DIEBOLD NIXDORF, INCORPORATED Significant Highlights
During 2019,
• Successfully amended and extended the vast majority of the Company's
$787.0 revolving credit facility and term A loans fromDecember 23, 2020 toApril 30, 2022
• Completed the merger squeeze-out of
German public subsidiary, which has streamlined and simplified the
Company's corporate structure
• Elected four new independent members to the Company's Board of Directors,
continuing to refresh the board to align with the Company's strategy and
opportunities
• Won a three-year, multi-million dollar agreement with a European DIY
retailer to refresh the end-to-end customer checkout experience in more
than 600 stores spanning 12 countries
• Executed a five-year agreement valued at more than
world's largest fuel and convenience retailers to deploy a new,
centralized card acceptance platform. The contract includes software
licenses, professional and maintenance services for stores in 10 European
markets
•
including an agreement with 1) KeyBank to digitally transform more than
1,400 self-service devices with DN Vynamic™ Software, and 2) a major
Belgian bank to upgrade more than 2,400 devices and cash recyclers to
Windows 10, leveraging DN AllConnect ServicesSM and the DN Vynamic
software suite
• Launched the DN Series™ family of self-service solutions - designed to
enable multiple capabilities that support financial institutions' efforts
to transform their branch environment, improve performance and
differentiate their user experience
• Secured a $17.0 win at Banco Itau Unibanco in Brazil to transform itsbranch network and increase automation via cash recyclers, full-function
ATMs and maintenance services
• Won a new frame agreement with Commerzbank in
ATMs with a multi-year software and services maintenance contract
• Benefited from solid growth in SCO demand from a number of European
customers, including a
more than 400 self-checkout terminals and related services
• Renewed a multi-year managed services contract with H&M, a global fashion
retailer, providing an integrated solution supporting its global stores
with an all-in-one POS system, DN Vynamic Software and DN AllConnect
Services
• Reached an agreement with Dave & Buster's, a leading
entertainment chain, to provide a self-service solution at locations
nationwide built around Diebold Nixdorf's newest K-two interactive kiosk
• Signed a multi-million dollar global agreement with Citibank for Vynamic
software and DN Series ATMs
• Won a multi-year ATM-as-a-Service agreement in Belgium with JoFiCo to
update and maintain approximately 1,560 ATMs
• Selected by a top
20,000
• Secured a multi-million dollar contract with Swisslos for 5,000 all-in-one
POS terminals
• Signed a comprehensive solutions contract, valued at nearly $10.0 , with
one of the largest banks in the Philippines to upgrade its ATM fleet to
Windows 10
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. For additional information regarding general
information regarding the Company, its business, strategy, competitors and
operations, refer to Item 1 of this annual report on Form 10-K.
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Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2019
DIEBOLD NIXDORF, INCORPORATED AND SUBSIDIARIES
(unaudited)
(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 on distributed IT assets such as ATMs, POS and SCO,
including managed services and professional services
• Timing of system upgrades and/or replacement cycles for ATMs, POS and SCO
• Demand for software products and professional services
• Demand for security products and services for the financial, retail and
commercial sectors
• Demand for innovative technology in connection with the Company's
Connected Commerce strategy
• Integration of sales force, business processes, procurement, and internal
IT systems
• Execution and risk management associated with DN Now transformational
activities
• Realization of cost reductions, which leverage the Company's global scale,
reduce overlap and improve operating efficiencies
DN Now Transformation Activities
Commensurate with its strategy, the Company is executing its multi-year transformation program called DN Now to relentlessly focus on its customers while improving operational excellence. Key activities include:
• Transitioning to a streamlined and customer-centric operating model
• Implementing a services modernization plan which focuses on upgrading
certain customer touchpoints, automating incident reporting and response,
and standardizing service offerings and internal processes
• Streamlining the product range of ATMs and manufacturing footprint
• Improving working capital management through greater focus and efficiency
of payables, receivables and inventory
• Reducing administrative expenses, including finance, IT and real estate
• Increasing sales productivity through improved coverage and compensation
arrangements
• Standardizing back-office processes to automate reporting and better
manage risks
• Optimizing the portfolio of businesses to improve overall profitability
These work streams are designed to improve the Company's profitability and net leverage ratio while establishing a foundation for future growth. The gross annualized savings target for DN Now is approximately$440 through 2021, of which approximately$130 is anticipated to be realized during 2020. In order to achieve these savings, the Company has and will continue to restructure the workforce globally, integrate and optimize systems and processes, transition workloads to lower cost locations, renegotiate and consolidate supplier agreements and streamline real estate holdings. By executing on these and other operational improvement activities, the Company expects to increase customer intimacy and satisfaction, while providing career enrichment opportunities for employees and enhancing value for shareholders. In 2019, the Company achieved approximately$175 in annualized gross run rate savings. The cost to achieve these savings was approximately$115 and was largely due to restructuring and the implementation of DN Now transformational programs. 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. 24
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Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2019
DIEBOLD NIXDORF, INCORPORATED AND SUBSIDIARIES
(unaudited)
(in millions, except per share amounts)
RESULTS OF OPERATIONS 2019 comparison with 2018Net Sales
The following table represents information regarding our net sales for the years
ended
% of Total Net Sales for
% Change in the Year Ended
2019 2018 % Change CC (1) 2019 2018
Segments
Eurasia Banking
Services $ 993.6 $ 1,111.8 (10.6 ) (6.6 ) 22.5 24.3
Products 656.2 688.4 (4.7 ) (0.2 ) 14.9 15.0
Total Eurasia Banking $ 1,649.8 $ 1,800.2 (8.4 ) (4.1 ) 37.4 39.3
Americas Banking
Services $ 1,002.5 $ 1,025.8 (2.3 ) (1.5 ) 22.7 22.4
Products 601.6 489.9 22.8 23.9 13.7 10.7
Total Americas Banking $ 1,604.1 $ 1,515.7 5.8 6.7 36.4 33.1
Retail
Services $ 612.0 $ 651.9 (6.1 ) (1.1 ) 13.9 14.3
Products 542.8 610.8 (11.1 ) (7.1 ) 12.3 13.3
Total Retail $ 1,154.8 $ 1,262.7 (8.5 ) (4.0 ) 26.2 27.6
Total net sales $ 4,408.7 $ 4,578.6 (3.7 ) (0.4 ) 100.0 100.0
(1) The Company calculates constant currency by translating the prior-year period results at the current year exchange rate.
