Diebold Nixdorf, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2017. Diebold Nixdorf provides connected-commerce services, software and transaction systems to banking and retail customers. Results include the Diebold Nixdorf AG acquisition completed August 15, 2016; therefore, year-over-year comparisons are substantially affected by acquisition accounting, integration costs and the enlarged business.
Effective January 1, 2017, the Company reported three lines of business: Services, Software and Systems, with prior periods recast. The Domination and Profit and Loss Transfer Agreement with Diebold Nixdorf AG became effective February 14, 2017.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $1,102.8 million | $509.6 million |
| Gross profit / margin | $242.5 million / 22.0% | $138.8 million / 27.2% |
| Operating profit (loss) / margin | $(48.6) million / (4.4)% | $(5.7) million / (1.1)% |
| Income (loss) from continuing operations | $(52.2) million | $20.7 million |
| Net income (loss) attributable to Diebold Nixdorf | $(58.8) million; $(0.78) diluted EPS | $168.2 million; $2.56 diluted EPS |
| Cash flow from operating activities | $(66.4) million | $(109.9) million |
| Capital expenditures | $12.1 million | $4.7 million |
| Cash and cash equivalents at period-end | $490.1 million | $304.6 million |
Services revenue was $573.2 million, Software revenue was $110.4 million and Systems revenue was $419.2 million. Segment operating profit was $81.2 million for Services, $5.3 million for Software and a $(3.9) million loss for Systems.
Total cash and cash availability was $1,271.4 million, consisting of cash, short-term investments, available uncommitted credit lines and the revolving credit facility. Gross debt carrying value was approximately $1,767.4 million, comprising $77.7 million of notes payable and $1,689.7 million of long-term debt. The Company was in compliance with its debt covenants at March 31, 2017.
Debt facilities included Term Loan A, U.S. and euro Term Loan B tranches, and $400.0 million of 8.5% senior notes due 2024. The Company had $520.0 million available under its revolving facility and $183.6 million available under short-term uncommitted lines of credit.
Material changes versus the prior comparable period
- Revenue more than doubled, increasing 116.4%, primarily because the acquisition contributed $623.6 million of revenue. Excluding the acquisition, several legacy businesses experienced lower volumes or nonrecurring-project comparisons.
- Gross margin declined to 22.0% from 27.2%, reflecting the acquired business’s outsourcing model, purchase-accounting adjustments, pricing pressure in China and the absence of profitable prior-year EMEA projects.
- Operating expenses increased to $291.1 million from $144.5 million, including acquired costs, $39.4 million of total amortization expense, $12.9 million of restructuring charges and $3.1 million of asset impairments.
- Interest expense rose to $30.8 million from $11.5 million because of acquisition financing.
- Q1 2016 included $147.8 million of after-tax income from discontinued operations, including the gain on sale of the North American electronic security business. Q1 2017 had no discontinued-operations income.
- Q1 2016 also included a $36.5 million mark-to-market gain on acquisition-related foreign-currency option contracts; no comparable gain was recorded in Q1 2017.
- Cash used in continuing operating activities improved by $43.5 million year over year, but total cash declined by $162.6 million during the quarter because of operating, investing and financing uses, including debt repayments, dividends and distributions to noncontrolling interest holders.
Guidance, outlook, commentary, risks and unusual items
Management launched the DN2020 transformation program in February 2017, targeting a $200 million improvement in operating profit through 2020 through integration, cost efficiencies and synergies. The Company expects approximately $120 million of restructuring costs and $60 million of integration-related costs over the program; it also disclosed approximately $70 million of additional restructuring costs expected through the end of DN2020. Management expects to use improved cash generation to invest in software and solutions and reduce leverage.
Management anticipated a second-quarter 2017 amendment to reprice and restructure portions of the Term Loan B facilities, with expected interest savings of approximately $5 million per quarter after execution. The filing does not provide formal full-year revenue or earnings guidance.
Key operating risks include execution of the Diebold Nixdorf AG integration, realization of synergies, competitive and pricing pressure, foreign-exchange volatility, customer spending cycles, cybersecurity and information-technology risks, pension funding, and the ability to reduce leverage while funding restructuring and integration activities.
The Company faces uncertainty regarding minority shareholders of Diebold Nixdorf AG. The DPLTA provides cash compensation and recurring payments to eligible minority holders, but the ultimate timing and amount of related payments are uncertain. The filing also identifies German appraisal proceedings that could result in higher compensation obligations.
The U.K. Competition and Markets Authority required a structural remedy. Subsequent to quarter-end, the Company undertook to divest either its legacy Diebold U.K. business or legacy Wincor Nixdorf U.K. business. Until approval and completion, the U.K. businesses must operate separately, potentially delaying integration and increasing transaction costs.
Material contingencies include aggregate estimated risk of up to approximately $141.9 million for material indirect-tax matters, including Brazil and Thailand exposures. A Brazil assessment was reduced to approximately R$17.3 million, while the Company continues to challenge the matter. Guarantees and standby letters of credit totaled $155.7 million, and one-year purchase commitments totaled $14.8 million.
Management stated that disclosure controls and procedures were effective as of March 31, 2017. The internal-control evaluation excluded the acquired Diebold Nixdorf AG operations under applicable SEC transition guidance, although oversight and monitoring processes were being extended to those operations.
Important facts for investors to verify
- Whether DN2020 delivers the targeted $200 million operating-profit improvement and whether restructuring and integration spending remains within disclosed expectations.
- The pace of acquisition integration, margin recovery and realization of procurement, service-utilization and facility synergies.
- Operating cash-flow conversion, working-capital requirements and progress toward debt reduction.
- Completion and pricing of the anticipated Term Loan B refinancing and the effect on interest expense and covenant headroom.
- The financial impact and timing of DPLTA minority-shareholder put rights, recurring compensation and appraisal proceedings.
- The outcome of the U.K. CMA remedy and the resulting divestiture, transaction costs and integration timetable.
- Potential exposure from Brazil and Thailand indirect-tax matters, guarantees, warranty obligations and other contingencies.
- The effect of purchase-accounting amortization, deferred-revenue adjustments and other non-routine items on reported margins and earnings.