Diebold Nixdorf(US:DBD)2019-10-29 21:09markdown Part I - Financial Information [Item 1: Financial Statements (Unaudited)](index=3&type=section&id=Item%201%3A%20Financial%20Statements%20(Unaudited)) Unaudited financial statements for Q3 2019 show a reduced net loss, decreased total assets, and the adoption of ASC 842 [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) | Account | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | **Assets** | | | | Cash, cash equivalents and restricted cash | $252.3 | $458.4 | | Total current assets | $1,870.4 | $2,203.4 | | Goodwill | $773.4 | $827.1 | | Total assets | $3,889.1 | $4,311.9 | | **Liabilities & Equity** | | | | Total current liabilities | $1,546.1 | $1,568.4 | | Long-term debt | $2,100.3 | $2,190.0 | | Total liabilities | $4,314.3 | $4,341.1 | | Total equity | $(425.2) | $(159.6) | [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) | Metric | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $1,078.8 | $1,119.0 | $3,257.1 | $3,288.8 | | Gross Profit | $271.5 | $228.9 | $796.7 | $689.0 | | Operating Profit (Loss) | $23.2 | $(160.3) | $6.0 | $(310.4) | | Net Loss | $(34.8) | $(244.6) | $(222.0) | $(438.5) | | Basic and Diluted Loss Per Share | $(0.46) | $(3.13) | $(2.86) | $(5.86) | [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) | Cash Flow Activity | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net cash provided (used) by operating activities | $7.4 | $(372.1) | | Net cash provided by investing activities | $10.2 | $90.1 | | Net cash (used) provided by financing activities | $(184.9) | $196.9 | | Decrease in cash, cash equivalents and restricted cash | $(174.5) | $(99.5) | [Notes to Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Notes detail accounting policies, lease standard adoption, restructuring, debt, legal contingencies, and corporate structure - The company adopted the new lease accounting standard ASC 842 on January 1, 2019, recognizing right-of-use (ROU) assets and corresponding lease liabilities on the balance sheet. This resulted in the recognition of **$169.1 million** in operating ROU assets[26](index=26&type=chunk)[40](index=40&type=chunk) - The DN Now transformation program, initiated in Q2 2018, targets approximately **$400 million** in gross annualized savings through 2021. Restructuring charges of **$19.8 million** were incurred in the first nine months of 2019, primarily for severance[77](index=77&type=chunk) - In May 2019, the company completed the merger/squeeze-out of Diebold Nixdorf AG, increasing its ownership to **100%** and streamlining its corporate structure. This resulted in a significant reduction of the redeemable noncontrolling interests balance[101](index=101&type=chunk) - The company is party to legal proceedings, including appraisal proceedings in Germany related to the Diebold Nixdorf AG acquisition and putative class action lawsuits in the U.S. alleging violations of federal securities laws[142](index=142&type=chunk)[147](index=147&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=44&type=section&id=Item%202%3A%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses performance, highlighting the DN Now program, improved gross margin, and significantly better operating cash flow [Overview and Strategy](index=54&type=section&id=Overview%20and%20Strategy) - The company's strategy is to enable Connected Commerce by integrating hardware, software, and services to enhance the consumer experience in banking and retail, while streamlining costs for its clients[185](index=185&type=chunk)[186](index=186&type=chunk) - The DN Now transformation program is a key strategic initiative focused on improving operational excellence, streamlining the operating model, modernizing services, optimizing the product portfolio, and reducing expenses. The program targets approximately **$400 million** in gross annualized savings through 2021[187](index=187&type=chunk) [Results of Operations](index=58&type=section&id=Results%20of%20Operations) Net Sales by Segment - Nine Months Ended Sep 30 (in millions) | Segment | 2019 | 2018 | % Change | % Change in CC | | :--- | :--- | :--- | :--- | :--- | | Eurasia Banking | $1,218.0 | $1,306.9 | (6.8)% | (1.4)% | | Americas Banking | $1,186.3 | $1,086.8 | 9.2% | 10.1% | | Retail | $852.8 | $895.1 | (4.7)% | 1.1% | | **Total** | **$3,257.1** | **$3,288.8** | **(1.0)%** | **3.2%** | Gross Profit and Margin - Nine Months Ended Sep 30 | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Gross Profit | $796.7M | $689.0M | | Gross Margin | 24.5% | 20.9% | | Services Gross Margin | 26.3% | 22.8% | | Products Gross Margin | 21.8% | 17.9% | - Operating loss for