UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2015 | |
OR | |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to | |
Commission file number 1-4879
Diebold, Incorporated
(Exact name of registrant as specified in its charter)
Ohio | 34-0183970 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
5995 Mayfair Road, P.O. Box 3077, North Canton, Ohio | 44720-8077 |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code (330) 490-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered |
Common Shares $1.25 Par Value | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
(do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
Approximate aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2015, based upon the closing price on the New York Stock Exchange on June 30, 2015, was $2,268,939,680.
Number of shares of common stock outstanding as of February 24, 2016 was 65,136,858.
DOCUMENTS INCORPORATED BY REFERENCE
Listed hereunder are the documents, portions of which are incorporated by reference, and the parts of this Form 10-K into which such portions are incorporated:
Diebold, Incorporated Proxy Statement for 2016 Annual Meeting of Shareholders to be held on or about April 21, 2016, portions of which are incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS
PART I
ITEM 1: BUSINESS
(dollars in millions)
GENERAL
Diebold, Incorporated (collectively with its subsidiaries, the Company) was incorporated under the laws of the state of Ohio in August 1876, succeeding a proprietorship established in 1859.
The Company provides the services, software and technology that connect people around the world with their money — bridging the physical and digital worlds of cash conveniently, securely and efficiently. Since its founding, the Company has evolved to become a leading provider of exceptional self-service innovation, security and services to financial, retail, commercial and other markets. At December 31, 2015, the Company employed approximately 16,000 associates globally, of which approximately 1,000 relate to the Company's recently divested electronic security business. The Company’s service staff is one of the financial industry’s largest, with professionals in more than 600 locations and businesses in more than 90 countries worldwide. The Company continues to execute its multi-year transformation, Diebold 2.0, with the primary objective of transforming the Company into a world-class, services-led and software-enabled company, supported by innovative hardware.
Diebold 2.0 consists of four pillars:
• | Cost - Streamline the cost structure and improve near-term delivery and execution. |
• | Cash - Generate increased free cash flow in order to fund the investments necessary to drive profitable growth, while preserving the ability to return value to shareholders. |
• | Talent - Attract and retain the talent necessary to drive innovation and the execution of the transformation strategy. |
• | Growth - Return Diebold to a sustainable and profitable growth trajectory. |
As part of the transformation, the Company has identified targeted savings of $200.0 that are expected to be fully realized by the end of 2017. Through the end of 2015, the Company has achieved $150.0 of gross cost savings. The Company has been reinvesting approximately 50 percent of the cost savings to drive long-term growth and operational efficiency.
The Company’s multi-year transformation plan consists of three phases: 1) Crawl, 2) Walk, and 3) Run. During the “Crawl” phase, Diebold was primarily focused on taking cost out of the business and reallocating a portion of these savings as reinvestments in systems and processes. The Company engaged Accenture LLP (Accenture) in a multi-year outsourcing agreement to provide finance and accounting and procurement business process services. With respect to talent, the Company attracted new leaders from top technology and services companies.
During the second half of 2015, the Company fully transitioned into the “Walk” phase of Diebold 2.0 whereby the Company will continue to build on each pillar of cost, cash, talent and growth. The main difference in the “Walk” phase will be a greater emphasis on increasing the mix of revenue from services and software, as well as shaping the Company’s portfolio of businesses. As it relates to increasing the mix of services and software, the Company has sharpened its focus on pursuing and winning managed services and multi-vendor services contracts. For the software business, the acquisition of Phoenix Interactive Design, Inc. (Phoenix) has significantly enhanced the Company's ability to capture more of the market for automated teller machine (ATM), multi-vendor, marketing and asset management software. All of the Company’s global software activities are being coordinated through the new development center in London, Ontario.
As it relates to shaping the portfolio of businesses, the Company’s achievements in 2015 are consistent with its strategy of transforming into a world-class, services-led, software-enabled company, supported by innovative hardware.
• | On March 16, 2015 - Diebold acquired Phoenix. |
• | During the first half of 2015, Diebold divested its Venezuela business. |
• | On October 25, 2015 - Diebold entered into an agreement to divest its North America electronic security business to Securitas AB. |
• | During 2015 - Diebold narrowed its scope in the Brazil other business to primarily focus on lottery and elections. |
• | On November 23, 2015 - Diebold and Wincor Nixdorf entered into a business combination agreement (Business Combination) to create a premier self-service company for financial and retail markets. |
• | On December 18, 2015 - Diebold announced it is forming a new joint venture with Inspur, one of China’s leading IT companies, to provide ATMs and kiosks to the China market. |
All of these decisions enable the Company to focus its resources and to pursue growth opportunities in the dynamic, global self-service industry. The Company will continue to execute on its “Walk” phase objectives throughout 2016.
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SERVICE AND PRODUCT SOLUTIONS
The Company has two core lines of business: Financial Self-Service (FSS) and Security Solutions, which the Company integrates based on its customers’ needs. Financial information for the service and product solutions can be found in note 20 to the consolidated financial statements, which is contained in Item 8 of this annual report on Form 10-K.
Financial Self-Service
The Company offers an integrated line of self-service solutions and technology, including comprehensive ATM outsourcing, ATM security, deposit automation, recycling and payment terminals and software. The Company also offers advanced functionality terminals capable of supporting mobile card-less transactions and two-way video technology to enhance bank branch automation. The Company is a global supplier of ATMs and related services and holds a leading market position in many countries around the world.
Self-Service Support & Maintenance. From analysis and consulting to monitoring and repair, the Company provides value and support to its customers every step of the way. Services include installation and ongoing maintenance of our products, OpteView® remote services, availability management, branch automation and distribution channel consulting. Additionally, service revenue includes services and parts the Company provides on a billed-work basis that are not covered by warranty or service contract.
Value-added Services.
• | Managed Services and Outsourcing - The Company provides end-to-end managed services and full outsourcing solutions, which include remote monitoring, troubleshooting for self-service customers, transaction processing, currency management, maintenance services and full support via person-to-person or online communication. This helps customers maximize their self-service channel by incorporating new technology, meeting compliance and regulatory mandates, protecting their institutions and reducing costs, all while ensuring a high level of service for their customers. The Company provides value to its customers by offering a comprehensive array of hardware-agnostic managed services and support. |
• | Professional Services - The Company’s service organization provides strategic analysis and planning of new systems, systems integration, architectural engineering, consulting and project management that encompass all facets — services, software and technology — of a successful self-service implementation. The Company’s Advisory Services team collaborates with our clients to help define the ideal customer experience, modify processes, refine existing staffing models and deploy technology to meet branch automation objectives. |
• | Multi-vendor Services - The Company recently sharpened its focus on securing multi-vendor services contracts primarily in North America. With the prevalence of mixed ATM fleets at financial institutions, the ability to service competitive units allows the Company to offer a differentiated, full service solution to its customers. |
Self-Service Software. The Company offers integrated, multi-vendor ATM software solutions designed to meet the evolving demands of a customer’s self-service network. The Company has enhanced its self-service software platforms with the acquisition of Phoenix. There are five primary types of self-service software that Diebold provides for customers, which include 1) terminal application software, 2) automation technology software, 3) operational software, 4) marketing software and 5) security. Terminal application software provides the ability to integrate seamlessly into traditional and multi-vendor environments while providing advanced service options to bring new functions quicker to market and improve the customer experience while providing the Financial Institution (FI) the ability to host this centrally or distribute it at their terminals. Automation technology software enables the self-service platform to transform into a robust enterprise banking solution that can connect seamlessly to other banking channels and systems for a consistent user experience, advanced functionality and greater operational efficiencies. Operational software provides centralized management of the entire self-service fleet, providing better intelligence and operations for improved efficiencies and cost control using data analytics. Marketing software allows FIs to provide personalized interaction with the consumer through the self-service channel, enhancing customer satisfaction and revenue generation. All software has enhanced security functions built-in for providing FIs the flexibility and enhanced consumer experience while ensuring that they are the trusted partners in the eco-system.
Self-Service Products. The Company offers a wide variety of self-service solutions. Self-service products include a full range of teller automation terminals as well as ATMs capable of cash dispensing and a number of more advanced functionalities, including check and cash deposit automation, cash recycling, mobile capabilities and two-way video.
In 2015, the Company completed the rollout of a suite of next-generation self-service terminals (Diebold Series), which offer a wide range of available capabilities and give Diebold the most modern fleet of ATMs in the market. The Diebold Series terminal consists of three new lines of ATMs-standard market, extended branch and high-performance. Each line is designed to meet specific market and branch needs: (1) the standard line is ideal for high-growth areas with mass-market applications; (2) the extended branch line offers rich transaction sets and advanced functionalities; (3) and the high-performance line offers highly personalized self-service experiences that are ideal for high-traffic, high-volume environments. The new self-service platform, paired with Diebold's industry-leading services and software, provide a complete end-to-end solution for FIs.
A significant demand driver in the global FSS marketplace is branch automation. The Company serves as a strategic partner to its customers by offering a complete branch automation solution that encompasses services, software and technology, as well as
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addresses the complete value chain of consult, design, build and operate. The concept is to help FIs reduce their costs by migrating routine transactions, typically done inside the branch, to lower-cost automated channels, while also growing revenue, and adding convenience and security for the banks' customers. The Company's Advisory Services team collaborates with our clients to help define the ideal customer experience, modify processes, refine existing staffing models and deploy technology to meet branch automation objectives. The Diebold 9900 in-lobby teller terminal (ILT) provides branch automation technology by combining the speed and accuracy of a self-service terminal with intelligence from the bank’s core systems, as well as the ability to complete higher value transactions away from the teller line.
The Company remains committed to collaborative innovation with its customers. In 2015, the Company introduced two new self-service concepts, Irving and Janus. Irving utilizes a number of different consumer recognition technologies and a secure mobile phone application to execute cardless transactions. The Company is a leader in self-service biometrics and the Irving concept leverages these capabilities with iris-scanning ATM technology that is being piloted by one of the largest banks in the United States. Janus is a dual-sided self-service terminal, which features video teller access and is capable of serving two consumers simultaneously.
Security Solutions
From the safes and vaults that the Company first manufactured in 1859 to the full range of physical and electronic security offerings it provides today, the Company’s security solutions combine an extensive services portfolio and advanced products to help address its customers’ unique needs. The Company provides its customers with the latest technological advances to better protect their assets, improve their workflow and increase their return on investment. All of these solutions are backed with experienced sales, installation and service teams. The Company is a leader in providing physical and electronic security systems as well as assisted transactions, providing total security systems solutions to financial, commercial, retail, and other markets.
Physical Security. The Company provides services for a portfolio of physical security offerings, in addition to serving as a national locksmith. The product portfolio consists of two primary product groups, facility products and barrier solutions. Facility products include pneumatic tube systems for drive-up lanes, as well as video and audio capability to support remote transactions. Barrier solutions include vaults, safes, depositories, bullet-resistive items and under-counter equipment. The Company recently launched its VeraPass® barrier solution, which is a unique access solution for FIs, retailers, and commercial property management firms that enhances the management of locks and keys.
Electronic Security. The Company provides a broad range of electronic security services and products, as well as monitoring solutions. The Company provides security monitoring solutions, including remote monitoring and diagnostics, fire detection, intrusion protection, managed access control, energy management, remote video management and storage, logical security and web-based solutions through its SecureStat® platform.
On October 25, 2015, the Company entered into a definitive asset purchase agreement to divest its North America-based electronic security business. For ES to continue its growth, it would require resources and investment that Diebold is not committed to make given its focus on the self-service market. On February 1, 2016, the Company divested its North America electronic security business to Securitas AB for an aggregate purchase price of $350.0 in cash, 10.0% of which is contingent on the successful transition of certain customer relationships, which management expects to receive full payment of $35.0 in the first quarter of 2016 now that all contingencies for this payment have been achieved. The Company has also agreed to provide certain transition services to Securitas AB after the closing, including providing a $6.0 credit for such services. As a result, North America electronic security financial results are reported as discontinued operations for the periods presented in this annual report on Form 10-K.
The continuing electronic security business net sales were $67.3, $80.2 and $76.2 for the years ended December 31, 2015, 2014 and 2013, respectively.
Brazil Other
The Company offers election, lottery and information technology solutions to customers in Brazil. The Company provides voting machines for official elections in Brazil. The Company also provides the terminals for the governmental lottery and correspondent bank, which are distributed in more than 11,000 locations across the country. During 2015, the Company narrowed its scope in the Brazil other business to primarily focus on lottery and elections to help rationalize its solution set in that market.
OPERATIONS
The Company’s operating results and the amount and timing of revenue are affected by numerous factors, including production schedules, customer priorities, sales volume and sales mix. During the past several years, the Company has changed the focus of its self-service business to that of a total solutions provider with a focus on services and software.
The principal raw materials used by the Company in its manufacturing operations are steel, plastics, electronic parts and components, and spare parts, which are purchased from various major suppliers. These materials and components are generally available in ample quantities.
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The Company carries working capital mainly related to trade receivables and inventories. Inventories generally are only manufactured or purchased as orders are received from customers. The Company’s normal and customary payment terms generally range from 30 to 90 days from date of invoice. The Company generally does not offer extended payment terms. The Company also provides financing arrangements to customers that are largely classified and accounted for as sales-type leases. As of December 31, 2015, the Company’s net investment in finance lease receivables was $74.9.
SEGMENTS AND FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
The Company’s operations are comprised of four geographic segments: North America (NA), Asia Pacific (AP), Europe, Middle East and Africa (EMEA), and Latin America (LA). The four geographic segments sell and service FSS and security systems around the globe, as well as elections, lottery and information technology solutions in Brazil other, through wholly-owned subsidiaries, joint ventures and independent distributors in most major countries.
Sales to customers outside the United States in relation to total consolidated net sales were $1,405.0 or 58.1 percent in 2015, $1,698.9 or 62.1 percent in 2014 and $1,477.5 or 57.2 percent in 2013.
Property, plant and equipment, net, located in the United States totaled $130.4, $116.5 and $101.4 as of December 31, 2015, 2014 and 2013, respectively, and property, plant and equipment, net, located outside the United States totaled $44.9, $49.2 and $56.4 as of December 31, 2015, 2014 and 2013, respectively.
Additional financial information regarding the Company’s international operations is included in note 20 to the consolidated financial statements, which is contained in Item 8 of this annual report on Form 10-K. The Company’s non-U.S. operations are subject to normal international business risks not generally applicable to domestic business. These risks include currency fluctuation, new and different legal and regulatory requirements in local jurisdictions, political and economic changes and disruptions, tariffs or other barriers, potentially adverse tax consequences and difficulties in staffing and managing foreign operations.
PRODUCT BACKLOG
The Company's product backlog, excluding the North America electronic security business, was $607.5 and $611.1 as of December 31, 2015 and 2014, respectively. The backlog includes orders estimated or projected to be shipped or installed within 12 months. Although the Company believes the orders included in the backlog are firm, some orders may be canceled by customers without penalty, and the Company may elect to permit cancellation of orders without penalty where management believes it is in the Company's best interests to do so. Historically, the Company has not experienced significant cancellations within its product backlog. Additionally, over 50 percent of the Company's revenues are derived from its service business, for which backlog information is not measured. Therefore, the Company does not believe that its product backlog, as of any particular date, is necessarily indicative of revenues for any future period.
COMPETITION
As described in more detail below, the Company participates in many highly competitive businesses in the services, software and technology space, with a mixture of local, regional and/or global competitors in its markets. In addition, the competitive environment for these types of solutions is evolving as the Company's customers are transforming their businesses utilizing innovative technology. Therefore, the Company’s product and service solutions must also provide cutting-edge capabilities to meet the customers emerging needs and compete with new innovators. The Company distinguishes itself by providing unique value with a wide range of innovative solutions to meet customers’ needs.
