Diebold Nixdorf, Inc. — Q3 2022 Form 10-Q Summary
Business context and reporting period
Diebold Nixdorf provides automated, digital and self-service solutions for banks and retailers, including ATMs, point-of-sale and self-checkout systems, software, implementation and managed services. The company operates in more than 100 countries with approximately 22,000 employees. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods.
Beginning in the second quarter of 2022, the company reorganized its reportable segments into global Banking and global Retail under a simplified operating model.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net sales | $810.4 million | $958.2 million | $2,491.9 million | $2,845.6 million |
| Gross profit | $193.8 million | $260.1 million | $539.9 million | $785.2 million |
| Gross margin | 23.9% | 27.1% | 21.7% | 27.6% |
| Operating profit (loss) | $5.5 million | $38.7 million | $(169.4) million | $87.8 million |
| Operating margin | 0.7% | 4.0% | (6.8)% | 3.1% |
| Net loss attributable to Diebold Nixdorf | $(49.8) million | $(2.1) million | $(432.1) million | $(40.5) million |
| Loss per share | $(0.63) | $(0.03) | $(5.48) | $(0.52) |
| Cash flow from operating activities | Not separately provided | Not separately provided | $(482.8) million | $(291.6) million |
Q3 revenue declined 15.4%, or 8.1% on a constant-currency basis. Nine-month revenue declined 12.4%, or 6.9% in constant currency. Services revenue was $514.3 million in Q3 and $1,565.9 million for the first nine months; product revenue was $296.1 million and $926.0 million, respectively.
Services gross margin declined to 30.6% in Q3 from 31.9% and to 29.4% for the nine months from 31.4%. Product gross margin declined to 12.2% in Q3 from 20.4% and to 8.6% for the nine months from 21.8%. Management cited inflation, higher labor and logistics costs, supply-chain disruption, lower installation activity and reduced fixed-cost absorption.
At September 30, 2022, cash, cash equivalents and restricted cash were $128.4 million, compared with $388.9 million at December 31, 2021. Total cash and stated availability, including short-term investments and undrawn facilities, was $187.3 million, compared with $737.8 million at year-end 2021. Inventory increased to $666.2 million from $544.2 million.
Total debt was classified as current and consisted of approximately $2.44 billion of notes payable, net of deferred financing fees. The classification reflected near-term maturities and potential covenant-related acceleration. Long-term debt was reported as zero at September 30, 2022, compared with $2.25 billion at December 31, 2021.
The company had approximately $0.1 million available under its $330.0 million revolving facility after letters of credit and $43.7 million available under international uncommitted credit lines. Revolving facility borrowings had a weighted-average interest rate of 7.31% at September 30, 2022.
Material changes versus the prior comparable period
- Revenue decreased primarily because of unfavorable foreign exchange, divestitures, delayed installations, supply-chain disruption and lower European point-of-sale and self-checkout activity.
- Banking revenue declined 13.4% in Q3 and 11.0% for the nine months; Retail revenue, excluding the separately presented held-for-sale business, declined 21.9% in Q3 and 17.3% for the nine months.
- Gross profit fell 25.5% in Q3 and 31.2% for the nine months, with the largest deterioration in product margins.
- Selling and administrative expense declined 16.6% in Q3 and 7.6% for the nine months, reflecting lower incentive compensation, organizational simplification and cost reductions. These savings were more than offset by lower gross profit and unusual charges.
- Operating results included $98.9 million of restructuring and transformation costs during the first nine months, including $20.7 million in Q3. The company is targeting more than $150 million of annualized cost savings by the end of 2023.
- Cash used in operations increased to $482.8 million from $291.6 million, driven by the substantially higher net loss and increased inventory investment caused by longer supply-chain lead times and delayed revenue.
- Shareholders’ equity declined to $(1.33) billion from $(845.1) million, primarily due to the year-to-date net loss and accumulated foreign-currency translation losses.
Guidance, outlook, risks and unusual items
The filing does not provide a conventional revenue or earnings forecast. Management expects strong underlying demand for self-service automation, banking and retail services, software and related products, but cautions that COVID-19 effects, inflation, supply-chain constraints, foreign exchange and customer installation delays could materially affect future results.
Management’s cost-reduction and transformation program targets more than $150 million of annualized savings by the end of 2023. Execution of this plan and successful conversion of backlog into sales remain important assumptions.
On October 20, 2022, after quarter-end, the company entered into a Transaction Support Agreement with significant term-loan and noteholders. The proposed recapitalization contemplated a $250 million asset-based facility, a $400 million super-senior term facility, exchanges of existing term loans and senior notes, and extensions of near-term maturities. The transaction remained subject to definitive documentation, creditor consents, participation thresholds and other closing conditions.
Substantial doubt existed regarding the company’s ability to continue as a going concern. The company was not in compliance with its net leverage covenant at September 30, 2022 but had obtained a waiver through December 31, 2022. Management expected the proposed refinancing to close before that date, but stated that there could be no assurance it would do so. The financial statements contain no adjustments that might be required if the company could not continue as a going concern.
- The company recorded a $127.4 million valuation allowance against deferred tax assets in connection with its going-concern assessment.
- Impairment charges totaled $64.7 million for the first nine months, including $38.4 million related to a suspended North American cloud ERP implementation, $16.8 million related to Russia, Ukraine and Belarus assets, and software and other impairments.
- A $34.4 million inventory charge related to legacy products was recorded during the second quarter as part of product portfolio consolidation.
- A $14.3 million non-cash pension settlement loss was recorded in Q3.
- The company recorded $16.8 million of first-quarter impairments associated with the Russia-Ukraine conflict and is pursuing liquidation of its Russian distribution subsidiary.
- Management estimated aggregate exposure from material indirect-tax matters at up to $51.4 million. Performance guarantees, standby letters of credit and surety bonds had maximum future contractual obligations of $161.8 million, with no associated liability recorded.
- Two German appraisal proceedings remain pending; the first-instance dismissal of claims in one proceeding was appealed. Management believes the company’s defenses are strong but cannot rule out increased compensation.
Most important facts for investors to verify
- Whether the Transaction Support Agreement closed successfully and whether the proposed ABL and super-senior facilities provided sufficient liquidity.
- Whether the company remained in compliance with debt covenants after the December 31, 2022 waiver expiration and whether any debt was accelerated.
- Actual cash generation, inventory normalization and availability under committed and uncommitted credit facilities.
- Progress toward the targeted annualized cost savings exceeding $150 million by the end of 2023.
- Recovery of revenue and margins as supply-chain constraints, inflation and installation delays moderate.
- Potential additional impairments to goodwill, software, ERP costs and other assets, given limited operating performance and management’s sensitivity to forecasts.
- Future effects of the Russia-Ukraine conflict, currency movements, COVID-19-related disruption and customer spending conditions.
- Outcomes of the German appraisal proceedings and indirect-tax contingencies.