Diebold Nixdorf(DBD) - 2018 Q4 - Annual Report

Part I Item 1: Business Diebold Nixdorf leads in 'Connected Commerce,' offering integrated solutions, services, and technology for banking and retail, focusing on consumer experience and operational efficiency via its 'DN Now' program - The company's core strategy is to enhance consumer banking and shopping experiences by integrating hardware, software, and services, while streamlining costs[8] - The 'DN Now' transformation program is a multi-year initiative aimed at improving operational excellence and customer focus. It targets approximately $400 million in gross annualized savings through 2021, with $160 million anticipated in 2019[9] - The business is structured into two primary customer segments: Banking (serving financial institutions) and Retail (serving retailers), offering a portfolio of services, software, and systems[10] Product Backlog (as of Dec 31) | Year | Product Backlog (in millions) | | :--- | :--- | | 2018 | $1,012.7 | | 2017 | $1,026.7 | - The company competes with major players such as NCR, Nautilus Hyosung, and GRG Banking in the banking sector, and with firms like Toshiba, Fujitsu, and Oracle in the retail market[25][28] Item 1A: Risk Factors The company faces significant risks from its 2016 acquisition, high debt, DN Now execution, operational challenges, competition, international volatility, cybersecurity, and internal control weaknesses - The company may fail to realize the anticipated strategic and financial benefits from the 2016 acquisition of Diebold Nixdorf AG and may not achieve the goals of its DN Now transformation program, which could adversely affect operating results[43][46] - A high level of indebtedness and restrictive covenants in debt agreements could make it difficult to service or refinance debt, limiting operational flexibility. The revolving credit facility and Term Loan A Facility mature in December 2020[50][52][57] - International operations, which accounted for 77.1% of revenue in 2018, expose the company to risks such as currency fluctuations, political instability, and changes in trade policies, including U.S. tariffs on goods imported from China[95][96][99] - The company recorded a $217.5 million non-cash goodwill impairment loss for the year ended December 31, 2018, and future impairments could occur if market conditions or assumptions change[108] - Management identified material weaknesses in internal control over financial reporting as of December 31, 2018, related to information technology general controls (ITGCs), inventory valuation, and controls over non-routine transactions[128] Item 1B: Unresolved Staff Comments The company reports that it has no unresolved staff comments from the U.S. Securities and Exchange Commission - There were no unresolved staff comments as of the filing date[153] Item 2: Properties The company maintains its corporate office in North Canton, Ohio, with manufacturing in North Carolina, Brazil, and Germany, alongside global administrative and sales offices - The company owns or leases manufacturing facilities in Greensboro, North Carolina; Brazil; and Germany[154] - Principal administrative, sales, and service offices are located across the Americas, EMEA (Europe, Middle East, and Africa), and AP (Asia Pacific) regions[154] Item 3: Legal Proceedings The company faces routine lawsuits and significant indirect tax contingencies, with an estimated aggregate risk of up to $106.1 million, mainly from Thailand customs duties - The company is challenging multiple customs rulings in Thailand regarding retroactive duties on ATM imports. Management believes it has a valid legal position and has not accrued for this contingency[158][160] - In 2018, a $4.9 million accrual related to a Brazil indirect tax matter was fully reversed after the statute of limitations expired[160] - The estimated aggregate risk for material indirect tax matters was up to $106.1 million as of December 31, 2018, including $27.0 million for the Thailand customs matter[161] Item 4: Mine Safety Disclosures This item is not applicable to the company - The company has no mine safety disclosures to report[162] Part II Item 5: Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities DBD shares trade on NYSE, experiencing significant 2018 volatility; annualized dividends were reduced to $0.10, with no Q4 2018 share repurchases Common Stock Price Range (DBD) | Year | High ($) | Low ($) | | :--- | :--- | :--- | | 2018 | 19.05 | 2.41 | | 2017 | 31.85 | 16.00 | | 2016 | 29.80 | 21.05 | Annualized Dividends Per Share | Year | Dividend per Share ($) | | :--- | :--- | | 2018 | 0.10 | | 2017 | 0.40 | | 2016 | 0.96 | Item 6: Selected Financial Data This section summarizes