The Company believes, based upon outside independent industry surveys from Retail Banking Research (RBR), that it is an exceptional service provider for and manufacturer of self-service solutions in the United States and internationally. The Company maintains a global service infrastructure that allows it to provide services and support to satisfy its customers’ needs. Many of the Company’s customers are beginning to adopt branch automation solutions to transform their branches, which will improve the customer experience and enhance efficiency through the utilization of automated transactions, mobile solutions and other client-facing technologies. As the trend towards branch automation continues to build more momentum, the traditional lines of “behind the counter” and “in front of the counter” are starting to blur, which is allowing for more entrants into the market. As customer requirements evolve, separate markets will converge to fulfill new customer demand. The Company expects that this will increase the complexity and competitive nature of the business.
The Company’s competitors in the self-service market segment include global and multi-regional manufacturers and service providers, such as NCR, Wincor Nixdorf, Nautilus Hyosung, GRG Banking Equipment, Glory Global Solutions, Oki Data and Triton Systems to a number of primarily local and regional manufacturers and service providers, including, but not limited to, Fujitsu and Hitachi-Omron in AP; Hantle/GenMega in NA; KEBA in EMEA; and Perto in LA. In addition, the Company faces competition in many markets from numerous independent ATM deployers.
In the self-service software market, the Company, in addition to the key hardware players highlighted above, competes with several smaller, niche software companies like KAL. In the managed services and outsourcing solutions market, apart from its traditional FSS competitors, the Company competes with a number of large technology competitors such as Fiserv, IBM and HP.
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In the security service and product markets, the Company competes with national, regional and local security companies. Of these competitors, some compete in only one or two product lines, while others sell a broad spectrum of security services and products. The unavailability of comparative sales information and the large variety of individual services and products make it difficult to give reasonable estimates of the Company’s competitive ranking in or share of the security market within the financial services, commercial, retail and government sectors. However, the Company believes it is a very well positioned security service and solution provider to global, national, regional and local financial, commercial and industrial customers.
The Company provides election systems, product solutions and support to the Brazil government. Competition in this market segment is based upon technology pre-qualification demonstrations to the Brazil government.
RESEARCH, DEVELOPMENT AND ENGINEERING
Customer demand for FSS and security technologies is growing. In order to meet this demand, the Company is focused on delivering innovation to its customers by continuing to invest in technology solutions that enable customers to reduce costs and improve efficiency. Expenditures for research, development and engineering initiatives were $86.9, $93.6 and $92.2 in 2015, 2014 and 2013, respectively. The Company recently announced a number of new innovative solutions, such as the responsive banking concept, the ActivEdge™ secure card reader and the world’s greenest ATM, as well as launched a new ATM product platform.
PATENTS, TRADEMARKS, LICENSES
The Company owns patents, trademarks and licenses relating to certain products in the United States and internationally. While the Company regards these as items of importance, it does not deem its business as a whole, or any industry segment, to be materially dependent upon any one item or group of items. Under Diebold 2.0, the Company intends to protect and defend its intellectual property, including pursuit of infringing third parties for damages and other appropriate remedies.
ENVIRONMENTAL
Compliance with federal, state and local environmental protection laws during 2015 had no material effect upon the Company’s business, financial condition or results of operations.
EMPLOYEES
At December 31, 2015, the Company employed approximately 16,000 associates globally, of which approximately 1,000 relate to the Company's recently divested electronic security business. The Company’s service staff is one of the financial industry’s largest, with professionals in more than 600 locations and businesses in more than 90 countries worldwide.
EXECUTIVE OFFICERS
Refer to Part III, Item 10 of this annual report on Form 10-K for information on the Company's executive officers, which is incorporated herein by reference.
AVAILABLE INFORMATION
The Company uses its Investor Relations web site, www.diebold.com/investors, as a channel for routine distribution of important information, including stock information, news releases, investor presentations and financial information. The Company posts filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the U.S. Securities and Exchange Commission (SEC), including its annual, quarterly, and current reports on Forms 10-K, 10-Q, and 8-K; its proxy statements; registration statements; and any amendments to those reports or statements. All such postings and filings are available on the Company’s Investor Relations web site free of charge. In addition, this web site allows investors and other interested persons to sign up to automatically receive e-mail alerts when the Company posts news releases and financial information on its web site. Investors and other interested persons can also follow the Company on Twitter at http://twitter.com/dieboldinc. The SEC also maintains a web site, www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The content on any web site referred to in this annual report on Form 10-K is not incorporated by reference into this annual report unless expressly noted.
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ITEM 1A: RISK FACTORS
(dollars and euros in millions)
The following, including the risk factors relating to the proposed business combination with Wincor Nixdorf (Business Combination), are certain risk factors that could affect our business, financial condition, operating results and cash flows. These risk factors should be considered in connection with evaluating the forward-looking statements contained in this annual report on Form 10-K because they could cause actual results to differ materially from those expressed in any forward-looking statement. The risk factors highlighted below are not the only ones we face. If any of these events actually occur, our business, financial condition, operating results or cash flows could be negatively affected.
We caution the reader to keep these risk factors in mind and refrain from attributing undue certainty to any forward-looking statements, which speak only as of the date of this annual report on Form 10-K.
We have launched an exchange offer as part of the Business Combination (Offer). The Offer is subject to conditions and the business combination agreement governing the Business Combination (Business Combination Agreement) may be terminated in accordance with its terms and the Business Combination may not be completed.
The Offer is subject to conditions, including obtaining required governmental and regulatory approvals and Wincor Nixdorf not experiencing a material adverse change. No assurance can be given that all of the conditions to the Offer will be satisfied or, if they are, as to the timing of such satisfaction. If the conditions to the Offer are not satisfied, the Company may allow the Offer to expire, or could amend or extend the Offer. In addition, the governmental and regulatory agencies from which the Company will seek approvals have broad discretion in administering the applicable governing regulations. As a condition to their approval of the transactions contemplated by the Business Combination Agreement, those agencies may impose requirements, limitations or costs or require divestitures or place restrictions on the conduct of the Company’s business. In addition, the Business Combination Agreement may be terminated by either party under certain circumstances, including if Wincor Nixdorf’s management and/or supervisory board no longer support the offer but instead determine to pursue a superior proposal.
Further, subject to the Offer conditions and Business Combination Agreement, the Business Combination will not be completed if there is a material adverse change affecting Wincor Nixdorf prior to the completion of the Business Combination. Other changes will not permit the Company to terminate the Offer or the Business Combination, even if such changes would have a material adverse effect on Wincor Nixdorf or the Company. If adverse changes occur but the Company and Wincor Nixdorf are still required to complete the Business Combination, the market value of the Company’s common shares may decrease.
Any delay in the completion of Business Combination could diminish the anticipated benefits of the Business Combination or result in additional transaction costs. Any uncertainty over the ability to complete the Business Combination could make it more difficult for the Company to maintain or to pursue particular business strategies. Conditions imposed by regulatory agencies in connection with their approval of the Business Combination may restrict our ability to modify the operations of our business in response to changing circumstances for a period of time after the closing of the Offer or our ability to expend cash for other uses or otherwise have an adverse effect on the anticipated benefits of the Business Combination, thereby adversely impacting our business, financial condition or results of operations. To the extent that the current market prices of the Company's common shares reflect a market premium based on the assumption that the Business Combination will be completed, any delay in or inability to complete the Business Combination could cause the price of the Company's common shares to decline.
The announcement and pendency of the Business Combination, during which the Company is subject to certain operating restrictions, could have an adverse effect on the Company’s business and cash flows, financial condition and results of operations.
The announcement and pendency of the Business Combination could disrupt the Company’s business, and uncertainty about the effect of the Business Combination may have an adverse effect on the Company following the Business Combination. These uncertainties could cause suppliers, vendors, partners and others that deal with the Company to defer entering into contracts with, or making other decisions concerning, the Company or to seek to change or cancel existing business relationships with the Company. In addition, the Company’s employees may experience uncertainty regarding their roles after the Business Combination. Employees may depart either before or after the completion of the Business Combination because of uncertainty and issues relating to the difficulty of coordination or because of a desire not to remain following the Business Combination. Therefore, the pendency of the Business Combination may adversely affect the Company’s ability to retain, recruit and motivate key personnel. Additionally, the attention of the Company’s management may be directed towards the completion of the Business Combination, including obtaining regulatory approvals, and may be diverted from the day-to-day business operations of the Company. Matters related to the Business Combination may require commitments of time and resources that could otherwise have been devoted to other opportunities that might have been beneficial to the Company. Additionally, the Business Combination Agreement requires the Company to refrain from taking certain actions while the Business Combination is pending. These restrictions may prevent the Company from pursuing otherwise attractive business opportunities or capital structure alternatives and from executing certain business strategies prior to the completion of the Business Combination. Further, the Business Combination may give rise to potential liabilities, including those that may result from future shareholder lawsuits relating to the Business Combination. Any of these matters could adversely affect the businesses of, or harm the results of operations, financial condition or cash flows of the Company.
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Negative publicity related to the Business Combination may materially adversely affect the Company.
From time to time, political and public sentiment in connection with a proposed acquisition may result in a significant amount of adverse press coverage and other adverse public statements affecting the parties to the acquisition. Adverse press coverage and public statements, whether or not driven by political or popular sentiment, may also result in legal claims or in investigations by regulators, legislators and law enforcement officials. Responding to these investigations and lawsuits, regardless of the ultimate outcome of the proceedings, can divert the time and effort of senior management from operating their business. Addressing any adverse publicity, governmental scrutiny or enforcement or other legal proceedings is time-consuming and expensive and, regardless of the factual basis for the assertions being made, could have a negative impact on the reputation of the Company, on the morale of its employees and on its relationships with regulators. It may also have a negative impact on its ability to take timely advantage of various business and market opportunities. The direct and indirect effects of negative publicity, and the demands of responding to and addressing it, may have a material adverse effect on the Company’s business and cash flows, financial condition and results of operations.
A combined Diebold and Wincor Nixdorf may fail to realize the anticipated strategic and financial benefits sought from the Business Combination.
If the Business Combination is completed, the combined company may not realize all of the anticipated benefits of the Business Combination. The success of the Business Combination will depend on, among other things, the Company’s ability to combine its business with Wincor Nixdorf’s business in a manner that facilitates growth in the value-added services sector and realizes anticipated cost savings. The Company believes that the Business Combination will provide an opportunity for revenue growth in managed services, professional services, installation and maintenance services.
However, the Company must successfully combine the businesses of the Company and Wincor Nixdorf in a manner that permits these anticipated benefits to be realized. In addition, the combined company must achieve the anticipated growth and cost savings without adversely affecting current revenues and investments in future growth. Further, providing managed services, professional services, installation and maintenance services can be highly complex and can involve the design, development, implementation and operation of new solutions and the transitioning of clients from their existing systems and processes to a new environment. If the combined company is not able to effectively provide value-added services and successfully achieve the growth and cost savings objectives, the anticipated benefits of the Business Combination may not be realized fully, or at all, or may take longer to realize than expected.
A combined Diebold and Wincor Nixdorf may experience operational challenges, negative synergies and loss of customers.
Integrating the operations and personnel of Wincor Nixdorf with the Company after the completion of the Business Combination will involve complex operational, technological and personnel-related challenges. This process will be time-consuming and expensive, and it may disrupt the businesses of either or both of the companies. The combined company may not realize all of the anticipated benefits of the Business Combination. Difficulties in the integration of the business, which may result in significant costs and delays, include:
• | managing a significantly larger combined company; |
• | integrating and unifying the offerings and services available to customers and coordinating distribution and marketing efforts; |
• | coordinating corporate and administrative infrastructures and harmonizing insurance coverage; |
• | unanticipated issues in coordinating accounting, information technology, communications, administration and other systems; |
• | difficulty addressing possible differences in corporate cultures and management philosophies; |
• | challenges associated with changing Wincor Nixdorf’s financial reporting from International Financial Reporting Standards (IFRS) to accounting principles generally accepted in the U.S. (U.S GAAP) and compliance with the Sarbanes-Oxley Act of 2002, as amended, and the rules promulgated thereunder by the SEC; |
• | legal and regulatory compliance; |
• | creating and implementing uniform standards, controls, procedures and policies; |
• | litigation relating to the transactions contemplated by a potential post-completion reorganization, including shareholder litigation; |
• | diversion of management’s attention from other operations; |
• | maintaining existing agreements and relationships with customers, distributors, providers and vendors and avoiding delays in entering into new agreements with prospective customers, distributors, providers and vendors; |
• | realizing benefits as a combined company from Wincor Nixdorf’s restructuring program, which Wincor Nixdorf refers to as the Delta Program, and the shift to providing information technology from hardware; |
• | unforeseen and unexpected liabilities related to the Business Combination, including the risk that certain of the Company's executive officers who will become members of Wincor Nixdorf’s supervisory board may be subject to additional fiduciary duties and liability; |
• | identifying and eliminating redundant and underperforming functions and assets; |
• | effecting actions that may be required in connection with obtaining regulatory approvals; and |
• | a deterioration of credit ratings. |
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Further, the Company and Wincor Nixdorf currently compete for and provide certain services and products to the same customers. As a combined company, the Company may lose customers or its share of customers’ business as entities that were customers of both the Company and Wincor Nixdorf seek to diversify their suppliers of services and products. Following the Business Combination, customers may no longer distinguish between the Company and Wincor Nixdorf and their respective services and products. Retail banking customers in particular may turn to competitors of the Company for products and services that they received from the Company and Wincor Nixdorf prior to the Business Combination. As a result, the combined company may lose customers and revenues may decrease following the Business Combination. In addition, third parties with whom the Company and Wincor Nixdorf currently have relationships may terminate or otherwise reduce the scope of their relationship with either party in anticipation or after the completion of the Business Combination. Any such loss of business could limit the combined company’s ability to achieve the anticipated benefits of the Business Combination. Such risks could also be exacerbated by a delay in the completion of the Business Combination. Finally, certain regulatory agencies may propose restrictions, divestitures or other business structures as part of their review and approval process which, if adopted, could have a negative impact, or cause the loss of, certain customer or supplier relationships of the combined company.
The Company will incur significant transaction fees and costs in connection with the Business Combination, some of which are payable regardless of whether the Business Combination is completed.
The Company expects to incur a number of significant non-recurring implementation and restructuring costs associated with combining the operations of the two companies. In addition, the Company will incur significant financing, investment banking, legal, accounting and other transaction fees and costs related to the Business Combination. The Company must pay some of these fees and costs regardless of whether the Business Combination is completed. Additional costs substantially in excess of currently anticipated costs may also be incurred in connection with the integration of the businesses of the Company and Wincor Nixdorf. In addition, if the Offer is not completed due to certain circumstances specified in the Business Combination Agreement, the Company may be required to pay Wincor Nixdorf a termination fee of up to €50.0, depending on the circumstances.
Although the Company expects that the cost savings, as well as the realization of other efficiencies related to the integration of the businesses, will offset these transaction- and combination-related costs over time, this net benefit may not be achieved in the near term, or at all. In addition, the timeline in which cost savings are expected to be realized is lengthy and may not be achieved. Failure of the Company to realize these synergies and other efficiencies in a timely manner or at all could have a material adverse effect on the Company’s business and cash flows, financial condition and results of operations.
The Company will incur a substantial amount of indebtedness in connection with the Business Combination and, as a result, will be highly leveraged. The Company’s failure to meet its debt service obligations could have a material adverse effect on the Company’s business, financial condition and results of operations.
The Company anticipates that it will need to borrow approximately $2,050.0 in connection with the Business Combination. As of December 31, 2015, on a pro forma basis after giving effect to (i) the Business Combination and the related Business Combination financing and (ii) the refinancing of certain of the Company’s and Wincor Nixdorf’s outstanding indebtedness at the time of closing, the total indebtedness of the combined company would have been approximately $2,300.0, and the Company would have had undrawn commitments available for borrowings of an additional $520.0 under its replacement credit facilities.
