Diebold Nixdorf, Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
Diebold Nixdorf provides banking and retail automation, software, hardware, and services in more than 100 countries, with approximately 21,000 employees. The report covers the three months ended March 31, 2023, with comparisons to the three months ended March 31, 2022. Reportable segments are Banking and Retail.
Financial performance and position
- Net sales: $858.1 million, up 3.4% from $829.8 million; sales increased 6.8% on a constant-currency basis. Banking sales rose 5.4% to $592.9 million, while Retail sales declined 0.7% to $265.2 million under the MD&A presentation.
- Gross profit and margin: Gross profit increased 13.0% to $209.3 million. Gross margin improved to 24.4% from 22.3%, including services margin of 29.7% and products margin of 16.4%.
- Operating results: Operating loss was $2.1 million versus an $83.4 million loss. Operating margin improved to negative 0.2% from negative 10.1%. Results included $15.0 million of restructuring and transformation costs, $14.1 million of refinancing-related costs, $17.7 million of acquired-intangible amortization, and $0.9 million of asset impairment.
- Segment profitability: Banking operating profit increased to $79.9 million from $46.1 million, with margin of 13.5% versus 8.2%. Retail operating profit increased to $39.1 million from $24.2 million, with margin of 15.0% versus 9.2%.
- Net loss: Net loss attributable to Diebold Nixdorf was $111.1 million, or $1.40 per diluted share, compared with $183.1 million, or $2.33 per share. Higher interest expense and foreign-exchange losses substantially offset operating improvement.
- Interest and taxes: Interest expense increased to $81.9 million from $48.1 million, including $13.6 million of deferred financing fee amortization. Net foreign-exchange loss was $10.6 million. Income tax expense was $21.1 million, producing an effective tax rate of negative 23.4%.
- Cash flow: Operating cash flow was negative $95.9 million, an improvement from negative $226.2 million. Investing cash flow was negative $1.7 million, including $5.7 million of capital expenditures and $5.4 million of capitalized software development. Financing cash flow provided $21.1 million.
- Liquidity: Cash, cash equivalents, restricted cash, and short-term investments totaled $263.0 million at March 31, 2023, down from $343.7 million at December 31, 2022. The Company reported zero additional availability under its $250 million ABL facility and had $29.0 million of outstanding letters of credit.
- Debt and equity: Current and long-term debt totaled approximately $2.66 billion on the balance sheet. Total equity was negative $1.47 billion, including negative shareholders’ equity of $1.49 billion. Long-term debt had a carrying value of $2.57 billion and a reported fair value of $1.44 billion.
- Working capital: Inventories increased to $639.5 million from $588.1 million, while deferred revenue increased to $486.7 million from $453.2 million. Remaining performance obligations were approximately $1.4 billion, generally expected to be recognized over the following 12 months.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by higher Banking ATM product volumes and improved Retail volume, partly offset by unfavorable foreign-currency translation and divestitures.
- Product gross margin expanded 540 basis points, reflecting lower logistics and raw-material costs, particularly semiconductor costs, and favorable geographic mix.
- Operating results benefited from the absence of the $55.2 million of impairment charges recorded in Q1 2022, including $38.4 million related to a North American ERP implementation and $16.8 million related to Russia, Ukraine, and Belarus assets.
- Research, development, and engineering expense declined 18.3% to $26.4 million as a result of cost reductions, relocation of activities to lower-cost jurisdictions, and project prioritization.
- Interest expense rose materially following the December 2022 refinancing transactions and higher variable interest rates.
- Cash usage improved year over year but remained significant, and inventory conversion was slower than expected, constraining borrowing-base availability.
Guidance, outlook, commentary, and risks
- Management did not provide a clear full-year financial guidance range in the filing. The Company continued to target more than $150 million of annualized cost savings by the end of 2023 through restructuring, process digitization, and operational streamlining.
- Management disclosed substantial doubt about the Company’s ability to continue as a going concern as of March 31, 2023. The Company stated that, without modifications to its ABL facility and access to additional capital, it projected insufficient liquidity to meet obligations over the following 12 months.
- The $55.0 million FILO facility was fully drawn on March 21, 2023, but its liquidity was expected to sustain operations only through part of the second quarter. The facility matured on June 4, 2023.
- On May 30, 2023, after the reporting date, the Company entered into a Restructuring Support Agreement with creditors holding substantial portions of its secured debt. The contemplated restructuring included pre-packaged Chapter 11 proceedings, Dutch scheme proceedings, and a proposed $1.25 billion debtor-in-possession facility, subject to court approval and other conditions.
- Under the proposed restructuring terms, existing common equity would be cancelled without recovery if the restructuring were consummated. First-lien creditors would receive substantially all of the reorganized equity, while second-lien creditors would receive a smaller equity allocation, subject to dilution.
- Key risks include failure to complete the restructuring, bankruptcy-related disruption and costs, inadequate liquidity, debt covenant compliance, supply-chain delays, inventory conversion, foreign-currency volatility, cybersecurity events, customer or employee attrition, and potential NYSE suspension or delisting.
- The Company received NYSE notices regarding late filing and noncompliance with minimum market-capitalization and shareholders’ equity requirements. The filing states that the late-filing deficiency was cured by filing this Form 10-Q, while the market-capitalization deficiency remained subject to remediation procedures.
- Material indirect-tax contingencies were estimated at up to $51.1 million. Performance guarantees and similar arrangements had maximum future obligations of $140.6 million, with no associated liability recorded.
Important facts for investors to verify
- Whether the Chapter 11 and Dutch restructuring proceedings were commenced, approved, completed, or otherwise modified, and the ultimate treatment of existing common equity and creditor claims.
- The Company’s post-quarter liquidity, operating cash burn, borrowing-base availability, and ability to refinance or repay near-term obligations.
- The status and final terms of the DIP facility, ABL facility, FILO facility, 2024 Senior Notes, and debt maturing in 2025.
- Whether the targeted cost savings are achieved without impairing service levels, customer relationships, product development, or revenue conversion.
- NYSE listing status and whether the common shares continue to trade on the NYSE or move to an over-the-counter market.
- Subsequent changes in inventory levels, deferred revenue, receivables collections, supplier terms, and the conversion of backlog into cash-generating sales.