Diebold Nixdorf, Inc. — Fiscal 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual Form 10-K rather than a quarterly report; fourth-quarter information is provided in the unaudited quarterly data. Amounts are in millions except per-share data.
Business context
Diebold Nixdorf provides connected-commerce technology, including ATMs, retail point-of-sale and self-checkout systems, software, managed services, maintenance, professional services and cash-management solutions. The Company operates in more than 100 countries with approximately 23,000 employees. Reportable segments are Eurasia Banking, Americas Banking and Retail.
Management launched the multi-year DN Now transformation program to simplify operations, modernize services, rationalize products and manufacturing, improve working capital, reduce administrative costs and optimize the business portfolio.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $4,578.6 | $4,609.3 | (0.7%) |
| Services revenue | $2,789.5 | $2,785.3 | 0.2% |
| Products revenue | $1,789.1 | $1,824.0 | (1.9%) |
| Gross profit | $890.9 | $999.8 | (10.9%) |
| Gross margin | 19.5% | 21.7% | Down 2.2 points |
| Operating loss | $(362.9) | $(93.5) | Worsened $269.4 |
| Operating margin | (7.9%) | (2.0%) | Down 5.9 points |
| Loss from continuing operations | $(566.0) | $(213.9) | Worsened $352.1 |
| Loss attributable to Diebold Nixdorf | $(568.7) | $(241.5) | Worsened $327.2 |
| Loss per share | $(7.48) | $(3.20) | Worsened $4.28 |
| Cash flow from operating activities | $(104.1) | $37.1 | Declined $141.2 |
| Total debt | $2,239.5 | $1,853.8 | Increased $385.7 |
| Cash and cash equivalents, excluding restricted cash | $353.1 | $535.2 | Declined $182.1 |
Segment revenue was $1,800.2 for Eurasia Banking, $1,515.7 for Americas Banking and $1,262.7 for Retail. Segment operating profit was $147.1, $27.6 and $50.3, respectively. Retail revenue increased 7.0%, while Eurasia Banking and Americas Banking declined 5.4% and 0.6%.
Fourth-quarter 2018 net sales were $1,289.8, gross profit was $207.8, net loss was $127.5 and loss attributable to Diebold Nixdorf was $123.6, or $(1.62) per share.
Material changes versus the prior comparable period
- Revenue was broadly flat, with growth in Retail offset by lower Eurasia Banking revenue and modestly lower Americas Banking revenue. Currency translation had a net favorable impact of $55.4.
- Gross profit declined $108.9, and gross margin contracted primarily because of lower service and product margins, inventory provisions, unfavorable customer mix, supply-chain costs and one-time service costs.
- The Company recorded $217.5 of non-cash goodwill impairment charges, compared with $3.1 in 2017. Goodwill declined to $827.1 from $1,117.1.
- The Company recorded a $74.5 inventory charge related to product portfolio streamlining, excess and obsolete inventory and manufacturing-footprint optimization.
- Interest expense increased to $154.9 from $117.3, reflecting higher debt balances, higher interest rates and the new Term Loan A-1 Facility.
- Operating cash flow shifted from a $37.1 inflow to a $104.1 outflow, affected by the operating loss, deferred revenue, finance receivables, inventory and supplier payments.
- The annualized dividend was reduced to $0.10 per share from $0.40. Management stated that future dividend funds would be redirected toward debt reduction and other capital needs.
Debt, liquidity and capital resources
At December 31, 2018, debt consisted principally of $2,190.0 of long-term debt, $49.5 of current notes payable and $27.5 of letters of credit. Major facilities included a $125.0 revolving facility balance, $650.0 of original Term Loan A-1 borrowings, Term Loan B facilities and $400.0 of 2024 Senior Notes. The revolving facility and certain Term Loan A facilities mature in December 2020; the Term Loan A-1 Facility matures in August 2022.
Total cash availability was $762.1, comprising $353.1 of unrestricted cash and cash equivalents, $33.5 of short-term investments, $28.0 of uncommitted lines and $347.5 of revolving-facility availability. Management expected capital resources to fund planned needs for at least the next 12 months, but the Company remained highly leveraged and dependent on operating performance, covenant compliance and refinancing.
The Company was in compliance with its debt covenants at year-end. The amended agreement permitted a maximum total net debt-to-adjusted-EBITDA ratio of 7.00 to 1.00 at December 31, 2018 and required minimum adjusted EBITDA-to-net-interest coverage of 1.38 to 1.00, subject to future step-downs and covenant-reset triggers.
Guidance, outlook, commentary and unusual items
- DN Now targets approximately $400 of gross annualized savings through 2021, including approximately $160 expected during 2019. The Company incurred $58.9 of DN Now restructuring charges in 2018 and expected approximately $175 to $200 of additional restructuring costs through plan completion.
- Management expected approximately $80 of 2019 capital expenditures and approximately $50 of 2019 pension contributions and benefit payments, partially offset by approximately $13 of expected trustee reimbursement.
- The Company signed or announced significant customer agreements, including a $70.0 multi-year Marks & Spencer services contract and a $68.0 managed-services agreement with a European home-improvement retailer.
- The Company increased its ownership of Diebold Nixdorf AG to approximately 94.7% by year-end and above 95% in January 2019, initiating squeeze-out procedures for remaining shares. Related cash payments and appraisal proceedings remain uncertain.
- Minority shareholders challenged the adequacy of the Diebold Nixdorf AG exit and recurring compensation under the domination and profit-and-loss transfer agreement. The filing does not provide a reliable estimate of potential additional liability.
- Material risks include refinancing and debt-service requirements, covenant compliance, execution of DN Now and acquisition integration, divestitures, currency and interest-rate exposure, tariffs on China-manufactured products, supply-chain disruption, cybersecurity, international regulation, tax contingencies and pension funding.
- Material indirect-tax exposure was estimated at up to $106.1, including $27.0 related to Thailand customs matters. The Company had $49.5 of unrecognized tax benefits and approximately $3,652.1 of contractual obligations.
- KPMG issued an unqualified opinion on the consolidated financial statements but an adverse opinion on internal control over financial reporting. Material weaknesses involved information-technology general controls, inventory valuation controls and controls over non-routine transactions.
- The Company adopted the new revenue-recognition standard in 2018 using a cumulative-effect method. The reported 2018 net sales were $18.2 higher than they would have been under the prior guidance, while after-tax income was $0.9 lower.
Investor verification checklist
- Verify the Company’s ability to generate positive operating cash flow and meet or refinance debt maturities beginning in 2020.
- Monitor DN Now savings realization against the $160 2019 target and the remaining restructuring-cost estimate.
- Assess whether the goodwill impairment and inventory charges indicate continuing weakness in Eurasia Banking, Retail and other reporting units.
- Review remediation of the three material weaknesses and whether future filings report effective internal controls.
- Track the Diebold Nixdorf AG squeeze-out, minority-shareholder appraisal proceedings and related cash requirements.
- Evaluate exposure to the up-to-$106.1 indirect-tax contingency, tariffs, foreign exchange and interest-rate movements.
- Reconcile reported annual and fourth-quarter results with the adoption effects of Topic 606 and the filing’s retrospective correction of immaterial errors.