The Company’s high level of indebtedness following the Business Combination could adversely affect the Company’s operations and liquidity. The Company’s anticipated level of indebtedness could, among other things:
• | make it more difficult for the Company to pay or refinance its debts as they become due during adverse economic and industry conditions because the Company may not have sufficient cash flows to make its scheduled debt payments; |
• | cause the Company to use a larger portion of its cash flow to fund interest and principal payments, reducing the availability of cash to fund working capital, capital expenditures, research and development and other business activities; |
• | limit the Company’s ability to take advantage of significant business opportunities, such as acquisition opportunities, and to react to changes in market or industry conditions; |
• | cause the Company to be more vulnerable to general adverse economic and industry conditions; |
• | cause the Company to be disadvantaged compared to competitors with less leverage; |
• | result in a downgrade in the credit rating of the Company or indebtedness of the Company or its subsidiaries, which could increase the cost of borrowings; and |
• | limit the Company’s ability to borrow additional monies in the future to fund working capital, capital expenditures, research and development and other general corporate purposes. |
In addition, the agreements governing our indebtedness contain restrictive covenants that limit our ability to engage in activities that may be in our long-term best interest. The Company's failure to comply with those covenants could result in an event of default that, if not cured or waived, could result in the acceleration of all its debt.
The Company may also incur additional long-term debt and working capital lines of credit to meet future financing needs, which would increase our total indebtedness. Although the terms of its existing and future credit agreements and of the indentures governing its debt contain restrictions on the incurrence of additional debt, including secured debt, these restrictions are subject
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to a number of important exceptions and debt incurred in compliance with these restrictions could be substantial. If the Company and its restricted subsidiaries incur significant additional debt, the related risks that the Company faces could intensify.
In addition to the Business Combination, we may be unable to successfully and effectively manage acquisitions, divestitures and other significant transactions, which could harm our operating results, business and prospects.
As part of our business strategy, including and in addition to the proposed Business Combination, we frequently engage in discussions with third parties regarding possible investments, acquisitions, strategic alliances, joint ventures, divestitures and outsourcing arrangements, and we enter into agreements relating to such transactions in order to further our business objectives. In order to pursue this strategy successfully, we must identify suitable candidates, successfully complete transactions, some of which may be large and complex, and manage post-closing issues such as the integration of acquired companies or employees and the divestiture of combined businesses, operations and employees. Integration, divestiture and other risks of these transactions can be more pronounced in larger and more complicated transactions, or if multiple transactions are pursued simultaneously. If we fail to identify and successfully complete transactions that further our strategic objectives, we may be required to expend resources to develop products and technology internally. This may put us at a competitive disadvantage and we may be adversely affected by negative market perceptions, any of which may have a material adverse effect on our revenue, gross margin and profitability.
Integration and divestiture issues are complex, time-consuming and expensive and, without proper planning and implementation, could significantly disrupt our business. The challenges involved in integrating and divesting include:
• | combining service and product offerings and entering into new markets in which we are not experienced; |
• | convincing customers and distributors that any such transaction will not diminish client service standards or business focus, preventing customers and distributors from deferring purchasing decisions or switching to other suppliers or service providers (which could result in additional obligations to address customer uncertainty), and coordinating service, sales, marketing and distribution efforts; |
• | consolidating and rationalizing corporate information technology infrastructure, which may include multiple legacy systems from various acquisitions and integrating software code; |
• | minimizing the diversion of management attention from ongoing business concerns; |
• | persuading employees that business cultures are compatible, maintaining employee morale and retaining key employees, integrating employees into our company, correctly estimating employee benefit costs and implementing restructuring programs; |
• | coordinating and combining administrative, service, manufacturing, research and development and other operations, subsidiaries, facilities and relationships with third parties in accordance with local laws and other obligations while maintaining adequate standards, controls and procedures; |
• | achieving savings from supply chain and administration integration; and |
• | efficiently divesting combined business operations which may cause increased costs as divested businesses are de-integrated from embedded systems and operations. |
We evaluate and enter into these types of transactions on an ongoing basis. We may not fully realize all of the anticipated benefits of any transaction and the time frame for achieving benefits of a transaction may depend partially upon the actions of employees, suppliers or other third parties. In addition, the pricing and other terms of our contracts for these transactions require us to make estimates and assumptions at the time we enter into these contracts, and, during the course of our due diligence, we may not identify all of the factors necessary to estimate costs accurately. Any increased or unexpected costs, unanticipated delays or failure to achieve contractual obligations could make these agreements less profitable or unprofitable.
Managing these types of transactions requires varying levels of management resources, which may divert our attention from other business operations. These transactions could result in significant costs and expenses and charges to earnings, including those related to severance pay, early retirement costs, employee benefit costs, asset impairment charges, charges from the elimination of duplicative facilities and contracts, in-process research and development charges, inventory adjustments, assumed litigation, regulatory compliance and other liabilities, legal, accounting and financial advisory fees and required payments to executive officers and key employees under retention plans. Moreover, we could incur additional depreciation and amortization expense over the useful lives of certain assets acquired in connection with these transactions, and, to the extent that the value of goodwill or intangible assets with indefinite lives acquired in connection with a transaction becomes impaired, we may be required to incur additional material charges relating to the impairment of those assets. In order to complete an acquisition, we may issue common shares, potentially creating dilution for existing shareholders, or borrow funds, which could affect our financial condition, results of operations and potentially our credit ratings. Any prior or future downgrades in our credit rating associated with a transaction could adversely affect our ability to borrow and our borrowing cost, and result in more restrictive borrowing terms. In addition, our effective tax rate on an ongoing basis is uncertain, and such transactions could impact our effective tax rate. We also may experience risks relating to the challenges and costs of closing a transaction and the risk that an announced transaction may not close. As a result, any completed, pending or future transactions may contribute to financial results that differ materially from the investment community’s expectations.
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Demand for and supply of our services and products may be adversely affected by numerous factors, some of which we cannot predict or control. This could adversely affect our operating results.
Numerous factors may affect the demand for and supply of our services and products, including:
• | changes in the market acceptance of our services and products; |
• | customer and competitor consolidation; |
• | changes in customer preferences; |
• | declines in general economic conditions; |
• | changes in environmental regulations that would limit our ability to service and sell products in specific markets; |
• | macro-economic factors affecting banks, credit unions and other FIs may lead to cost-cutting efforts by customers, which could cause us to lose current or potential customers or achieve less revenue per customer; and |
• | availability of purchased products. |
If any of these factors occur, the demand for and supply of our services and products could suffer, and which could adversely affect our results of operations.
Increased energy and raw material costs could reduce our income.
Energy prices, particularly petroleum prices, are cost drivers for our business. In recent years, the price of petroleum has been highly volatile, particularly due to the unstable political conditions in the Middle East and increasing international demand from emerging markets. Price increases in fuel and electricity costs, such as those increases that may occur from climate change legislation or other environmental mandates, may continue to increase our cost of operations. Any increase in the costs of energy would also increase our transportation costs.
The primary raw materials in our FSS, security, election and lottery systems product solutions are steel, plastics, and electronic parts and components. The majority of our raw materials are purchased from various local, regional and global suppliers pursuant to supply contracts. However, the price of these materials can fluctuate under these contracts in tandem with the pricing of raw materials.
Although we attempt to pass on higher energy and raw material costs to our customers, it is often not possible given the competitive markets in which we operate.
Our business may be affected by general economic conditions, cyclicality and uncertainty and could be adversely affected during economic downturns.
Demand for our services and products is affected by general economic conditions and the business conditions of the industries in which we sell our services and products. The business of most of our customers, particularly our financial institution customers, is, to varying degrees, cyclical and has historically experienced periodic downturns. Under difficult economic conditions, customers may seek to reduce discretionary spending by forgoing purchases of our services and products. This risk is magnified for capital goods purchases such as ATMs and physical security products. In addition, downturns in our customers’ industries, even during periods of strong general economic conditions, could adversely affect the demand for our services and products, and our sales and operating results.
In particular, continuing economic difficulties in the global markets have led to an economic recession in many of the markets in which we operate. As a result of these difficulties and other factors, including new or increased regulatory burdens, financial institutions have failed and may continue to fail, resulting in a loss of current or potential customers, or deferred or canceled orders, including orders previously placed. Any customer deferrals or cancellations could materially affect our sales and operating results.
Additionally, the unstable political conditions in the Middle East, among others, or the sovereign debt concerns of certain countries could lead to further financial, economic and political instability, and this could lead to an additional deterioration in general economic conditions.
We may be unable to achieve, or may be delayed in achieving, our cost-cutting initiatives, and this may adversely affect our operating results and cash flow.
We have launched a number of cost-cutting initiatives, including as part of Diebold 2.0 and other restructuring initiatives, to improve operating efficiencies and reduce operating costs. Although we have achieved a substantial amount of annual cost savings associated with these cost-cutting initiatives, we may be unable to sustain the cost savings that we have achieved. In addition, if we are unable to achieve, or have any unexpected delays in achieving, additional cost savings, our results of operations and cash flows may be adversely affected. Even if we meet our goals as a result of these initiatives, we may not receive the expected financial benefits of these initiatives.
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We face competition that could adversely affect our sales and financial condition.
All phases of our business are highly competitive. Some of our services and products are in direct competition with similar or alternative services or products provided by our competitors. We encounter competition in price, delivery, service, performance, product innovation, product recognition and quality.
Because of the potential for consolidation in any market, our competitors may become larger, which could make them more efficient and permit them to be more price-competitive. Increased size could also permit them to operate in wider geographic areas and enhance their abilities in other areas such as research and development and customer service. As a result, this could also reduce our profitability.
We expect that our competitors will continue to develop and introduce new and enhanced services and products. This could cause a decline in market acceptance of our services and products. In addition, our competitors could cause a reduction in the prices for some of our services and products as a result of intensified price competition. Also, we may be unable to effectively anticipate and react to new entrants in the marketplace competing with our services and products.
Competitive pressures can also result in the loss of major customers. An inability to compete successfully could have an adverse effect on our operating results, financial condition and cash flows in any given period.
Additional tax expense or additional tax exposures could affect our future profitability.
We are subject to income taxes in both the United States (U.S.) and various non-U.S. jurisdictions, and our domestic and international tax liabilities are dependent upon the distribution of income among these different jurisdictions. If we decide to repatriate cash and cash equivalents and short-term investments residing in international tax jurisdictions, there could be further negative impact on foreign and domestic taxes. Our tax expense includes estimates of additional tax that may be incurred for tax exposures and reflects various estimates and assumptions, including assessments of future earnings of the Company that could affect the valuation of our net deferred tax assets. Our future results could be adversely affected by changes in the effective tax rate as a result of a change in the mix of earnings in countries with differing statutory tax rates, changes in the overall profitability of the Company, changes in tax legislation, changes in the valuation of deferred tax assets and liabilities, the results of audits and examinations of previously filed tax returns and continuing assessments of our income tax exposures.
Additionally, our future results could be adversely affected by the results of indirect tax audits and examinations, and continuing assessments of our indirect tax exposures. For example, in August 2012, one of the Company’s Brazil subsidiaries was notified of a tax assessment of approximately R$270.0, including penalties and interest, regarding certain Brazil federal indirect taxes (Industrialized Products Tax, Import Tax, Programa de Integração Social and Contribution to Social Security Financing) for 2008 and 2009. The assessment alleges improper importation of certain components into Brazil’s free trade zone that would nullify certain indirect tax incentives. On September 10, 2012, the Company filed its administrative defenses with the tax authorities.
In response to an order by the administrative court, the tax inspector provided further analysis with respect to the initial assessment in December 2013 that indicates a potential exposure that is significantly lower than the initial tax assessment received in August 2012. This revised analysis has been accepted by the initial administrative court; however, this matter remains subject to ongoing administrative proceedings and appeals. Accordingly, the Company cannot provide any assurance that its exposure pursuant to the initial assessment will be lowered significantly or at all. In addition, this matter could negatively impact Brazil federal indirect taxes in other years that remain open under statute. It is reasonably possible that the Company could be required to pay significant taxes, penalties and interest related to this matter, which could be material to the Company’s consolidated financial statements. The Company continues to defend itself in this matter.
Furthermore, beginning in July 2014, the Company challenged customs rulings in Thailand seeking to retroactively collect customs duties on previous imports of ATMs. Management believes that the customs authority’s attempt to retroactively assess customs duties is in contravention of World Trade Organization agreements and, accordingly, is challenging the rulings. In the third quarter of 2015, the Company received a prospective ruling from the United States Customs Border Protection that is consistent with our interpretation of the treaty in question. We presented that ruling for consideration in our ongoing dispute with Thailand. The matters are currently in the appeals process and management continues to believe that the Company has a valid legal position in these appeals. Accordingly, the Company has not accrued any amount for this contingency; however, the Company cannot provide any assurance that it will not ultimately be subject to retroactive assessments.
A loss contingency is reasonably possible if it has a more than remote but less than probable chance of occurring. Although management believes the Company has valid defenses with respect to its indirect tax positions, it is reasonably possible that a loss could occur in excess of the estimated accrual. The Company estimated the aggregate risk at December 31, 2015 to be up to approximately $174.5 for its material indirect tax matters, of which approximately $138.0 and $24.0, respectively, relates to the Brazil indirect tax matter and Thailand customs matter disclosed above. The aggregate risk related to indirect taxes is adjusted as the applicable statutes of limitations expire. It is reasonably possible that we could be required to pay taxes, penalties and interest related to this matter or other open years, which could be material to our financial condition and results of operations.
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In international markets, we compete with local service providers that may have competitive advantages.
In a number of international markets in each region where we operate, for instance in Brazil and China, we face substantial competition from local service providers that offer competing services and products. Some of these companies may have a dominant market share in their territories and may be owned by local stakeholders. This could give them a competitive advantage. Local providers of competing services and products may also have a substantial advantage in attracting customers in their countries due to more established branding in that country, greater knowledge with respect to the tastes and preferences of customers residing in that country and/or their focus on a single market. As a U.S. based multi-national corporation, we must ensure our compliance with both U.S. and foreign regulatory requirements.
Because our operations are conducted worldwide, they are affected by risks of doing business abroad.
We generate a significant percentage of revenue from operations conducted outside the United States. Revenue from international operations amounted to approximately 58.1 percent in 2015, 62.1 percent in 2014 and 57.2 percent in 2013 of total revenue during these respective years.
Accordingly, international operations are subject to the risks of doing business abroad, including, among other things, the following:
• | fluctuations in currency exchange rates, particularly in China (renminbi), Brazil (real) and EMEA (primarily the euro); |
• | transportation delays and interruptions; |
• | political and economic instability and disruptions; |
• | the failure of foreign governments to abide by international agreements and treaties; |
• | restrictions on the transfer of funds; |
• | the imposition of duties, tariffs and other taxes; |
• | import and export controls; |
• | changes in governmental policies and regulatory environments; |
• | ensuring our compliance with U.S. laws and regulations and applicable laws and regulations in other jurisdictions, including the Foreign Corrupt Practices Act (FCPA), the UK Bribery Act, and applicable laws and regulations in other jurisdictions; |
• | labor unrest and current and changing regulatory environments; |
• | the uncertainty of product acceptance by different cultures; |
• | the risks of divergent business expectations or cultural incompatibility inherent in establishing joint ventures with foreign partners; |
• | difficulties in staffing and managing multi-national operations; |
• | limitations on the ability to enforce legal rights and remedies; |
• | reduced protection for intellectual property rights in some countries; and |
• | potentially adverse tax consequences, including repatriation of profits. |
Any of these events could have an adverse effect on our international operations by reducing the demand for our services and products or decreasing the prices at which we can sell our services and products, thereby adversely affecting our financial condition or operating results. We may not be able to continue to operate in compliance with applicable customs, currency exchange control regulations, transfer pricing regulations or any other laws or regulations to which we may be subject. In addition, these laws or regulations may be modified in the future, and we may not be able to operate in compliance with those modifications.