Net sales decreased$169.9 or 3.7 percent including a net unfavorable currency impact of$151.0 primarily related to the euro andBrazil real. The following results include the impact of foreign currency:
Segments
• Eurasia Banking net sales decreased
currency impact of
decreased
including a low margin maintenance contract roll-off in
with the fewer product roll outs in various countries and
under-performance of a non-core business, partially offset by higher
product volume in Germany , the Middle East and South Africa related to
unit replacements from Windows 10 upgrades.
• Americas Banking net sales increased
currency impact of
currency and a small divestiture, net sales increased
primarily by product and installation sales in
the
upgrades, in addition to increased software license volume in the U.S.
Partially offsetting these increases, services revenue declined from lower
maintenance contract volume and billed work activity in the U.S. • Retail net sales decreased
impact of
Excluding currency and the impact of divestitures, net sales decreased
$30.0 primarily from lower POS installations and reduced low-margin non-core business, partially offset by incremental SCO volume and new service contracts in theU.K. 25
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Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2019
DIEBOLD NIXDORF, INCORPORATED AND SUBSIDIARIES
(unaudited)
(in millions, except per share amounts)
Gross Profit
The following table represents information regarding our gross profit for the
years ended
2019 2018 $ Change % Change
Gross profit - services
Gross margin - services 26.3 % 22.7 % Gross margin - products 21.1 % 14.9 % Total gross margin 24.2 % 19.6 % Services gross margin increased 3.6 percent and was favorably impacted by lower restructuring charges of$9.8 and lower non-routine charges of$13.8 . Excluding restructuring and non-routine charges, services gross margin increased 2.9 percent as services margin increased in the Eurasia banking segment related to the favorable impact of the services modernization initiatives and favorable mix of higher margin installation activity. The prior year was unfavorably impacted by one-time banking services cost inBrazil . Product gross margin increased 6.2 percent and was favorably impacted by lower restructuring charges of$9.1 and lower non-routine charges of$51.2 , primarily related to lower purchase accounting amortization and inventory charges. Excluding the impact of restructuring and non-routine charges, products gross margin increased 2.8 percent. Increased margin was primarily due to improved mix and higher volume fromCanada ,Brazil andU.S. regional customers as well as higher margin Windows 10 upgrades in certain areas ofEurope . These improvements are aligned with the Company's focus on higher margin product mix throughout the geographies as well as improved supply chain management and lower expedited freight costs in theAmericas .
Operating Expenses
The following table represents information regarding our operating expenses for the years endedDecember 31 : 2019 2018 $ Change % Change Selling and administrative expense$ 908.8 $ 893.5 $ 15.3 1.7 Research, development and engineering expense 147.1 157.4 (10.3 ) (6.5) Impairment of assets 30.2 180.2 (150.0 ) (83.2) Loss (gain) on sale of assets, net 7.6 (6.7 ) 14.3 N/M Total operating expenses$ 1,093.7 $ 1,224.4 $ (130.7 ) (10.7) N/M = Not Meaningful Selling and administrative expense increased$15.3 . Excluding incremental restructuring of$4.0 , increased non-routine charges of$20.6 and a favorable currency impact of$20.3 , selling and administrative expense increased$11.0 primarily attributable to an increase in annual incentive plan cost and an unfavorable impact of the mark-to-market adjustment of the legacy Wincor Nixdorf stock option program partially offset by the cost reduction initiatives tied to the DN Now program. Non-routine cost in selling and administrative expenses were$174.1 and$153.5 in 2019 and 2018, respectively. The components of the non-routine expenses consisted of increased DN Now transformation expense, a one-time non-cash item inBrazil and$5.6 from the German real estate tax incurred related to the squeeze out. These increases were partially offset by lower integration expense and purchase accounting adjustments. Selling and administrative expense included restructuring charges of$37.4 and$33.4 in 2019 and 2018, respectively, primarily due to the workforce alignment actions under the DN Now plan. Research, development and engineering expense in 2019 decreased$10.3 including a net favorable currency impact of$5.5 . Excluding the impact of currency, research, development and engineering expense decreased$4.8 due primarily to lower headcount tied to the Company's DN Now restructuring program and prior year investment in the DN Series product line, partially offset by increased software development cost. 26
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Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2019
DIEBOLD NIXDORF, INCORPORATED AND SUBSIDIARIES
(unaudited)
(in millions, except per share amounts)
The Company recorded impairment charges of $30.2 in 2019 related primarily
related to capitalized software in addition to assets from a non-core business
transferred to assets held for sale. A goodwill impairment charge of $180.2 was
recorded in the second and third quarters of 2018.
The loss on sales of assets, net in 2019 included the divestiture of the
Venezuela business and losses from the divestiture and liquidation of non-core
businesses in Eurasia offset by a gain on sale of assets related to the Kony
transaction. The gain on sale of assets, net in 2018 was primarily related to a
gain on sale of buildings in North America , the liquidation of the Barbados
operating entity, a gain related to a sale of a maintenance contract in Brazil
and a China investment.
Operating Loss
The following table represents information regarding our operating loss for the
years ended
2019 2018 $ Change % Change
Operating loss
The operating loss decreased compared to the prior year primarily due to product and services gross margin improvements as well as higher impairment charges in 2018, partially offset by higher selling and administrative costs and loss on sale of assets. Other Income (Expense)
The following table represents information regarding our other income (expense)
for the years ended
2019 2018 $ Change % Change
Interest income $ 9.3 $ 8.7 $ 0.6 6.9
Interest expense (202.9 ) (154.9 ) (48.0 ) (31.0)
Foreign exchange loss, net (5.1 ) (2.5 ) (2.6 ) (104.0)
Miscellaneous, net (3.6 ) (4.0 ) 0.4 10.0
Other income (expense) $ (202.3 ) $ (152.7 ) $ (49.6 ) (32.5)
Interest expense increased $48.0 due to an additional $650.0 Term Loan A-1
Facility debt with higher incremental interest rates and related fee
amortization. Foreign exchange loss, net, increased $2.6 and was unfavorably
impacted by transactions related to Eurasia in addition to incremental loss
associated with the collapse of the Barbados financing structure related to the
Acquisition.
