Diebold, Incorporated — FY2012 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2012, and was filed February 15, 2013. The registrant is identified in the filing as Diebold, Incorporated, not Diebold Nixdorf. The company provides self-service, ATM, software-led services, electronic and physical security, integrated outsourcing, and Brazilian election and lottery solutions. It reports two geographic segments: Diebold North America (DNA) and Diebold International (DI). Services represented 54.4% of revenue, and international sales represented 48.7% of consolidated revenue.
Key financial metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $2,991.7 million | $2,835.8 million | +5.5% |
| Gross profit | $736.2 million | $735.9 million | Flat |
| Gross margin | 24.6% | 26.0% | -1.4 percentage points |
| Operating profit | $124.7 million | $155.6 million | -19.8% |
| Operating margin | 4.2% | 5.5% | -1.3 percentage points |
| Income from continuing operations attributable to Diebold | $81.6 million | $144.3 million | -43.5% |
| Diluted EPS from continuing operations | $1.28 | $2.23 | -$0.95 |
| Net income attributable to Diebold | $78.5 million | $144.8 million | -45.8% |
| Cash flow from operating activities | $135.5 million | $215.4 million | -$79.9 million |
| Capital expenditures | $49.7 million | $54.8 million | -$5.0 million |
At December 31, 2012, cash and cash equivalents were $368.8 million and short-term investments were $261.9 million. Current assets were $1.815 billion versus current liabilities of $838.9 million, producing net working capital of $976.0 million. Total debt, including current notes payable and long-term debt, was $651.7 million; estimated fair value was $664.7 million. The company had $200.0 million available under its committed credit facility and $77.4 million available under short-term uncommitted lines. Debt covenants were reported as satisfied.
Total equity was $845.3 million, compared with $858.3 million in 2011. Goodwill was $273.0 million. Net investment in finance lease receivables was $77.7 million. The company paid $72.8 million in dividends, or $1.14 per share, and announced a 2013 annualized dividend of $1.15 per share.
Material changes versus the prior comparable period
- Revenue increased 5.5%, led by DNA revenue growth of 13.2%; DI revenue declined 2.1%, primarily because of unfavorable foreign currency effects.
- Financial self-service revenue increased to $2.312 billion from $2.138 billion, while election and lottery systems revenue declined to $56.2 million from $92.8 million.
- Gross profit was essentially unchanged despite higher revenue. Service margin fell to 25.3% from 26.7%, and product margin fell to 23.8% from 25.1%, reflecting pricing pressure, compensation and benefit costs, warranty expense, customer and product mix, and regional competitive pressure.
- Operating expenses increased 5.4%. Research, development and engineering spending rose 10.0% to $85.9 million.
- Operating profit declined by $30.9 million. DNA operating profit fell 15.8% to $103.6 million, while DI operating profit fell 35.1% to $21.1 million.
- Operating cash flow declined 37.1%, primarily because of lower earnings and unfavorable working-capital changes, including trade receivables and deferred revenue.
- The company recorded $15.2 million of restructuring charges and $42.3 million of net non-routine expenses. The latter included $16.8 million related to the FCPA investigation and $21.9 million of early pension buyout costs.
- The company recorded $15.8 million of asset impairments, including impairments related to ERP software, the Shanghai affiliate, and cancellation of the planned corporate headquarters. No goodwill impairment was recorded in 2012.
Guidance, outlook, commentary, risks, and unusual items
Management described a cautious 2013 outlook because of a difficult year-over-year comparison, uncertainty among U.S. regional banks, and the potential impact of the timing and outcome of large pending Brazilian orders. Management highlighted growing Asia-Pacific and U.S. national-account backlogs, continued expansion of software-led and integrated services, and cost-reduction initiatives targeted at approximately $100 million of additional efficiencies by the end of 2013. The filing does not provide a specific 2013 revenue or earnings guidance range.
The company acquired GAS Tecnologia in Brazil for approximately $39.0 million, including approximately $12.0 million of future holdback payments, and also acquired Altus in Turkey. GAS contributed approximately $26.0 million of estimated goodwill and $16.0 million of estimated amortizable intangible assets; its 2012 financial contribution was not significant.
- FCPA investigation: The company voluntarily self-reported potential historical violations to the SEC and DOJ. Investigations remained ongoing, and the company accrued $20.0 million in total estimated losses at year-end. Additional losses could be material.
- Brazilian tax assessment: A subsidiary received an assessment of approximately $133.0 million relating to indirect taxes, penalties and interest. Management estimated a possible loss range of $0 to $236.0 million.
- Internal controls: Management and KPMG identified a material weakness involving Brazilian indirect-tax controls, manufacturing and supply-chain processes, roles and responsibilities, and communication with regional and corporate management. KPMG issued an adverse opinion on internal control effectiveness, although it issued an unqualified opinion on the consolidated financial statements.
- Litigation: A shareholder securities class action remained pending, with an unspecified damages claim and no estimable loss range.
- Pension obligations: Pension and other benefit liabilities totaled approximately $221.1 million. The pension plan was underfunded by approximately $200.6 million, and the company expected to contribute $3.3 million to pension plans in 2013.
- Liquidity and concentration: Approximately $614.0 million, or 97% of cash and cash equivalents and short-term investments, was held in international tax jurisdictions, and repatriation could create additional taxes.
- Subsequent executive changes: The CEO stepped down in January 2013. The company expected approximately $9.0 million of executive severance costs in the first quarter of 2013, including approximately $3.0 million of accelerated stock compensation.
Most important facts for investors to verify
- Reconcile the 2012 revenue growth with the substantial decline in operating margin, earnings, and operating cash flow.
- Review the expected resolution, accrual adequacy, and potential covenant or reputational effects of the FCPA investigation.
- Monitor the Brazilian indirect-tax assessment, including whether the potential $0 to $236.0 million loss range changes.
- Confirm remediation and auditor reassessment of the material weakness in internal control over financial reporting.
- Assess debt maturities, particularly the $75.0 million senior-note maturity in 2013 and approximately $476.7 million of debt maturities in 2016.
- Evaluate pension funding requirements, the $200.6 million pension underfunding, and the effect of interest rates and asset returns.
- Track execution of the $100.0 million cost-savings program, restructuring costs, and the impact of pricing pressure on service and product margins.
- Assess exposure to Brazil, foreign currency movements, election-system cyclicality, U.S. bank spending, and large pending orders.