Additionally, there are ongoing concerns regarding the short- and long-term stability of the euro and its ability to serve as a single currency for a variety of individual countries. These concerns could lead individual countries to revert, or threaten to revert, to their former local currencies, which could lead to the dissolution of the euro. Should this occur, the assets we hold in a country that re-introduces its local currency could be significantly devalued. Furthermore, the dissolution of the euro could cause significant volatility and disruption to the global economy, which could impact our financial results. Finally, if it were necessary for us to conduct our business in additional currencies, we would be subjected to additional earnings volatility as amounts in these currencies are translated into U.S. dollars.
We may be exposed to liabilities under the FCPA, which could harm our reputation and have a material adverse effect on our business.
We are subject to compliance with various laws and regulations, including the FCPA and similar worldwide anti-bribery laws, which generally prohibit companies and their intermediaries from engaging in bribery or making other improper payments to foreign officials for the purpose of obtaining or retaining business or gaining an unfair business advantage. The FCPA also requires proper record keeping and characterization of such payments in our reports filed with the SEC.
Our employees and agents are required to comply with these laws. We operate in many parts of the world that have experienced governmental and commercial corruption to some degree, and strict compliance with anti-bribery laws may conflict with local customs and practices. Foreign companies, including some that may compete with us, may not be subject to the FCPA and may follow local customs and practices. Accordingly, such companies may be more likely to engage in activities prohibited by the FCPA, which could have a significant adverse impact on our ability to compete for business in such countries.
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Despite our commitment to legal compliance and corporate ethics, we cannot ensure that our policies and procedures will always protect us from intentional, reckless or negligent acts committed by our employees or agents. Violations of these laws, or allegations of such violations, could disrupt our business and result in financial penalties, debarment from government contracts and other consequences that may have a material adverse effect on our reputation, business, financial condition or results of operations. Future changes in anti-bribery or economic sanctions laws and enforcement could also result in increased compliance requirements and related expenses that may also have a material adverse effect on our business, financial condition or results of operations.
In addition, our business opportunities in select geographies have been or may be adversely affected by the settlement of the FCPA matter that we settled with the U.S. government in late 2013. Some countries in which we do business may also initiate their own reviews and impose penalties, including prohibition of our participating in or curtailment of business operations in those jurisdictions. We could also face third-party claims in connection with this matter or as a result of the outcome of the current or any future government reviews. Our disclosure, internal review and any current or future governmental review of this matter could, individually or in the aggregate, have a material adverse effect on our reputation and our ability to obtain new business or retain existing business from our current clients and potential clients, to attract and retain employees and to access the capital markets.
We may expand operations into international markets in which we may have limited experience or rely on business partners.
We continually look to expand our services and products into international markets. We have currently developed, through joint ventures, strategic investments, subsidiaries and branch offices, service and product offerings in more than 90 countries outside of the United States. As we expand into new international markets, we will have only limited experience in marketing and operating services and products in such markets. In other instances, we may rely on the efforts and abilities of foreign business partners in such markets. Certain international markets may be slower than domestic markets in adopting our services and products, and our operations in international markets may not develop at a rate that supports our level of investment. Further, violations of laws by our foreign business partners, or allegations of such violations, could disrupt our business and result in financial penalties and other consequences that may have a material adverse effect on our business, financial condition or results of operations.
We have a significant amount of long-term assets, including goodwill and other intangible assets, and any future impairment charges could adversely impact our results of operations.
We review long-lived assets, including property, plant and equipment and identifiable amortizing intangible assets, for impairment whenever changes in circumstances or events may indicate that the carrying amounts are not recoverable. If the fair value is less than the carrying amount of the asset, a loss is recognized for the difference. Factors which may cause an impairment of long-lived assets include significant changes in the manner of use of these assets, negative industry or market trends, a significant under-performance relative to historical or projected future operating results, or a likely sale or disposal of the asset before the end of its estimated useful life.
As of December 31, 2015, we had $161.5 of goodwill. We assess all existing goodwill at least annually for impairment on a reporting unit basis. The Company’s four reporting units were defined as Domestic and Canada, AP, EMEA, and LA. The techniques used in our qualitative and quantitative assessment and goodwill impairment tests incorporate a number of estimates and assumptions that are subject to change. Although we believe these estimates and assumptions are reasonable and reflect market conditions forecast at the assessment date, any changes to these assumptions and estimates due to market conditions or otherwise may lead to an outcome where impairment charges would be required in future periods.
System security risks, systems integration and cybersecurity issues could disrupt our internal operations or services provided to customers, and any such disruption could adversely affect revenue, increase costs, and harm our reputation and stock price.
Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate our own confidential information or those of our customers, corrupt data, create system disruptions or cause shutdowns. A network security breach could be particularly harmful if it remains undetected for an extended period of time. Groups of hackers may also act in a coordinated manner to launch distributed denial of service attacks, or other coordinated attacks, that may cause service outages or other interruptions. We could incur significant expenses in addressing problems created by network security breaches, such as the expenses of deploying additional personnel, enhancing or implementing new protection measures, training employees or hiring consultants. Further, such corrective measures may later prove inadequate. Moreover, actual or perceived security vulnerabilities in our services and products could cause significant reputational harm, causing us to lose existing or potential customers. Reputational damage could also result in diminished investor confidence. Actual or perceived vulnerabilities may also lead to claims against us. Although our license agreements typically contain provisions that eliminate or limit our exposure to such liability, there is no assurance these provisions will withstand legal challenges. We could also incur significant expenses in connection with customers’ system failures.
In addition, sophisticated hardware and operating system software and applications that we produce or procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of the system. The costs to eliminate or alleviate security problems, viruses and bugs could be significant, and the efforts to address these problems could result in interruptions, delays or cessation of service that could impede sales, manufacturing, distribution or other critical functions.
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Portions of our information technology infrastructure also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems, and transitioning data and other aspects of the process could be expensive, time consuming, disruptive and resource-intensive. Such disruptions could adversely impact the ability to fulfill orders and interrupt other processes and, in addition, could adversely impact our ability to maintain effective internal control over financial reporting. Delayed sales, lower margins, lost customers or diminished investor confidence resulting from these disruptions could adversely affect our financial results, stock price and reputation.
An inability to attract, retain and motivate key employees could harm current and future operations.
In order to be successful, we must attract, retain and motivate executives and other key employees, including those in managerial, professional, administrative, technical, sales, marketing and information technology support positions. We also must keep employees focused on our strategies and goals. Hiring and retaining qualified executives, engineers and qualified sales representatives are critical to our future, and competition for experienced employees in these areas can be intense. The failure to hire or loss of key employees could have a significant impact on our operations.
We may not be able to generate sufficient cash flows to fund our operations and make adequate capital investments, or to pay dividends.
Our cash flows from operations depend primarily on sales and service margins. To develop new service and product technologies, support future growth, achieve operating efficiencies and maintain service and product quality, we must make significant capital investments in manufacturing technology, facilities and capital equipment, research and development, and service and product technology. In addition to cash provided from operations, we have from time to time utilized external sources of financing. Despite our Diebold 2.0 transformation program, depending upon general market conditions or other factors, we may not be able to generate sufficient cash flows to fund our operations and make adequate capital investments, or to continue to pay dividends, either in whole or in part. In addition, any tightening of the credit markets may limit our ability to obtain alternative sources of cash to fund our operations.
Although the Company has paid dividends on its common shares in the past, there is no assurance that the Company will continue to pay dividends at the same rate or at all after the Business Combination. The declaration and payment of future dividends, as well as the amount thereof, are subject to the declaration by the Company’s board of directors. The amount and size of any future dividends will depend on the Company’s results of operations, financial condition, capital levels, cash requirements, future prospects and other factors. As previously announced, it is the Company's intention following closing of the Business Combination to pay a dividend at a rate less than the Company's current annual dividend rate, subject to market and other conditions.
New service and product developments may be unsuccessful.
We are constantly looking to develop new services and products that complement or leverage the underlying design or process technology of our traditional service and product offerings. We make significant investments in service and product technologies and anticipate expending significant resources for new software-led services and product development over the next several years. There can be no assurance that our service and product development efforts will be successful, that we will be able to cost effectively develop or manufacture these new services and products, that we will be able to successfully market these services and products or that margins generated from sales of these services and products will recover costs of development efforts.
Our ability to maintain effective internal control over financial reporting may be insufficient to allow us to accurately report our financial results or prevent fraud, and this could cause our financial statements to become materially misleading and adversely affect the trading price of our common shares.
We require effective internal control over financial reporting in order to provide reasonable assurance with respect to our financial reports and to effectively prevent fraud. Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If the Company cannot provide reasonable assurance with respect to our financial statements and effectively prevent fraud, our financial statements could become materially misleading, which could adversely affect the trading price of our common shares.
If the Company is not able to maintain the adequacy of our internal control over financial reporting, including any failure to implement required new or improved controls, or if the Company experiences difficulties in their implementation, our business, financial condition and operating results could be harmed. Any material weakness could affect investor confidence in the accuracy and completeness of our financial statements. As a result, our ability to obtain any additional financing, or additional financing on favorable terms, could be materially and adversely affected. This, in turn, could materially and adversely affect our business, financial condition and the market value of our securities and require us to incur additional costs to improve our internal control systems and procedures. In addition, perceptions of the Company among customers, lenders, investors, securities analysts and others could also be adversely affected.
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The Company had material weaknesses in its internal control over financial reporting in the past, and can give no assurances that any additional material weaknesses will not arise in the future due to our failure to implement and maintain adequate internal control over financial reporting. In addition, although the Company has been successful historically in strengthening our controls and procedures, those controls and procedures may not be adequate to prevent or identify irregularities or ensure the fair presentation of our financial statements included in our periodic reports filed with the SEC.
Low investment performance by our domestic pension plan assets may result in an increase to our net pension liability and expense, which may require us to fund a portion of our pension obligations and divert funds from other potential uses.
We sponsor several defined benefit pension plans that cover certain eligible employees. Our pension expense and required contributions to our pension plans are directly affected by the value of plan assets, the projected rate of return on plan assets, the actual rate of return on plan assets and the actuarial assumptions we use to measure the defined benefit pension plan obligations.
A significant market downturn could occur in future periods resulting in a decline in the funded status of our pension plans and causing actual asset returns to be below the assumed rate of return used to determine pension expense. If return on plan assets in future periods perform below expectations, future pension expense will increase. Further, as a result of global economic instability in recent years, our pension plan investment portfolio has been volatile.
We establish the discount rate used to determine the present value of the projected and accumulated benefit obligations at the end of each year based upon the available market rates for high quality, fixed income investments. We match the projected cash flows of our pension plans against those generated by high-quality corporate bonds. The yield of the resulting bond portfolio provides a basis for the selected discount rate. An increase in the discount rate would reduce the future pension expense and, conversely, a decrease in the discount rate would increase the future pension expense.
Based on current guidelines, assumptions and estimates, including investment returns and interest rates, we do not plan to make contributions to our pension plans in 2016. Changes in the current assumptions and estimates could result in contributions in years beyond 2016 that are greater than the projected 2016 contributions required. We cannot predict whether changing market or economic conditions, regulatory changes or other factors will further increase our pension expenses or funding obligations, diverting funds we would otherwise apply to other uses.
Our businesses are subject to inherent risks, some for which we maintain third-party insurance and some for which we self-insure. We may incur losses and be subject to liability claims that could have a material adverse effect on our financial condition, results of operations or cash flows.
We maintain insurance policies that provide limited coverage for some, but not all, of the potential risks and liabilities associated with our businesses. The policies are subject to deductibles and exclusions that result in our retention of a level of risk on a self-insurance basis. For some risks, we may not obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented. As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially, and in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. As a result, we may not be able to renew our existing insurance policies or procure other desirable insurance on commercially reasonable terms, if at all. Even where insurance coverage applies, insurers may contest their obligations to make payments. Our financial condition, results of operations and cash flows could be materially and adversely affected by losses and liabilities from uninsured or under-insured events, as well as by delays in the payment of insurance proceeds, or the failure by insurers to make payments. We also may incur costs and liabilities resulting from claims for damages to property or injury to persons arising from our operations.
Our assumptions used to determine our self-insurance liability could be wrong and materially impact our business.
We evaluate our self-insurance liability based on historical claims experience, demographic factors, severity factors and other actuarial assumptions. However, if future occurrences and claims differ from these assumptions and historical trends, our business, financial results and financial condition could be materially impacted by claims and other expenses.
An adverse determination that our services, products or manufacturing processes infringe the intellectual property rights of others, an adverse determination that a competitor has infringed our intellectual property rights, or our failure to enforce our intellectual property rights could have a materially adverse effect on our business, operating results or financial condition.
As is common in any high technology industry, others have asserted from time to time, and may assert in the future, that our services, products or manufacturing processes infringe their intellectual property rights. A court determination that our services, products or manufacturing processes infringe the intellectual property rights of others could result in significant liability and/or require us to make material changes to our services, products and/or manufacturing processes. We are unable to predict the outcome of assertions of infringement made against us.
The Company also seeks to enforce our intellectual property rights against infringement. In October 2015, the Company filed a complaint with the U.S. International Trade Commission (ITC) and the U.S. District Court for the Northern District of Ohio alleging that Nautilus Hyosung Inc., and its subsidiary Nautilus Hyosung America Inc., infringe the Company's patents in certain ATMs. The complaints allege that Hyosung has infringed upon six of the Company's patents which relate to features in Hyosung products.
17
Based upon the Complaint filed by the Company, the ITC has decided to institute an investigation and has set a target date to complete the investigation in the first quarter of 2017. In response to these actions taken by the Company, in February 2016 Nautilus Hyosung filed complaints against the Company in front of the ITC and U.S. District Court for the Northern District of Texas alleging the Company infringes certain Nautilus Hyosung patents. The Company is aggressively defending the claims asserted by Nautilus Hyosung.
The Company cannot predict the outcome of actions to enforce our intellectual property rights, and, although we seek to enforce our intellectual property rights, we cannot guarantee that we will be successful in doing so. Any of the foregoing could have a materially adverse effect on our business, operating results or financial condition.
Changes in laws or regulations or the manner of their interpretation or enforcement could adversely impact our financial performance and restrict our ability to operate our business or execute our strategies.
New laws or regulations, or changes in existing laws or regulations or the manner of their interpretation or enforcement, could increase our cost of doing business and restrict our ability to operate our business or execute our strategies. This includes, among other things, the possible taxation under U.S. law of certain income from foreign operations, compliance costs and enforcement under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and costs associated with complying with the Patient Protection and Affordable Care Act of 2010 and the regulations promulgated thereunder. For example, under Section 1502 of the Dodd-Frank Act, the SEC has adopted additional disclosure requirements related to the source of certain “conflict minerals” for issuers for which such “conflict minerals” are necessary to the functionality or product manufactured, or contracted to be manufactured, by that issuer. The metals covered by the rules include tin, tantalum, tungsten and gold, commonly referred to as “3TG.” Our suppliers may use some or all of these materials in their production processes. The SEC’s rules require us to perform supply chain due diligence on our supply chain, including the mine owner and operator. Global supply chains can have multiple layers, thus the costs of complying with these requirements could be substantial. These requirements may also reduce the number of suppliers who provide conflict free metals, and may affect our ability to obtain products in sufficient quantities or at competitive prices. Compliance costs and the unavailability of raw materials could have a material adverse effect on our results of operations. As another example, the customs authority in Thailand has unilaterally changed its position with respect to its obligations under the World Trade Organization’s International Technology Agreement (ITA), which provides duty-free treatment for the importation of ATMs into Thailand from other member countries that have signed the ITA.
Anti-takeover provisions could make it more difficult for a third party to acquire us.
