Diebold, Incorporated Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012. The filing identifies the registrant as Diebold, Incorporated, a global provider of financial self-service, security, election and lottery systems, and related services. Results are unaudited and are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $743.2 million | $662.4 million | $1.442 billion | $1.277 billion |
| Gross profit | $185.6 million | $169.5 million | $378.8 million | $318.9 million |
| Gross margin | 25.0% | 25.6% | 26.3% | 25.0% |
| Operating profit | $39.9 million | $25.1 million | $94.5 million | $34.0 million |
| Operating margin | 5.4% | 3.8% | 6.6% | 2.7% |
| Income from continuing operations attributable to Diebold | $26.5 million | $20.3 million | $71.7 million | $22.8 million |
| Diluted EPS from continuing operations | $0.41 | $0.31 | $1.12 | $0.34 |
- Q2 sales increased 12.2%; six-month sales increased 12.9%.
- Q2 operating profit increased 58.9%; six-month operating profit increased 178.3%.
- Services represented more than half of revenue. Product revenue grew particularly strongly, although Q2 product margin declined to 23.9% from 25.1% because of international pricing and product-mix pressure.
- Q2 service margin was unchanged at 25.9%; six-month service margin improved to 27.0% from 25.1%.
- DNA revenue increased 18.0% in Q2 and 24.0% for the six-month period, driven by U.S. financial self-service demand, especially deposit automation. DI revenue increased 6.1% in Q2 and 1.6% year to date.
- DI returned to profitability in Q2, with operating profit of $3.9 million versus $1.9 million in the prior-year quarter; six-month operating profit was $3.2 million versus a $5.4 million loss.
Cash flow, liquidity and capital structure
- Six-month operating cash flow was negative $34.0 million, improving from negative $100.0 million in 2011. Working-capital uses included increases in receivables and inventories.
- Investing cash flow was negative $21.6 million, including $20.7 million of capital expenditures and net investment purchases.
- Financing cash flow was positive $40.8 million, including $36.3 million of dividends, $430.3 million of borrowings and $366.8 million of debt repayments.
- Cash and cash equivalents were $320.5 million at June 30, 2012, compared with $333.9 million at December 31, 2011. Cash and short-term investments totaled approximately $591.4 million.
- Total debt was $691.8 million, comprising $61.7 million of notes payable and $630.0 million of long-term debt, compared with $627.9 million at year-end 2011. Available borrowing capacity included $185.0 million under the credit facility and $47.4 million under international short-term lines.
- Management stated that capital resources were expected to fund planned working capital, investment, pension contributions, dividends and potential share repurchases for at least the next 12 months. The company was in compliance with its debt covenants.
- Approximately $582.1 million, or 98.4% of cash and short-term investments, was held in international tax jurisdictions and could be subject to additional tax costs upon repatriation.
Material changes and unusual items
- The company recorded a $6.7 million impairment charge for capitalized software and software-related costs after changing the configuration and design of its global ERP implementation. The comparable 2011 impairment was $3.0 million.
- Six-month restructuring charges declined to $2.4 million from $16.3 million. Current restructuring primarily related to the global shared-services initiative and the EMEA reorganization.
- Expected additional restructuring costs included approximately $1.2 million during the remainder of 2012 and up to $8.3 million in future periods for global shared services, plus $2.6 million during the remainder of 2012 and $0.4 million in 2013 for the EMEA reorganization.
- Six-month non-routine expense was $1.3 million versus $10.5 million in 2011, primarily related to legal and compliance costs associated with the FCPA investigation.
- Comprehensive income attributable to Diebold was $41.3 million for the first six months, but foreign-currency translation and hedging losses reduced other comprehensive income by $30.6 million.
- The effective tax rate was 33.8% in Q2 versus 23.3% in the prior-year quarter, but 27.3% for the six months versus 32.7% in 2011. The filing attributes the changes to geographic earnings mix and a prior-year discrete state-tax benefit.
Outlook, risks and contingencies
- Management expressed increased confidence in continued growth based on strength in North American financial self-service, deposit automation, software-led services, security outsourcing and selected emerging markets. No quantified full-year revenue or earnings guidance is provided in the filing.
- Management targeted an additional $100.0 million of efficiencies from the SmartBusiness 300 initiatives by the end of 2013.
- The company voluntarily self-reported potential FCPA issues involving historical transactions in Russia and Asia Pacific to the SEC and DOJ. The investigations remained ongoing, discussions toward a possible resolution had begun, and any ultimate loss could be material; the recorded estimate was not material as of June 30, 2012.
- A securities class action remained pending, and management stated that any possible loss or range of loss could not be estimated. Routine lawsuits were not considered material.
- Guarantees and standby letters of credit had maximum future payment obligations of $76.3 million, with no associated liability recorded. The warranty liability was $66.9 million at June 30, 2012.
- Principal business risks include international currency exposure, pricing pressure, global economic conditions affecting financial institution capital spending, customer adoption of new technology, cybersecurity, pension funding, litigation, FCPA resolution, restructuring execution and the ability to realize cost savings.
Investor verification checklist
- Verify the sustainability of revenue growth, particularly U.S. deposit automation demand and the timing of equipment replacement cycles.
- Assess whether product-margin pressure in Asia Pacific and Latin America offsets improving North American and EMEA performance.
- Monitor operating cash conversion, receivables and inventory growth, and the effect of working capital on liquidity.
- Review debt maturities, including $75.0 million of senior notes due in 2013, available credit capacity and covenant compliance.
- Track additional ERP impairment, restructuring spending and projected SmartBusiness 300 savings.
- Follow the SEC and DOJ FCPA investigations and the unresolved securities litigation for potential material financial or governance consequences.
- Evaluate the tax implications and practical availability of cash held in international jurisdictions.