Diebold Nixdorf, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2017. Diebold Nixdorf provides connected-commerce services, software and systems for banking and retail customers. Results include Diebold Nixdorf AG, acquired on August 15, 2016; therefore, year-over-year comparisons are materially affected by acquisition accounting, integration activities and the change to Services, Software and Systems reporting segments.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $1,133.9 million, up 95.5% | $2,236.7 million, up 105.3% |
| Gross profit / margin | $237.8 million / 21.0% | $480.3 million / 21.5% |
| Operating profit (loss) / margin | $(30.1) million / (2.7)% | $(78.7) million / (3.5)% |
| Loss from continuing operations | $(23.6) million | $(75.8) million |
| Net loss attributable to Diebold Nixdorf | $(30.6) million; diluted EPS $(0.41) | $(89.4) million; diluted EPS $(1.19) |
| Cash flow from operating activities | Not separately reported for the quarter | $(185.8) million |
- Services revenue was $580.2 million in the quarter and $1,153.4 million year to date; Software revenue was $107.7 million and $218.1 million, respectively; Systems revenue was $446.0 million and $865.2 million, respectively.
- Segment operating profit was $81.8 million in the quarter and $164.4 million year to date. Services generated $77.0 million and $158.2 million, Software $6.4 million and $11.7 million, and Systems incurred losses of $1.6 million and $5.5 million, respectively.
- Cash and cash equivalents were $451.3 million at June 30, 2017, compared with $652.7 million at December 31, 2016. Short-term investments were $76.9 million.
- Total cash availability was $1,129.1 million, including cash, short-term investments, $160.0 million available under uncommitted lines and $440.9 million available under the revolving credit facility.
- Debt carrying value was approximately $1.90 billion, consisting of $112.5 million of notes payable and $1,787.5 million of long-term debt. Interest expense was $32.2 million in the quarter and $63.0 million year to date.
- Total assets were $5.46 billion and total equity was $624.7 million at June 30, 2017. Redeemable noncontrolling interests increased to $449.0 million from $44.1 million, primarily due to the Diebold Nixdorf AG domination and profit-and-loss transfer agreement.
Material changes versus the prior comparable period
- Revenue more than doubled primarily because the acquired Diebold Nixdorf AG contributed $635.8 million in the quarter and $1,259.4 million year to date. Excluding the acquisition, Services, Software and Systems revenue generally declined or was flat, reflecting contract run-off, lower systems volumes, nonrecurring projects and market changes in China.
- Gross margin declined from 26.7% to 21.0% in the quarter and from 27.0% to 21.5% year to date. Services and Software margins were diluted by the acquired business’s higher third-party labor model, lower Americas maintenance revenue, technician turnover and training investments.
- Operating results moved from profit to loss. The deterioration reflected higher amortization of acquired intangibles, acquisition and integration costs, restructuring charges, purchase-accounting adjustments and increased interest expense.
- Six-month net loss attributable to the Company was $89.4 million versus net income of $147.1 million in 2016. The prior-year result included $148.3 million of after-tax income from the divestiture of the North American electronic security business.
- Operating cash use improved modestly from $199.8 million to $185.8 million, but cash declined $201.4 million during the first six months of 2017. Working capital, taxes, restructuring payments and other assets and liabilities remained significant cash uses.
- Debt was refinanced and repriced in May 2017. The U.S. Term Loan B was reduced, a $250.0 million delayed-draw Term Loan A was used, and the Company expects approximately $5.0 million of quarterly interest savings.
Guidance, outlook, commentary and unusual items
- No formal revenue or earnings guidance is provided in the filing. Management’s stated capital-allocation priority is to reduce leverage and accelerate acquisition synergies.
- DN2020 targets approximately $240 million of operating-profit savings by 2020. Management expects approximately $240 million of restructuring and integration costs over the program, including approximately $75 million of additional restructuring costs after June 30, 2017.
- Management expects modest Services revenue growth through higher service attach rates, managed-services sales and billed work, while pursuing efficiency through standardized offerings, remote resolution and facility consolidation. Software is described as a key strategic differentiator; Systems is being reshaped around innovation and efficiency.
- The Company launched a partnership with Kony for white-label mobile applications, announced Windows 10 readiness and introduced new ATM and kiosk concepts.
- The Company acquired Visio Objekt GmbH for $2.4 million and recorded a $7.4 million pretax gain from divesting its legacy U.K. business and Mexican electronic-security business.
- Restructuring charges were $14.4 million in the quarter and $27.3 million year to date. Acquisition-related purchase-accounting charges included $65.2 million of acquired-intangible amortization and $20.7 million of deferred-revenue adjustments year to date.
- Material contingencies include German appraisal proceedings and potential future payments to Diebold Nixdorf AG minority shareholders under the DPLTA, Brazil indirect-tax matters, Thailand customs disputes and guarantees with maximum future payment obligations of $162.1 million.
- The Company was in compliance with its debt covenants at June 30, 2017. Covenants include maximum net debt-to-adjusted-EBITDA leverage of 4.50-to-1.00 and minimum adjusted EBITDA-to-net-interest coverage of 3.00-to-1.00, with scheduled leverage reductions beginning December 31, 2017.
- Revenue recognition standard ASC 606 was scheduled for adoption on January 1, 2018. The initial assessment indicated potential earlier recognition of revenue related to product shipments, but the transition method and ultimate financial-statement impact had not been finalized.
Important facts for investors to verify
- Whether acquisition-related revenue growth converts into organic growth, improved gross margins and positive operating cash flow.
- Progress toward DN2020’s $240 million savings target, the remaining approximately $75 million of restructuring costs and the timing of synergy realization.
- Leverage, interest coverage, debt maturities, variable-rate exposure and compliance with tightening covenant thresholds.
- Liquidity after recurring negative operating cash flow, dividends, pension contributions, restructuring payments and potential DPLTA redemption or compensation payments.
- The outcome and potential financial exposure from German minority-shareholder appraisal proceedings and Brazil and Thailand tax/customs matters.
- The final impact and transition method adopted for ASC 606 revenue recognition.
- The filing states that disclosure controls were effective, but management’s June 30 evaluation did not include Diebold Nixdorf AG’s internal control over financial reporting, as permitted by SEC guidance.