Diebold, Incorporated 2010 Q3 Form 10-Q Summary
Business Context and Reporting Period
Diebold, Incorporated, a global provider of financial self-service, security, facility, election and lottery systems, reported unaudited results for the three and nine months ended September 30, 2010. The company operated through Diebold North America (DNA) and Diebold International (DI), with more than 16,000 employees in approximately 90 countries. The filing predates the Diebold Nixdorf name.
Financial Results and Position
| Metric | Q3 2010 | Q3 2009 | First nine months 2010 | First nine months 2009 |
|---|---|---|---|---|
| Revenue | $748.6 million | $645.2 million | $2.033 billion | $1.993 billion |
| Gross profit | $193.9 million | $152.2 million | $530.0 million | $473.4 million |
| Gross margin | 25.9% | 23.6% | 26.1% | 23.8% |
| Operating profit | $52.4 million | $31.2 million | $139.8 million | $122.3 million |
| Operating margin | 7.0% | 4.8% | 6.9% | 6.1% |
| Income from continuing operations | $45.4 million | $25.2 million | $101.7 million | $69.3 million |
| Net income attributable to Diebold | $46.1 million | $(7.2) million | $99.8 million | $24.9 million |
| Diluted EPS from continuing operations | $0.66 | $0.37 | $1.49 | $0.98 |
- Q3 revenue increased 16.0%; nine-month revenue increased 2.0%.
- Q3 product revenue increased 33.1% and service revenue increased 3.0%. Nine-month product revenue increased 2.8% and service revenue increased 1.3%.
- Q3 revenue growth was led by Brazil election systems, Brazil’s core business, North America and EMEA. Brazilian election systems revenue was $77.0 million in Q3 and $123.2 million year to date, compared with none in the prior-year periods.
- Nine-month DNA revenue declined 7.2% to $968.5 million, while DI revenue increased 12.0% to $1.064 billion.
- Cash and cash equivalents were $239.8 million at September 30, 2010, compared with $328.4 million at December 31, 2009. Short-term investments were $195.5 million, resulting in cash and short-term investments of approximately $435.3 million.
- Net cash provided by operating activities was $51.1 million, down from $121.0 million in the prior-year period. Capital expenditures were $38.0 million, dividends paid were $54.0 million and share repurchases were $23.4 million.
- Total debt was $608.4 million, consisting primarily of $293.1 million under the credit facility and $300.0 million of senior notes. The company reported $209.2 million of availability under its committed credit facility and compliance with debt covenants.
- Total assets were $2.590 billion and total equity was $1.134 billion at September 30, 2010.
Material Changes Versus the Prior Comparable Period
- Profitability improved substantially because of higher revenue, favorable product mix, improved service productivity and better foreign-exchange results.
- Q3 gross margin improved 230 basis points, while nine-month gross margin improved 230 basis points. Service gross margin increased to 27.1% in Q3 and 26.8% for the first nine months.
- Operating expenses increased 16.9% in Q3 and 11.1% year to date, reflecting higher selling expenses, healthcare and pension costs, legal and consulting costs, research and development investment, and impairment charges.
- Q3 included a $3.0 million impairment of a cost-method investment. The first nine months also included a $4.1 million impairment of customer-contract intangible assets related to TFE Technology Holdings.
- Q3 and year-to-date results included out-of-period revenue deferrals of $18.7 million and $19.8 million, respectively, reducing operating profit by $5.3 million and $5.8 million. The adjustment related to multiple-deliverable contracts in China and was recorded as immaterial by management.
- Restructuring charges declined to $0.5 million in Q3 and $2.8 million year to date, versus $1.8 million and $10.2 million, respectively, in the prior-year periods.
- Results benefited from the absence of the $31.4 million after-tax loss on the 2009 sale of the U.S. election systems business and from the absence of the prior-year $25.0 million SEC settlement accrual. The SEC settlement was paid in June 2010.
Outlook, Commentary, Risks and Unusual Items
Management described signs of stabilization and growth across major geographies, double-digit global order growth and improving demand, particularly in emerging markets, services, deposit automation and security. Management expects services, which represented more than half of revenue, to continue growing and stated that the company was on track to meet its 2010 cost-savings target under the SB 200 initiative. The filing does not provide a specific quantitative revenue or earnings guidance range.
- Management expected capital resources to fund working capital, research and development, facilities, pension contributions, dividends and share repurchases for at least the next 12 months.
- Brazilian election revenue is cyclical and occurs in alternating election years, making Q3 and year-to-date comparisons unusually favorable.
- The company continued to report material weaknesses in internal control over financial reporting involving revenue recognition for multiple-deliverable arrangements and income-tax accounting. Management expected remediation by the end of 2010, but disclosure controls were considered ineffective as of September 30, 2010.
- The company was conducting a global Foreign Corrupt Practices Act review and had self-reported potential transactions and payments by its Russian subsidiary to the SEC and Department of Justice. The SEC inquiry had become a formal, non-public investigation; outcomes and financial effects were not determinable.
- Pending matters included securities class-action, shareholder derivative and wage-and-hour litigation, as well as remaining claims involving the former U.S. election systems business. Management could not determine the potential impact of several proceedings.
- Guarantees and standby letters of credit had maximum future payment obligations of $70.0 million, with no associated liability recorded. The company also reported an $8.0 million maximum exposure under certain indemnifications related to the election systems sale.
- Key operating risks include foreign-exchange volatility, Venezuelan currency devaluation, economic weakness affecting financial-institution customers, competition and pricing pressure, technology acceptance, pension and healthcare costs, cybersecurity, litigation, FCPA matters and the ability to complete control remediation.
Important Facts for Investors to Verify
- Whether the revenue-recognition and income-tax material weaknesses were fully remediated after year-end 2010 and whether additional out-of-period adjustments were required.
- The ultimate scope, duration and financial consequences of the SEC and DOJ FCPA investigations and related litigation.
- The sustainability of earnings growth after normalizing for Brazilian election-system revenue, the prior-year SEC settlement and discontinued-operation effects.
- Operating cash-flow conversion, particularly the impact of receivables, inventories, deferred revenue and international cash restrictions.
- Debt maturities, variable-rate exposure, covenant headroom and the company’s ability to fund dividends, repurchases and strategic investments.
- Progress in DNA revenue recovery, service-margin expansion, cost savings and the company’s stated shift toward recurring services revenue.