DIEBOLD NIXDORF, Inc quarterly report, Q1 FY2020

Business Context and Reporting Period

Diebold Nixdorf, Incorporated is a global provider of connected-commerce solutions for financial institutions and retailers, including ATMs, point-of-sale and self-checkout systems, software, managed services and professional services. The filing covers the unaudited quarter ended March 31, 2020, with comparison to March 31, 2019. The company operates through Eurasia Banking, Americas Banking and Retail segments and had approximately 22,000 employees in more than 100 countries.

Key Financial Metrics

Metric	Q1 2020	Q1 2019	Change
Net sales	$910.7 million	$1,028.1 million	Down 11.4%; down 9.3% in constant currency
Gross profit	$226.8 million	$246.1 million	Down 7.8%
Gross margin	24.9%	23.9%	Up 1.0 percentage point
Operating loss	$26.0 million	$24.5 million	Operating margin declined to negative 2.9% from negative 2.4%
Net loss	$93.4 million	$131.9 million	Improved by $38.5 million
Net loss attributable to Diebold Nixdorf	$92.8 million	$132.7 million	Loss per share improved to $(1.20) from $(1.74)
Cash flow from operations	$(79.9) million	$(57.1) million	Greater use of cash by $22.8 million
Capital expenditures	$5.4 million	$14.7 million	Down $9.3 million

Services revenue was $587.8 million, down from $628.7 million, while product revenue was $322.9 million, down from $399.4 million. Services gross margin increased to 25.6% from 25.0%; product gross margin increased to 23.7% from 22.3%.

Segment revenue: Eurasia Banking $310.5 million, down 18.8%; Americas Banking $344.7 million, down 5.0%; Retail $255.5 million, down 9.7%.
Segment operating profit: Eurasia Banking $31.7 million versus $33.7 million; Americas Banking $53.7 million versus $18.5 million; Retail $15.3 million versus $8.1 million.
Balance sheet: Cash, cash equivalents and restricted cash were $512.1 million versus $280.9 million at December 31, 2019. Total assets were $3.84 billion.
Debt: Current notes payable were $103.4 million and long-term debt was $2.35 billion, compared with $32.5 million and $2.11 billion, respectively, at year-end 2019. The company drew its full revolving facility during the quarter.
Liquidity: Cash and cash equivalents excluding restricted cash were $508.5 million. Total cash and cash availability was $587.9 million, down from $808.5 million at December 31, 2019, primarily because the revolving facility was fully drawn.
Leverage and covenants: Net debt to trailing twelve-month adjusted EBITDA was 4.2 times. The company stated that it was in compliance with its debt covenants at March 31, 2020.
Equity: Total shareholders’ equity attributable to Diebold Nixdorf was negative $727.9 million, and total equity was negative $710.6 million.

Material Changes Versus the Prior Comparable Period

Revenue declined primarily because of unfavorable currency movements, prior-year non-recurring refresh and point-of-sale projects, divestitures, reduced low-margin services activity and early COVID-19-related customer and supply-chain disruptions.
Gross margin improved despite lower revenue, reflecting service modernization, improved product and geographic mix, lower software amortization and reduced incentive compensation. These benefits were partly offset by non-routine charges.
Selling and administrative expense declined 3.6% and research, development and engineering expense declined 11.9%, largely due to DN Now cost reductions, lower incentive compensation and cost-management actions.
Operating loss increased modestly because higher restructuring and non-routine charges offset operating-cost savings and gross-margin improvement.
Cash used in operations increased as working-capital movements, cash bonuses, assets held for sale and other operating items more than offset the lower net loss. Financing cash flow increased by $327.9 million because of the revolving-facility draw.
Other comprehensive loss was $105.5 million, primarily due to a $96.6 million currency-translation loss and losses on interest-rate hedges, compared with other comprehensive income of $0.8 million in Q1 2019.

Outlook, Commentary, Risks and Unusual Items

Management stated that COVID-19 did not have a material adverse effect on reported first-quarter results, but expected the pandemic to affect operations and results for the remainder of 2020. The duration and financial impact could not be reasonably estimated.
The company activated pandemic response procedures, maintained manufacturing operations, continued customer service and was designated critical infrastructure by the U.S. Department of Homeland Security and other governments. It also reported facility closures in certain jurisdictions, supply-chain risks and possible staffing constraints.
Management expects sufficient liquidity for at least the next 12 months, while acknowledging uncertainty regarding customers, suppliers, macroeconomic conditions and the pandemic. The company drew its revolving facility as a precaution and stated that no additional availability remained after letters of credit.
DN Now targets approximately $440 million of gross annualized savings through 2021. Approximately $175 million of annualized gross run-rate savings had been achieved in 2019. The company targeted an additional $80 million to $100 million of annualized savings through measures including bonus reductions, deferred merit increases, a hiring freeze, project suspensions and real-estate consolidation.
The company expects approximately $40 million to $60 million of additional restructuring costs through the end of the DN Now plan. Q1 restructuring expense was $10.0 million versus $3.8 million in Q1 2019.
Significant Q1 non-routine items included a $12.0 million onerous-contract provision, a $3.3 million spare-parts inventory provision, $1.8 million of incremental payments to essential service technicians and $4.8 million of indemnification costs related to a previously divested German business.
The company sold Portavis GmbH, a non-core Eurasia Banking consulting business, for $10.1 million of cash consideration excluding cash divested and recorded a $1.8 million gain.
A first-quarter goodwill triggering-event analysis found sufficient fair-value cushion for the Eurasia Banking, Americas Banking and EMEA Retail reporting units, with no impairment recorded. Management will continue monitoring potential COVID-19-related impairment triggers.
Material contingencies include estimated indirect-tax exposure of up to $89.1 million, including $30.4 million related to Thailand customs matters; German appraisal proceedings concerning former Diebold Nixdorf AG compensation; and consolidated U.S. securities class-action litigation. Management stated that it intends to defend these matters vigorously and cannot predict their outcomes.
Guarantees and standby letters of credit had maximum future payment obligations of $91.5 million, with no associated liability recorded.

Important Facts for Investors to Verify

Whether COVID-19 caused a larger-than-disclosed deterioration in second-quarter and subsequent revenue, service activity, supply chains or customer capital spending.
Whether the company can achieve the DN Now savings targets and whether the remaining $40 million to $60 million of restructuring costs are sufficient.
Liquidity after the full revolving-facility draw, including the $68.8 million portion maturing in December 2020, scheduled term-loan amortization and refinancing requirements.
Compliance with increasingly restrictive leverage and interest-coverage covenants, including the stated 7.00-to-1.00 maximum leverage ratio at March 31, 2020 and scheduled step-downs.
The sustainability of improved segment margins despite lower revenue and increased non-routine charges.
Potential goodwill, intangible-asset, receivable and inventory impairments as pandemic-related assumptions change.
The ultimate amounts and timing of payments related to tax contingencies, German appraisal proceedings, U.S. securities litigation and other legal claims.
Foreign-exchange, interest-rate and pension-funding exposure, particularly given the $105.5 million quarterly other comprehensive loss.