Net Loss
The following table represents information regarding our net loss for the years
ended
2019 2018 $ Change % Change
Net loss $ (344.6 ) $ (528.7 ) $ 184.1 34.8
Percent of net sales (7.8 )% (11.5 )%
Effective tax rate (51.0 )% (7.8 )%
The loss before taxes and net loss decreased primarily due to the reasons described above. Net loss was also impacted by the change in the income tax expense.
The effective tax rate on the loss for 2019 was (51.0) percent and is primarily due to theU.S. taxed foreign income, including global intangible low-taxed income (GILTI), valuation allowances recorded on certain foreign and state jurisdictions andU.S. foreign tax credits that management concluded do not meet the more likely than not criteria for realization and the tax effects related to theBarbados structure collapse. The Company's collapse of itsBarbados structure to meet the covenant requirements under its credit agreement resulted in a net tax expense of$46.2 inclusive of the offsetting valuation allowance release relating to the Company's nondeductible interest expense that was carried forward fromDecember 31, 2018 . No taxes are currently payable related to theBarbados structure collapse. TheU.S. Tax Cuts and Jobs Act (Tax Act) was enacted onDecember 22, 2017 . The Tax Act reduced theU.S. federal corporate income tax rate from 35 percent to 21 percent, required companies to pay a one-time transition tax on earnings for certain foreign 27
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Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2019
DIEBOLD NIXDORF, INCORPORATED AND SUBSIDIARIES
(unaudited)
(in millions, except per share amounts)
subsidiaries and created new taxes on certain foreign sourced earnings. Due to
the complexities involved in accounting for the enacted Tax Act, the Company
applied the guidance in Staff Accounting Bulletin (SAB) 118 and a reasonable
estimate of the impacts was included for the year ended December 31, 2017 . At
December 31, 2017 , the Company recorded a non-cash charge to tax expense of
$81.7 of which $45.1 represented the reduction to deferred income taxes for the
income tax rate change and $36.6 related to the one-time transition tax on
deferred foreign earnings. As of December 31, 2018 , the Company completed the
accounting as required under SAB 118 for items previously considered
provisional. While the Company was able to make an estimate of the transition
tax for 2017, it continued to gather additional information to more precisely
compute the amount reported on its 2017 U.S. Federal tax return which was filed
in the fourth quarter of 2018. Additionally, the Company was affected by other
analyses related to the Tax Act. Transition tax was $41.1 greater than the
Company's initial estimate and was included in tax expense for 2018. Likewise,
while the Company was able to make an estimate of the impact of the reduction to
the corporate tax rate, in 2018 the Company recorded additional tax benefits of
$2.5 as a result of adjustments made to federal temporary differences including
a pension contribution made in 2018 that was deductible for 2017 at the higher
35 percent federal tax rate. In 2018, the Company also recorded a tax benefit of
$8.5 related to the one-time transition tax for a fiscal year foreign
subsidiary. The Company will continue to analyze the full effects of the Tax Act
on its financial statements as additional guidance is issued and interpretations
evolve.
The effective tax rate on the loss for 2018 was (7.8) percent on the overall
loss from operations and was primarily driven by the provisional impacts of the
Tax Act. In addition to the impact of the Tax Act, the overall effective tax
rate is impacted by the jurisdictional income (loss) and varying respective
statutory rates which is reflected in the foreign tax rate differential caption
of the rate reconciliation.
Segment
The following tables represent information regarding the Company's net sales and operating profit by reporting segment: Eurasia Banking: 2019 2018 $ Change % Change Net sales$ 1,649.8 $ 1,800.2 $ (150.4 ) (8.4 ) Segment operating profit$ 169.3 $ 150.1 $ 19.2 12.8 Segment operating profit margin 10.3 % 8.3 % Eurasia Banking net sales decreased$150.4 , including a net unfavorable currency impact of$79.3 related primarily to the euro and divestitures of$30.4 . Excluding currency and the impact of divestitures, net sales decreased$40.8 primarily due to declining low-margin services solutions, including a low margin maintenance contract roll-off inIndia , combined with the lower product roll outs in various countries and under-performance of a non-core business, partially offset by higher product volume inGermany , theMiddle East andSouth Africa related to unit replacements from Windows 10 upgrades. Segment operating profit increased$19.2 , compared to the prior year, including a net unfavorable currency impact of$10.4 due in part to higher gross margins on services and products. The increase in services margin was primarily attributable to the services modernization program which benefited numerous countries inEurope andAsia in addition to a favorable solutions mix, while products margin also increased from DN Now initiatives as well as favorable country and product mix. Additionally, segment operating profit benefited from lower operating expenses tied to DN Now initiatives, restructuring programs and the phase out of non-profitable service contracts. Segment operating profit margin increased 2.0 percent despite lower net sales, as a result of higher services and products gross margin and lower operating expense primarily attributable to DN Now initiatives. Americas Banking: 2019 2018 $ Change % Change Net sales$ 1,604.1 $ 1,515.7 $ 88.4 5.8 Segment operating profit$ 119.7 $ 17.2 $ 102.5 N/M
Segment operating profit margin 7.5 % 1.1 %
N/M = Not Meaningful
Americas Banking net sales increased$88.4 including a net unfavorable currency impact of$12.3 primarily related to theBrazil real. Excluding currency and a small divestiture, net sales increased$105.6 driven primarily by product and installation sales inCanada ,Brazil ,Mexico and theU.S. regional customers related to unit replacements from Windows 10 upgrades, in addition to increased software license volume in theU.S. Partially offsetting these increases, services revenue declined from lower maintenance contract volume and billed work activity in theU.S. 28
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Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2019
DIEBOLD NIXDORF, INCORPORATED AND SUBSIDIARIES
(unaudited)
(in millions, except per share amounts)
Segment operating profit increased $102.5 mostly from increased DN Now
initiatives favorably impacting both cost of sales and operating expense. Gross
profit was favorably impacted by large product refresh projects in Canada and
favorable mix in the U.S. , Brazil and Latin America . Additionally, the Company
made improvements to supply chain management resulting in lower expedited
freight costs. Segment operating profit in 2018 was unfavorably impacted by
one-time banking services cost in Brazil .
