Diebold Nixdorf, Incorporated — FY2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016; filed February 24, 2017. The filing includes quarterly information, but it is an annual report rather than a standalone fourth-quarter filing. The company changed its name from Diebold, Incorporated following the August 15, 2016 acquisition of Diebold Nixdorf AG, formerly Wincor Nixdorf AG.
Business Context
Diebold Nixdorf provides connected-commerce services, software, ATMs, retail technology, security solutions, and related field services in more than 130 countries. Approximately 25,000 employees serve major financial institutions and global retailers. Reportable segments were North America, Asia Pacific, Europe, Middle East and Africa, and Latin America; management expected to transition reporting toward Services, Systems, and Software beginning in 2017.
- The Diebold Nixdorf AG acquisition substantially expanded the company’s European and retail operations and added approximately $1,054.8 million of revenue from August 15 through December 31, 2016.
- Management identified approximately $160 million of annual cost synergies over three years, with significant integration and restructuring expenditures required.
- Product backlog increased to $1,060.0 million at December 31, 2016, from $641.1 million, although more than 50% of revenue is service-based and not included in backlog.
Financial Performance and Position
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $3,316.3 million | $2,419.3 million | +37.1% |
| Services revenue | $1,907.9 million | $1,394.2 million | +36.8% |
| Products revenue | $1,408.4 million | $1,025.1 million | +37.4% |
| Gross profit | $721.7 million | $652.0 million | +10.7% |
| Gross margin | 21.8% | 26.9% | Down 510 basis points |
| Operating profit (loss) | $(159.8) million | $58.6 million | Declined $218.4 million |
| Operating margin | (4.8%) | 2.4% | Down 720 basis points |
| Continuing operations, net of tax | $(170.7) million | $59.5 million | Declined $230.2 million |
| Net income (loss) attributable to Diebold Nixdorf | $(33.0) million | $73.7 million | Turned to loss |
| Basic EPS | $(0.48) | $1.13 | Declined |
Revenue growth was principally acquisition-driven. Financial self-service revenue rose 19.8% to $2,526.5 million, retail revenue contributed $438.1 million from the acquisition, Brazil other revenue increased to $78.3 million, and security revenue declined 6.6% to $273.4 million. International revenue represented 69.2% of consolidated sales, compared with 58.1% in 2015.
Profitability was adversely affected by acquisition-related purchase accounting, including $62.7 million of inventory valuation adjustments, $16.2 million related to deferred revenue, and $49.7 million of acquired-intangible amortization. Service gross margin fell to 28.0% from 33.1%, and product gross margin fell to 13.3% from 18.6%.
- Net non-routine expense was $249.3 million, including $118.9 million of acquisition, divestiture, and integration costs.
- Restructuring charges totaled $59.4 million, including $42.8 million related to the acquisition integration plan.
- Selling and administrative expense increased 55.9% to $761.2 million; research, development, and engineering expense increased 26.8% to $110.2 million.
- Interest expense increased to $101.4 million from $32.5 million due to acquisition financing.
- A $145.0 million after-tax gain from the sale of the North American electronic security business was reported in discontinued operations, resulting in a smaller consolidated net loss than the continuing-operations loss.
Cash Flow, Debt and Liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Cash flow from continuing operations | $39.0 million | $31.6 million |
| Total operating cash flow, including discontinued operations | $28.4 million | $36.7 million |
| Continuing investing cash flow | $(923.3) million | $(62.4) million |
| Continuing financing cash flow | $881.6 million | $42.2 million |
| Cash and cash equivalents | $652.7 million | $313.6 million |
| Total cash availability | $1,435.4 million | $774.5 million |
- Acquisition payments, net of cash acquired, were $884.6 million. Capital expenditures were $39.5 million; management expected approximately $100 million of 2017 capital expenditures.
- Debt obligations included $106.9 million of current notes payable and $1,691.4 million of long-term debt, net of deferred financing fees, versus $606.2 million of long-term debt at year-end 2015.
- Acquisition financing included $1,000.0 million of U.S.-dollar Term Loan B capacity, €350.0 million of euro-denominated Term Loan B capacity, and $400.0 million of 8.5% senior notes due 2024.
