Business Context and Reporting Period
This unaudited Form 10-Q covers Diebold, Incorporated and subsidiaries for the three and nine months ended September 30, 2013, with comparisons to the same periods in 2012. The filing identifies the registrant as Diebold, Incorporated, the predecessor company to Diebold Nixdorf. The company provides financial self-service, security, services, software, voting and lottery solutions in approximately 90 countries, with about 16,000 employees.
Reporting segments were Diebold North America (DNA) and Diebold International (DI). Services represented more than 50% of revenue.
Financial Performance and Position
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $705.4 million | $709.9 million | $2,046.0 million | $2,151.6 million |
| Gross profit | $172.8 million | $171.6 million | $460.2 million | $547.1 million |
| Gross margin | 24.5% | 24.2% | 22.5% | 25.4% |
| Operating profit (loss) | $(30.3) million | $21.0 million | $(67.8) million | $112.3 million |
| Operating margin | (4.3)% | 3.0% | (3.3)% | 5.2% |
| Net income (loss) attributable to Diebold | $(21.7) million | $16.2 million | $(140.2) million | $85.5 million |
| Diluted EPS | $(0.34) | $0.25 | $(2.20) | $1.34 |
- Revenue mix: Q3 services revenue was $405.2 million and product revenue was $300.2 million. Nine-month services revenue increased slightly to $1,200.7 million, while product revenue declined to $845.4 million.
- Segment trends: Q3 DNA revenue declined 9.7% to $356.9 million, while DI revenue increased 10.8% to $348.5 million. For nine months, DNA revenue declined 11.6% to $1,056.2 million and DI revenue increased 3.4% to $989.9 million.
- Cash flow: Nine-month operating cash flow was negative $59.0 million versus negative $28.8 million in 2012. Investing activities provided $13.7 million, while financing activities used $117.4 million. Capital expenditures were $25.6 million.
- Liquidity: Cash and cash equivalents were $205.9 million, short-term investments were $199.7 million, and total stated global liquidity was $667.8 million at September 30, 2013, including available credit facilities.
- Debt: Notes payable were $26.8 million and long-term debt was $561.6 million. Available borrowing capacity was $82.2 million under international short-term lines and $180.0 million under the five-year credit facility. The company was in compliance with its debt covenants.
- Balance sheet: Total assets were $2.30 billion and total equity was $677.7 million. Inventories increased to $480.4 million from $413.0 million at December 31, 2012.
Material Changes Versus the Prior Comparable Period
- Nine-month revenue decreased 4.9%, principally because of lower DNA financial self-service volume after expiration of the 2012 Americans with Disabilities Act compliance deadline. Election and lottery revenue declined 56.9% year over year.
- Q3 gross margin improved modestly because of stronger service margins, but nine-month gross margin fell 290 basis points due to lower product volume and mix, weaker DNA performance, and higher service costs in Latin America.
- Operating results included a $70.0 million pre-tax, non-cash goodwill impairment charge for the Brazil reporting unit, compared with $7.9 million of impairment expense in Q3 2012.
- Nine-month operating expenses increased 21.4% to $528.0 million. Restructuring charges increased to $21.4 million from $4.9 million, and non-routine expenses totaled $56.4 million versus $1.9 million.
- Other significant nine-month items included $28.0 million of estimated FCPA-related losses, a $17.2 million net charge related to a securities litigation settlement, and approximately $9.3 million of executive severance costs.
- The company recorded approximately $47.0 million of tax expense related to repatriation of previously undistributed earnings and established a $39.2 million valuation allowance on certain Brazilian deferred tax assets.
- Cash declined by $162.9 million during the first nine months, compared with a $31.4 million decline in the prior-year period, reflecting negative operating cash flow, dividends, debt repayments and other financing uses.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Management targeted $150.0 million of cumulative cost savings from its multi-year realignment plan, expected to be fully realized by the end of 2015. Approximately 50% of the savings was expected to benefit operating profit, with the remainder reinvested in research and development, information technology, back-office transformation and sales capabilities.
- Additional restructuring costs of $94.0 million to $121.0 million were expected through the end of 2014, including $48.0 million to $59.0 million of non-cash voluntary early-retirement charges in Q4 2013.
- A voluntary early-retirement program for approximately 1,400 eligible U.S. employees was expected to generate a pre-tax charge of approximately $74.0 million to $90.0 million in Q4 2013, depending on participation.
- Management expected liquidity to be sufficient for at least the next 12 months to fund working capital, research and development, capital investments, pensions, dividends and potential share repurchases.
- The company’s Brazil reporting unit faced deteriorating macroeconomic conditions, structural changes in auction-based purchasing and increased competition. Management reduced its Brazil earnings outlook, which triggered the goodwill impairment. Future impairment remains possible if forecasts or market conditions worsen.
- A Brazilian subsidiary faced an approximately $133.0 million indirect-tax assessment, including penalties and interest, relating to 2008 and 2009 imports and tax incentives. The matter was pending administrative review, and the company estimated aggregate risk for material indirect-tax matters of up to approximately $381.0 million beyond recorded accruals of approximately $26.0 million. The SEC requested related documents and records.
- The company reached terms with the SEC and DOJ for an FCPA settlement requiring combined payments of $48.0 million and an independent compliance monitor for at least 18 months. The payments were remitted in November 2013.
- Management reported that disclosure controls and procedures were not effective as of September 30, 2013 because of a material weakness involving Brazilian manufacturing, supply-chain and indirect-tax incentive controls. Remediation had begun and was expected to continue into 2014.
- The company froze certain U.S. pension and supplemental executive retirement benefits effective December 31, 2013. The action reduced pension liabilities and was expected to substantially reduce future pension expense; management stated that no pension contributions were planned for the following 12 months.
Most Important Facts for Investors to Verify
- Whether the Brazil business stabilizes and whether additional goodwill or other asset impairments are required.
- Progress toward the $150.0 million realignment savings target, related execution risks and the timing and size of remaining restructuring charges.
- The outcome of the Brazilian indirect-tax assessment and related SEC review, including exposure beyond recorded accruals.
- Completion and effectiveness of remediation for the material weakness in Brazilian indirect-tax and supply-chain controls.
- Actual cash generation, working-capital normalization and the company’s ability to sustain dividends while operating cash flow is negative.
- Debt maturities, refinancing needs, variable-rate exposure and continued compliance with financial covenants.
- Recovery in North American financial self-service demand and the sustainability of international growth, particularly in Asia Pacific, EMEA and Brazil.