five-year financial data, showing 2018 net sales flat at $4.6 billion, a $(566.0) million net loss, and total debt increasing to $2.24 billion Selected Financial Data (in millions, except per share data) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | $4,578.6 | $4,609.3 | $3,316.3 | $2,419.3 | $2,734.8 | | (Loss) income from continuing operations | $(566.0) | $(213.9) | $(179.3) | $57.8 | $104.7 | | Loss per share from continuing operations | $(7.48) | $(3.20) | $(2.68) | $0.89 | $1.62 | | Common dividends paid per share | $0.10 | $0.40 | $0.96 | $1.15 | $1.15 | | Total assets | $4,311.9 | $5,222.0 | $5,270.3 | $2,242.4 | $2,342.1 | | Total debt | $2,239.5 | $1,853.8 | $1,798.3 | $638.2 | $505.4 | Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations In 2018, Diebold Nixdorf pursued its DN Now program, saw net sales decrease by 0.7% to $4.6 billion, a $(566.0) million net loss due to impairment, and negative operating cash flow, while raising $650 million in new debt Results of Operations: 2018 vs 2017 In 2018, net sales decreased by 0.7% to $4,578.6 million, operating loss widened to $(362.9) million due to a goodwill impairment, gross margin contracted, and net loss increased to $(566.0) million Net Sales by Segment (2018 vs 2017, in millions) | Segment | 2018 | 2017 | % Change | | :--- | :--- | :--- | :--- | | Eurasia Banking | $1,800.2 | $1,903.4 | (5.4)% | | Americas Banking | $1,515.7 | $1,525.6 | (0.6)% | | Retail | $1,262.7 | $1,180.3 | 7.0% | | Total net sales | $4,578.6 | $4,609.3 | (0.7)% | Key Profitability Metrics (2018 vs 2017, in millions) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Gross Profit | $890.9 | $999.8 | | Gross Margin | 19.5% | 21.7% | | Operating Loss | $(362.9) | $(93.5) | | Net Loss from Continuing Operations | $(566.0) | $(213.9) | - The significant increase in operating loss was primarily driven by a non-cash goodwill impairment charge of $217.5 million recorded in 2018[197][199] Results of Operations: 2017 vs 2016 Fiscal year 2017 saw net sales increase by 39.0% to $4,609.3 million due to the Diebold Nixdorf AG acquisition, while operating loss narrowed to $(93.5) million despite acquisition-related costs Net Sales by Segment (2017 vs 2016, in millions) | Segment | 2017 | 2016 | % Change | | :--- | :--- | :--- | :--- | | Eurasia Banking | $1,903.4 | $1,232.6 | 54.4% | | Americas Banking | $1,525.6 | $1,567.3 | (2.7)% | | Retail | $1,180.3 | $516.4 | 128.6% | | Total net sales | $4,609.3 | $3,316.3 | 39.0% | - The significant increase in net sales was primarily driven by incremental revenue of $1,517.7 million from the 2016 acquisition of Diebold Nixdorf AG[218] - The operating loss decreased to $(93.5) million in 2017 from $(169.8) million in 2016, as higher gross margin from the acquisition more than offset increased operating expenses[233] Liquidity and Capital Resources In 2018, liquidity weakened with cash and availability decreasing to $762.1 million, net cash used in operations was $(104.1) million, debt increased via a new $650 million term loan, and dividends were reduced Consolidated Cash Flow Summary (in millions) | Cash Flow Activity | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Operating activities | $(104.1) | $37.1 | $39.3 | | Investing activities | $34.4 | $(120.8) | $(923.3) | | Financing activities | $10.9 | $(63.7) | $881.3 | - Total cash and cash availability decreased from $1,278.5 million at year-end 2017 to $762.1 million at year-end 2018[252] - In May 2018, the company decided to reallocate future dividend funds towards debt reduction and other capital needs, after paying dividends of $7.7 million in 2018[267] Critical Accounting Policies and Estimates Critical accounting policies involve revenue recognition (Topic 606 adopted in 2018), goodwill impairment (significant charge in 2018), and complex income tax estimates due to global operations and the 2017 U.S. Tax Act - The company adopted ASU Topic 606 (Revenue from Contracts with Customers) on January 1, 2018, using the cumulative effect method, resulting in a $4.6 million increase to retained earnings[388][389][443] - Goodwill is tested for impairment at the reporting unit level. The fair value of reporting units is determined using a combination of income and market approaches, which rely on significant estimates like future cash flows, discount rates, and growth rates[297][298] - The company's accounting for income taxes involves complex estimates regarding deferred tax assets and liabilities, valuation allowances, and uncertain tax positions, particularly following the 2017 U.S. Tax Act[303][304] Item 7A: Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from foreign currency and interest rates; a 10% adverse FX