Segment operating profit margin increased 6.4 percent primarily as a result of
higher product gross margin, in addition to lower cost related to the DN Now
initiatives.
Retail: 2019 2018 $ Change % Change
Net sales $ 1,154.8 $ 1,262.7 $ (107.9 ) (8.5 )
Segment operating profit $ 58.3 $ 47.1 $ 11.2 23.8
Segment operating profit margin 5.0 % 3.7 %
Retail net sales decreased $107.9 , including a net unfavorable currency impact
of $59.4 mostly related to the euro and divestitures of $18.5 . Excluding
currency and the impact of divestitures, net sales decreased $30.0 primarily
from lower POS installations, partially offset by incremental SCO volume and new
service contracts in the U.K.
Segment operating profit increased $11.2 compared to the prior year including a
net unfavorable currency impact of $3.0 . Excluding the impact of currency,
segment operating profit increased $14.2 primarily from lower services cost and
operating expenses tied to DN Now initiatives as well as a favorable service mix
related to maintenance and support activities in Europe .
Segment operating profit margin increased 1.3 percent in 2019 primarily from lower costs and expenses tied to DN Now initiatives as well as a favorable service mix.
2018 comparison with 2017Net Sales
The following table represents information regarding our net sales for the years
ended
% of Total Net Sales for
% Change in the Year Ended
2018 2017 % Change CC (1) 2018 2017
Segments
Eurasia Banking
Services $ 1,111.8 $ 1,133.1 (1.9 ) (4.0 ) 24.3 24.6
Products 688.4 770.3 (10.6 ) (12.5 ) 15.0 16.7
Total Eurasia Banking $ 1,800.2 $ 1,903.4 (5.4 ) (7.4 ) 39.3 41.3
Americas Banking
Services $ 1,025.8 $ 1,043.9 (1.7 ) (0.7 ) 22.4 22.6
Products 489.9 481.7 1.7 3.7 10.7 10.5
Total Americas Banking
33.1 33.1
Retail
Services $ 651.9 $ 608.3 7.2 4.7 14.3 13.2
Products 610.8 572.0 6.8 3.1 13.3 12.4
Total Retail $ 1,262.7 $ 1,180.3 7.0 3.9 27.6 25.6
Total net sales $ 4,578.6 $ 4,609.3 (0.7 ) (1.8 ) 100.0 100.0
(1) The Company calculates constant currency by translating the prior-year period results at the current year exchange rate.
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Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2019
DIEBOLD NIXDORF, INCORPORATED AND SUBSIDIARIES
(unaudited)
(in millions, except per share amounts)
Net sales decreased $30.7 or 0.7 percent, including a net favorable currency
impact of $55.4 primarily related to the euro, partially offset by the Brazil
real. Additionally, prior year net sales were adversely impacted $30.4 related
to deferred revenue purchase accounting adjustments (Deferred Revenue
Adjustments).
The following results include the impact of foreign currency and purchase accounting adjustments:
Segments
• Eurasia Banking net sales decreased
currency impact of
were adversely impacted
of
Deferred Revenue Adjustments, net sales decreased
product volume related to fewer product deployments and projects,
particularly in Thailand , Turkey , Indonesia , the Middle East and
Australia . In addition, services in India decreased as a result of a
low-margin maintenance contract roll off. Net sales declined from theCompany's strategic decision to reduce its product and services portfolio
in
decreases were partially offset by increased unit replacements in
related to Windows 10 migrations.
• Americas Banking net sales decreased
currency impact of
net sales increased
professional services volume in
particularly in
offset by lower product volume in the
maintenance contract base roll offs of two customers in
divestiture in September 2017 .
• Retail net sales increased
impact of
adversely impacted
Deferred Revenue Adjustments, net sales increased
offset by lower product volume from the Eurasia non-core businesses and
large prior year non-recurring POS and kiosk activity in
multiple customers as well as lower lottery equipment volume in
Gross Profit
The following table represents information regarding our gross profit for the
years ended
2018 2017 $ Change % Change
Gross profit - services
Gross margin - services 22.7 % 24.2 % Gross margin - products 14.9 % 17.8 % Total gross margin 19.6 % 21.7 % Services gross margin decreased 1.5 percent, including higher non routine charges of$10.9 primarily related to a spare parts inventory provision of$24.5 and other charges of$1.6 while the prior year was adversely impacted by Deferred Revenue Adjustments of$15.2 . Restructuring was$9.5 lower compared to the prior year. Excluding non-routine and restructuring expenses, services gross margin decreased 1.4 percent due in part to higher retail services cost in the Eurasia non-core businesses and higher one-time banking services cost inBrazil in the second quarter of 2018. Additionally, an unfavorable customer mix on professional services volume in Eurasia drove lower margin in the retail segment as well as an unfavorable service customer mix in the Eurasia banking segment and higher services cost inChina andIndonesia . These decreases were partially offset by a large, low-margin maintenance contract roll off inIndia . Product gross margin decreased 2.9 percent, including slightly lower non routine charges of$0.8 , primarily from reduced Purchase Accounting Adjustments of$36.4 , related to amortization and prior-year Deferred Revenue Adjustments and a benefit from theBrazil indirect tax accrual reversal of$9.0 , in addition to lower integration of$0.6 and legal and consulting expense of$0.6 , partially offset by higher inventory provision charges of$45.8 . Restructuring expense increased$8.9 compared to the prior year. Excluding non-routine and restructuring expenses, product gross margin decreased 2.2 percent, primarily from an unfavorable banking customer mix in theAmericas as well as expedited freight cost from supply chain delays in the first half of 2018. Additionally, the 30
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Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2019
DIEBOLD NIXDORF, INCORPORATED AND SUBSIDIARIES
(unaudited)
(in millions, except per share amounts)
retail segment was impacted by an unfavorable customer mix in Brazil , related to
license volume, and increased cost and unfavorable customer mix in Eurasia.