Certain provisions of our charter documents, including provisions limiting the ability of shareholders to raise matters at a meeting of shareholders without giving advance notice and permitting cumulative voting, may make it more difficult for a third party to gain control of our board of directors and may have the effect of delaying or preventing changes in our control or management. This could have an adverse effect on the market price of our common shares. Additionally, Ohio corporate law provides that certain notice and informational filings and special shareholder meeting and voting procedures must be followed prior to consummation of a proposed control share acquisition, as defined in the Ohio Revised Code. Assuming compliance with the prescribed notice and information filings, a proposed control share acquisition may be made only if, at a special meeting of shareholders, the acquisition is approved by both a majority of our voting power represented at the meeting and a majority of the voting power remaining after excluding the combined voting power of the interested shares, as defined in the Ohio Revised Code. The application of these provisions of the Ohio Revised Code also could have the effect of delaying or preventing a change of control.
The Company may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
The Company's ability to make scheduled payments or refinance its debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. The Company may be unable to maintain a level of cash flows from operating activities sufficient to permit the payment of principal, premium, if any, and interest on its indebtedness.
If the Company's cash flows and capital resources are insufficient to fund its debt service obligations, the Company could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance its indebtedness. The Company may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow the Company to meet its scheduled debt service obligations. In addition, the terms of the Company's existing or future debt arrangements may restrict it from effecting any of these alternatives.
The Company's inability to generate sufficient cash flows to satisfy its debt obligations, or to refinance its indebtedness on commercially reasonable terms or at all, would materially and adversely affect its financial position and results of operations.
18
ITEM 1B: UNRESOLVED STAFF COMMENTS
None.
ITEM 2: PROPERTIES
The Company's corporate offices are located in North Canton, Ohio. Within NA, Diebold leases manufacturing facilities in Greensboro, North Carolina and has selling, service and administrative offices throughout the United States and Canada, including a software development center in Canada. AP owns and operates manufacturing facilities in China and India and selling, service and administrative offices in the following locations: Australia, China, Hong Kong, India, Indonesia, Malaysia, Philippines, Taiwan, Thailand, Singapore and Vietnam. EMEA owns or leases and operates manufacturing facilities in Belgium and Hungary and has selling, service and administrative offices in the following locations: Austria, Denmark, Belgium, France, Germany, Hungary, Israel, Italy, Luxembourg, Morocco, Namibia, the Netherlands, Poland, Portugal, Russia, South Africa, Spain, Switzerland, Turkey, Uganda, the United Arab Emirates and the United Kingdom. LA has selling, service and administrative offices in the following locations: Barbados, Belize, Bolivia, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, and Uruguay. In addition, LA owns and operates manufacturing facilities and has selling, service and administrative offices throughout Brazil. The Company leases a majority of the selling, service and administrative offices under operating lease agreements.
The Company considers that its properties are generally in good condition, are well maintained, and are generally suitable and adequate to carry on the Company's business.
19
ITEM 3: LEGAL PROCEEDINGS
(dollars in millions)
At December 31, 2015, the Company was a party to several lawsuits that were incurred in the normal course of business, none of which individually or in the aggregate is considered material by management in relation to the Company's financial position or results of operations. In addition, the Company has indemnification obligations with certain former employees and costs associated with these indemnifications are expensed as incurred. In management's opinion, the Company's consolidated financial statements would not be materially affected by the outcome of those legal proceedings, commitments, or asserted claims.
In addition to the routine legal proceedings noted above, the Company was a party to the legal proceedings described below at
December 31, 2015:
Indirect Tax Contingencies
The Company accrues non-income tax liabilities for indirect tax matters when management believes that a loss is probable and the amounts can be reasonably estimated, while contingent gains are recognized only when realized. In the event any losses are sustained in excess of accruals, they are charged against income. In evaluating indirect tax matters, management takes into consideration factors such as historical experience with matters of similar nature, specific facts and circumstances, and the likelihood of prevailing. Management evaluates and updates accruals as matters progress over time. It is reasonably possible that some of the matters for which accruals have not been established could be decided unfavorably to the Company and could require recognizing future expenditures. Also, statutes of limitations could expire without the Company paying the taxes for matters for which accruals have been established, which could result in the recognition of future gains upon reversal of these accruals at that time.
At December 31, 2015, the Company was a party to several routine indirect tax claims from various taxing authorities globally that were incurred in the normal course of business, none of which individually or in the aggregate is considered material by management in relation to the Company’s financial position or results of operations. In management’s opinion, the consolidated financial statements would not be materially affected by the outcome of these indirect tax claims and/or proceedings or asserted claims.
In addition to these routine indirect tax matters, the Company was a party to the proceedings described below:
In August 2012, one of the Company's Brazil subsidiaries was notified of a tax assessment of approximately R$270.0, including penalties and interest, regarding certain Brazil federal indirect taxes (Industrialized Products Tax, Import Tax, Programa de Integração Social and Contribution to Social Security Financing) for 2008 and 2009. The assessment alleges improper importation of certain components into Brazil's free trade zone that would nullify certain indirect tax incentives. On September 10, 2012, the Company filed its administrative defenses with the tax authorities. This proceeding is currently pending an administrative level decision, which could negatively impact Brazil federal indirect taxes in other years that remain open under statute. It is reasonably possible that the Company could be required to pay taxes, penalties and interest related to this matter, which could be material to the Company's consolidated financial statements.
In response to an order by the administrative court, the tax inspector provided further analysis with respect to the initial assessment in December 2013, which has now been accepted by the initial administrative court, that indicates a potential exposure that is significantly lower than the initial tax assessment received in August 2012. This revised analysis has been accepted by the initial administrative court; however, this matter remains subject to ongoing administrative proceedings and appeals. Accordingly, the Company cannot provide any assurance that its exposure pursuant to the initial assessment will be lowered significantly or at all. In addition, this matter could negatively impact Brazil federal indirect taxes in other years that remain open under statute. It is reasonably possible that the Company could be required to pay taxes, penalties and interest related to this matter, which could be material to the Company's consolidated financial statements. The Company continues to defend itself in this matter.
In connection with the Brazil indirect tax assessment, in May 2013, the SEC requested that the Company retain certain documents and produce certain records relating to the assessment, to which the Company complied. In September 2014, the Company was notified by the SEC that it had closed its inquiry relating to the assessment.
Beginning in July 2014 the Company challenged customs rulings in Thailand seeking to retroactively collect customs duties on previous imports of ATMs. Management believes that the customs authority’s attempt to retroactively assess customs duties is in contravention of World Trade Organization agreements and, accordingly, is challenging the rulings. In the third quarter of 2015, the Company received a prospective ruling from the United States Customs Border Protection which is consistent with its interpretation of the treaty in question. We are submitting that ruling for consideration in our ongoing dispute with Thailand. The matters are currently in the appeals process and management continues to believe that the Company has a valid legal position in these appeals. Accordingly, the Company has not accrued any amount for this contingency; however, the Company cannot provide any assurance that it will not ultimately be subject to a retroactive assessment.
At December 31, 2015 and 2014, the Company had an accrual of approximately $7.5 and $12.5, respectively, related to the Brazil indirect tax matter disclosed above. The reduction in the accrual is due to the expiration of the statute of limitations related to years subject to audit and foreign currency fluctuations.
20
A loss contingency is reasonably possible if it has a more than remote but less than probable chance of occurring. Although management believes the Company has valid defenses with respect to its indirect tax positions, it is reasonably possible that a loss could occur in excess of the estimated accrual, for which the Company estimated the aggregate risk at December 31, 2015 to be up to approximately $174.5 for its material indirect tax matters, of which approximately $138.0 and $24.0, respectively, relates to the Brazil indirect tax matter and Thailand customs matter disclosed above. The aggregate risk related to indirect taxes is adjusted as the applicable statutes of limitations expire.
ITEM 4: MINE SAFETY DISCLOSURES
Not applicable.
21
PART II
ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The common shares of the Company are listed on the New York Stock Exchange with a symbol of “DBD.” The price ranges of common shares of the Company for the periods indicated below are as follows:
2015 | 2014 | 2013 | |||||||||||||||||||||
High | Low | High | Low | High | Low | ||||||||||||||||||
1st Quarter | $ | 36.49 | $ | 30.63 | $ | 40.78 | $ | 32.05 | $ | 33.30 | $ | 27.59 | |||||||||||
2nd Quarter | $ | 38.94 | $ | 33.21 | $ | 41.45 | $ | 36.20 | $ | 33.95 | $ | 28.26 | |||||||||||
3rd Quarter | $ | 35.79 | $ | 29.16 | $ | 40.90 | $ | 35.00 | $ | 35.40 | $ | 27.89 | |||||||||||
4th Quarter | $ | 37.98 | $ | 29.60 | $ | 38.67 | $ | 32.31 | $ | 34.44 | $ | 28.88 | |||||||||||
Full Year | $ | 38.94 | $ | 29.16 | $ | 41.45 | $ | 32.05 | $ | 35.40 | $ | 27.59 | |||||||||||
There were 56,238 shareholders of the Company at December 31, 2015, which includes an estimated number of shareholders who have shares held in their accounts by banks, brokers, and trustees for benefit plans and the agent for the dividend reinvestment plan.
On the basis of amounts paid and declared quarterly, the annualized dividends per share were $1.15 in 2015, 2014 and 2013.
Information concerning the Company’s share repurchases made during the fourth quarter of 2015:
Period | Total Number of Shares Purchased (1) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans | Maximum Number of Shares that May Yet Be Purchased Under the Plans (2) | |||||||||
October | 137 | $ | 37.47 | — | 2,426,177 | ||||||||
November | 2,871 | $ | 33.80 | — | 2,426,177 | ||||||||
December | 425 | $ | 30.80 | — | 2,426,177 | ||||||||
Total | 3,433 | $ | 33.64 | — | |||||||||
(1) | All shares were surrendered or deemed surrendered to the Company in connection with the Company’s stock-based compensation plans. |
(2) | The total number of shares repurchased as part of the publicly announced share repurchase plan was 13,450,772 as of December 31, 2015. The plan was approved by the Board of Directors in April 1997. The Company may purchase shares from time to time in open market purchases or privately negotiated transactions. The Company may make all or part of the purchases pursuant to accelerated share repurchases or Rule 10b5-1 plans. The plan has no expiration date. The following table provides a summary of Board of Director approvals to repurchase the Company's outstanding common shares: |
Total Number of Shares Approved for Repurchase | ||
1997 | 2,000,000 | |
2004 | 2,000,000 | |
2005 | 6,000,000 | |
2007 | 2,000,000 | |
2011 | 1,876,949 | |
2012 | 2,000,000 | |
15,876,949 | ||
22
PERFORMANCE GRAPH
The graph below compares the cumulative 5-Year total return provided shareholders on Diebold, Inc.'s common stock relative to the cumulative total returns of the S&P 500 index, the S&P Midcap 400 index and two customized peer groups both consisting of twenty-five companies whose individual companies are listed in footnotes 1 and 2 below. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock, in each index and in each of the peer groups on 12/31/2010 and its relative performance is tracked through 12/31/2015.
(1) | There are twenty-five companies included in the Company's first customized peer group (New Peer Group) which are: Actuant Corp., Allegion PLC, Benchmark Electronics Inc., Brady Corp., Convergys Corp., DST Systems, Fidelity National Information Services, Fiserv Inc., Global Payments Inc., Harris Corp., International Game Technology PLC, Intuit Inc., Lexmark International Inc., Logitech International SA, Mettler Toledo International Inc., NCR Corp., Netapp Inc., Outerwall Inc., Pitney-Bowes Inc., Sensata Technologies Holding NV, The Brinks Company, The Timken Company, Unisys Corp., Western Union Company (The) and Woodward Inc. |
(2) | The twenty-five companies included in the Company's second customized peer group (Old Peer Group) are: Actuant Corp., Benchmark Electronics Inc., Brady Corp., Convergys Corp., DST Systems, Fidelity National Information Services, Fiserv Inc., Flowserve Corp., Global Payments Inc., Harris Corp., International Game Technology PLC, Intuit Inc., Lexmark International Inc., Logitech International SA, Mettler Toledo International Inc., NCR Corp., Outerwall Inc., Pitney-Bowes Inc., Sensata Technologies Holding NV, SPX Corp., The Brinks Company, The Timken Company, Unisys Corp., Western Union Company (The) and Woodward Inc. |
23
ITEM 6: SELECTED FINANCIAL DATA
The following table should be read in conjunction with “Part II - Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II - Item 8 - Financial Statements and Supplementary Data” of this Form 10-K.
Year Ended December 31, | |||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
(in millions, except per share data) | |||||||||||||||||||
Results of operations | (unaudited) | (unaudited) | |||||||||||||||||
Net sales | $ | 2,419.3 | $ | 2,734.8 | $ | 2,582.7 | $ | 2,724.3 | $ | 2,577.4 | |||||||||
Cost of sales | 1,767.3 | 2,008.6 | 1,996.7 | 2,044.1 | 1,862.4 | ||||||||||||||
Gross profit | $ | 652.0 | $ | 726.2 | $ | 586.0 | $ | 680.2 | $ | 715.0 | |||||||||
Amounts attributable to Diebold, Incorporated | |||||||||||||||||||
Income (loss) from continuing operations, net of tax | $ | 57.8 | $ | 104.7 | $ | (195.3 | ) | $ | 62.6 | $ | 151.8 | ||||||||
Income (loss) from discontinued operations, net of tax | 15.9 | 9.7 | 13.7 | 11.0 | (7.6 | ) | |||||||||||||
Net income (loss) attributable to Diebold, Incorporated | $ | 73.7 | $ | 114.4 | $ | (181.6 | ) | $ | 73.6 | $ | 144.2 | ||||||||
Basic earnings (loss) per common share | |||||||||||||||||||
Income (loss) from continuing operations, net of tax | $ | 0.89 | $ | 1.62 | $ | (3.06 | ) | $ | 1.00 | $ | 2.36 | ||||||||
Income (loss) from discontinued operations, net of tax | 0.24 | 0.15 | 0.21 | $ | 0.17 | (0.12 | ) | ||||||||||||
Net income (loss) attributable to Diebold, Incorporated | $ | 1.13 | $ | 1.77 | $ | (2.85 | ) | $ | 1.17 | $ | 2.24 | ||||||||
Diluted earnings (loss) per common share | |||||||||||||||||||
Income (loss) from continuing operations, net of tax | $ | 0.88 | $ | 1.61 | $ | (3.06 | ) | $ | 0.98 | $ | 2.35 | ||||||||
Income (loss) from discontinued operations, net of tax | 0.24 | 0.15 | 0.21 | $ | 0.17 | $ | (0.12 | ) | |||||||||||
Net income (loss) attributable to Diebold, Incorporated | $ | 1.12 | $ | 1.76 | $ | (2.85 | ) | $ | 1.15 | $ | 2.23 | ||||||||
Number of weighted-average shares outstanding | |||||||||||||||||||
Basic shares | 64.9 | 64.5 | 63.7 | 63.1 | 64.2 | ||||||||||||||
Diluted shares | 65.6 | 65.2 | 63.7 | 63.9 | 64.8 | ||||||||||||||
Dividends | |||||||||||||||||||
Common dividends paid | $ | 75.6 | $ | 74.9 | $ | 74.0 | $ | 72.8 | $ | 72.9 | |||||||||
Common dividends paid per share | $ | 1.15 | $ | 1.15 | $ | 1.15 | $ | 1.14 | $ | 1.12 | |||||||||
Consolidated balance sheet data (as of period end) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||
Current assets | $ | 1,643.6 | $ | 1,655.5 | $ | 1,555.4 | $ | 1,814.9 | $ | 1,732.3 | |||||||||
Current liabilities | $ | 955.8 | $ | 1,027.8 | $ | 893.8 | $ | 838.8 | $ | 837.9 | |||||||||
Net working capital | $ | 687.8 | $ | 627.7 | $ | 661.6 | $ | 976.1 | $ | 894.4 | |||||||||
Property, plant and equipment, net | $ | 175.3 | $ | 165.7 | $ | 160.9 | $ | 184.3 | $ | 192.7 | |||||||||
Total long-term liabilities | $ | 858.0 | $ | 759.5 | $ | 668.9 | $ | 908.8 | $ | 834.9 | |||||||||
Total assets | $ | 2,249.3 | $ | 2,342.1 | $ | 2,183.5 | $ | 2,592.9 | $ | 2,517.4 | |||||||||
Total equity | $ | 435.5 | $ | 554.8 | $ | 620.8 | $ | 845.3 | $ | 844.6 | |||||||||
24
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2015
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in millions, except per share amounts)
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Management’s discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes that appear elsewhere in this annual report on Form 10-K.