- Debt agreements required a maximum total net debt-to-adjusted EBITDA ratio of 4.50 at December 31, 2016 and a minimum adjusted EBITDA-to-net-interest coverage ratio of 3.00. The company reported compliance with its covenants.
- Management expected available capital resources to fund operations, planned investments, pension contributions, dividends, and other requirements for at least the following 12 months. Approximately $576.1 million, or 80.4% of cash and short-term investments, was held in international tax jurisdictions.
Material Changes Versus 2015
- The acquisition transformed the scale and geographic mix of the business, increasing total assets to $5,270.3 million from $2,242.4 million and goodwill to $998.3 million from $161.5 million.
- Long-term debt increased by approximately $1,085.2 million, while interest expense more than tripled.
- Revenue increased substantially, but operating and net profitability deteriorated because of acquisition accounting, integration costs, restructuring, higher amortization, and financing costs.
- Gross margin declined materially despite higher gross profit, reflecting the acquired business’s lower-margin outsourcing model and purchase-accounting charges.
- Annualized dividends declined to $0.96 per share from $1.15; dividends paid declined to $64.6 million from $75.6 million.
- The North American electronic security divestiture closed February 1, 2016, generating $350.0 million of cash consideration and a $239.5 million pretax gain.
Outlook, Commentary, Risks and Unusual Items
- Management’s strategy emphasized services, software, managed services, branch automation, retail transformation, cloud technologies, analytics, and connected devices.
- The company expected approximately $160 million of annual acquisition synergies by 2019 but anticipated approximately $130 million of additional integration restructuring costs through the end of the integration plan.
- Management expected approximately $26.7 million of pension contributions and $1.2 million of other post-retirement benefit payments in 2017.
- Key risks include high leverage, restrictive debt covenants, refinancing and interest-rate exposure, foreign currency volatility, acquisition integration, customer loss, cybersecurity, competition, economic weakness in banking and retail markets, and impairment of goodwill or intangible assets.
- The company estimated aggregate reasonably possible exposure for material indirect tax matters of up to approximately $172.9 million, including $125.9 million related to Brazil and $24.0 million related to Thailand. The Brazil matter had a $7.3 million accrual at year-end.
- Diebold Nixdorf AG minority shareholders retained put and recurring-compensation rights under the Domination and Profit and Loss Transfer Agreement. The ultimate timing and amount of payments remained uncertain.
- The U.K. Competition and Markets Authority review remained outstanding at year-end, requiring separate operation of the U.K. businesses until clearance and potentially affecting integration or requiring remedies.
- The company’s FCPA monitorship and related deferred prosecution obligations expired October 29, 2016. The filing states that the corporate monitor certified the compliance program as reasonably designed and implemented.
- No goodwill impairment was recorded in 2016, but the Asia Pacific and Latin America reporting units had relatively limited excess fair value of approximately 21.5% and 18.3%, respectively.
- Management and KPMG concluded that internal control over financial reporting was effective; however, the acquired Diebold Nixdorf AG operations were excluded from the 2016 assessment under SEC guidance.
Investor Verification Items
- Verify the final purchase-price allocation, goodwill allocation, acquired-intangible amortization, and any subsequent measurement-period adjustments.
- Track integration costs, restructuring cash payments, and whether the approximately $160 million synergy target is achieved without further margin erosion.
- Monitor leverage, adjusted EBITDA covenant compliance, interest expense, debt maturities, and the company’s ability to convert operating cash flow into debt reduction.
- Assess recurring operating performance excluding the $145.0 million after-tax divestiture gain and other acquisition-related adjustments.
- Review the outcome and financial impact of the Brazil and Thailand tax contingencies, Diebold Nixdorf AG minority-shareholder claims, and the U.K. regulatory review.
- Evaluate goodwill and intangible-asset impairment sensitivity, especially for the Asia Pacific and Latin America reporting units.
- Confirm the post-acquisition internal-control assessment once Diebold Nixdorf AG operations are included in the company’s control evaluation.