These decreases were partially offset by increased gross margin in the Eurasia
banking segment primarily from a favorable customer mix in various countries,
particularly in Germany , Thailand and the Middle East .
Operating Expenses
The following table represents information regarding our operating expenses for the years endedDecember 31 : 2018 2017 $ Change % Change Selling and administrative expense$ 893.5 $ 933.7 $ (40.2 ) (4.3) Research, development and engineering expense 157.4 155.5 1.9 1.2 Impairment of assets 180.2 3.1 177.1 N/M (Gain) loss on sale of assets, net (6.7 ) 1.0 (7.7 ) N/M Total operating expenses$ 1,224.4 $ 1,093.3 $ 131.1 12.0 N/M = Not Meaningful Selling and administrative expense in 2018 decreased$40.2 including lower non-routine charges of$22.0 and higher restructuring of$12.1 . Excluding the impact of restructuring and non-routine charges and a net unfavorable currency impact of$9.6 , due primarily to the euro, selling and administrative expense was lower by$39.8 , mostly from cost reduction initiatives across the Company related to DN Now as well as an increased benefit from the mark-to-market adjustment of the legacy Wincor Nixdorf stock option program of$3.4 , partially offset by the retail segment from increased investment in theNorth America retail sales organization. Non-routine cost in selling and administrative expenses were$153.4 and$175.4 in 2018 and 2017, respectively. The components of the non-routine expenses in 2018 pertained to purchase accounting adjustments of$89.1 related to intangible asset amortization, integration cost totaling$43.4 , legal and consulting cost of$18.3 and executive severance of$2.7 . Selling and administrative expense included restructuring charges of$33.4 and$21.3 in 2018 and 2017, respectively, primarily due to the workforce alignment actions under the DN Now plan. Research, development and engineering expense increased$1.9 due to higher restructuring cost of$4.1 and an unfavorable currency impact of$4.4 , primarily related to the euro, partially offset by lower non-routine expense of$0.3 . Excluding restructuring and the impact of currency, expense was down$6.3 mostly from DN Now initiatives and lower associate related expense. As a result of certain impairment triggering events, the Company performed an impairment test of goodwill for its four reporting units during the third quarter of 2018. Based on the results of the impairment testing, the Company recorded a non-cash goodwill impairment loss of$109.5 related to the Eurasia Banking, EMEA Retail and Rest of World Retail reporting units during 2018. During the second quarter of 2018, the Company performed an impairment test of goodwill for all of its LoB reporting units due to the change in its reportable operating segments which resulted in a$70.7 non-cash impairment loss. The year endedDecember 31, 2018 recorded impairment of$180.2 , related to the impairment of goodwill in the second and third quarters, compared to$3.1 in the same prior year period related to information technology transformation and integration activities. The gain on sale of assets in 2018 was primarily related to a gain on sale of buildings inNorth America of$4.8 , the liquidation of theBarbados operating entity of$3.3 and a gain related to a sale of a maintenance contract inBrazil and a certainChina investment. This gain on sale of assets was partially offset by the loss pertaining to a settlement of certain matters related to anAmericas divestiture in the second quarter of 2018.
Operating Loss
The following table represents information regarding our operating profit (loss)
for the years ended
2018 2017 $ Change % Change
Operating loss
N/M = Not Meaningful
The operating loss increased, compared to the prior year, mostly due to higher non-routine expense, including the non-cash goodwill impairment, and incremental restructuring expense. Excluding non-routine and restructuring expense, operating loss increased$57.9 from lower gross profit in all segments, partially offset by lower selling and administrative expense attributable to DN Now initiatives. 31
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Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2019
DIEBOLD NIXDORF, INCORPORATED AND SUBSIDIARIES
(unaudited)
(in millions, except per share amounts)
Other Income (Expense)
The following table represents information regarding our other income (expense)
for the years ended
2018 2017 $ Change % Change
Interest income $ 8.7 $ 20.3 $ (11.6 ) (57.1)
Interest expense (154.9 ) (117.3 ) (37.6 ) 32.1
Foreign exchange loss, net (2.5 ) (3.9 ) 1.4 35.9
Miscellaneous, net (4.0 ) 2.5 (6.5 ) N/M
Other income (expense) $ (152.7 ) $ (98.4 ) $ (54.3 ) 55.2
N/M = Not Meaningful
Interest income in 2018 decreased, primarily as a result of overall lower
average balances as well as lower U.S. market returns on nonqualified plans and
repatriation of cash in Brazil and EMEA. Interest expense was higher compared to
the prior year due to higher domestic interest rates and the additional $650.0
of Term Loan A-1 Facility debt incurred in 2018 with higher incremental interest
rates and related fee amortization. Miscellaneous, net in 2018 was unfavorably
impacted by higher cost and lower benefits associated with the company owned
life insurance.
Income (Loss), Net of Tax
The following table represents information regarding our income (loss), net of
tax, for the years ended
2018 2017 $ Change % Change
Net loss$ (528.7 ) $ (213.9 ) $ (314.8 ) N/M Percent of net sales (11.5 )% (4.6 )%
Effective tax rate (benefit) (7.8 )% (14.7 )%
N/M = Not Meaningful
The loss before taxes and net loss increased primarily due to the reasons described above. Net loss was also impacted by the change in the income tax expense.