movement would decrease 2018 operating profit by $9.1 million, and a 1% interest rate increase would raise interest expense by $14.6 million - A hypothetical 10% adverse movement in foreign exchange rates would have decreased 2018 operating profit by $9.1 million[317] - A one percentage point increase in interest rates would have increased 2018 interest expense by $14.6 million[319] Item 8: Financial Statements and Supplementary Data This section presents audited financial statements for 2016-2018; KPMG LLP issued an unqualified opinion on financials but an adverse opinion on internal control effectiveness due to material weaknesses as of December 31, 2018 - The independent auditor, KPMG LLP, issued an adverse opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2018[327][333] - Material weaknesses were identified related to ineffective controls over information technology general controls (user access), inventory valuation, and non-routine transactions[335] Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This item is not applicable to the company - The company reports no changes in or disagreements with its accountants on accounting and financial disclosure[643] Item 9A: Controls and Procedures Management concluded disclosure controls were not effective as of December 31, 2018, due to material weaknesses in IT general controls, inventory valuation, and non-routine transactions, with a remediation plan underway - The CEO and CFO concluded that disclosure controls and procedures were not effective as of December 31, 2018[645] - Material weaknesses were identified in: (1) IT general controls related to user access, (2) controls over inventory valuation, and (3) controls over non-routine transactions[650][651][653] - A remediation plan is underway, which includes improving the risk assessment process, enhancing communication, revoking inappropriate IT access, and implementing more precise controls[658] Item 9B: Other Information There is no other information to report under this item - None[659] Part III Item 10: Directors, Executive Officers and Corporate Governance This section details executive officers, including CEO Gerrard B. Schmid and CFO Jeffrey L. Rutherford, confirms a Code of Business Ethics, and incorporates director and governance information by reference from the 2019 proxy statement - Most information for this item, including details on directors and the audit committee, is incorporated by reference from the 2019 Annual Meeting Proxy Statement[663] - The company maintains a Code of Business Ethics (COBE) applicable to all directors, officers, and employees[664] Item 11: Executive Compensation Information regarding executive and director compensation is incorporated by reference from the company's proxy statement for the 2019 Annual Meeting - All information related to executive compensation is incorporated by reference from the 2019 Annual Meeting Proxy Statement[666] Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section, largely referenced from the 2019 proxy statement, includes equity compensation plan details, showing 7.1 million securities issuable and 3.6 million available for future issuance as of year-end 2018 Equity Compensation Plan Information (as of Dec 31, 2018) | Plan Category | Securities to be Issued Upon Exercise (a) | Weighted-Average Exercise Price (b) | Securities Remaining for Future Issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 7,144,217 | $27.05 | 3,600,000 | Item 13: Certain Relationships and Related Transactions and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the company's proxy statement for the 2019 Annual Meeting - All information for this item is incorporated by reference from the 2019 Annual Meeting Proxy Statement[670] Item 14: Principal Accountant Fees and Services Information regarding fees paid to the principal accountant, KPMG LLP, and the services provided is incorporated by reference from the company's proxy statement for the 2019 Annual Meeting - All information for this item is incorporated by reference from the 2019 Annual Meeting Proxy Statement[671] Part IV Item 15: Exhibits and Financial Statement Schedules This section lists all Form 10-K exhibits, including financial statements, various agreements, compensatory plans, and certifications, with all financial statement schedules omitted - This item lists the financial statements, financial statement schedules (all omitted), and exhibits filed with the annual report[673][674] - Exhibits include key corporate documents, debt agreements, employment and compensation plans, and certifications by the CEO and CFO[674][676][677] Item 16: Form 10-K Summary The company did not provide a summary under this optional item - None[680]