Diebold Nixdorf, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2018. The filing was signed August 6, 2018. The company provides connected-commerce hardware, software and services for banking and retail customers through Eurasia Banking, Americas Banking and Retail segments. Comparative segment information was reclassified to conform to the new structure.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $1,105.6 million | $1,133.9 million | $2,169.8 million | $2,236.7 million |
| Gross profit | $219.7 million | $237.8 million | $460.6 million | $480.3 million |
| Gross margin | 19.9% | 21.0% | 21.2% | 21.5% |
| Operating profit (loss) | $(131.5) million | $(30.1) million | $(152.5) million | $(78.7) million |
| Operating margin | (11.9%) | (2.7%) | (7.0%) | (3.5%) |
| Net income (loss) | $(133.4) million | $(23.6) million | $(196.7) million | $(75.8) million |
| Loss attributable to Diebold Nixdorf | $(138.5) million | $(30.6) million | $(209.4) million | $(89.4) million |
| Diluted loss per share | $(1.82) | $(0.41) | $(2.76) | $(1.19) |
- Services and software revenue increased 4.1% in the quarter and 4.1% year to date, while product revenue declined 12.7% and 14.3%, respectively.
- Q2 revenue declined 2.5% as reported and 5.2% in constant currency; six-month revenue declined 3.0% as reported and 8.0% in constant currency.
- Q2 included a $90.0 million non-cash goodwill impairment charge, primarily affecting Services-Asia Pacific and Software-EMEA reporting units. Goodwill declined to $998.6 million from $1,117.1 million at December 31, 2017.
- Six-month operating cash flow was $(256.6) million versus $(185.8) million in the prior-year period. Inventory used $111.9 million of cash, reflecting project-related inventory builds and supply-chain issues.
- Capital expenditures were $30.6 million, and investing activities provided $30.2 million, primarily due to net investment maturities.
- Cash and cash equivalents were $299.0 million at June 30, 2018, down from $535.2 million at year-end 2017. Total cash availability, including short-term investments and undrawn facilities, was $882.2 million.
- Notes payable and long-term debt totaled approximately $1,885.1 million, before considering cash and short-term investments. Long-term debt carrying value was $1,816.6 million.
- Total equity declined to $261.1 million from $506.8 million at year-end 2017; shareholders’ equity attributable to Diebold Nixdorf declined to $227.0 million.
Material changes versus the prior comparable period
- Revenue performance weakened, driven primarily by lower product deployments and projects in Eurasia, lower banking product volume in the Americas, supply-chain delays, and lower POS and kiosk volume in Germany.
- Segment operating profit declined to $23.8 million in Q2 from $66.3 million and to $61.5 million for the six months from $130.5 million. Retail and Americas Banking experienced particularly significant margin deterioration.
- Gross margin declined 110 basis points in Q2 and 30 basis points year to date. Management cited unfavorable customer and product mix, higher manufacturing and expedited freight costs, and non-recurring service costs in Brazil.
- Selling and administrative expense declined 7.2% in Q2 and 7.5% year to date, reflecting cost-reduction initiatives and lower corporate IT and employee-related costs. Research and development expense increased 4.6% in Q2 and 2.6% year to date.
- Interest expense decreased to $28.4 million in Q2 and $54.4 million year to date, compared with $32.2 million and $63.0 million, respectively, in the prior-year periods.
- The company adopted the revenue recognition standard in 2018 using the modified retrospective method. The opening retained-earnings increase was $4.6 million; reported six-month net sales were $13.8 million higher than they would have been under the prior guidance.
- The quarterly dividend was suspended beginning in Q2 2018, and management stated that future dividend funds would be redirected toward debt reduction and other capital needs.
Guidance, outlook, commentary and risks
- Under the DN Now transformation program, management established a savings target in excess of $200 million, including approximately $100 million expected over the next year from a new customer-centric operating model. The filing does not provide formal revenue or earnings guidance.
- Management expects approximately $130 million to $150 million of additional restructuring costs through completion of DN Now, primarily for severance. The prior DN2020 restructuring plan was suspended, with no additional DN2020 costs anticipated.
- Although the company was compliant with debt covenants at June 30, management anticipated potential noncompliance with the net-debt-to-EBITDA covenant at the end of the third quarter if performance did not improve. The company was seeking an amendment or waiver, with no assurance of success.
- In early August 2018, minority shareholders requested redemption of approximately 2.4 million Diebold Nixdorf AG shares, with an estimated value of $160 million. The company expects to use cash and revolver borrowings; timing and final cash requirements remain uncertain.
- Operating liquidity is pressured by substantial operating cash outflows, high leverage, potential covenant issues, planned restructuring expenditures and the DPLTA redemption obligation.
- Material risks include foreign exchange volatility, supply-chain disruption, customer and product mix, integration and transformation execution, technology and cybersecurity failures, competitive pricing, regulatory and tax matters, pension funding, and the ability to realize targeted cost savings.
- Indirect tax matters have estimated aggregate exposure of up to $128.1 million, including Brazil and Thailand matters. The Brazil matter had a $4.2 million accrual; management stated that the ultimate exposure could be material.
- The company had guarantees and standby letters of credit with maximum future payment obligations of $168.5 million at June 30, 2018, without an associated recorded liability.
Investor verification checklist
- Verify subsequent amendments or waivers to the net-debt-to-EBITDA covenant and the company’s compliance status after Q2.
- Verify the final amount, timing and financing of the Diebold Nixdorf AG minority-shareholder redemptions.
- Track actual DN Now savings, restructuring charges and cash costs against the stated targets.
- Assess whether operating cash flow and working-capital management improve, particularly inventory conversion and collections.
- Reconcile reported results with constant-currency performance and the effects of revenue-recognition adoption.
- Review goodwill headroom and the sensitivity of reporting-unit valuations to revenue, margin, discount-rate and terminal-growth assumptions.
- Monitor debt balances, variable interest rates, revolver availability and the company’s ability to fund operations and scheduled obligations.