The effective tax rate for 2018 was (7.8) percent and is primarily due to a goodwill impairment charge, the Tax Act, valuation allowances on certain foreign and state jurisdictions, foreign tax credits and the higher interest expense burden resulting from the debt restructuring. More specifically, the expense on the loss reflects the reduction of theU.S. federal corporate income tax rate from 35 percent to 21 percent, refinement of the transition tax underSAB 118, a goodwill impairment charge, which for tax purposes is primarily nondeductible and the business interest deduction limitation. As a result of the Company's debt restructuring activity during the year, a full valuation allowance was required on the current year nondeductible business interest expense. In addition, the overall effective tax rate is impacted by the jurisdictional income (loss) and varying respective statutory rates. The effective tax rate for 2017 was (14.7) percent on the overall loss from continuing operations. TheU.S. enacted the Tax Act, which was signed into law onDecember 22, 2017 . The Tax Act changed many aspects ofU.S. corporate income taxation and included a reduction of the corporate income tax rate from 35 percent to 21 percent, implementation of a territorial tax system and imposition of a tax on deemed repatriated earnings of foreign subsidiaries. The resulting impact to the Company was an estimated$45.1 reduction to deferred income taxes for the income tax rate change and an estimated one-time non-cash charge of$36.6 related to deferred foreign earnings. Due to the complexities involved in accounting for the recently enacted Tax Act, theSAB 118 requires that the Company include in its financial statements the reasonable estimate of the impact of the Tax Act on earnings to the extent such reasonable estimate has been determined. The Company recorded a reasonable estimate of such effects, the net one-time charge related to the Tax Act may differ, possibly materially, due to, among other things, further refinement of its calculations, changes in interpretations and assumptions, additional guidance that may be issued by theU.S. Government , and actions and related accounting policy decisions the Company may take as a result of the Tax Act. The Company completed its analysis over a one-year measurement period endingDecember 31, 2018 and any adjustments during this measurement period were included in net loss from continuing operations as an adjustment to income tax expense in the reporting period when such adjustments are determined. 32
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Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2019
DIEBOLD NIXDORF, INCORPORATED AND SUBSIDIARIES
(unaudited)
(in millions, except per share amounts)
Segment
The following tables represent information regarding our revenue and operating profit by reporting segment for the years endedDecember 31 : Eurasia Banking: 2018 2017 $ Change % Change Net sales$ 1,800.2 $ 1,903.4 $ (103.2 ) (5.4 ) Segment operating profit$ 150.1 $ 126.8 $ 23.3 18.4 Segment operating profit margin 8.3 % 6.7 % Eurasia Banking net sales decreased$103.2 ,including a net favorable currency impact of$41.3 mainly related to the euro. Prior year net sales were adversely impacted$18.3 , including a net unfavorable currency impact of$1.4 , related to Deferred Revenue Adjustments. Excluding currency and Deferred Revenue Adjustments, net sales decreased$164.2 due to lower product volume related to fewer product deployments and projects, particularly inThailand ,Turkey ,Indonesia , theMiddle East andAustralia . In addition, services inIndia decreased as a result of a low-margin maintenance contract roll off. In addition, net sales declined from the Company's strategic decision to reduce its product and services portfolio inIndia andChina as market conditions became less favorable. These decreases were partially offset by increased unit replacements inGermany related to Windows 10 migrations. Segment operating profit increased$23.3 , compared to the prior year, including a net favorable currency impact of$3.6 . Excluding the impact of currency, operating profit increased$19.7 mostly from lower operating expenses tied to the DN Now plan and increased product gross profit related to higher margin pull through on a favorable customer mix, particularly inGermany ,Thailand and theMiddle East . These increases were partially offset by lower services revenue and associated profit in variousAsia Pacific countries as well as higher services cost inChina andIndonesia in addition to lower margin pull through on software revenue attributable to an unfavorable customer mix and higher cost in various countries. Segment operating profit margin increased in 2018, primarily as a result of lower operating expense related to the DN Now plan, as well as higher product gross profit, partially offset by lower services and software gross profit. Americas Banking: 2018 2017 $ Change % Change Net sales$ 1,515.7 $ 1,525.6 $ (9.9 ) (0.6 ) Segment operating profit$ 17.2 $ 68.1 $ (50.9 ) (74.7 ) Segment operating profit margin 1.1 % 4.5 % Americas Banking net sales decreased$9.9 , including a net unfavorable currency impact of$20.6 related to theBrazil real. Excluding currency, net sales increased$10.7 from higher software license volume inBrazil , professional services volume inNorth America and higher product volume, particularly inMexico ,Canada andEcuador . These increases were partially offset by lower product volume in theU.S. as well as low-profit maintenance contract base roll offs of two customers inNorth America and$4.1 lower electronic security revenue inChile due to the business divestiture inSeptember 2017 . Segment operating profit decreased$50.9 , compared to the prior year including a net favorable currency impact of$0.5 . Excluding the impact of currency, operating profit decreased$51.4 , adversely impacted by one-time services cost inBrazil from the second quarter of 2018. Additionally, product gross profit decreased mostly from higher freight cost, primarily related to supply chain delays in the first half of 2018 inNorth America andMexico as well as an unfavorable customer mix inMexico . Partially offsetting these decreases, selling and administrative expense was lower from cost reduction initiatives related to the DN Now plan and the Company's annual incentive program as well as higher software gross profit from increased professional services activity inNorth America .
Segment operating profit margin decreased in 2018, primarily as a result of higher freight and one time services cost in the first three quarters of 2018, partially offset by lower selling and administrative expense.
Retail: 2018 2017 $ Change % Change Net sales$ 1,262.7 $ 1,180.3 $ 82.4 7.0
Segment operating profit
Retail net sales increased$82.4 , including a net favorable currency impact of$34.7 mainly related to the euro. Prior year net sales were adversely impacted$12.1 , including a net unfavorable currency impact of$1.0 , related to Deferred Revenue Adjustments. 33
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Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2019
DIEBOLD NIXDORF, INCORPORATED AND SUBSIDIARIES
(unaudited)
(in millions, except per share amounts)
Excluding currency and Deferred Revenue Adjustments, net sales increased $34.6
due to a large North America kiosk project as well as higher POS activity in
Central Eastern Europe , the U.K , France and Spain . These increases were
partially offset by lower product volume from the Eurasia non-core businesses
and large prior year non-recurring POS and kiosk activity in Germany for
multiple customers as well as lower lottery equipment volume in Brazil .