the nine months ended Sep 30, 2019 improved to **$6.0 million** from a loss of **$310.4 million** in the prior year, primarily due to the absence of the **$217.5 million** goodwill impairment charge recorded in 2018 and improved gross profit[231](index=231&type=chunk) - Interest expense for the nine months ended Sep 30, 2019 increased by **$53.7 million** to **$153.3 million**, mainly due to the additional **$650.0 million** Term Loan A-1 Facility with higher interest rates[233](index=233&type=chunk) [Liquidity and Capital Resources](index=67&type=section&id=Liquidity%20and%20Capital%20Resources) Total Cash and Availability (in millions) | Component | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $248.7 | $353.1 | | Revolving Facility Availability | $385.8 | $347.5 | | **Total cash and cash availability** | **$716.4** | **$762.1** | - Net cash provided by operating activities was **$7.4 million** for the first nine months of 2019, a significant improvement of **$379.5 million** from a use of **$372.1 million** in the same period of 2018. This was driven by a lower net loss and better working capital management[255](index=255&type=chunk) - The company successfully amended and extended the majority of its revolving credit facility and term A loans from a December 2020 maturity to April 2022[183](index=183&type=chunk) - The ratio of net debt to trailing 12 months adjusted EBITDA was **4.7 times** as of September 30, 2019, and the company was in compliance with its debt covenants[263](index=263&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=71&type=section&id=Item%203%3A%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) No material changes in market risk exposures have occurred since the 2018 Annual Report on Form 10-K - There have been no material changes in the company's market risk exposures since December 31, 2018[277](index=277&type=chunk) [Controls and Procedures](index=72&type=section&id=Item%204%3A%20Controls%20and%20Procedures) Management concluded disclosure controls were ineffective due to three ongoing material weaknesses in internal control over financial reporting - The CEO and CFO concluded that disclosure controls and procedures were not effective as of September 30, 2019[282](index=282&type=chunk) - The ineffectiveness is due to three material weaknesses identified as of December 31, 2018, which were not yet remediated. These weaknesses relate to: - Ineffective information technology general controls (ITGCs) - Ineffective controls over inventory valuation - Ineffective controls over non-routine transactions[283](index=283&type=chunk)[284](index=284&type=chunk)[285](index=285&type=chunk)[286](index=286&type=chunk) - A remediation plan is being implemented, which includes improving the risk assessment process, revoking inappropriate IT access, refining inventory valuation procedures, and enhancing controls over non-routine transaction calculations[288](index=288&type=chunk)[289](index=289&type=chunk) Part II - Other Information [Legal Proceedings](index=74&type=section&id=Item%201%3A%20Legal%20Proceedings) No material developments in legal proceedings have occurred since the 2018 Annual Report on Form 10-K - There have been no material developments with respect to legal proceedings reported in the Company's annual report on Form 10-K for the year ended December 31, 2018[293](index=293&type=chunk) [Risk Factors](index=74&type=section&id=Item%201A%3A%20Risk%20Factors) No material changes to the company's risk factors have occurred since the 2018 Annual Report on Form 10-K - There has been no material change to the company's risk factors since December 31, 2018[294](index=294&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=74&type=section&id=Item%202%3A%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During Q3 2019, the company repurchased **3,721 shares** at an average price of **$9.81**, related to share-based compensation plans Share Repurchases - Q3 2019 | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | July | 2,060 | $9.58 | | August | 369 | $12.55 | | September | 1,292 | $9.39 | | **Total** | **3,721** | **$9.81** | - All shares repurchased were surrendered to the Company in connection with its share-based compensation plans[295](index=295&type=chunk) [Exhibits](index=75&type=section&id=Item%206%3A%20Exhibits) This section lists exhibits filed with the Form 10-Q, including corporate governance documents, credit agreement amendments, and certifications - Key exhibits filed include the Seventh Amendment to the Credit Agreement dated August 7, 2019, and certifications by the CEO and CFO pursuant to the Sarbanes-Oxley Act[300](index=300&type=chunk)