Diebold, Incorporated Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2012; filed November 9, 2012. The filing identifies the registrant as Diebold, Incorporated. Financial statements are unaudited and amounts are in thousands except per-share data.
Business Context
Diebold provides financial self-service, security, software-led services, voting and lottery systems globally through Diebold North America (DNA) and Diebold International (DI). Management is pursuing a transition toward software-led services, integrated outsourcing and security solutions. The company had approximately 17,000 employees in nearly 90 countries.
Key Financial Metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net sales | $709,919 | $709,322 | $2,151,598 | $1,985,861 |
| Gross profit | $173,210 | $194,386 | $552,019 | $513,280 |
| Gross margin | 24.4% | 27.4% | 25.7% | 25.8% |
| Operating profit | $22,658 | $54,412 | $117,195 | $88,383 |
| Operating margin | 3.2% | 7.7% | 5.4% | 4.5% |
| Net income attributable to Diebold | $17,434 | $41,755 | $89,099 | $65,060 |
| Diluted EPS | $0.27 | $0.65 | $1.39 | $1.00 |
Q3 revenue was essentially flat year over year, while nine-month revenue increased 8.3%. Services represented $1,196,079 of nine-month sales and products represented $955,519. Nine-month service gross margin was 26.3%; product gross margin was 24.8%.
At September 30, 2012, cash and cash equivalents were $302,550, short-term investments were $269,614 and total current assets were $1,788,070. Total debt was $722,863, consisting of $75,000 of notes payable and $647,863 of long-term debt. Available borrowing capacity was $31,535 under international short-term lines and $167,000 under the revolving credit facility. The company was in compliance with its debt covenants.
For the first nine months, operating cash flow was negative $28,756, compared with negative $54,664 in 2011. Investing cash flow was negative $58,450, including $23,625 for acquisitions and $35,856 of capital expenditures. Financing cash flow was positive $52,948, including $54,573 of dividends paid and net debt borrowings. Cash decreased $31,370 to $302,550.
Material Changes Versus Prior Comparable Period
- Q3 revenue increased only $597, or 0.1%, as DNA growth of 8.6% was largely offset by an 8.9% decline in DI.
- Nine-month revenue increased 8.3%, led by DNA growth of 18.5%; DI revenue declined 2.1%, principally because of unfavorable currency effects and lower election and lottery sales.
- Q3 gross profit declined 10.9% and gross margin fell three percentage points because of geographic, customer and product mix, lower U.S. service volume, higher employee and scrap costs, fewer fleet rebates and restructuring effects.
- Q3 operating profit declined 58.4%, primarily because of lower margins, higher research and development spending and a $7,930 impairment of the Shanghai Diebold King Safe investment.
- Nine-month operating profit increased 32.6%, despite a slightly lower gross margin, due to higher revenue and lower selling and administrative expenses, including lower non-routine and restructuring costs.
- Net income attributable to Diebold increased 36.9% for the nine months, but declined 58.3% in Q3. The nine-month effective tax rate increased to 27.9% from 25.8%; the Q3 rate increased to 30.2% from 20.8%.
- In August 2012, the company acquired Brazilian banking and payment security provider GAS Tecnologia for approximately $39,000, including approximately $15,000 of deferred holdback payments. Estimated acquired intangible assets were $16,000 and goodwill was $26,000.
Outlook, Commentary, Risks and Unusual Items
Management reported strong North American performance in deposit automation, integrated services and security, and stated that it had increased confidence in generating top-line growth. No specific numerical revenue or earnings guidance is provided in the filing. Management expects capital resources to fund working capital, research and development, facilities, pension contributions, dividends and potential share repurchases for at least the next 12 months.
- Restructuring charges were $4,902 for the first nine months. Management expected additional 2012 costs of approximately $9,700 and up to $10,000 in future periods for the global realignment and global shared services plans, subject to change.
- Impairment charges totaled $14,631 for the first nine months, including $6,701 related to the ERP implementation and $7,930 related to the Shanghai affiliate investment.
- A Brazilian subsidiary received an approximately $133,000 federal tax assessment, including penalties and interest, related to alleged improper importation and indirect-tax incentives. No accrual was recorded; management believes it has a valid position, but a material loss is reasonably possible and the amount of any loss cannot currently be estimated.
- The SEC and Department of Justice continued investigating potential Foreign Corrupt Practices Act violations identified in Russia and Asia Pacific. The company had recorded an estimated loss that was not material, but stated that a material change in estimates remains reasonably possible.
- Management disclosed a material weakness in internal control over financial reporting involving Brazilian manufacturing and supply-chain controls, indirect-tax incentives, subsidiary roles and responsibilities, and communication with regional and corporate management. Disclosure controls and procedures were therefore concluded to be ineffective as of September 30, 2012.
- Guarantees and standby letters of credit had maximum future payment obligations of $71,302, with no associated liability recorded. The warranty liability was $68,910 at September 30, 2012.
- Key operating risks include foreign-exchange volatility, pricing pressure, global economic conditions, customer capital spending, technology acceptance, cybersecurity, pension funding, litigation and tax matters, FCPA investigations and execution of restructuring and cost-reduction initiatives.
Most Important Facts for Investors to Verify
- Monitor remediation of the Brazilian internal-control material weakness and whether subsequent filings report effective controls.
- Assess the potential financial impact and status of the $133,000 Brazilian tax assessment, including exposure for other open tax years.
- Track developments and ultimate settlement costs from the SEC and DOJ FCPA investigations and the securities class action.
- Evaluate whether the reported North American growth and software-led services strategy offset DI weakness, currency pressure and declining Q3 margins.
- Review liquidity around the $75,000 senior-notes maturity in 2013, variable-rate debt exposure and available revolver capacity.
- Verify whether restructuring costs, ERP-related impairment and the Shanghai affiliate impairment recur or require further charges.
- Reconcile negative operating cash flow with reported earnings and monitor working-capital requirements, inventory and receivables.