Diebold Nixdorf, Inc. — Q1 2022 Form 10-Q Summary
Business Context and Reporting Period
Diebold Nixdorf provides connected commerce technology, products, software, and services to banking and retail customers in more than 100 countries. Reported segments are Eurasia Banking, Americas Banking, and Retail. This unaudited Form 10-Q covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $829.8 million | $943.9 million | Down 12.1% |
| Gross profit | $185.3 million | $273.2 million | Down 32.2% |
| Gross margin | 22.3% | 28.9% | Down 660 basis points |
| Operating profit (loss) | $(83.4) million | $36.2 million | Declined $119.6 million |
| Operating margin | (10.1%) | 3.8% | Down 1,390 basis points |
| Net loss attributable to Diebold Nixdorf | $(183.1) million | $(8.1) million | Loss increased |
| Loss per share | $(2.33) | $(0.10) | Worsened |
| Cash flow from operations | $(226.2) million | $(65.2) million | Use increased $161.0 million |
Service revenue was $526.2 million, with a 28.9% gross margin, while product revenue was $303.6 million, with an 11.0% gross margin. Approximately 63% of revenue was recognized over time and 37% at a point in time.
At March 31, 2022, cash, cash equivalents, and restricted cash were $224.7 million, compared with $388.9 million at December 31, 2021. Total reported cash availability was $476.4 million, including cash, short-term investments, available revolving capacity, uncommitted credit lines, and cash held for sale.
Total debt was approximately $2.35 billion before deferred financing fees, including $135.9 million outstanding under the 2023 Revolving Facility and $2.34 billion of reported long-term debt after deferred financing fees. The company reported a net debt to trailing twelve-month adjusted EBITDA ratio of 6.4 times and was in compliance with its debt covenants at quarter-end.
Total equity was negative $1.01 billion at March 31, 2022, compared with negative $837.0 million at December 31, 2021.
Material Changes Versus the Prior Comparable Period
- Revenue declined across all segments: Eurasia Banking fell 15.2%, Americas Banking fell 8.6%, and Retail fell 12.3%.
- On a constant-currency basis, consolidated revenue declined 8.7%. The reported decline included a $35.5 million unfavorable currency impact, divestiture effects, and lower Russia and Ukraine revenue.
- Services gross margin decreased 320 basis points because of labor inflation, higher third-party labor costs, lower installation activity, and lower fixed-cost absorption.
- Product gross margin decreased 1,310 basis points because of higher logistics costs and raw-material inflation.
- Operating expenses increased 13.4% to $268.7 million, primarily because of $55.2 million of asset impairment charges. This was partly offset by the absence of $22.6 million of restructuring and DN Now transformation expenses recorded in Q1 2021.
- Operating cash flow deteriorated because of the larger net loss, inventory growth, payment timing, and a $77.7 million reduction in accounts payable. Inventory increased to $620.8 million from $544.2 million at year-end.
- Financing activities provided $65.6 million, principally from $75.0 million of net revolving credit borrowings, compared with a $24.9 million financing cash use in Q1 2021.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management said capital resources are expected to be sufficient for planned working capital, research and development, capital investments, and pension contributions for at least the next 12 months. However, the company continues to face substantial negative operating cash flow and high leverage.
- Supply-chain disruptions, longer lead times, semiconductor availability, freight constraints, inflation, and customer-site logistics materially affected revenue and margins. Management is pursuing supply-chain optimization and price increases.
- The company indefinitely suspended its North American cloud-based ERP implementation and recorded a $38.4 million impairment of related capitalized costs. Remaining capitalized cloud implementation costs were $16.6 million.
- Because of the Russia-Ukraine conflict and related sanctions, the company began liquidating its Russian distribution subsidiary and recorded a $16.8 million impairment related to Russia, Ukraine, and Belarus assets and receivables. Revenue from affected Russian, Ukrainian, and Belarusian operations may not be re-established.
- On May 10, 2022, after the reporting date, the company announced a new initiative targeting annualized cost savings of more than $150 million over the following 12 to 18 months. The initiative is not reflected in the March 31 financial statements.
- The company disclosed no material change to previously reported risk factors. Key risks include supply-chain disruption, COVID-19 effects, inflation, foreign-exchange volatility, cybersecurity, debt service and refinancing capacity, covenant compliance, customer capital spending, competition, geopolitical conflict, litigation, and execution of restructuring and strategic initiatives.
- Potentially material contingencies include indirect tax matters with aggregate estimated risk of up to $55.7 million, German appraisal proceedings related to former Diebold Nixdorf AG transactions, and guarantees with maximum future contractual obligations of $158.1 million. No associated guarantee liability was recorded.
Important Facts for Investors to Verify
- Whether revenue and installation activity recover as supply-chain constraints and customer-site delays ease.
- Whether product and service margins improve sufficiently to offset inflation, logistics costs, and lower fixed-cost absorption.
- Liquidity, borrowing needs, and compliance with progressively tighter leverage and interest-coverage covenants.
- Progress and achievable timing of the announced cost-savings initiative targeting more than $150 million of annualized savings.
- Further financial effects from the Russia-Ukraine conflict, including liquidation costs, collectability of receivables, and loss of regional revenue.
- Whether additional impairments may be required for goodwill, capitalized software, cloud implementation costs, or other long-lived assets.
- The outcome and potential cash exposure from the German appraisal proceedings and indirect tax matters.
- The company’s ability to reverse substantial negative operating cash flow while carrying approximately $2.35 billion of debt and negative shareholders’ equity.