Introduction
Diebold provides the services, software and technology that connect people around the world with their money — bridging the physical and digital worlds of cash conveniently, securely and efficiently. Since its founding in 1859, the Company believes it has evolved to become a leading provider of exceptional self-service innovation, security and services to financial, retail, commercial and other markets. At December 31, 2015, the Company employed approximately 16,000 associates globally, of which approximately 1,000 relate to the Company's recently divested electronic security business. The Company’s service staff is one of the financial industry’s largest, with professionals in more than 600 locations and businesses in more than 90 countries worldwide. The Company continues to execute its multi-year transformation, Diebold 2.0, with the primary objective of transforming the Company into a world-class, services-led and software-enabled company, supported by innovative hardware, which automates the way people connect with their money.
Diebold 2.0 consists of four pillars:
• | Cost - Streamline the cost structure and improve near-term delivery and execution. |
• | Cash - Generate increased free cash flow in order to fund the investments necessary to drive profitable growth, while preserving the ability to return value to shareholders in the form of reliable dividends and, as appropriate, share repurchases. |
• | Talent - Attract and retain the talent necessary to drive innovation and the focused execution of the transformation strategy. |
• | Growth - Return Diebold to a sustainable, profitable growth trajectory. |
The Company's multi-year transformation plan is expected to occur in three phases: 1) Crawl, 2) Walk, and 3) Run. As part of the transformation, the Company has identified targeted savings of $200.0 that are expected to be fully realized by the end of 2017 and plans to reinvest approximately 50 percent of the cost savings to drive long-term growth. During the “Crawl” phase, the Company was primarily focused on taking cost out of the business and reallocating a portion of these savings as reinvestments in systems and processes. The Company engaged Accenture LLP (Accenture) in a multi-year outsourcing agreement to provide finance and accounting and procurement business process services. With respect to talent, the Company attracted new leaders from top technology and services companies.
During the second half of 2015, the Company transitioned into the “Walk” phase of Diebold 2.0 whereby the Company will continue to build on each pillar of cost, cash, talent and growth. The main difference in the “Walk” phase will be a greater emphasis on increasing the mix of revenue from services and software, as well as shaping the Company’s portfolio of businesses. As it relates to increasing the mix of services and software, the Company has recently sharpened its focus on pursuing and winning multi-vendor services contracts in North America to further diversify its portfolio of services offerings. The total number of non-Diebold automated teller machines (ATMs) signed under contract as of December 31, 2015 was more than 12,000, which gives the Company a solid platform for future growth. For the software business, the recent acquisition of Phoenix Interactive Design, Inc., (Phoenix) has significantly enhanced the Company’s ability to capture more of the dynamic self-service market. The integration of Phoenix is tracking to plan and all of the Company’s global software activities are being coordinated through the new development center in London, Ontario.
As it relates to shaping the portfolio of businesses, the Company’s announcements subsequent to the third quarter of 2015 are consistent with its strategy of transforming into a world-class services-led, software-enabled company, supported by innovative hardware. On October 25, 2015, the Company entered into a definitive asset purchase agreement to divest its North America-based electronic security business. For ES to continue its growth, it would require resources and investment that Diebold is not committed to make given its focus on the self-service market. On February 1, 2016, the Company divested its North America electronic security business to Securitas AB for an aggregate purchase price of $350.0 in cash, 10.0% of which is contingent on the successful transition of certain customer relationships, which management expects to receive full payment of $35.0 in the first quarter of 2016 now that all contingencies for this payment have been achieved. The Company is estimating a pre-tax gain of approximately $245.0 on the ES divestiture which will be recognized in the first quarter of 2016 and is subject to change upon the finalization of the working capital adjustments and the income tax effect of gain on sale. The Company has also agreed to provide certain transition services for a $6.0 credit. Additionally, the Company is narrowing its scope in the Brazil other business to primarily focus on lottery and elections to help rationalize its solution set in that market. These decisions enable the Company to refocus its resources and better position itself to pursue growth opportunities in the dynamic self-service industry.
25
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2015
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in millions, except per share amounts)
In December 2015, the Company announced it is forming a new joint venture with a subsidiary of the Inspur Group, a Chinese cloud computing and data center company, to develop, manufacture and distribute financial self-service (FSS) solutions in China. Inspur will hold a majority stake of 51 percent in the new joint venture, which will be named Inspur Financial Information Systems, Ltd. The joint venture will offer a complete range of self-service terminals within the Chinese market, including ATMs. Also, Diebold will serve as the exclusive distributor outside of China for all products developed by the new joint venture, which will be sold under the Diebold brand.
In addition, to support Diebold's services-led approach to the market, Inspur will acquire a minority share of Diebold's current China joint venture. Moving forward, this business will be focused on providing a whole suite of services including installation, maintenance, professional and managed services related to ATMs and other automated transaction solutions.
Solutions
The Company believes it is a leader in managed and maintenance services with a dedicated service network serving our customers across the globe. The combination of the Company’s differentiated security, remote management and highly-trained field technicians has made the Company the preferred choice for current and emerging self-service solutions. Through managed services, banks entrust the management of their ATM and security operations to the Company, allowing their associates to focus on core competencies. Furthermore, the Company’s managed services provides banks and credit unions with a leading-edge technology that they need to stay competitive in the marketplace.
A significant demand driver in the global ATM marketplace is branch automation. The concept is to help financial institutions reduce their costs by migrating routine transactions, typically done inside the branch, to lower-cost automated channels, while also growing revenue, and adding convenience and security for the banks’ customers. The Company serves as a strategic partner to its customers by offering a complete branch automation solution-services, software and technology-that addresses the complete value chain of consult, design, build and operate. The Company’s Advisory Services team collaborates with our clients to help define the ideal customer experience, modify processes, refine existing staffing models and deploy technology to meet branch automation objectives. The Diebold 9900 in-lobby teller terminal (ILT) provides branch automation technology by combining the speed and accuracy of a self-service terminal with intelligence from the bank’s core systems, as well as the ability to complete higher value transactions away from the teller line.
The Company also offers hardware-agnostic, omni-channel software solutions for ATMs and a host of other self-service applications. These offerings include highly configurable, enterprise-wide software that automates and migrates financial services across channels, changing the way financial products are delivered to consumers.
Mobile integration is an emerging trend in branch automation, as consumers look for more convenient ways to interact with their financial institutions. To address this need, the Company offers its innovative Mobile Cash Access software solution, which enables consumers to initiate ATM transactions with a mobile device. By eliminating the need for an ATM card, Mobile Cash Access dramatically speeds up transaction time and reduces the risk of card skimming, fraud and theft since sensitive customer information is never stored on the mobile device and is passed to the ATM via a secure virtual private network connection. The Company has demonstrated success with this solution in North America (NA), and Europe, Middle East and Africa (EMEA).
As part of its branch automation solution, the Company offers two-way video capabilities. The solution provides consumers with on-demand access to bank call center representatives at the ATM for sales or bank account maintenance support. In addition to delivering a personal touch outside of regular business hours, it ultimately assists financial institutions by maximizing operational efficiencies, improving the consumer experience and enhancing the overall consumer relationship.
An innovation that enhances security for customers is Diebold’s ActivEdge™ secure card reader. This is the ATM industry’s first complete anti-skimming, EMV compliant card reader that prevents all known forms of skimming, the most prevalent type of ATM crime. ActivEdge™ can assist financial institutions avoid skimming-related fraud losses which, according to the ATM Industry Association, totals more than $2 billion annually worldwide. ActivEdge™ requires users to insert cards into the reader via the long edge, instead of the traditional short edge. the Company believes by shifting a card’s angle 90 degrees, ActivEdge™ prevents modern skimming devices from reading the card’s full magnetic strip, eliminating the devices’ ability to steal card data.
The Company will continue to invest in developing new services, software and security solutions that align with the needs of its customers. During the third quarter, the Company added its high-performance cash-dispensing and full-function ATM models to its self-service platform. Over the past year, the Company has unveiled three new lines of ATMs-standard market, extended branch and the high-performance line, which are designed to meet specific market and branch needs for customers.
26
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2015
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in millions, except per share amounts)
Business Drivers
The business drivers of the Company's future performance include, but are not limited to:
• | demand for services and software, including managed services and professional services; |
• | timing of self-service equipment upgrades and/or replacement cycles; |
• | demand for products and solutions related to bank branch automation opportunities; |
• | demand for security products and services for the financial and commercial sectors; and |
• | high levels of deployment growth for new self-service products in emerging markets. |
Pending Business Combination with Wincor Nixdorf
In the fourth quarter of 2015, the Company announced its intention to acquire Wincor Nixdorf ordinary shares through a tender offer for €38.98 in cash and 0.434 common shares of the Company per outstanding ordinary share of Wincor Nixdorf. The Company considered a number of factors in connection with its evaluation of the proposed transaction, including significant strategic opportunities and potential synergies, as generally supporting its decision to enter into the business combination agreement. The final purchase price is dependent on the stock price of the Company at the time of close. Based on the closing stock price of the Company on January 26, 2016 and the U.S. dollar to euro foreign currency exchange rate of $1.0845 per euro, the total estimated purchase price will be $1,609.7 as incorporated in the Company's Form S-4/A filed with the U.S. Securities and Exchange Commission on February 5, 2016. The Company intends to finance the cash portion of the purchase price as well as any Wincor Nixdorf debt outstanding under our revolving and term loan credit agreement entered into on December 23, 2015 and bridge agreement entered into on November 23, 2015.
27
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2015
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in millions, except per share amounts)
The table below presents the changes in comparative financial data for the years ended December 31, 2015, 2014 and 2013. Comments on significant year-to-year fluctuations follow the table. The operating results for the NA electronic security business have been reclassified to discontinued operations for all of the periods presented. The following discussion should be read in conjunction with the consolidated financial statements and the accompanying notes that appear elsewhere in this annual report on Form 10-K.
Year ended December 31, | |||||||||||||||||||||
2015 | 2014 | 2013 | |||||||||||||||||||
% of Net Sales | % Change | % of Net Sales | % Change | % of Net Sales | |||||||||||||||||
Net sales | |||||||||||||||||||||
Services | $ | 1,394.2 | 57.6 | (2.7) | $ | 1,432.8 | 52.4 | 0.8 | $ | 1,420.8 | 55.0 | ||||||||||
Products | 1,025.1 | 42.4 | (21.3) | 1,302.0 | 47.6 | 12.1 | 1,161.9 | 45.0 | |||||||||||||
2,419.3 | 100.0 | (11.5) | 2,734.8 | 100.0 | 5.9 | 2,582.7 | 100.0 | ||||||||||||||
Cost of sales | |||||||||||||||||||||
Services | 932.8 | 38.6 | (4.3) | 974.8 | 35.6 | (7.0) | 1,048.3 | 40.6 | |||||||||||||
Products | 834.5 | 34.5 | (19.3) | 1,033.8 | 37.8 | 9.0 | 948.4 | 36.7 | |||||||||||||
1,767.3 | 73.1 | (12.0) | 2,008.6 | 73.4 | 0.6 | 1,996.7 | 77.3 | ||||||||||||||
Gross profit | 652.0 | 26.9 | (10.2) | 726.2 | 26.6 | 23.9 | 586.0 | 22.7 | |||||||||||||
Selling and administrative expense | 488.2 | 20.2 | 2.0 | 478.4 | 17.5 | (15.3) | 564.5 | 21.9 | |||||||||||||
Research, development and engineering expense | 86.9 | 3.6 | (7.2) | 93.6 | 3.4 | 1.5 | 92.2 | 3.6 | |||||||||||||
Impairment of assets | 18.9 | 0.8 | N/M | 2.1 | 0.1 | (97.1) | 72.0 | 2.8 | |||||||||||||
Gain on sale of assets, net | (0.6 | ) | — | (95.3) | (12.9 | ) | (0.5) | N/M | (2.4 | ) | (0.1) | ||||||||||
593.4 | 24.5 | 5.7 | 561.2 | 20.5 | (22.7) | 726.3 | 28.1 | ||||||||||||||
Operating profit (loss) | 58.6 | 2.4 | (64.5) | 165.0 | 6.0 | N/M | (140.3 | ) | (5.4) | ||||||||||||
Other expense, net | (12.8 | ) | (0.5) | 24.3 | (10.3 | ) | (0.4) | N/M | (1.5 | ) | (0.1) | ||||||||||
Income (loss) from continuing operations before taxes | 45.8 | 1.9 | (70.4) | 154.7 | 5.7 | N/M | (141.8 | ) | (5.5) | ||||||||||||
Income tax (benefit) expense | (13.7 | ) | (0.6) | N/M | 47.4 | 1.7 | (2.1) | 48.4 | 1.9 | ||||||||||||
Income (loss) from continuing operations | 59.5 | 2.5 | (44.5) | 107.3 | 3.9 | N/M | (190.2 | ) | (7.4) | ||||||||||||
Income from discontinued operations, net of tax | 15.9 | 0.6 | 63.9 | 9.7 | 0.4 | (29.2) | 13.7 | 0.6 | |||||||||||||
Net income (loss) | 75.4 | 3.1 | (35.6) | 117.0 | 4.3 | N/M | (176.5 | ) | (6.8) | ||||||||||||
Net income attributable to noncontrolling interests | 1.7 | 0.1 | (34.6) | 2.6 | 0.1 | (49.0) | 5.1 | 0.2 | |||||||||||||
Net income (loss) attributable to Diebold, Incorporated | $ | 73.7 | 3.0 | (35.6) | $ | 114.4 | 4.2 | N/M | $ | (181.6 | ) | (7.0) | |||||||||
Amounts attributable to Diebold, Incorporated | |||||||||||||||||||||
Income (loss) from continuing operations, net of tax | $ | 57.8 | 2.4 | $ | 104.7 | 3.8 | $ | (195.3 | ) | (7.6) | |||||||||||
Income from discontinued operations, net of tax | 15.9 | 0.6 | 9.7 | 0.4 | 13.7 | 0.6 | |||||||||||||||
Net income (loss) attributable to Diebold, Incorporated | $ | 73.7 | 3.0 | $ | 114.4 | 4.2 | $ | (181.6 | ) | (7.0) | |||||||||||
28
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2015
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in millions, except per share amounts)
RESULTS OF OPERATIONS
2015 comparison with 2014
Net Sales
The following table represents information regarding our net sales for the years ended December 31:
2015 | 2014 | $ Change | % Change | ||||||||||
Total financial self-service | $ | 2,108.7 | $ | 2,197.2 | $ | (88.5 | ) | (4.0) | |||||
Total security | 292.8 | 312.4 | (19.6 | ) | (6.3) | ||||||||
Total financial self-service & security | 2,401.5 | 2,509.6 | (108.1 | ) | (4.3) | ||||||||
Brazil other | 17.8 | 225.2 | (207.4 | ) | (92.1) | ||||||||
Total net sales | $ | 2,419.3 | $ | 2,734.8 | $ | (315.5 | ) | (11.5) | |||||
FSS sales decreased $88.5 or 4.0 percent inclusive of a net unfavorable currency impact of $161.2. The unfavorable currency impact was related primarily to the Brazil real and the euro. The following segment results include the impact of foreign currency.
