Diebold, Incorporated — Form 10-Q Summary
Reporting period: Three months ended March 31, 2012. The filing identifies the registrant as Diebold, Incorporated, not Diebold Nixdorf, Inc. Financial statements are unaudited and prepared under U.S. GAAP.
Business Context and Reporting Period
Diebold provides financial self-service, security, software and related services globally. Its two reporting segments are Diebold North America (DNA), serving the United States and Canada, and Diebold International (DI), serving other international markets and providing voting and lottery solutions in Brazil. The company had more than 16,000 employees in nearly 90 countries.
Management’s strategy emphasized becoming a more software-led services provider, expanding integrated services and outsourcing, and pursuing cost efficiencies through its SmartBusiness initiatives.
Key Financial Metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $698.5 million | $614.2 million | 13.7% increase |
| Gross profit | $193.2 million | $149.4 million | 29.3% increase |
| Gross margin | 27.7% | 24.3% | 340 basis-point improvement |
| Operating profit | $54.6 million | $8.9 million | 516.1% increase |
| Operating margin | 7.8% | 1.4% | 640 basis-point improvement |
| Income from continuing operations | $46.0 million | $4.1 million | Increase of $41.8 million |
| Net income attributable to Diebold | $45.2 million | $2.5 million | Increase of $42.7 million |
| Diluted EPS | $0.71 | $0.04 | Increase of $0.67 |
| Effective tax rate | 22.7% | 58.8% | Decrease of 36.1 percentage points |
Services revenue was $396.9 million and product revenue was $301.6 million. Services represented approximately 56.8% of total sales. DNA revenue increased 30.7% to $399.9 million, while DI revenue decreased 3.1% to $298.6 million. Financial self-service revenue increased 21.1%; security revenue decreased 5.9%; and election and lottery revenue decreased 72.3%.
The margin improvement reflected higher North American financial self-service volume, productivity gains in software-led and maintenance services, and substantially lower restructuring charges. Other income and expense also improved, including lower interest expense and a foreign-exchange gain compared with a loss in the prior-year quarter.
Cash Flow, Liquidity and Debt
| Metric | March 31, 2012 | December 31, 2011 |
|---|---|---|
| Cash and cash equivalents | $311.4 million | $333.9 million |
| Short-term investments | $300.1 million | $286.9 million |
| Total assets | $2.631 billion | $2.517 billion |
| Current liabilities | $867.3 million | $824.2 million |
| Long-term debt | $618.1 million | $606.2 million |
| Total debt, including notes payable | $657.5 million | $627.9 million |
- Operating cash flow was negative $26.0 million, improved from negative $90.2 million in Q1 2011.
- Investing cash flow was negative $19.8 million, compared with positive $2.2 million in the prior-year quarter. Capital expenditures were $12.3 million.
- Financing cash flow was positive $18.5 million, including $18.1 million of dividends, $263.7 million of debt borrowings and $234.3 million of debt repayments.
- Cash and cash equivalents declined by $22.5 million during the quarter to $311.4 million.
- The company had $197.0 million available under its $500.0 million committed credit facility and $71.4 million available under international short-term lines of credit.
- $75.0 million of senior notes is due in 2013 but remained classified as long-term debt because management expects to fund repayment through available credit capacity or other financing.
- The company was in compliance with its debt covenants at March 31, 2012.
- Approximately $601.5 million, or 98.4% of cash and short-term investments, was held in international tax jurisdictions and could be subject to additional tax upon repatriation.
Material Changes Versus the Prior Comparable Period
- Revenue growth was concentrated in North America, particularly higher financial self-service product volume and deposit-automation demand.
- DI revenue declined because of lower volume in Brazil and EMEA and unfavorable currency effects, partly offset by growth in Asia Pacific.
- Gross margin improved from 24.3% to 27.7%; service margin increased to 28.1% and product margin to 27.1%.
- Operating expenses decreased 1.4% to $138.6 million despite higher compensation and strategic consulting costs.
- Restructuring charges declined to $1.7 million from $11.8 million, while non-routine expenses declined to $0.9 million from $5.8 million, primarily reflecting lower FCPA-related legal and compliance costs.
- The tax rate benefited from the absence of the prior-year impact of EMEA losses for which no tax benefit was recognized, as well as lower foreign tax assessments and uncertain-tax-position interest.
- Weighted-average diluted shares declined to 63.3 million from 66.2 million, partly supporting the EPS increase.
Guidance, Outlook, Risks and Unusual Items
Management did not provide specific full-year revenue or earnings guidance in the filing. It reported increased confidence in continued growth based on the strong first quarter, North American demand, improving EMEA performance and expansion of software-led services.
- SmartBusiness 300 initiatives were targeted to produce an additional $100.0 million of efficiencies by the end of 2013.
- The global shared-services plan is expected to affect approximately 200 IT and financial-services-related jobs over two years. Additional restructuring costs were estimated at $1.5 million during 2012 and up to $9.5 million in future periods.
- Additional EMEA reorganization costs were estimated at $0.4 million to $1.1 million for the remainder of 2012.
- The SEC and Department of Justice continued investigations related to potential Foreign Corrupt Practices Act issues in Russia and Asia Pacific. The company could not predict the outcome, and future losses could be material, although the accrued estimate at March 31, 2012 was not material.
- The company disclosed securities and shareholder litigation. Management stated that the potential loss from a federal securities class action could not be estimated; a shareholder derivative settlement was subject to court approval and was not expected to be material.
- Key operating risks include currency volatility, Brazil and other international markets, customer capital-spending cycles, pricing and technology competition, financial-sector consolidation, cybersecurity, pension performance, litigation, tax consequences of repatriating overseas cash and the execution of restructuring initiatives.
- Guarantees and standby letters of credit had maximum future payment obligations of $77.9 million, with no associated liability recorded.
Investor Verification Checklist
- Verify that the filing relates to Diebold, Incorporated and reconcile this with the requested Diebold Nixdorf company name.
- Assess whether the substantial Q1 earnings improvement is sustainable after considering lower restructuring and FCPA-related costs, tax-rate normalization and favorable North American volume.
- Monitor DI performance, particularly Brazil, EMEA and foreign-exchange effects.
- Review liquidity surrounding the $75.0 million senior-note maturity in 2013 and the company’s reliance on credit facilities.
- Evaluate the conversion of strong earnings into cash, given negative operating cash flow and increased inventories and receivables.
- Track the SEC and DOJ FCPA investigations and related securities litigation for potential material financial exposure.
- Verify progress and eventual costs of the global shared-services and EMEA restructuring plans.
- Consider the tax implications and availability of the $601.5 million held in international jurisdictions.