Diebold, Incorporated — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2015. The filing identifies the issuer as Diebold, Incorporated, with approximately 16,000 employees and operations in more than 90 countries. Its businesses include financial self-service, security, services, software and related technology. Results are unaudited and are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net sales | $680.9 million | $768.0 million | $2,069.8 million | $2,189.8 million |
| Gross profit | $167.3 million | $200.6 million | $530.1 million | $551.5 million |
| Gross margin | 24.6% | 26.1% | 25.6% | 25.2% |
| Operating profit | $19.6 million | $46.7 million | $53.9 million | $127.2 million |
| Operating margin | 2.9% | 6.1% | 2.6% | 5.8% |
| Net income | $22.9 million | $35.0 million | $41.2 million | $83.0 million |
| Net income attributable to Diebold | $21.7 million | $33.1 million | $41.1 million | $84.5 million |
| Diluted EPS | $0.33 | $0.51 | $0.63 | $1.30 |
- Q3 revenue declined 11.3%; nine-month revenue declined 5.5%. Product sales fell more sharply than services, with Q3 product revenue down approximately 21.3% and service revenue down approximately 2.9%.
- Q3 operating profit fell 58.0%, while nine-month operating profit fell 57.6%. The nine-month decline reflected lower product revenue, restructuring and non-routine charges, and $18.9 million of asset impairments.
- Services generated a 30.1% Q3 gross margin and 30.8% nine-month gross margin, compared with 16.4% and 18.3% for products. Management attributed the nine-month service-margin improvement to service-transformation efforts and mix.
- Q3 net income declined 34.6%; nine-month net income declined 50.4%. Tax benefits produced effective tax rates of negative 34.7% in Q3 and negative 4.3% for nine months, driven by foreign tax credits, releases of uncertain tax positions and Venezuela-related discrete items.
Cash flow, liquidity and capital structure
- Cash flow from operations was negative $120.1 million for the first nine months, compared with negative $110.7 million in the prior-year period. Working capital, particularly receivables, inventories, taxes and deferred revenue, was a significant use of cash.
- Investing cash flow was negative $105.8 million, including $59.4 million for the Phoenix acquisition and $42.9 million of capital expenditures.
- Financing cash flow was positive $133.4 million, including $230.0 million of term-loan borrowings, partially offset by debt repayments and $56.5 million of dividends.
- Cash and cash equivalents were $198.5 million at September 30, 2015, compared with $322.0 million at December 31, 2014. Short-term investments were $99.2 million. Total stated cash and cash availability was $697.2 million, including available credit facilities.
- Total debt was approximately $699.2 million, consisting of $80.9 million of notes payable and $618.3 million of long-term debt, compared with approximately $505.4 million at year-end 2014. The company remained in compliance with its debt covenants.
- The company had $348.9 million available under its revolving credit facility and $50.6 million available under international short-term credit lines. Management intended to refinance the $175.0 million of senior notes maturing in March 2016 through the revolving facility.
- Quarterly dividends remained $0.2875 per share. Pension contributions totaled $12.9 million through September 30, including a voluntary $10.0 million contribution in the first quarter.
Material changes versus the prior comparable period
- Financial self-service revenue decreased 7.4% in Q3 but increased 0.9% for nine months; security revenue increased 4.9% in Q3 and 5.7% for nine months. Brazil other revenue decreased 91.3% in Q3 and 90.3% for nine months.
- North America revenue was flat in Q3 and increased 6.6% for nine months, helped by electronic security, Canadian deposit automation and the Phoenix acquisition. Asia Pacific, EMEA and Latin America revenue declined, primarily due to currency effects, lower product volume and regional economic conditions.
- Latin America operating profit declined 74.3% in Q3 and 45.8% for nine months. Results were affected by Brazil’s economic and political environment, a $4.6 million bad-debt reserve, a $4.7 million inventory reserve, currency effects and lower product volume.
- The company recorded $17.9 million of restructuring charges for nine months, compared with $6.8 million in 2014, and expects an additional $3.0 million to $4.1 million through year-end 2015.
- The company acquired Phoenix Interactive Design for approximately $72.9 million, including $12.6 million of deferred consideration. The acquisition added approximately $42.5 million of preliminary goodwill and $26.8 million of preliminary intangible assets and resulted in a $9.1 million impairment of redundant legacy software.
- The company sold its Venezuela joint-venture interest after recording a net $9.3 million impairment. It continues to operate in Venezuela indirectly.
- Accumulated other comprehensive loss increased to $316.7 million from $190.5 million at year-end 2014, primarily because of foreign-currency translation losses.
Guidance, outlook, risks and unusual items
- Management did not provide a specific revenue or earnings outlook in the filing. It expects capital resources to fund working capital, investments, pension contributions, dividends and potential share repurchases for at least the next 12 months.
- The Diebold 2.0 transformation targets $200.0 million of savings fully realized by the end of 2017, with approximately half of the savings intended for reinvestment. The company was transitioning from the “Crawl” phase to the “Walk” phase, emphasizing services, software and portfolio reshaping.
- On October 25, 2015, the company agreed to sell its North American electronic security business to Securitas Electronic Security for approximately $350.0 million in cash. Ten percent of the consideration is contingent on customer-transition performance, and closing was expected in the first quarter of 2016 subject to regulatory and other conditions. The company also agreed to provide transition services and a $6.0 million service credit.
- On October 17, 2015, the company disclosed a non-binding term sheet concerning a potential combination with Wincor Nixdorf. No definitive agreement had been reached, and completion was uncertain.
- Material risks include foreign-exchange volatility, weak economic and political conditions in Brazil, competitive and pricing pressure, customer and product adoption risk, execution of the transformation plan, refinancing requirements, pension funding, cybersecurity, and the ability to complete the electronic-security divestiture or any Wincor Nixdorf transaction.
- Indirect-tax contingencies were estimated at up to approximately $166.9 million, including approximately $118.3 million related to Brazil and $26.0 million related to Thailand. The Brazil matter had an $8.4 million accrual; no accrual was recorded for the Thailand matter.
- Guarantees and standby letters of credit had maximum future payment obligations of $105.0 million, with no associated liability recorded. Warranty liability was $77.3 million at September 30, 2015.
- Management stated that disclosure controls and procedures were effective. A phased North American enterprise-resource-planning implementation was underway, with remaining implementation expected in the fourth quarter of 2015 and during 2016.
Investor verification checklist
- Verify the company’s ability to refinance the $175.0 million senior-note maturity in March 2016 without constraining liquidity or increasing borrowing costs.
- Assess whether operating cash flow can recover from the first-nine-month outflow of $120.1 million and support dividends, pension contributions, acquisitions and transformation spending.
- Track execution of the Diebold 2.0 savings program, expected restructuring costs and the conversion of savings into sustainable service and software growth.
- Evaluate the impact of currency movements and continuing weakness in Brazil, China and other emerging markets on revenue, margins and receivables.
- Confirm closing terms, contingent consideration and proceeds from the electronic-security divestiture, and monitor the status and financing implications of the proposed Wincor Nixdorf combination.
- Review developments in the Brazil and Thailand indirect-tax matters, including potential exposure beyond recorded accruals.