Diebold, Incorporated — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2010; filed August 9, 2010. The filing identifies the registrant as Diebold, Incorporated, the predecessor name associated with the provided company metadata.
Business Context and Reporting Period
Diebold provides financial self-service, security, software, installation, maintenance and managed services globally, with more than 16,000 employees in nearly 90 countries. Beginning in 2010, management reported two geographic segments: Diebold North America (DNA) and Diebold International (DI). Services represented more than 50% of revenue.
- DNA second-quarter revenue was $322.6 million, down 11.0%; DI revenue was $342.5 million, up 4.3%.
- For the six months, DNA revenue was $618.8 million, down 13.8%; DI revenue was $665.3 million, up 5.6%.
- Brazilian election-system revenue was $46.2 million in the second quarter and $46.2 million for the six months, reflecting the business’s biennial cycle.
Financial Performance and Liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $665.2 million, down 3.7% | $1.284 billion, down 4.7% |
| Gross profit | $178.1 million; 26.8% margin | $336.2 million; 26.2% margin |
| Operating profit | $46.9 million; 7.0% margin | $87.4 million; 6.8% margin |
| Income from continuing operations | $31.1 million; diluted EPS $0.46 | $56.3 million; diluted EPS $0.83 |
| Net income attributable to Diebold | $29.7 million; diluted EPS $0.45 | $53.7 million; diluted EPS $0.80 |
| Operating cash flow | Not separately provided | $(16.0) million |
- Service gross margin improved to 27.6% in the quarter from 24.4% and to 26.6% for the six months from 23.1%, driven by productivity, lower parts scrap and workforce reductions.
- Product revenue declined, primarily because a large North American ATM deposit-automation project had been completed in 2009 and Brazilian financial self-service volume declined.
- Cash and cash equivalents were $231.6 million at June 30, 2010, compared with $328.4 million at December 31, 2009. Short-term investments were $151.5 million.
- Operating cash flow was reduced by working-capital investment, including a $97.3 million increase in trade receivables, a $35.5 million increase in inventories and payment of the $25.0 million SEC penalty.
- Capital expenditures were $26.9 million. Dividends paid were $36.1 million, and share repurchases used $19.9 million.
- Total debt was $576.0 million, including $21.1 million of current notes payable and $554.9 million of long-term debt. Available capacity was $251.7 million under the committed credit facility and $42.2 million under short-term uncommitted lines.
- Debt covenants were in compliance at June 30, 2010. Management stated that capital resources should be sufficient for planned needs for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue decreased $25.7 million, while gross profit increased $9.2 million and operating profit increased $0.2 million.
- Six-month revenue decreased $64.0 million and operating profit decreased $3.6 million, but income from continuing operations increased $12.2 million and net income attributable to Diebold increased $21.6 million.
- The six-month earnings comparison benefited from the $25.0 million SEC settlement charge recorded in 2009; the penalty was paid in June 2010.
- Financial self-service revenue declined 12.5% in the second quarter and 9.1% for the six months. Security revenue declined 2.2% and 5.2%, respectively.
- Operating expenses increased 7.3% in the second quarter and 8.1% for the six months, including a $4.1 million impairment of TFE customer-contract intangibles.
- Discontinued-operations losses decreased to $0.7 million in the quarter and $1.7 million for the six months, compared with $1.6 million and $8.6 million, respectively, in 2009.
Guidance, Outlook, Risks and Unusual Items
- Management described the market as challenging but cited stabilization and growth in several regions, improved service profitability, greater security-business stability and opportunities in emerging markets, managed services and deposit automation.
- The company stated it was on track to meet its 2010 SmartBusiness 200 cost-savings target and expected to complete a workforce reduction of approximately 350 employees by the end of 2010.
- Management expected to deliver 195,000 election terminals in Brazil during 2010 and stated that production schedules were on track.
- Unusual items included the $4.1 million TFE intangible-asset impairment, $2.3 million of restructuring charges for the six months, $6.4 million of Venezuelan balance-sheet devaluation expense and the SEC penalty payment.
- The company recorded a $5.6 million withdrawal liability settlement related to a multi-employer pension plan in the second quarter.
- Management identified material weaknesses in internal controls over revenue recognition for multiple-deliverable arrangements and income-tax accounting. Disclosure controls were therefore deemed ineffective at June 30, 2010. Remediation was expected by the end of 2010.
- The company voluntarily disclosed potential FCPA-related transactions and payments by its Russian subsidiary to the SEC and DOJ. The outcome and financial impact could not be predicted.
- Other risks include foreign-exchange volatility, Venezuelan currency restrictions, economic weakness affecting financial-institution customers, pension funding requirements, customer and technology acceptance, litigation, cybersecurity and the ability to realize cost savings.
- The company had a maximum exposure of $8.0 million under shared-liability indemnifications related to the sale of its U.S. election-systems business. Various guarantees and standby letters of credit had maximum future obligations of $71.6 million, with no related liability recorded.
- The SEC civil settlement was finalized and paid; separate shareholder securities litigation and Ohio voting-system proceedings remained unresolved, and management could not determine their potential financial impact.
Most Important Facts for Investors to Verify
- Whether North American ATM and security demand recovers after the completed 2009 project and weak branch-construction environment.
- Whether service-margin improvements and SmartBusiness 200 cost savings offset declining product revenue and higher operating expenses.
- Working-capital conversion and the ability to restore positive operating cash flow after the first-half outflow.
- Debt maturities, variable-rate exposure, covenant headroom and continued access to the committed credit facility.
- Completion and effectiveness of remediation for the two material internal-control weaknesses.
- The outcome of the FCPA review and related SEC or DOJ actions, including possible financial, regulatory or customer consequences.
- Potential exposure from shareholder litigation, Ohio voting-system claims, indemnifications and guarantees.
- The sustainability of earnings excluding the favorable comparison created by the 2009 SEC charge and other non-routine items.