• | NA FSS sales increased $6.4 or 0.7 percent due primarily to increased volume in Canada from a large deposit automation upgrade project combined with the incremental sales from the acquisition of Phoenix in the first quarter of 2015. The United States (U.S.) experienced growth in multi-vendor services within the national bank space as significant contracts were won in the first, third and fourth quarters of 2015. This favorability was partially offset by a product volume decline related to two large enterprise accounts in the U.S. and the winding down of the Agilis 3 and Windows 7 upgrade project in the U.S. regional bank space. |
• | Asia Pacific (AP) FSS sales decreased $55.9 or 11.7 percent impacted by $17.8 in unfavorable currency. The decline was primarily attributable to a decrease in product revenue in China where the government is encouraging banks to increase their use of domestic ATM suppliers. This decline was partially offset by an increase in service revenue as India, Philippines and China have experienced growth in their service installation base as well as higher professional services volume across a majority of the region. |
• | EMEA FSS sales decreased $28.3 or 6.7 percent inclusive of a $66.6 unfavorable currency impact mainly related to the weakening of the euro. Excluding the unfavorable currency impact, EMEA FSS sales increased $38.3 due to higher product volume in Turkey and with European distributors, as well as a full year benefit of Cryptera, which was acquired in the third quarter of 2014. In addition to the unfavorable currency, offsetting declines occurred in Italy due to lower product volume while Belgium, Austria and the UK had large projects in 2014. |
• | Latin America (LA) FSS sales decreased $10.7 or 2.5 percent inclusive of $69.5 unfavorable currency impact mainly related to the weakening of the Brazil real. Excluding the unfavorable currency impact, LA FSS sales increased $58.8 due to growth across a majority of the region, including Mexico which experienced double digit growth related to several customers renewing their existing ATM fleets. This was offset by the unfavorable currency impact and the sale of the Company’s equity interest in the Venezuelan joint venture. |
Security sales decreased $19.6 or 6.3 percent impacted by $6.1 in unfavorable currency. Approximately two-thirds of the decrease was related to continuing electronic security business, driven by volume declines in LA due to government mandated security updates in 2014. There were volume declines in AP as a result of exiting the business in Australia. Physical security was down due to volume declines in AP, LA and both the regional and national bank space in the U.S.
Brazil other sales included an unfavorable currency impact of $62.8 and a decrease related to deliveries of information technology (IT) equipment to the Brazil education ministry in the prior year. Additionally, market-specific economic and political factors continue to weigh on the purchasing environment driving lower volume in country.
29
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2015
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in millions, except per share amounts)
Gross Profit
The following table represents information regarding our gross profit for the years ended December 31:
2015 | 2014 | $ Change | % Change | ||||||||||
Gross profit - services | $ | 461.4 | $ | 458.0 | $ | 3.4 | 0.7 | ||||||
Gross profit - products | 190.6 | 268.2 | (77.6 | ) | (28.9) | ||||||||
Total gross profit | $ | 652.0 | $ | 726.2 | $ | (74.2 | ) | (10.2) | |||||
Gross margin - services | 33.1 | % | 32.0 | % | |||||||||
Gross margin - products | 18.6 | % | 20.6 | % | |||||||||
Total gross margin | 26.9 | % | 26.6 | % | |||||||||
Service gross margin increased during the time period with slight improvements throughout the international regions. AP service gross margin increased largely due to operational efficiencies gained through organizational restructuring while EMEA was driven primarily by higher service parts volume with EMEA distributors. LA’s margin improvement was driven by Venezuela, which had a lower cost of market adjustment in 2014 that favorably affected margins between the time periods. NA experienced a declines in gross margin and gross profit as a result of volume and service mix. Service gross profit in 2015 and 2014 included restructuring charges of $3.1 and $1.3, respectively.
Product gross margin decreased during the time period due to a decline in volume and a shift in product solution mix. In addition, product gross margin was adversely impacted by $4.7 of inventory reserves related to the cancellation of certain projects in connection with the current Brazil economic and political environment. Product gross profit included total restructuring charges and non-routine expenses of $1.6 in 2015 and net benefit of $5.2 in 2014, which was related to Brazil indirect tax reversals.
Operating Expenses
The following table represents information regarding our operating expenses for the years ended December 31:
2015 | 2014 | $ Change | % Change | ||||||||||
Selling and administrative expense | $ | 488.2 | $ | 478.4 | $ | 9.8 | 2.0 | ||||||
Research, development and engineering expense | 86.9 | 93.6 | (6.7 | ) | (7.2) | ||||||||
Impairment of assets | 18.9 | 2.1 | 16.8 | N/M | |||||||||
Gain on sale of assets, net | (0.6 | ) | (12.9 | ) | 12.3 | (95.3) | |||||||
Total operating expenses | $ | 593.4 | $ | 561.2 | $ | 32.2 | 5.7 | ||||||
The increase in selling and administrative expense resulted primarily from higher non-routine and restructuring charges and an increase in the bad debt reserve of $4.6 in the third quarter of 2015 related to the cancellation of a previously awarded government contract in connection with the current Brazil economic and political environment, net of lower operational spend and favorable currency impact.
Non-routine expenses of $36.3 and $9.2 were included in 2015 and 2014, respectively. The non-routine expenses pertained to legal, indemnification and professional fees related to corporate monitor efforts, which was $14.7 and $9.2 in 2015 and 2014, respectively. Additionally, 2015 included divestiture and potential acquisition costs of $21.1 in non-routine expense, with no comparable expense in 2014. Selling and administrative expense also included $16.7 and $9.7 of restructuring charges in 2015 and 2014, respectively. Restructuring charges in 2015 and 2014 consisted of the Company's transformation and business process outsourcing initiative. There were additional costs in 2015 associated with executive delayering.
Research, development and engineering expense as a percent of net sales in 2015 and 2014 were relatively flat. The Company increased investment in 2015 related to the acquisition and integration of Phoenix as well as incremental expense associated with the acquisition of Cryptera, which was completed in the second half of 2014. This increase was offset by favorable currency impact and a decrease between the time periods mainly due to higher material and labor costs in 2014 related to the launch of new ATM models and enhanced modules.
As of March 31, 2015, the Company agreed to sell its equity interest in its Venezuela joint venture to its joint venture partner and recorded a $10.3 impairment of assets in the first quarter of 2015. On April 29, 2015, the Company closed the sale for the estimated fair market value and recorded a $1.0 reversal of impairment of assets based on final adjustments in the second quarter of 2015,
30
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2015
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in millions, except per share amounts)
resulting in a $9.3 impairment of assets. Final fair value adjustments resulted in an overall impairment of $9.7. The Company no longer has a consolidating entity in Venezuela but will continue to operate in Venezuela on an indirect basis. Additionally, the Company recorded an impairment related to other intangibles in LA in the second quarter of 2015 and an impairment of $9.1 related to redundant legacy Diebold internally-developed software as a result of the acquisition of Phoenix in the first quarter of 2015 in which the carrying amounts of the assets were not recoverable.
During the second quarter of 2014, the Company divested its Eras subsidiary, resulting in a gain on sale of assets of $13.7.
Operating Profit
The following table represents information regarding our operating profit (loss) for the years ended December 31:
2015 | 2014 | $ Change | % Change | ||||||||||
Operating profit | $ | 58.6 | $ | 165.0 | $ | (106.4 | ) | (64.5) | |||||
Operating profit margin | 2.4 | % | 6.0 | % | |||||||||
The decrease in operating profit resulted from lower product revenue primarily in Brazil and China combined with higher net non-routine and restructuring charges. Impairment of assets and gain on sales of assets unfavorably impacted operating profit as a result of impairments in the first half of 2015 and the gain on the sale of Eras in 2014. Improvement in service margin helped to partially offset these declines.
Other (Expense) Income
The following table represents information regarding our other (expense) income for the years ended December 31:
2015 | 2014 | $ Change | % Change | ||||||||||
Investment income | $ | 26.0 | $ | 34.5 | $ | (8.5 | ) | (24.6) | |||||
Interest expense | (32.5 | ) | (31.4 | ) | (1.1 | ) | 3.5 | ||||||
Foreign exchange loss, net | (10.0 | ) | (11.8 | ) | 1.8 | (15.3) | |||||||
Miscellaneous, net | 3.7 | (1.6 | ) | 5.3 | N/M | ||||||||
Other (expense) income | $ | (12.8 | ) | $ | (10.3 | ) | $ | (2.5 | ) | 24.3 | |||
The decrease in investment income was driven primarily by unfavorable currency impact in Brazil. The foreign exchange loss net for 2015 and 2014 included $7.5 and $12.1, respectively, related to the devaluation of the Venezuela currency. The change in miscellaneous, net was primarily related to income derived from the fair value re-measurement of foreign currency option contracts.
Net Income from Continuing Operations, net of tax
The following table represents information regarding our net income from continuing operations, net of tax for the years ended December 31:
2015 | 2014 | $ Change | % Change | ||||||||||
Net income (loss) | $ | 59.5 | $ | 107.3 | $ | (47.8 | ) | (44.5) | |||||
Percent of net sales | 2.5 | % | 3.9 | % | |||||||||
Effective tax rate | (29.9 | )% | 30.6 | % | |||||||||
The decrease in net income was driven by lower operating profit resulting from lower product revenue in conjunction with higher net non-routine and restructuring charges as well as a net detriment between years associated with impairment of assets and gain on sales of assets.
The tax rate benefit for the year ended December 31, 2015 resulted from the repatriation of foreign earnings, the associated recognition of foreign tax credits and related benefits due to the passage of the Protecting Americans from Tax Hikes (PATH) Act of 2015.
31
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2015
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in millions, except per share amounts)
Income from Discontinued Operations, Net of Tax
On February 1, 2016, the Company executed a definitive asset purchase agreement (Purchase Agreement) with a wholly owned subsidiary of Securitas AB (Securitas Electronic Security) to divest its electronic security business located in the U.S. and Canada for an aggregate purchase price of approximately $350.0 in cash, 10.0 percent of which is contingent based on the successful transition of certain customer relationships, which management expects to receive full payment of $35.0 in the first quarter of 2016 now that all contingencies for this payment have been achieved. The Company has also agreed to provide certain transition services to Securitas Electronic Security after the closing, including providing the Securitas Electronic Security a $6.0 credit for such services.
Income from discontinued operations, net of tax was $15.9 and $9.7 for the years ended December 31, 2015 and 2014, respectively. The operating results for the electronic security business were previously included in the Company's NA segment and have been reclassified to discontinued operations for all of the periods presented. Additionally, the assets and liabilities of this business are classified as held for sale in the Company's consolidated balance sheets for all of the periods presented.
Segment Revenue and Operating Profit Summary
The following tables represent information regarding our revenue and operating profit by reporting segment for the years ended December 31:
North America: | 2015 | 2014 | $ Change | % Change | |||||||||
Revenue | $ | 1,094.5 | $ | 1,091.4 | $ | 3.1 | 0.3 | ||||||
Segment operating profit | $ | 250.1 | $ | 266.3 | $ | (16.2 | ) | (6.1) | |||||
Segment operating profit margin | 22.9 | % | 24.4 | % | |||||||||
NA revenue increased due to higher FSS sales. The key drivers of this growth were higher volume in Canada from a large deposit automation upgrade project, increased multi-vendor services revenue in the U.S. and the acquisition of Phoenix. This was offset in part by decreased product volume in the U.S. in both the national and regional bank space. Physical security sales were lower between the time periods with volume declines in product revenue more than offsetting an increase in service. Operating profit decreased principally due to the mix between regional and national customers, product mix and increased operating expenses resulting from the Phoenix acquisition.
Asia Pacific: | 2015 | 2014 | $ Change | % Change | |||||||||
Revenue | $ | 439.6 | $ | 500.3 | $ | (60.7 | ) | (12.1) | |||||
Segment operating profit | $ | 63.1 | $ | 66.4 | $ | (3.3 | ) | (5.0) | |||||
Segment operating profit margin | 14.4 | % | 13.3 | % | |||||||||
AP revenue in 2015 decreased from the prior year mainly as a result of a 39.4 percent decline in product revenue in China where the government is encouraging banks to increase their use of domestic ATM suppliers. AP Revenue in 2015 was also adversely impacted by unfavorable currency of $19.3. These declines were partially offset by service revenue growth in a majority of the countries related to higher professional services and billed work volume. Operating profit decreased as a result of lower product volume combined with higher operating expense, which was offset by increased service margin largely due to operational efficiencies gained through organizational restructuring.
Europe, Middle East and Africa: | 2015 | 2014 | $ Change | % Change | |||||||||
Revenue | $ | 393.1 | $ | 421.2 | $ | (28.1 | ) | (6.7) | |||||
Segment operating profit | $ | 55.3 | $ | 61.4 | $ | (6.1 | ) | (9.9) | |||||
Segment operating profit margin | 14.1 | % | 14.6 | % | |||||||||
EMEA revenue decreased primarily due to an unfavorable currency impact of $66.6 as well as product volume declines in Italy, Belgium, Austria and the UK. This was offset by higher product volume in the Middle East and increased service parts sales to distributors, as well as the benefit of the Cryptera acquisition of $8.6. Operating profit declined primarily due to the aforementioned currency impact as well as lower product volume and revenue mix combined with higher operating expenses due to incremental spend resulting from the Cryptera acquisition. This was offset by additional service revenue associated with parts sales to a distributor in the Middle East.
32
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2015
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in millions, except per share amounts)
Latin America: | 2015 | 2014 | $ Change | % Change | |||||||||
Revenue | $ | 492.1 | $ | 721.9 | $ | (229.8 | ) | (31.8) | |||||
Segment operating profit | $ | 37.4 | $ | 68.7 | $ | (31.3 | ) | (45.6) | |||||
Segment operating profit margin | 7.6 | % | 9.5 | % | |||||||||
LA revenue decreased in 2015 compared to 2014, including a net unfavorable currency impact of $136.9. In Brazil, market-specific economic and political factors affecting the purchasing environment have driven lower Brazil other volume as well as a delivery of IT equipment to a Brazil education ministry in 2014 that was non-recurring. This was partially offset by FSS revenue growth related to product volume, particularly in Mexico where several customers are renewing their install bases. Operating profit decreased due to product volume decline in the Brazil other business and $9.3 of bad debt and inventory reserve increases primarily related to the cancellation of previously awarded government contracts in connection with the current Brazil economic and political environment. Operating profit benefited from decreased operating expenses during the time period mainly related to favorable currency impact.
Refer to note 20 to the consolidated financial statements, which is contained in Item 8 of this annual report on Form 10-K, for further details of segment revenue and operating profit.
2014 comparison with 2013
Net Sales
The following table represents information regarding our net sales for the years ended December 31:
2014 | 2013 | $ Change | % Change | ||||||||||
Total financial self-service | $ | 2,197.2 | $ | 2,166.4 | $ | 30.8 | 1.4 | ||||||
Total security | 312.4 | 344.3 | (31.9 | ) | (9.3) | ||||||||
Brazil other | 225.2 | 72.0 | 153.2 | N/M | |||||||||
Total net sales | $ | 2,734.8 | $ | 2,582.7 | $ | 152.1 | 5.9 | ||||||
The increase in FSS sales included a net unfavorable currency impact of $53.2 or 2.5 percent, of which 43 percent related to the Brazil real. The following segment results include the impact of foreign currency. NA FSS sales decreased $17.6 or 2.0 percent primarily from lower volume within the U.S. national bank business partially offset by improvement between years in the U.S. regional bank space and Canada. AP FSS sales increased $19.6 or 4.3 percent primarily due to growth in India, China and the Philippines partially offset by a decline in Indonesia due to a large order in the prior year. EMEA FSS sales increased $59.6 or 16.5 percent with the main drivers being growth in Western Europe, higher volume in Africa and the acquisition of Cryptera. LA FSS sales decreased $30.8 or 6.6 percent due to lower product sales volume primarily in Brazil, a decline in Colombia and a decrease in Venezuela resulting from the currency control policy of the Venezuelan government offset by higher volume in Mexico and a net gain in the rest of the region.
