Business Context and Reporting Period
Diebold, Incorporated filed this Form 10-K for the fiscal year ended December 31, 2010. The company provides automated teller machines, self-service technologies, software, security systems, election and lottery systems, and related maintenance, outsourcing and managed services. Services represented 52.9% of 2010 revenue. Reporting was reorganized into Diebold North America (DNA) and Diebold International (DI).
International revenue was $1,560.9 million, or 55.3% of consolidated sales. The company employed 16,124 associates globally.
Key Financial Metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net sales | $2,823.8 million | $2,718.3 million | +3.9% |
| Gross profit | $719.6 million | $650.0 million | +10.7% |
| Gross margin | 25.5% | 23.9% | +1.6 percentage points |
| Operating profit (loss) | $(1.8) million | $150.6 million | Down $152.4 million |
| Operating margin | (0.1)% | 5.5% | Down 5.6 percentage points |
| Income (loss) from continuing operations attributable to Diebold | $(20.5) million | $73.1 million | Down $93.6 million |
| Net income (loss) attributable to Diebold | $(20.3) million | $26.0 million | Down $46.3 million |
| Diluted EPS | $(0.31) | $0.39 | Down $0.70 |
| Cash flow from operations | $273.4 million | $296.9 million | Down $23.5 million |
Product revenue increased 7.4% to $1,330.4 million, while service revenue increased 0.9% to $1,493.4 million. Product gross margin was 24.5%, and service gross margin was 26.3%. Research, development and engineering expense was $74.2 million, or 2.6% of sales.
Fourth-quarter 2010 sales were $791.0 million versus $724.9 million in the prior-year quarter. Fourth-quarter income from continuing operations attributable to Diebold was a loss of $118.7 million, or $(1.83) per diluted share, primarily reflecting the EMEA goodwill impairment.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $328.7 million, and short-term investments were $273.1 million at December 31, 2010.
- Current assets were $1,714.0 million versus current liabilities of $809.8 million, producing net working capital of approximately $904.3 million.
- Total debt was $565.4 million, consisting primarily of $235.0 million drawn under the credit facility, $300.0 million of senior notes, $11.9 million of industrial development revenue bonds and $15.0 million of current notes payable.
- The company reported $265.4 million available under its committed credit facility and $87.5 million available under international short-term uncommitted lines.
- Debt agreements contain financial covenants; the company stated it was in compliance at year-end.
- Contractual obligations totaled approximately $796.0 million, including debt, interest, operating leases and purchase commitments.
- Finance lease receivables totaled $122.6 million. The company expected to contribute $23.9 million to pension plans and pay approximately $1.8 million for other postretirement benefits in 2011.
Material Changes Versus the Prior Comparable Period
- Revenue grew 3.9%, but operating results deteriorated sharply because of higher operating expenses and a $168.7 million non-cash goodwill impairment charge related to EMEA.
- Gross margin improved from 23.9% to 25.5%, driven by favorable product mix, Brazilian election and lottery systems revenue, service productivity improvements and lower service-parts scrap.
- DNA revenue declined 4.5% to $1,320.6 million, while DNA operating profit increased 5.6% to $81.4 million.
- DI revenue increased 12.5% to $1,503.2 million, aided by Brazilian election systems and Latin American growth, but DI recorded an $83.2 million operating loss after the EMEA impairment.
- Brazilian election systems revenue was $123.2 million in 2010 compared with none in 2009, reflecting the business’s cyclical nature.
- Operating cash flow declined despite higher gross profit, partly because of the $25.0 million SEC settlement payment and working-capital movements.
- Restructuring charges fell to $4.2 million from $25.2 million in 2009. Net non-routine expenses were $16.2 million, primarily employment litigation, FCPA-related legal and compliance costs.
- The company recorded an immaterial out-of-period adjustment that reduced revenue by $19.8 million and operating profit by $5.8 million for multiple-deliverable arrangements in China; the related revenue was deferred until installation.
- The annual dividend increased to $1.08 per share from $1.04. A first-quarter 2011 dividend of $0.28 per share was declared.
Outlook, Commentary, Risks and Unusual Items
Management described stabilization and growth in several markets, particularly Latin America and Asia Pacific, and substantial growth in North American financial self-service orders. Europe remained challenging. For 2011, management planned to balance cost reduction with investment in software, services, security solutions and emerging markets. The filing does not provide a clear numerical revenue or earnings guidance range.
- FCPA investigation: The company identified potentially problematic transactions in Russia and Asia Pacific, voluntarily self-reported to the SEC and DOJ, and is cooperating with a formal, non-public SEC investigation and DOJ document request. The company stated that identified matters had not materially affected the consolidated financial statements, but it could not predict the scope, duration or outcome.
- Goodwill impairment: EMEA goodwill was fully impaired in 2010. The company retained $269.4 million of goodwill and warned that further adverse operating performance or changes in valuation assumptions could result in additional impairment charges.
- Litigation and contingencies: A federal securities class action and shareholder derivative action remained unresolved, with financial impact indeterminable. The company also had ongoing labor litigation and a pending Butler County election-systems matter. Routine legal proceedings were not considered material by management.
- Controls: Management stated that previously reported material weaknesses involving revenue recognition and income taxes had been remediated as of December 31, 2010. KPMG issued an unqualified opinion on the financial statements and internal control over financial reporting.
- Other risks: Key exposures include international currency and political risk, customer concentration in financial and government sectors, raw-material and energy costs, competition, pension funding, cybersecurity, tax uncertainty and the ability to realize planned cost savings.
Investor Verification Priorities
- Verify the status, potential penalties, covenant implications and business consequences of the SEC and DOJ FCPA investigations.
- Assess whether EMEA operating performance has stabilized and whether additional goodwill or intangible-asset impairments are possible.
- Reconcile reported earnings with cash generation, including the effects of impairment charges, working capital, deferred revenue and the SEC settlement payment.
- Review debt maturities, covenant headroom, variable-rate exposure and available borrowing capacity.
- Monitor the unresolved securities, derivative and labor litigation, including potential indemnification exposure from the former U.S. election systems business.
- Evaluate whether the remediation of internal-control weaknesses remains effective, particularly for revenue recognition and income taxes.
- Confirm the sustainability of margin improvements, restructuring savings, service growth and recurring Brazilian election-related revenue.