Segment operating profit decreased $40.8 compared to the prior-year including a
$2.6 net favorable currency impact. Excluding currency, Retail operating profit
decreased $43.4 primarily due to the under performance from the Eurasia non-core
businesses in addition to low-margin service and product revenue unfavorably
impacting gross profit in various countries in Eurasia. The current year was
also unfavorably impacted by higher selling and administrative expense from
developing the North America retail sales organization.
Segment operating profit margin decreased in 2018, primarily as a result of the
under performance of the non-core businesses and an unfavorable customer mix
driving lower gross margin on higher revenue in addition to increased operating
expense.
Refer to note 20 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, R&D activities, investments in facilities or equipment, pension contributions, and any repurchases of the Company's common shares for at least the next 12 months. The Company had$3.6 and$105.3 of restricted cash atDecember 31, 2019 and 2018. AtDecember 31, 2019 ,$286.2 or 98.4 percent of the Company's cash, cash equivalents and restricted cash and short-term investments reside in international tax jurisdictions. Repatriation of certain international held funds could be negatively impacted by potential payments for certain foreign taxes. The Company has earnings in certain jurisdictions available for repatriation of$1,488.0 with no additional tax expense primarily as a result of the Tax Act. The Company has made acquisitions in the past and may make acquisitions in the future. Part of the Company's strategy is to optimize the business portfolio through divestitures and complementary acquisitions. The Company intends to finance any future acquisitions with 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. Subject to certain limitations in its debt agreements, as market conditions warrant, the Company may from time to time repay, repurchase or otherwise refinance loans that it has borrowed or debt securities that it has issued, including with funds borrowed under existing or new credit facilities or proceeds from the issuance of new securities.
The Company's total cash and cash availability as of
2019 2018
Cash and cash equivalents (excluding restricted cash)
36.7 28.0
Revolving facility 387.3 347.5
Short-term investments 10.0 33.5
Total cash and cash availability $ 711.3 $ 762.1
The following table summarizes the results of our consolidated statement of cash
flows for the years ended December 31 :
Net cash flow provided (used) by 2019 2018 2017
Operating activities $ 135.8 $ (104.1 ) $ 37.1
Investing activities (6.8 ) 34.4 (120.8 )
Financing activities (215.5 ) 10.9 (63.7 )
Effect of exchange rate changes on cash, cash
equivalents and restricted cash (1.1 ) (18.7 ) 37.9
Net decrease in cash, cash equivalents and
restricted cash $ (87.6 ) $ (77.5 ) $ (109.5 )
During 2019, cash, cash equivalents and restricted cash decreased $87.6
primarily due to payments on long-term debt and the redemption of shares and
cash compensation to Diebold Nixdorf AG minority shareholders. This is partially
offset by cash provided by operating activities resulting from the impact of DN
Now Transformation activities on working capital.
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Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2019
DIEBOLD NIXDORF, INCORPORATED AND SUBSIDIARIES
(unaudited)
(in millions, except per share amounts)
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
$135.8 for the year ended December 31, 2019 , an increase of $239.9 from $104.1
cash used in operating activities for the year ended December 31, 2018 . The
overall increase was primarily due to improvements in working capital and a
reduction in the net loss. Additional detail is included below:
• Cash flows from operating activities during the year ended
2019 compared to the year ended
above for further discussion of the Company's net loss.
• The net aggregate of trade accounts receivable, inventories and accounts
payable provided $183.3 and $11.4 in operating cash flows during the year
ended December 31, 2019 and 2018, respectively. The $171.9 increase isprimarily a result of DN Now transformation activities through greater
focus and efficiency of payables, receivables and inventory.
• Deferred revenue used $54.9 of operating cash during the year ended
2018. The
related to lower customer prepayments primarily due to reducing early
payment discounts.
• The aggregate of income taxes and deferred income taxes provided
operating cash during the year ended
used in 2018. Refer to note 4 for additional discussion on income taxes.
• In the aggregate, the other combined certain assets and liabilities used
in 2019 is primarily due to a
funding requirements for the Company's U.S. pension plans offset by
changes in certain other assets and liabilities.
The most significant changes in adjustments to net income include the
non-recurring effects from goodwill impairment and lower non-routine inventory
charges partially offset by deferred taxes compared to the prior year. The
impairment of assets non-cash adjustment decreased to $30.2 in 2019 compared to
$180.2 in 2018, or $150.0 , primarily due to the non-recurring effects from
goodwill impairment. The non-cash inventory charge of $23.8 in 2019 builds upon
the Company's focus on streamlining its product portfolio and harvesting
inventory. Other items include depreciation and amortization expense which
decreased primarily due to a reduction in amortization of certain acquired
intangibles as they become fully amortized and lower share-based compensation
expense due to fewer granted awards.
Investing Activities. Net cash used by investing activities was $6.8 for the
year ended December 31, 2019 compared to net cash provided by investing
activities of $34.4 for the year ended December 31, 2018 . The $41.2 unfavorable
change was primarily due to the monetization of the Company's investment in the
company owned life insurance plans in 2018 and a reduction in utilization of
short-term investments in Brazil for cash needs across the organization. These
were partially offset by increased proceeds from divestitures and the sale of
assets primarily related to exiting non-core activities as well as a decrease in
cash spent on capital expenditures and certain other assets. The maturities and
purchases of investments primarily related to short-term investment activity in
Brazil .
The Company anticipates capital expenditures of approximately $70 in 2020 to be
utilized for improvements to the Company's product line and investments in its
infrastructure. Currently, the Company finances these investments primarily with
funds provided by income retained in the business, borrowings under the
Company's committed and uncommitted credit facilities, and operating and capital
leasing arrangements.
Financing Activities. Net cash used by financing activities was $215.5 for the
year ended December 31, 2019 compared to net cash provided by financing
activities of $10.9 for the year ended 2018, a change of $226.4 . The change was
primarily related to a reduction in borrowings from the revolver and certain
facilities under the Credit Agreement partially offset by the redemption of
shares and cash compensation paid to Diebold Nixdorf AG minority shareholders of
$97.5 for the year ended December 31, 2019 compared to $377.2 in 2018. Refer to
note 11 for details of the Company's cash flows related to debt borrowings and
repayments.