Security sales decreased due to a decline in the physical security business, which was partially offset by an increase in the electronic security business. From a regional perspective, the decrease in total physical security sales resulted primarily from a decline in NA. The increase in electronic security related to LA, where in Chile a large government project was completed in the fourth quarter of 2014.
Brazil other increased due to lottery sales volume combined with the favorable impact of deliveries of IT equipment to the education ministry primarily in the first quarter of 2014, which are not expected to recur in 2015, offset in part by a decrease in election systems sales.
33
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2015
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in millions, except per share amounts)
Gross Profit
The following table represents information regarding our gross profit for the years ended December 31:
2014 | 2013 | $ Change | % Change | ||||||||||
Gross profit - services | $ | 458.0 | $ | 372.5 | $ | 85.5 | 23.0 | ||||||
Gross profit - products | 268.2 | 213.5 | 54.7 | 25.6 | |||||||||
Total gross profit | $ | 726.2 | $ | 586.0 | $ | 140.2 | 23.9 | ||||||
Gross margin - services | 32.0 | % | 26.2 | % | |||||||||
Gross margin - products | 20.6 | % | 18.4 | % | |||||||||
Total gross margin | 26.6 | % | 22.7 | % | |||||||||
The increase in service gross margin was primarily driven by NA, which benefited from lower employee-related expense associated with restructuring initiatives implemented as part of the Company’s service transformation efforts, including the ongoing benefit from its pension freeze and voluntary early retirement program. Total service gross margin in 2014 compared to the prior year was also favorably impacted by margin improvement in LA. Total service gross profit in 2014 and 2013 included restructuring charges of $0.5 and $25.6, respectively.
The increase in product gross margin resulted from margin improvements in each international region. LA was a strong contributor as the Company benefited from certain contractual provisions in Venezuela that settled in the year ended December 31, 2014. EMEA was also a contributor largely due to higher volume. Total product gross profit in 2014 included a non-routine benefit of $5.8 and 2013 included non-routine expense of $0.8, both of which were related to Brazil indirect taxes.
Operating Expenses
The following table represents information regarding our operating expenses for the years ended December 31:
2014 | 2013 | $ Change | % Change | ||||||||||
Selling and administrative expense | $ | 478.4 | $ | 564.5 | $ | (86.1 | ) | (15.3) | |||||
Research, development and engineering expense | 93.6 | 92.2 | 1.4 | 1.5 | |||||||||
Impairment of assets | 2.1 | 72.0 | (69.9 | ) | (97.1) | ||||||||
Gain on sale of assets, net | (12.9 | ) | (2.4 | ) | (10.5 | ) | N/M | ||||||
Total operating expenses | $ | 561.2 | $ | 726.3 | $ | (165.1 | ) | (22.7) | |||||
The decrease in selling and administrative expense resulted primarily from lower non-routine expense and restructuring charges, savings realized from the Company's continued focus on cost structure and favorable currency impact, partially offset by the reinvestment of the Company’s savings into transformation initiatives. Non-routine expenses of $9.2 and $128.7 were included in 2014 and 2013, respectively. The primary components of the 2013 non-routine expense were a $67.6 non-cash pension charge, additional losses of $28.0 related to the settlement of the Foreign Corrupt Practices Act (FCPA) investigation, $17.2 related to the settlement of the securities class action lawsuit and executive severance costs of $9.3. Selling and administrative expense also included $9.7 and $20.3 of restructuring charges in 2014 and 2013, respectively. Restructuring charges in 2014 and 2013 related to the Company's multi-year realignment plan. Excluding non-routine expenses and restructuring charges, selling and administrative expense increased $43.9, which is nearly flat as a percentage of net sales in 2014 compared to the prior year. The increase in selling and administrative expense primarily relates to incremental commission expense and investments related to our back office transformation.
Research, development and engineering expense as a percent of net sales in 2014 and 2013 were relatively flat. The Company increased investment in 2014 related to development efforts to support the Company's innovation in future products, which was offset by restructuring charges of $6.0 incurred in 2013.
The Company performed an other-than-annual assessment for its Brazil reporting unit in the third quarter of 2013 based on a two-step impairment test and concluded that the goodwill within the Brazil reporting unit was partially impaired. The Company recorded a $70.0 pre-tax, non-cash goodwill impairment charge in the third quarter of 2013 due to deteriorating macro-economic outlook, structural changes to an auction-based purchasing environment and new competitors entering the market.
34
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2015
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in millions, except per share amounts)
During the second quarter of 2014, the Company divested Eras within the NA segment, resulting in a gain on sale of assets of $13.7. During the first quarter of 2013, the Company recognized a gain on assets of $2.2 resulting from the sale of certain U.S. manufacturing operations to a long-time supplier.
Operating Profit (Loss)
The following table represents information regarding our operating profit (loss) for the years ended December 31:
2014 | 2013 | $ Change | % Change | ||||||||||
Operating profit (loss) | $ | 165.0 | $ | (140.3 | ) | $ | 305.3 | N/M | |||||
Operating profit (loss) margin | 6.0 | % | (5.4 | )% | |||||||||
The increase in operating profit (loss) resulted from a reduction in operating expense mainly due to lower non-routine and restructuring charges. Operating profit also improved in total margin and higher product sales, offset in part by higher spend partially attributable to reinvestment of the Company’s savings into transformation strategies.
Other (Expense) Income
The following table represents information regarding our other (expense) income for the years ended December 31:
2014 | 2013 | $ Change | % Change | ||||||||||
Investment income | $ | 34.5 | $ | 27.6 | $ | 6.9 | 25.0 | ||||||
Interest expense | (31.4 | ) | (29.2 | ) | (2.2 | ) | 7.5 | ||||||
Foreign exchange (loss) gain, net | (11.8 | ) | 0.2 | (12.0 | ) | N/M | |||||||
Miscellaneous, net | (1.6 | ) | (0.1 | ) | (1.5 | ) | N/M | ||||||
Other (expense) income | $ | (10.3 | ) | $ | (1.5 | ) | $ | (8.8 | ) | N/M | |||
The increase in investment income compared to the prior year was driven by LA due to leasing portfolio growth in Brazil. The foreign exchange loss for 2014 and the foreign exchange gain in 2013 included losses of $12.1 and $1.6, respectively, related to the devaluation of the Venezuelan currency.
Income from Discontinued Operations, Net of Tax
Income from discontinued operations, net of tax was $9.7 and $13.7 for the years ended December 31, 2014 and 2013, respectively. The operating results for the electronic security business were previously included in the Company's NA segment and have been reclassified to discontinued operations for all of the periods presented. Additionally, the assets and liabilities of this business are classified as held for sale in the Company's consolidated balance sheet for all of the periods presented.
Income (Loss) from Continuing Operations, Net of Tax
The following table represents information regarding our income (loss) from continuing operations, net of tax, for the years ended December 31:
2014 | 2013 | $ Change | % Change | ||||||||||
Income (loss) from continuing operations, net of tax | $ | 107.3 | $ | (190.2 | ) | $ | 297.5 | N/M | |||||
Percent of net sales | 3.9 | % | (7.4 | )% | |||||||||
Effective tax rate | 30.6 | % | (34.1 | )% | |||||||||
The increase in net income was driven by higher operating profit related mainly to significantly lower non-routine and restructuring expense, an improvement in service margin and higher product sales. These benefits were offset in part by higher spend partially attributable to reinvestment of the Company’s savings into transformation initiatives and unfavorable other (expense) income in 2014 resulting from foreign exchange loss due to the devaluation of the Venezuelan currency.
35
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2015
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in millions, except per share amounts)
The negative tax rate for 2013 is a result of tax expense of approximately $55.0 related to the repatriation of previously undistributed earnings and the establishment of a valuation allowance of approximately $39.2 on deferred tax assets in the Company's Brazil manufacturing facility. The 2013 tax rate was also negatively impacted by the partially non-deductible goodwill impairment related to the Brazil reporting unit and the FCPA penalty charge.
Segment Revenue and Operating Profit Summary
The following tables represent information regarding our revenue and operating profit by reporting segment for the years ended December 31:
North America: | 2014 | 2013 | $ Change | % Change | ||||||||||
Revenue | $ | 1,091.4 | $ | 1,140.2 | $ | (48.8 | ) | (4.3) | ||||||
Segment operating profit | $ | 266.3 | $ | 232.4 | $ | 33.9 | 14.6 | |||||||
Segment operating profit margin | 24.4 | % | 20.4 | % | ||||||||||
NA revenue decreased due to lower FSS sales resulting from decreased volume in the U.S. national bank sector partially due to the impact of a large non-recurring project in the prior year, offset in part by improvement between years in the U.S. regional bank business and Canada. NA revenue also declined due to lower physical security sales between years. Operating profit increased despite the net sales decline due to an improvement in service margin primarily driven by lower employee-related expense resulting from restructuring initiatives in addition to the ongoing benefit from the Company's pension freeze and voluntary early retirement program.
Asia Pacific: | 2014 | 2013 | $ Change | % Change | ||||||||||
Revenue | $ | 500.3 | $ | 479.1 | $ | 21.2 | 4.4 | |||||||
Segment operating profit | $ | 66.4 | $ | 62.8 | $ | 3.6 | 5.7 | |||||||
Segment operating profit margin | 13.3 | % | 13.1 | % | ||||||||||
AP revenue in 2014 included net unfavorable currency impact of $14.1. Including the impact of foreign currency, revenue in 2014 compared to 2013 increased mainly from growth in India, China and the Philippines partially offset by a decrease in Indonesia because of a large order in 2013. Operating profit increased due to higher volume and improved margin performance in the region partially offset by higher operating expense.
Europe, Middle East and Africa: | 2014 | 2013 | $ Change | % Change | ||||||||||
Revenue | $ | 421.2 | $ | 362.2 | $ | 59.0 | 16.3 | |||||||
Segment operating profit | $ | 61.4 | $ | 44.0 | $ | 17.4 | 39.5 | |||||||
Segment operating profit margin | 14.6 | % | 12.1 | % | ||||||||||
EMEA revenue increased primarily from higher sales volume in Western Europe and Africa. The acquisition of Cryptera in the third quarter of 2014 resulted in incremental revenue and operating profit of $14.9 and $1.2, respectively. The overall volume increase led to product gross margin expansion driving the improvement in operating profit compared to the prior year.
Latin America: | 2014 | 2013 | $ Change | % Change | ||||||||||
Revenue | $ | 721.9 | $ | 601.1 | $ | 120.8 | 20.1 | |||||||
Segment operating profit | $ | 68.7 | $ | 41.5 | $ | 27.2 | 65.5 | |||||||
Segment operating profit margin | 9.5 | % | 6.9 | % | ||||||||||
LA revenue increased in 2014 compared to 2013, including a net unfavorable currency impact of $29.1. The constant currency revenue improvement related to lottery sales volume and deliveries of IT equipment to the education ministry in the first quarter of 2014 partially offset by a decrease in FSS volume and elections systems sales. Operating profit increased as a result of the higher product sales volume, the benefit from certain contractual provisions in Venezuela that settled in the year ended December 31, 2014 and a gain in service margin primarily in Brazil. This was partially offset by an increase in operating expenses and a lower of cost or market adjustment of $4.1 in 2014 as a result of the Venezuelan currency devaluation.
36
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2015
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in millions, except per share amounts)
Refer to note 20 to the consolidated financial statements, which is contained in Item 8 of this annual report on Form 10-K, for further details of segment revenue and operating profit.
LIQUIDITY AND CAPITAL RESOURCES
Capital resources are obtained from income retained in the business, borrowings under the Company’s senior notes, committed and uncommitted credit facilities and operating and capital leasing arrangements. Management expects that the Company’s capital resources will be sufficient to finance planned working capital needs, research and development activities, investments in facilities or equipment, pension contributions, the payment of dividends on the Company’s common shares and any repurchases of the Company’s common shares for at least the next 12 months. At December 31, 2015, $326.5 or 92.4 percent of the Company’s cash and cash equivalents and short-term investments reside in international tax jurisdictions. Repatriation of these funds could be negatively impacted by potential payments for foreign and domestic taxes, excluding $107.1 that is available for repatriation with no additional tax expense because the Company has already provided for such taxes. Part of the Company’s growth strategy is to pursue strategic acquisitions. The Company has made acquisitions in the past and intends to make acquisitions in the future, including the potential acquisition of Wincor Nixdorf. The Company intends to finance any future acquisitions with either cash and short-term investments, cash provided from operations, borrowings under available credit facilities, proceeds from debt or equity offerings and/or the issuance of common shares. The Company intends to finance the cash portion of the purchase price as well as any Wincor Nixdorf debt outstanding under our revolving and term loan credit agreement entered into on December 23, 2015 and bridge agreement entered into on November 23, 2015.
The Company's global liquidity as of December 31, 2015 and 2014 was as follows:
2015 | 2014 | ||||||
Cash and cash equivalents | $ | 313.6 | $ | 326.1 | |||
Additional cash availability from | |||||||
Short-term uncommitted lines of credit | 69.0 | 115.2 | |||||
Five-year credit facility | 352.0 | 280.0 | |||||
Short-term investments | 39.9 | 136.7 | |||||
Total global liquidity | $ | 774.5 | $ | 858.0 | |||
The following table summarizes the results of our consolidated statement of cash flows for the years ended December 31:
Net cash flow provided by (used in) | 2015 | 2014 | 2013 | ||||||||
Operating activities - continuing operations | $ | 31.6 | $ | 189.1 | $ | 122.9 | |||||
Investing activities - continuing operations | (62.4 | ) | 15.1 | (51.1 | ) | ||||||
Financing activities - continuing operations | 42.2 | (81.2 | ) | (204.5 | ) | ||||||
Discontinued operations, net | 2.6 | (3.5 | ) | (0.3 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents | (23.9 | ) | (28.2 | ) | (5.1 | ) | |||||
Net (decrease) increase in cash and cash equivalents | $ | (9.9 | ) | $ | 91.3 | $ | (138.1 | ) | |||
Operating Activities. Cash flows from operating activities can fluctuate significantly from period to period as working capital needs and the timing of payments for income taxes, restructuring activities, pension funding and other items impact reported cash flows. Net cash provided by operating activities was $31.6 for the year ended December 31, 2015, a decrease of $157.5 from $189.1 for the year ended December 31, 2014. The overall decline was primarily due to lower income from continuing operations, higher working capital and reductions in deferred revenue. Additional detail is included below:
• | Cash flows from continuing operating activities during the year ended December 31, 2015 compared to the year ended December 31, 2014 were negatively impacted by a $47.8 decrease in income from continuing operations, net of tax, primarily related to the aforementioned market-specific economic and political factors affecting the purchasing environment in Brazil, bad debt and inventory reserve increases related to the cancellation of certain projects in connection with the current Brazil economic and political environment, $18.9 impairment of assets, the adverse impact of foreign currency compared to the same period of 2014, and the gain on sale of assets of $13.7 in the second quarter of 2014 which resulted from the Company's divestiture of its Eras subsidiary. The decrease in share-based compensation expense to $12.4 in 2015 from $21.5 in 2014 was primarily due to changes in the assumptions related to performance shares. The impairment of assets, primarily in the first quarter of 2015, related to the sale of the Company's equity interest in Venezuela as well as impairment of redundant legacy Diebold internally-developed software as a result of the acquisition of Phoenix. |
37
MANAGEMENT’S DISCUSSION AND AN