.