Business Context and Reporting Period
Diebold, Incorporated’s Form 10-K covers the fiscal year ended December 31, 2015. The company provides automated teller machines, financial self-service hardware and software, managed and maintenance services, branch automation, and security solutions across more than 90 countries. Approximately 16,000 associates were employed globally at year-end, including approximately 1,000 associated with the electronic security business subsequently divested.
Management continued the multi-year Diebold 2.0 transformation, targeting $200.0 million of cumulative savings by the end of 2017. The company reported $150.0 million of gross savings through 2015 and entered the “Walk” phase, emphasizing services, software, multi-vendor contracts, and portfolio rationalization.
Key Financial Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $2,419.3 million | $2,734.8 million | Down 11.5% |
| Services revenue | $1,394.2 million | $1,432.8 million | Down 2.7% |
| Products revenue | $1,025.1 million | $1,302.0 million | Down 21.3% |
| Gross profit | $652.0 million | $726.2 million | Down 10.2% |
| Gross margin | 26.9% | 26.6% | Up 30 basis points |
| Operating profit | $58.6 million | $165.0 million | Down 64.5% |
| Operating margin | 2.4% | 6.0% | Down 360 basis points |
| Income from continuing operations attributable to Diebold | $57.8 million | $104.7 million | Down 44.5% |
| Net income attributable to Diebold | $73.7 million | $114.4 million | Down 35.6% |
| Diluted earnings per share | $1.12 | $1.76 | Down 36.4% |
| Cash flow from continuing operations | $31.6 million | $189.1 million | Down $157.5 million |
| Capital expenditures | $52.3 million | $60.1 million | Down $7.8 million |
| Dividends paid | $75.6 million | $74.9 million | Annualized rate of $1.15 per share |
Services represented 57.6% of consolidated revenue, compared with 52.4% in 2014. Service gross margin improved to 33.1% from 32.0%, while product gross margin declined to 18.6% from 20.6% because of lower volume and unfavorable product mix.
At December 31, 2015, cash and cash equivalents were $313.6 million, short-term investments were $39.9 million, and total global liquidity was $774.5 million, including available credit facilities. Total debt was $645.1 million, consisting of $32.0 million of current notes payable and $613.1 million of long-term debt. The company was in compliance with its debt covenants.
Total assets were $2,249.3 million and total equity was $435.5 million at year-end. The pension liability remained significant, with a funded status deficit of approximately $198.5 million. Management did not expect to make pension contributions in 2016, although future funding requirements may increase.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because of lower product sales in Brazil and China, unfavorable foreign currency effects, reduced Brazil “other” revenue, and weaker security sales.
- Foreign currency headwinds reduced 2015 financial self-service revenue by approximately $161.2 million, including significant effects from the Brazilian real and euro.
- Latin America revenue declined 31.8% to $492.1 million, and segment operating profit declined 45.6% to $37.4 million, reflecting Brazil’s economic and political conditions, currency depreciation, canceled government projects, and nonrecurring 2014 deliveries.
- Asia Pacific revenue declined 12.1%, primarily because of a 39.4% decline in product revenue in China as banks increased use of domestic ATM suppliers.
- North America revenue was broadly stable, supported by multi-vendor services, a Canadian deposit automation project, and the Phoenix acquisition, but segment operating margin fell to 22.9% from 24.4%.
- Operating profit was pressured by $21.2 million of restructuring charges, $36.4 million of net non-routine expense, $18.9 million of asset impairments, and the absence of the $13.7 million Eras divestiture gain recorded in 2014.
- Operating cash flow fell sharply because of lower earnings, increased receivables and inventory, lower customer prepayments, and higher tax-related cash usage.
- The company acquired Phoenix Interactive Design for approximately $72.9 million, including $12.6 million of deferred consideration, strengthening its multi-vendor ATM software platform.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected to continue the “Walk” phase of Diebold 2.0 in 2016, with emphasis on services, software, multi-vendor services, operational efficiency, and portfolio shaping. The filing does not provide clear consolidated 2016 revenue or earnings guidance.
- On February 1, 2016, the company completed the sale of its North America electronic security business to Securitas AB for approximately $350.0 million in cash. The company expected to receive the contingent $35.0 million payment and estimated a pre-tax gain of approximately $245.0 million, subject to final adjustments and taxes.
- In November 2015, Diebold agreed to pursue the acquisition of Wincor Nixdorf. The estimated purchase price was approximately $1,609.7 million based on assumptions disclosed in the filing. The company anticipated approximately $2,050.0 million of acquisition financing and projected pro forma combined indebtedness of approximately $2,300.0 million.
- Key Wincor Nixdorf transaction risks included regulatory approval, completion conditions, integration challenges, customer and employee attrition, transaction costs, possible termination fees of up to €50.0 million, and substantially higher leverage. The transaction could also reduce the post-closing dividend rate.
- Material tax contingencies included Brazil indirect tax matters and Thailand customs disputes. Aggregate reasonably possible exposure for material indirect tax matters was estimated at up to approximately $174.5 million, including approximately $138.0 million for Brazil and $24.0 million for Thailand. The company had accrued approximately $7.5 million for the Brazil matter and none for the Thailand matter.
- Other unusual items included a $9.3 million impairment related to the Venezuela divestiture, a $9.1 million impairment of redundant legacy software following the Phoenix acquisition, $7.5 million of Venezuelan foreign-exchange loss, and a $7.0 million gain on euro option contracts related to the proposed Wincor Nixdorf transaction.
- Goodwill totaled $161.5 million. No goodwill impairment was recorded in 2015, but the Latin America reporting unit had only approximately $7.2 million, or 1.3%, of excess fair value over carrying value, creating sensitivity to further deterioration in regional performance.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The assessment excluded Phoenix because it was acquired during 2015; the company also continued implementing enterprise resource planning systems.
Most Important Facts for Investors to Verify
- Whether revenue and cash flow stabilize as the company shifts from products toward services and software.
- The sustainability of improved service margins and the timing and quality of the remaining Diebold 2.0 cost savings.
- The final accounting, financing, leverage, integration costs, synergies, and dividend policy associated with the Wincor Nixdorf transaction.
- The final proceeds, tax impact, working-capital adjustment, and estimated gain from the electronic security divestiture.
- Potential cash exposure from Brazil and Thailand tax and customs matters, as well as any additional international tax assessments.
- Liquidity after debt maturities, including the $175.0 million of senior notes due in March 2016 and any acquisition-related borrowing.
- Performance of the Latin America and Asia Pacific reporting units, particularly the Latin America goodwill impairment cushion.
- Effects of currency movements, customer project cancellations, government-sector demand, cybersecurity risks, and pension funding requirements.