Diebold, Incorporated — Q1 2015 Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended March 31, 2015. Diebold is a global provider of financial self-service, integrated services and software, security systems, and selected Brazil-based information technology, lottery and other solutions. The company operated through North America, Asia Pacific, Europe, Middle East and Africa, and Latin America reportable segments. The statements are unaudited.
Management continued executing the “Diebold 2.0” turnaround, focused on cost reduction, cash generation, talent, services and software growth, and a return to sustainable profitable growth. Management expected to transition from the “Crawl” phase to the “Walk” phase in the second half of 2015.
Financial performance and key metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $655.5 million | $688.3 million | Down 4.8% |
| Gross profit | $175.3 million | $164.1 million | Up 6.8% |
| Gross margin | 26.7% | 23.8% | Up 2.9 percentage points |
| Operating profit | $3.6 million | $23.3 million | Down 84.5% |
| Operating margin | 0.5% | 3.4% | Down 2.9 percentage points |
| Net income (loss) | $(5.6) million | $4.9 million | Declined $10.5 million |
| Net income (loss) attributable to Diebold | $(2.8) million | $9.8 million | Declined $12.6 million |
| Diluted earnings per share | $(0.04) | $0.15 | Down $0.19 |
| Operating cash flow | $(62.2) million | $(31.6) million | Use increased $30.6 million |
Services revenue increased to $394.0 million from $383.4 million, while product revenue declined to $261.5 million from $304.9 million. Financial self-service revenue increased 6.2% to $495.2 million, and security revenue increased 5.3% to $150.0 million. Brazil other revenue declined 87.0% to $10.3 million, primarily because the prior-year period included large information technology deliveries to a Brazilian education ministry.
Service gross margin improved to 30.7% from 28.2%, and product gross margin improved to 20.7% from 18.4%. Selling and administrative expense increased 8.0% to $129.9 million, while research, development and engineering expense increased 11.5% to $22.3 million.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $227.1 million at March 31, 2015, compared with $322.0 million at December 31, 2014.
- Total cash and cash availability was $644.8 million, including $114.4 million of short-term investments, $78.3 million available under international short-term lines, and $225.0 million available under the five-year credit facility.
- Total debt was $579.4 million, consisting of $44.7 million of notes payable and $534.7 million of long-term debt, compared with total debt of $505.4 million at year-end 2014.
- The credit facility had a $520.0 million borrowing limit, expires in August 2019, and had $225.0 million available at quarter-end. The company was in compliance with its debt covenants.
- Remaining senior notes included $175.0 million due in March 2016 and $50.0 million due in 2018. Management intended to secure additional financing for the 2016 maturity.
- The company paid $18.9 million of dividends, or $0.2875 per share, during the quarter.
- Operating cash flow was negatively affected by increases in receivables, inventories and other current assets, as well as lower accrued compensation balances. Investing cash flow included $59.4 million paid for the Phoenix acquisition and $10.8 million of capital expenditures.
Material changes versus the prior comparable period
- Revenue declined despite growth in financial self-service and security, primarily because of the nonrecurrence of large Brazil information technology deliveries and unfavorable foreign currency effects.
- Gross margin expanded substantially, but operating profit fell because of higher transformation spending, higher operating expenses, and $19.4 million of asset impairment charges.
- The company recorded a $10.3 million impairment related to the planned sale of its Venezuela joint venture and a $9.1 million impairment of redundant legacy capitalized software following the Phoenix acquisition.
- Operating cash use doubled year over year, while debt increased by approximately $74.0 million from December 31, 2014.
- Accumulated other comprehensive loss increased to $253.6 million from $190.5 million, primarily because of a $68.4 million unfavorable currency translation adjustment.
- North America, Asia Pacific and EMEA segment operating profit increased, while Latin America revenue fell 34.1% and segment operating profit fell 73.0%.
Guidance, outlook, risks and unusual items
- The company expanded its cost-savings target to $200 million expected to be fully realized by the end of 2017. Approximately 50% of the savings was expected to benefit operating profit, with the remainder reinvested in growth initiatives.
- Additional restructuring costs of approximately $2.2 million to $4.3 million were expected through the end of 2015, primarily in North America and EMEA, in addition to costs associated with the Latin America and Brazil realignment.
- On March 13, 2015, the company acquired Phoenix Interactive Design for approximately $72.9 million, including $12.6 million of deferred cash payments due over three years. Preliminary goodwill and other intangible assets were $42.3 million and $32.7 million, respectively.
- Venezuela was remeasured using the SIMADI exchange rate, producing a $7.5 million foreign exchange loss. The Venezuela joint venture sale closed on April 29, 2015, with no additional impairment required; the company stated that it would continue operating in Venezuela indirectly.
- Material risks include foreign exchange volatility, political and economic instability in international markets, customer capital-spending cycles, competitive and pricing pressure, technology acceptance, cybersecurity, pension funding, execution of the transformation plan, and the ability to refinance the 2016 senior-note maturity.
- Aggregate estimated risk for material indirect tax matters was up to approximately $196.4 million, including approximately $164.4 million related to a Brazilian tax matter and $26.0 million related to Thailand customs matters. The company had accrued approximately $10.4 million for the Brazilian matter and none for the Thailand matter.
- Guarantees and standby letters of credit had maximum future payment obligations of $106.9 million, with no associated liability recorded. Warranty liability was $97.1 million at March 31, 2015.
Most important facts for investors to verify
- Whether the Diebold 2.0 transformation delivers the targeted $200 million of savings and improves operating margins and cash generation.
- The refinancing plan and terms for the $175.0 million of senior notes due in March 2016.
- Execution and financial contribution of the Phoenix acquisition, including the final purchase price allocation and integration-related impairments.
- The continuing effect of currency controls and devaluation in Venezuela, Brazil and other international markets.
- Progress in reducing working-capital cash usage, particularly receivables and inventories.
- Potential exposure from the Brazilian indirect tax dispute and Thailand customs claims, which management characterized as reasonably possible but not probable.
- Whether services and software growth offsets product-volume volatility and the decline in Brazil other revenue.