DIEBOLD NIXDORF, Inc quarterly report, Q2 FY2016

Diebold, Incorporated — Form 10-Q Summary

Business context and reporting period

This unaudited Form 10-Q covers the quarter and six months ended June 30, 2016. Diebold provides financial self-service, ATM, software, managed services, security and related technology solutions in North America, Asia Pacific, Europe, the Middle East and Africa, and Latin America. The company employed approximately 15,000 associates in more than 90 countries and was executing its “Diebold 2.0” services-led transformation.

The filing reflects the pending acquisition of Wincor Nixdorf, which had satisfied the tender threshold but remained subject to final antitrust approval in Poland. The company also completed the sale of its North American electronic security business to Securitas Electronic Security on February 1, 2016.

Financial performance and key metrics

Metric	Three months ended June 30, 2016	Three months ended June 30, 2015	Six months ended June 30, 2016	Six months ended June 30, 2015
Net sales	$580.0 million	$644.5 million	$1,089.6 million	$1,219.3 million
Gross profit / margin	$155.1 million / 26.7%	$170.7 million / 26.5%	$293.9 million / 27.0%	$330.0 million / 27.1%
Operating profit / margin	$10.3 million / 1.8%	$24.0 million / 3.7%	$4.6 million / 0.4%	$21.0 million / 1.7%
Income from continuing operations	$(20.8) million	$19.7 million	$(0.1) million	$9.6 million
Net income attributable to Diebold	$(21.1) million	$22.2 million	$147.1 million	$19.4 million
Diluted earnings per share	$(0.32)	$0.34	$2.24	$0.30

Six-month revenue declined 10.6%; financial self-service revenue declined 11.6% and security revenue declined 8.4%. Brazil other revenue increased 47.5%.
Service gross margin was 34.0% in the second quarter and 33.1% for the six-month period. Product gross margin declined to 15.2% and 16.3%, respectively, from 17.9% and 19.0%.
Net loss from continuing operations in the second quarter reflected lower product volume and mix, higher acquisition-related interest expense, and a $22.7 million mark-to-market loss on an acquisition-related foreign currency forward contract.
The six-month net income was dominated by the $149.6 million after-tax gain on the sale of the North American electronic security business.
Six-month net cash used in operating activities was $206.2 million, including $200.0 million from continuing operations, compared with $99.1 million used in the prior-year period.
Capital expenditures were $11.3 million for the six months, compared with $24.7 million in 2015. Dividends paid were $38.0 million, or $0.5750 per share.

Liquidity, debt and balance sheet

At June 30, 2016, cash and cash equivalents were $335.5 million, short-term investments were $26.6 million, and restricted cash was $1,823.0 million.
Total cash and stated cash availability was $2,492.6 million, including $97.5 million available under international uncommitted lines of credit and $210.0 million available under the revolving credit facility. Restricted cash was earmarked primarily for the Wincor Nixdorf acquisition, debt repayment, interest and transaction costs.
Long-term debt increased to $2,274.0 million from $606.2 million at December 31, 2015. Total debt, including notes payable, was approximately $2,313.0 million on a carrying-value basis.
Debt financing included $1.0 billion of U.S. dollar Term Loan B borrowings, €350.0 million of euro-denominated Term Loan B borrowings, and $400.0 million of 8.5% senior notes due 2024. The Term Loan B tranches bear variable interest at applicable LIBOR or EURIBOR margins.
The company stated that it was in compliance with its financial and other debt covenants at June 30, 2016. Management expected available capital resources to support planned needs for at least the next 12 months.
Approximately $298.4 million, or 82.4% of unrestricted cash and short-term investments, was held in international tax jurisdictions. Repatriation could result in additional taxes.

Material changes versus the prior comparable period

Revenue fell due principally to lower product sales, reduced upgrade-project activity, weaker demand in China and India, Latin American volume declines, and unfavorable foreign exchange. Services revenue was comparatively resilient.
Operating profit declined 57.1% in the second quarter and 78.1% for the six-month period. Product gross profit declined 34.7% and 35.2%, respectively, while service gross profit was broadly stable.
Interest expense rose to $24.3 million in the second quarter and $35.8 million for the six-month period, compared with $7.6 million and $15.6 million, respectively, primarily because of acquisition financing.
Operating cash flow deteriorated because receivables, inventory and accounts payable used $167.4 million during the first six months, and other assets and liabilities used an additional $60.7 million.
Debt increased substantially to fund the planned Wincor Nixdorf transaction. Restricted cash increased from zero at year-end 2015 to $1,823.0 million.
The North American electronic security divestiture removed that business from continuing operations and generated $365.1 million of investing cash inflows, including proceeds from the sale.
Restructuring charges decreased to $5.4 million for the first six months from $10.2 million in the prior-year period, while acquisition and divestiture-related costs increased to $25.5 million.

Guidance, outlook, commentary, risks and unusual items

Management expected the Wincor Nixdorf acquisition to close in summer 2016, subject to Polish antitrust approval. The $400.0 million senior notes were required to be redeemed at par plus accrued interest if the acquisition had not closed by November 21, 2016.
Management stated that minimal additional restructuring costs were expected through the end of 2016, although the estimate could change as the transformation plan was finalized.
The company announced an intention to reduce its dividend rate after the acquisition closed; no specific future dividend amount was provided in the filing.
The acquisition-related foreign currency forward contract had a fair value liability of $22.7 million at June 30, 2016 and $30.2 million as of July 25, 2016. Foreign exchange movements could materially affect earnings.
Material contingencies included potential indirect-tax exposure of up to approximately $209.1 million, including approximately $179.1 million related to Brazil and $24.0 million related to Thailand. The company had accrued $9.3 million for the Brazil matter and no amount for the Thailand matter.
Guarantees and standby letters of credit had maximum future payment obligations of $101.1 million, with no associated liability recorded.
Key stated risks included completing and integrating Wincor Nixdorf, realizing expected synergies, elevated leverage and interest costs, currency volatility, weak global demand, competitive and pricing pressure, technology acceptance, cybersecurity, pension obligations, tax matters and the potential effects of Brexit.
The company reported effective disclosure controls and procedures as of June 30, 2016, with no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

Whether the Wincor Nixdorf acquisition closed, the final purchase accounting, consideration paid, integration costs and realized synergies.
The post-acquisition debt balance, leverage and interest coverage, including the treatment of acquisition financing and restricted cash.
Whether product demand and margins stabilized, particularly in China, India, North America and Latin America, and whether services growth offset product weakness.
The final working-capital adjustment for the Securitas divestiture and any remaining stranded costs from the divested business.
The outcome and required cash payments, if any, associated with the Brazil and Thailand indirect-tax contingencies.
The future dividend level and the company’s ability to restore positive operating cash flow while funding debt service and transformation initiatives.