Diebold Nixdorf, Inc. — Q1 2019 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended March 31, 2019, compared with the three months ended March 31, 2018. Diebold Nixdorf provides connected-commerce hardware, software and services for banking and retail customers in more than 100 countries, with approximately 23,000 employees. Reportable segments are Eurasia Banking, Americas Banking and Retail.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $1,028.1 million | $1,064.2 million | (3.4%) reported; 3.0% increase in constant currency |
| Gross profit | $244.1 million | $238.4 million | 2.4% increase |
| Gross margin | 23.7% | 22.4% | Up 130 basis points |
| Operating loss | $(24.5) million | $(23.5) million | Operating margin declined to (2.4%) from (2.2%) |
| Loss before taxes | $(71.1) million | $(47.5) million | Higher interest expense |
| Net loss | $(131.9) million | $(65.6) million | Net margin (12.8%) versus (6.2%) |
| Net loss attributable to Diebold Nixdorf | $(132.7) million | $(73.2) million | Loss per share $(1.74) versus $(0.97) |
| Cash used in operating activities | $(57.1) million | $(142.3) million | Improved by $85.2 million |
| Cash, cash equivalents and restricted cash | $377.9 million | $364.2 million | March 31, 2019 versus March 31, 2018 |
Services revenue was $628.7 million, down from $690.3 million, while product revenue was $399.4 million, up from $373.9 million. Services gross margin was 24.7% and product gross margin was 22.3%.
At March 31, 2019, total debt was approximately $2.24 billion, comprising $47.2 million of notes payable and $2.19 billion of long-term debt. Cash and cash equivalents excluding restricted cash were $284.4 million, with total cash availability of $685.8 million, including undrawn facilities and short-term investments. Net debt to trailing twelve-month adjusted EBITDA was 5.7 times. The Company reported compliance with its debt covenants.
Material changes versus the prior comparable period
- Reported revenue declined primarily because of a $65.6 million unfavorable foreign-currency impact, especially from the euro and Brazilian real. Constant-currency revenue increased $29.5 million.
- Eurasia Banking revenue decreased 12.1%, including lower maintenance revenue in India and lower Asia-Pacific product volume. Americas Banking revenue increased 8.7%, driven by higher North American installations and Latin American product volume. Retail revenue decreased 4.3% reported but increased 4.2% in constant currency.
- Gross profit improved despite lower revenue, reflecting better product volume and mix, services modernization and DN Now cost initiatives.
- Interest expense increased to $50.9 million from $26.0 million, primarily because of the additional Term Loan A-1 Facility and related fee amortization.
- Income tax expense was $60.4 million, producing an effective tax rate of negative 85.0% on the loss. Drivers included GILTI, BEAT, the collapse of the Barbados structure to meet lender requirements and jurisdictional income mix. Management stated that the related discrete items did not create additional cash taxes.
- Cash used in operations improved substantially, aided by better collections, lower inventory-related cash use and higher deferred-revenue collections, although operating cash flow remained negative.
- The Company paid no quarterly dividend in Q1 2019, compared with $7.7 million, or $0.10 per share, in Q1 2018.
- Balance-sheet presentation changed significantly with adoption of ASC 842 leases on January 1, 2019, adding $173.3 million of operating lease right-of-use assets and $172.1 million of operating lease liabilities, with no cumulative retained-earnings adjustment.
Guidance, outlook, commentary and risks
Management expects the DN Now transformation program to produce approximately $400 million of gross annualized savings by 2021, including approximately $160 million in 2019. The program includes workforce realignment, services modernization, product and manufacturing rationalization, working-capital improvements, administrative cost reductions, process standardization and divestitures of non-core or non-accretive businesses. Additional restructuring costs of approximately $170 million to $200 million were expected through completion of the plan.
Management stated that available capital resources should be sufficient for planned working capital, research and development, capital expenditures, pension contributions and other needs for at least the next 12 months. The Company estimated approximately $60 million of cash income taxes for 2019. No formal revenue or earnings guidance is provided in the filing text.
Unusual items included $44.5 million of non-routine selling and administrative costs, including legal and consulting expenses, a squeeze-out-related real estate tax cost and a Brazil accounts-receivable discount; divestiture and liquidation losses and gains; and $3.8 million of restructuring charges. The Company also recorded prior-year goodwill impairments totaling $351.9 million in 2018, although no Q1 2019 goodwill impairment was reported.
Material risks include high leverage and covenant compliance, variable interest rates, foreign-currency volatility, execution of DN Now and the Diebold Nixdorf AG integration, supply-chain disruptions, customer spending conditions, technology acceptance, cybersecurity and operational failures, tax and regulatory matters, pension funding, litigation, and the outcome of the Diebold Nixdorf AG appraisal proceedings. Aggregate reasonably possible indirect-tax exposure was estimated at up to $118.7 million, including $27.0 million related to Thailand customs matters; no accrual was recorded for the Thailand contingency.
The Company disclosed that its disclosure controls and procedures were not effective as of March 31, 2019 because three material weaknesses in internal control over financial reporting remained unremediated: information-technology general and user-access controls, inventory valuation controls, and controls over non-routine transactions.
Important facts for investors to verify
- Whether DN Now delivers the targeted $160 million of 2019 savings and the approximately $400 million annualized savings target by 2021.
- Liquidity headroom, restricted cash availability, debt maturities, interest costs and compliance with increasingly restrictive leverage and interest-coverage covenants.
- Whether negative operating cash flow reverses as working-capital initiatives mature, particularly inventory and receivables management.
- The effect of foreign exchange, especially the euro and Brazilian real, on reported revenue, margins and cash balances.
- Progress in remediating the three material weaknesses in internal control over financial reporting.
- The financial impact and timing of the Diebold Nixdorf AG squeeze-out, DPLTA appraisal proceedings and related minority-shareholder payments.
- Potential exposure from indirect-tax matters, guarantees totaling $220.3 million, and other legal or contingent obligations.
- Whether the reported segment improvement in Eurasia Banking and Americas Banking is sustained and offsets continued pressure in Retail and services revenue.