Diebold, Incorporated 2014 Form 10-K Summary
Business context and reporting period
Diebold, Incorporated was a global provider of financial self-service equipment and services, security systems, software, and Brazil-based election, lottery and information-technology solutions. The company operated in more than 90 countries with approximately 16,000 employees. This Form 10-K covers the fiscal year ended December 31, 2014, filed February 17, 2015. The filing also provides fourth-quarter 2014 data.
Management was executing the multi-year “Diebold 2.0” turnaround, focused on cost reduction, cash generation, talent, and returning the business to sustainable profitable growth. Management expected to complete the “Crawl” phase and enter the “Walk” phase during the second half of 2015.
Key financial metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net sales | $3.051 billion | $2.857 billion | +6.8% |
| Services revenue | $1.638 billion | $1.637 billion | Approximately flat |
| Products revenue | $1.413 billion | $1.220 billion | +15.8% |
| Gross profit | $779.4 million | $640.4 million | +21.7% |
| Gross margin | 25.5% | 22.4% | +310 basis points |
| Operating profit | $180.9 million | $(118.3) million | Improved by $299.2 million |
| Operating margin | 5.9% | (4.1)% | Improved by 10.0 percentage points |
| Net income attributable to Diebold | $114.4 million | $(181.6) million | Turned profitable |
| Diluted EPS | $1.76 | $(2.85) | Improved by $4.61 |
| Cash flow from operations | $186.9 million | $124.2 million | +$62.7 million |
| Free cash flow | Approximately $125 million | Approximately $89 million | Approximately +40% |
Fourth-quarter 2014 net sales were $861.3 million, gross profit was $227.8 million, and net income attributable to Diebold was $30.0 million, compared with fourth-quarter 2013 net sales of $811.4 million, gross profit of $180.1 million, and a net loss attributable to Diebold of $41.4 million.
International sales represented 56.1% of consolidated sales in 2014, compared with 52.3% in 2013. Services and software represented approximately 55% of total revenue. Product backlog was approximately $704.3 million at December 31, 2014, compared with $725.8 million at year-end 2013; management cautioned that backlog excludes most service revenue and is not necessarily indicative of future revenue.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $322.0 million, compared with $230.7 million at year-end 2013.
- Short-term investments were $136.7 million, down from $243.0 million.
- Management reported total global liquidity of $853.9 million, including cash, short-term investments, $115.2 million of unused short-term lines, and $280.0 million available under the five-year credit facility.
- Total debt was $505.4 million, consisting of $25.6 million of current notes payable and $479.8 million of long-term debt. Debt maturities included approximately $176.1 million in 2016 and $50.4 million in 2018.
- The amended revolving credit facility increased commitments from $500 million to $520 million and expires in August 2019. The company was in compliance with its debt covenants at year-end.
- Current assets were $1.656 billion and current liabilities were $1.028 billion, producing net working capital of $627.8 million.
- Net cash used in financing activities was $81.2 million, including $74.9 million of dividends. The annualized dividend remained $1.15 per share.
- Capital expenditures increased to $61.5 million from $35.4 million, primarily reflecting transformation-related reinvestment.
- Approximately 95.5% of cash and cash equivalents and short-term investments were held in international tax jurisdictions; repatriation could result in additional tax costs, except for $88.4 million already provided for.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by a 15.8% increase in product sales and a $153.1 million increase in Brazil Other revenue, partly from lottery sales and information-technology equipment deliveries to Brazil’s education ministry. Management stated that the education-ministry deliveries were not expected to recur in 2015.
- FSS revenue increased 1.4% and security revenue increased 1.5%. North America revenue declined 0.5%, while AP, EMEA and Brazil revenue increased 4.4%, 16.3% and 34.3%, respectively.
- Gross margin improved in both services and products, benefiting from restructuring, lower employee-related costs, improved international product margins, and favorable contractual settlements in Venezuela.
