Diebold, Incorporated Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2015. The filing identifies the registrant as Diebold, Incorporated, with approximately 16,000 employees and operations in more than 90 countries. The company provides automated teller machine, financial self-service, security, software and related services. Results are unaudited and are not necessarily indicative of the full year.
Financial performance and position
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Net sales | $733.4 million | $733.5 million | $1,388.9 million | $1,421.8 million |
| Gross profit | $187.5 million | $186.8 million | $362.8 million | $350.9 million |
| Gross margin | 25.6% | 25.5% | 26.1% | 24.7% |
| Operating profit | $30.7 million | $57.2 million | $34.3 million | $80.5 million |
| Operating margin | 4.2% | 7.8% | 2.5% | 5.7% |
| Net income | $23.9 million | $43.1 million | $18.3 million | $48.0 million |
| Net income attributable to Diebold | $22.2 million | $41.6 million | $19.4 million | $51.4 million |
| Diluted EPS | $0.34 | $0.64 | $0.30 | $0.79 |
- Service revenue was $410.1 million in the second quarter and $804.1 million year to date; product revenue was $323.3 million and $584.8 million, respectively.
- Service gross margin improved to 31.5% in the quarter and 31.1% year to date, while product gross margin was 18.0% and 19.2%, respectively.
- Six-month operating cash flow was negative $99.2 million, compared with negative $91.8 million in the prior year. Investing cash flow was negative $83.2 million, including the Phoenix acquisition, while financing cash flow was positive $122.6 million.
- Cash and cash equivalents were $244.4 million at June 30, 2015, down from $322.0 million at December 31, 2014. Short-term investments were $119.5 million.
- Total cash and stated availability, including cash, short-term investments and undrawn credit facilities, was $803.9 million, compared with $853.9 million at year-end.
- Total debt was $669.9 million, consisting of $35.1 million of notes payable and $634.8 million of long-term debt, compared with total debt of $505.4 million at December 31, 2014.
- Total assets were $2.396 billion and total equity was $490.2 million at June 30, 2015.
Material changes versus the prior comparable period
- Second-quarter revenue was essentially flat year over year; six-month revenue declined 2.3%, primarily reflecting lower Brazil other revenue and unfavorable foreign exchange effects.
- Financial self-service revenue increased 4.6% in the quarter and 5.3% year to date; security revenue increased 6.9% and 6.1%, respectively. Brazil other revenue declined 95.5% in the quarter and 89.7% year to date.
- North America revenue increased 13.1% in the quarter and 10.2% year to date, supported by Canadian deposit-automation demand and electronic security. EMEA revenue declined 10.4% and 4.7%, while Latin America declined 15.5% and 25.7%.
- Operating profit and net income fell sharply because of higher selling and administrative expenses, restructuring costs, impairment charges, non-routine expenses, currency effects and the absence of the prior-year $13.7 million gain on the sale of Eras.
- The company acquired Phoenix Interactive Design for approximately $72.9 million, including $12.6 million of deferred cash payments. The acquisition added approximately $41.2 million of preliminary goodwill and $29.3 million of intangible assets.
- The company completed the sale of its Venezuela joint venture. Total impairment related to the transaction was $9.3 million for the six months, including a $1.0 million second-quarter reversal. A $7.5 million Venezuela currency devaluation loss was recorded in the first quarter.
- Accumulated other comprehensive loss increased to $247.2 million from $190.5 million at year-end, primarily because of foreign currency translation losses.
Guidance, outlook, commentary and unusual items
- Management expects to enter the “Walk” phase of its Diebold 2.0 transformation during the second half of 2015, with greater emphasis on revenue growth and increasing the mix of services and software.
- The multi-year transformation plan targets $200.0 million of savings to be fully realized by the end of 2017, with approximately 50% expected to be reinvested in growth initiatives.
- Additional restructuring costs of approximately $6.4 million to $8.5 million were expected through the end of 2015. Cumulative transformation-related restructuring costs were $94.4 million at June 30, 2015.
- Management expected available capital resources to fund working capital, research and development, capital investment, pension contributions, dividends and potential share repurchases for at least the next 12 months.
- The company entered into a $230.0 million term loan in June 2015, with a balloon maturity in August 2019. The revolving credit facility had $343.0 million available, and management intended to refinance the $175.0 million of senior notes maturing in March 2016 through the revolver.
- The company was in compliance with its debt covenants at June 30, 2015. However, variable-rate debt creates exposure to LIBOR and other interest-rate changes.
- Management identified competitive pressure, foreign currency and inflation, customer capital-spending conditions, cybersecurity, technology acceptance, pension funding, tax matters and execution of the transformation plan as principal risks.
- Material indirect-tax contingencies included a Brazil matter and Thailand customs matters. Aggregate estimated risk for material indirect-tax matters was up to approximately $201.1 million, including approximately $169.1 million related to Brazil and $26.0 million related to Thailand; the filing states that the company had a $10.7 million accrual for the Brazil matter and no accrual for the Thailand matter.
- Guarantees and standby letters of credit had maximum future payment obligations of $116.7 million, with no associated liability recorded. Purchase commitments due within one year totaled approximately $12.5 million.
- After quarter-end, effective July 24, 2015, Chief Operating Officer George S. Mayes, Jr. stepped down. His severance terms were still being negotiated. The company also entered into or amended several executive change-in-control and severance agreements.
Most important facts for investors to verify
- Whether the Phoenix acquisition generates the expected software, managed-services and branch-automation growth and whether purchase accounting remains preliminary.
- Progress toward the $200.0 million transformation savings target and the amount and timing of additional restructuring costs.
- Ability to improve operating margins and free cash flow, given negative six-month operating cash flow and increased debt.
- Refinancing capacity and covenant compliance surrounding the $175.0 million senior-note maturity in March 2016.
- Potential exposure from the Brazil indirect-tax assessment and Thailand customs dispute, including outcomes that could exceed recorded accruals.
- Effects of currency weakness, especially in Brazil, Latin America and Europe, and the continuing indirect operations in Venezuela.
- Executive transition and severance costs following the COO departure, as well as the impact of newly amended change-in-control arrangements.