Business Context and Reporting Period
Diebold, Incorporated, a global provider of self-service delivery, security systems, software and services, filed this unaudited Form 10-Q for the three months ended March 31, 2013. The filing identifies the registrant as Diebold, Incorporated; it does not use the name Diebold Nixdorf. The company had approximately 16,000 employees in nearly 90 countries and reported through Diebold North America (DNA) and Diebold International (DI).
Financial Performance and Position
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $633.5 million | $698.5 million | Down 9.3% |
| Gross profit | $130.0 million | $193.2 million | Down 32.7% |
| Gross margin | 20.5% | 27.7% | Down 7.2 percentage points |
| Operating income (loss) | $(13.9) million | $54.6 million | Down $68.6 million |
| Operating margin | (2.2%) | 7.8% | Down 10.0 percentage points |
| Net income (loss) | $(13.9) million | $46.0 million | Down $59.8 million |
| Net income (loss) attributable to Diebold | $(13.4) million | $45.2 million | Down $58.6 million |
| Diluted EPS | $(0.21) | $0.71 | Down $0.92 |
| Operating cash flow | $(31.7) million | $(26.0) million | Use increased $5.7 million |
| Capital expenditures | $9.3 million | $12.3 million | Down $3.0 million |
Services revenue was $382.2 million, down 3.7%, while product revenue was $251.3 million, down 16.7%. Service gross margin declined to 22.3% from 28.1%; product gross margin declined to 17.8% from 27.1%.
At March 31, 2013, cash and cash equivalents were $340.1 million and short-term investments were $257.3 million. Total debt was $678.7 million, consisting of $54.6 million of notes payable and $624.0 million of long-term debt. Available borrowing capacity included $55.9 million under international short-term lines and $118.0 million under the credit facility, which had a $500.0 million borrowing limit and expired in June 2013. The company was in compliance with its debt covenants.
Total assets were $2.63 billion and total equity was $834.4 million. The company paid $18.4 million in dividends, or $0.2875 per share, during the quarter. Approximately $587.0 million, or 98.3% of cash and short-term investments, was held in international tax jurisdictions.
Material Changes Versus the Prior Comparable Period
- DNA revenue fell 17.3% to $330.9 million and DNA operating profit declined from $54.9 million to a $6.0 million loss. The primary driver was lower U.S. regional-bank product volume following the expiration of 2012 ADA and PCI compliance deadlines.
- DI revenue increased 1.4% to $302.7 million but generated a $7.9 million operating loss versus a $0.3 million loss in Q1 2012. Asia Pacific and EMEA growth was largely offset by weakness in Latin America and Brazil.
- Financial self-service revenue decreased 11.6%, while security revenue increased 1.8%. The 2012 acquisition of GAS Tecnologia contributed to security growth in Brazil.
- Lower volumes, unfavorable customer and product mix, weaker resource productivity and higher costs reduced both service and product margins.
- Selling and administrative expense increased 4.9% to $125.5 million, and research, development and engineering expense increased 11.9% to $21.0 million.
- Operating results included $9.5 million of restructuring charges versus $1.7 million in Q1 2012, $7.5 million of net non-routine expenses versus $0.9 million, and a $2.2 million gain on the sale of certain U.S. manufacturing operations.
- The company repaid $75.0 million of senior notes at maturity using its revolving credit facility, increasing credit-facility borrowings.
Guidance, Outlook, Risks and Unusual Items
Management did not provide a specific quarterly or full-year revenue or earnings forecast in the filing. It expects capital resources to be sufficient for at least the next 12 months to fund working capital, research and development, capital investments, pension contributions, dividends and potential share repurchases.
The company announced a multi-year realignment plan focused on globalizing service operations, centralizing research and development, and reducing general and administrative costs. Management targeted approximately $100 million to $150 million of cost-structure savings over several years and expected additional restructuring costs of $15 million to $30 million. SmartBusiness 300 initiatives were targeted to deliver an additional $100 million of efficiencies by the end of 2013.
- Management cited branch transformation, deposit automation, integrated services, software, security outsourcing and growth in emerging markets as key opportunities.
- Foreign exchange exposure was significant, including an unfavorable Brazilian real impact on international sales and a $1.6 million Venezuelan balance-sheet devaluation charge.
- A Brazilian subsidiary faced an indirect-tax assessment of approximately $133 million, with management estimating a possible loss range of $0 to $236 million. The matter could affect other open tax years.
- The SEC and DOJ continued investigating potential Foreign Corrupt Practices Act matters. The company had accrued $20 million for estimated pretax losses, but stated that the ultimate outcome could require a material change in the estimate.
- The company disclosed a putative securities class action for which a material outcome was reasonably possible, but the potential loss could not be estimated.
- Guarantees and standby letters of credit had maximum future payment obligations of $101.3 million, with no associated liability recorded.
- Management concluded that disclosure controls were not effective at March 31, 2013 because of a material weakness involving Brazilian manufacturing, supply-chain and indirect-tax controls. Remediation was planned through the third quarter of 2013.
- Pension expense increased to $8.1 million from $4.9 million, including a $1.2 million curtailment loss related to executive departures. The company expected to contribute approximately $30 million of treasury shares to its salaried pension plan during 2013.
Important Facts for Investors to Verify
- Confirm the identity and continuity of the registrant, since the filing is for Diebold, Incorporated rather than a company named Diebold Nixdorf.
- Review whether the June 2013 credit-facility expiration was refinanced or renewed and assess the effect on liquidity and debt maturities.
- Monitor execution of the realignment plan, projected $100 million to $150 million savings, and remaining restructuring costs.
- Track recovery in North American regional-bank demand after the 2012 ADA and PCI compliance cycle and the sustainability of Asia Pacific and security growth.
- Assess the potential cash and earnings impact of the Brazilian tax assessment and the SEC/DOJ FCPA investigations.
- Verify remediation of the Brazilian internal-control material weakness and whether subsequent filings report effective controls.
- Evaluate the sustainability of dividends and pension funding given negative operating cash flow and the company’s debt profile.