- Selling and administrative expense declined 13.6%, impairment expense declined from $72.0 million to $2.1 million, and restructuring charges declined from $57.0 million to $11.9 million.
- 2013 included substantial unusual charges: a $70.0 million goodwill impairment, a $67.6 million non-cash pension charge, $28.0 million related to the FCPA investigation, a $17.2 million securities litigation settlement, and $57.0 million of restructuring charges. These items materially depressed 2013 earnings.
- 2014 included a $13.7 million pretax gain from the sale of Diebold Eras, a $5.8 million Brazil indirect-tax recovery, $11.9 million of restructuring charges, and a $13.0 million acquisition of Cryptera A/S.
- Foreign exchange losses increased, primarily because of the Venezuelan currency devaluation. The company recorded a $12.1 million foreign-exchange loss, a $6.1 million reduction in cash, and a $4.1 million inventory adjustment related to the devaluation.
- Accumulated other comprehensive loss increased to $190.5 million from $54.3 million, primarily due to foreign-currency translation and pension-related losses.
- Previously reported material weaknesses in internal control related to Brazil indirect taxes and India system adoption and account reconciliations were remediated as of December 31, 2014. Management and KPMG concluded that internal control over financial reporting was effective.
Guidance, outlook, commentary and risks
Management extended its cost-savings plan through 2016 and 2017 and targeted $200 million of cumulative savings fully realized by the end of 2017. Approximately half was expected to be reinvested in research and development, information technology, back-office transformation, sales and marketing; management expected approximately half to benefit operating profit.
Management expected additional restructuring costs of approximately $5 million to $7 million through the end of 2015, including costs associated with the January 2015 realignment of the Latin America and Brazil businesses. Beginning in the first quarter of 2015, those businesses were to be reported as one operating segment.
The company expected to contribute $18.6 million to pension plans and approximately $1.5 million to other post-retirement plans in 2015. It expected available liquidity and operating cash flow to fund operations, investments, pension contributions, dividends and potential share repurchases for at least the next 12 months.
- Material risks include competition and pricing pressure, technology adoption, customer concentration in financial institutions and government entities, economic cyclicality, raw-material costs, and execution of the Diebold 2.0 transformation.
- International exposure creates currency, political, regulatory, tax, customs and repatriation risks. Venezuela, Brazil and EMEA were notable currency-sensitive regions.
- A Brazilian indirect-tax assessment remained unresolved. The company carried an approximately $12.5 million accrual, while estimating reasonably possible aggregate exposure for material indirect-tax matters of up to approximately $229.7 million, including approximately $175.6 million related to Brazil and $26.0 million related to Thailand customs matters.
- The company was challenging potential retroactive Thai customs duties and had not accrued an amount for that matter.
- Goodwill was $172.0 million at year-end. No 2014 goodwill impairment was recorded, but Brazil and AP had relatively limited excess fair value of approximately 17% and 39%, respectively, making future impairment sensitive to operating performance and valuation assumptions.
- Cybersecurity, systems integration, product defects, pension funding, tax audits, litigation, FCPA-related matters and the ability to sustain cost savings could materially affect future results.
Most important facts for investors to verify
- Whether the approximately $200 million cost-savings program produces the expected operating-profit and cash-flow benefits by 2017.
- Whether services and software revenue increases from approximately 55% toward management’s stated objective of exceeding 60% during the transformation.
- The recurrence and quality of 2014 earnings after excluding the Eras sale, Brazil tax recovery, currency effects, and unusually depressed 2013 comparisons.
- Progress and cash requirements associated with the Brazil and Latin America realignment and the non-recurring Brazil education-ministry deliveries.
- The ultimate outcome and cash exposure from the Brazilian indirect-tax assessment and Thailand customs dispute.
- Debt maturities, covenant compliance, pension funding needs, and the extent to which internationally held cash is available without additional tax leakage.
- Whether goodwill in Brazil and AP remains recoverable under changing economic, currency and competitive conditions.