Business Context and Reporting Period
Diebold Nixdorf, Incorporated filed its Form 10-K for the fiscal year ended December 31, 2020. The company provides connected-commerce hardware, software and services to financial institutions and retailers in more than 100 countries, with approximately 22,000 employees. Reportable segments are Eurasia Banking, Americas Banking and Retail. The filing also provides unaudited fourth-quarter information.
Services represented approximately 61% of 2020 revenue, and international operations represented approximately 75% of revenue. The business was materially affected by COVID-19-related installation delays, customer spending reductions, supply-chain uncertainty and foreign-currency movements.
Key Financial Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $3,902.3 million | $4,408.7 million | Down 11.5% |
| Gross profit | $1,035.0 million | $1,067.1 million | Down 3.0% |
| Total gross margin | 26.5% | 24.2% | Up 2.3 percentage points |
| Operating profit (loss) | $24.0 million | $(26.6) million | Improved $50.6 million |
| Operating margin | 0.6% | (0.6)% | Improved 1.2 percentage points |
| Net loss | $(267.8) million | $(344.6) million | Improved $76.8 million |
| Loss attributable to Diebold Nixdorf | $(269.1) million | $(341.3) million | Improved $72.2 million |
| Basic and diluted loss per share | $(3.47) | $(4.45) | Improved $0.98 |
| Cash flow from operating activities | $18.0 million | $135.8 million | Down $117.8 million |
Services revenue was $2,364.4 million, down from $2,608.0 million, while product revenue was $1,537.9 million, down from $1,800.7 million. Services gross margin increased to 29.5% from 26.3%, and product gross margin increased to 21.9% from 21.1%.
- Year-end cash, cash equivalents and restricted cash were $324.5 million; short-term investments were $37.2 million.
- Total stated cash and availability were $685.9 million, including $283.1 million available under the revolving credit facility, $41.1 million under uncommitted lines and $37.2 million of short-term investments.
- Long-term debt was $2,335.7 million, and total contractual long-term debt obligations were approximately $2,401.0 million before considering interest.
- Net debt to trailing twelve-month adjusted EBITDA was 4.1 times at year-end. The company reported compliance with its debt covenants.
- Cash interest paid was $138.1 million, compared with $189.7 million in 2019. Reported interest expense increased to $292.7 million, primarily because of refinancing-related make-whole premiums and deferred financing-cost write-offs.
- Total equity was negative $831.7 million, compared with negative $506.3 million at December 31, 2019.
- Product backlog was $981 million at December 31, 2020, compared with $796 million at December 31, 2019; backlog is not measured for the service business.
- No dividends were paid in 2019 or 2020.
Material Changes Versus the Prior Comparable Period
- Revenue declined in all segments: Eurasia Banking fell 13.3%, Americas Banking fell 11.5% and Retail fell 8.9%.
- Revenue reductions primarily reflected COVID-19 installation delays, prior-year non-recurring refresh projects, divestitures, and the deliberate reduction of lower-margin services business.
- Despite lower revenue, gross margin improved through service modernization, favorable product and geographic mix, cost controls, lower software amortization and the DN Now transformation.
- Segment operating profit increased in Eurasia Banking to $177.8 million from $169.3 million, in Americas Banking to $191.0 million from $119.7 million, and in Retail to $77.6 million from $58.3 million.
- Operating expenses declined 7.6% to $1,011.0 million. Impairment charges fell to $7.5 million from $30.2 million, although the company recorded an $11.5 million net loss on asset sales and divestitures.
- Operating cash flow declined sharply because of higher inventories associated with pandemic-related revenue delays, higher trade receivables, and income-tax payments.
- In July 2020, the company issued approximately $1.1 billion of 2025 senior secured notes and used the proceeds and cash on hand to repay term loans and part of its revolving borrowings. The refinancing extended maturities, with no significant debt maturities expected until 2023.
- Goodwill increased to $800.4 million primarily because of foreign-currency translation. The annual impairment test resulted in no goodwill impairment, although the EMEA Retail reporting unit had only approximately 15% excess fair value over carrying value.
Fourth-Quarter Information
Fourth-quarter 2020 net sales were $1,105.9 million, compared with $1,151.6 million in the fourth quarter of 2019. Gross profit was $276.5 million versus $270.4 million. Net loss was $50.4 million versus $122.6 million, and loss attributable to Diebold Nixdorf was $51.2 million versus $122.6 million. Fourth-quarter basic and diluted loss per share was $0.66 versus $1.60 in the prior-year quarter.
Guidance, Outlook, Commentary and Risks
- DN Now has a gross annualized savings target of approximately $500 million through 2021. The company expects approximately $160 million of additional savings during 2021; approximately $175 million and $165 million of annualized gross run-rate savings were achieved in 2019 and 2020, respectively.
- The company expects approximately $85 million of 2021 capital expenditures, capitalized software development and cloud-based software implementation costs.
- Management stated that available capital resources should be sufficient for at least the next 12 months to fund working capital, research and development, facilities, equipment, pension contributions and permitted share repurchases.
- Management intends to emphasize free-cash-flow conversion and growth while completing the DN Now transformation and accelerating digital and cloud initiatives, including its strategic relationship with Accenture.
- COVID-19 remains a material uncertainty affecting customer demand, installations, supply chains, manufacturing, field technicians and cash flow. The filing states that the ultimate financial impact cannot reasonably be estimated and could be material.
- Principal financial risks include substantial leverage, debt-service requirements, restrictive covenants, variable interest rates and the transition away from LIBOR.
- Other significant risks include cybersecurity and data-privacy incidents, foreign exchange, supplier and manufacturing concentration, declining cash usage and ATM demand, competition, tax contingencies, pension obligations, impairment of goodwill and pending litigation.
- Indirect tax matters carried an estimated aggregate reasonably possible exposure of up to $74.0 million. The company also faces German appraisal proceedings related to compensation offered in connection with the Diebold Nixdorf AG domination agreement and squeeze-out, as well as consolidated U.S. securities litigation; outcomes were not estimable from the filing.
- Management and KPMG LLP reported effective internal control over financial reporting as of December 31, 2020, and KPMG issued unqualified audit opinions on the financial statements and internal controls.
Important Facts for Investors to Verify
- Whether DN Now savings are sustained and converted into operating cash flow after restructuring and transformation payments.
- Whether COVID-19-related installation delays, customer deferrals and supply-chain issues affect 2021 revenue and working capital.
- The company’s ability to meet debt maturities beginning in 2023, reduce leverage and comply with tightening covenant thresholds.
- The sustainability of positive operating profit given the large interest burden, recurring restructuring costs and negative shareholders’ equity.
- The valuation sensitivity of the $800.4 million goodwill balance, particularly the EMEA Retail reporting unit’s approximately 15% impairment-test cushion.
- The ultimate outcomes and potential cash exposure from indirect tax matters, German appraisal proceedings and securities litigation.
- Progress in converting backlog and remaining performance obligations into revenue; the filing reports approximately $1.5 billion of remaining performance obligations, generally expected to be recognized over the next 12 months.