Benefit Plans. The Company plans to make contributions to its retirement plans
as well as benefits payments directly from the Company of approximately $23 for
the year ended December 31, 2020 , which is lower than historical amounts due to
a $20.0 pre-payment of the minimum statutory funding requirements for the
Company's U.S. pension plans during the fourth quarter of 2019. The Company
anticipates reimbursement of approximately $13 for certain benefits paid from
its trustee in 2019. Beyond 2020, minimum statutory funding requirements for the
Company's U.S. pension plans may become more significant. The actual amounts
required to be contributed are dependent upon, among other things, interest
rates, underlying asset returns and the impact of legislative or regulatory
actions related to pension funding obligations. The Company has adopted a
pension investment policy designed to achieve an adequate funded status based on
expected benefit payouts and to establish an asset allocation that will
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2019
DIEBOLD NIXDORF, INCORPORATED AND SUBSIDIARIES
(unaudited)
(in millions, except per share amounts)
meet or exceed the return assumption while maintaining a prudent level of risk.
The plan's target asset allocation adjusts based on the plan's funded status. As
the funded status improves or declines, the debt security target allocation will
increase and decrease, respectively. Management monitors assumptions used for
our actuarial projections as well as any funding requirements for the plans.
Payments due under the Company's other post-retirement benefit plans are not
required to be funded in advance. Payments are made as medical costs are
incurred by covered retirees and are principally dependent upon the future cost
of retiree medical benefits under these plans. The Company expects the other
post-retirement benefit plan payments to be approximately $1 in 2020. Refer to
note 15 for further discussion of the Company's pension and other
post-retirement benefit plans.
Dividends. The Company paid dividends of $7.7 and $30.6 in the years ended
December 31, 2018 and 2017, respectively. Annualized dividends per share were
$0.10 and $0.40 for the years ended December 31, 2018 and 2017, respectively. In
May 2018 , the Company announced its decision to reallocate future dividend funds
towards debt reduction and other capital resource needs.
Contractual Obligations. The following table summarizes the Company's
approximate obligations and commitments to make future payments under
contractual obligations as of
Payment due by period
Less than 1 More than 5
Total year 1-3 years 3-5 years yearsShort-term uncommitted lines of credit (1)$ 5.0 $ 5.0 $ - $ - $ - Long-term debt 2,200.8 27.5 992.6 1,180.7 - Interest on debt (2) 492.6 157.2 264.1 71.3 - Minimum lease obligations 217.0 79.4 83.3 30.7 23.6 Purchase commitments - - - - - Total$ 2,915.4 $ 269.1 $ 1,340.0 $ 1,282.7 $ 23.6
(1) The amount available under the short-term uncommitted lines at
2019 was
(2) Amounts represent estimated contractual interest payments on outstanding
long-term debt and notes payable. Rates in effect as of
are used for variable rate debt.
AtDecember 31, 2019 , the Company also maintained uncertain tax positions of$50.9 , for which there is a high degree of uncertainty as to the expected timing of payments (refer to note 4).
Refer to note 11 for additional information regarding the Company's debt obligations.
The Company anticipates a repayment of approximately
InFebruary 2020 , the Company began soliciting the consents of certain of the lenders under the Credit Agreement necessary to amend the Credit Agreement to permit the Company to incur new secured or unsecured debt. If the required consents are obtained and the Credit Agreement is amended accordingly, subject to market and other conditions, the Company may incur new secured debt to refinance certain of the outstanding term loans under the Credit Agreement. However, there can be no assurance that the Company will be able to amend the Credit Agreement or that it will be able to refinance certain of the term loans on commercially acceptable terms or at all.
Refer to note 17 for additional information regarding the Company's hedging and derivative instruments.
Off-Balance Sheet Arrangements. The Company enters into various arrangements not
recognized in the consolidated balance sheets that have or could have an effect
on its financial condition, results of operations, liquidity, capital
expenditures or capital resources. The principal off-balance sheet arrangements
that the Company enters into are guarantees and sales of finance receivables.
The Company provides its global operations guarantees and standby letters of
credit through various financial institutions to suppliers, customers,
regulatory agencies and insurance providers. If the Company is not able to
comply with its contractual obligations, the suppliers, regulatory agencies and
insurance providers may draw on the pertinent bank (refer to note 17 ). The
Company has sold finance receivables to financial institutions while continuing
to service the receivables. The Company records these sales by removing finance
receivables from the consolidated balance sheets and recording gains and losses
in the consolidated statement of operations (refer to note 7).
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Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2019
DIEBOLD NIXDORF, INCORPORATED AND SUBSIDIARIES
(unaudited)
(in millions, except per share amounts)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of the Company's financial condition and results of operations are based upon the Company's consolidated financial statements. The consolidated financial statements of the Company are prepared in conformity with generally accepted accounting principles inthe United States (U.S. GAAP). The preparation of the accompanying consolidated financial statements in conformity withU.S. GAAP requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities and reported amounts of revenues and expenses. Such estimates include revenue recognition, the valuation of trade and financing receivables, inventories, goodwill, intangible assets, other long-lived assets, legal contingencies, guarantee obligations, and assumptions used in the calculation of income taxes, pension and post-retirement benefits and customer incentives, among others. These estimates and assumptions are based on management's best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors. Management monitors the economic conditions and other factors and will adjust such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. The Company's significant accounting policies are described in note 1 to the consolidated financial statements, which is contained in Item 8 of this annual report on Form 10-K. Management believes that, of its significant accounting policies, its policies concerning revenue recognition, allowances for credit losses, inventory reserves, goodwill, long-lived assets, taxes on income, contingencies and pensions and post-retirement benefits are the most critical because they are affected significantly by judgments, assumptions and estimates. Additional information regarding these policies is included below. Revenue Recognition. Revenue is measured based on consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties. The amount of consideration can vary depending on discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties, or other similar items contained in the contract with the customer of which generally these variable consideration components represents minimal amount of net sales. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. The Company's payment terms vary depending on the individual contracts and are generally fixed fee. The Company recognizes advance payments and billings in excess of revenue recognized as deferred revenue. In certain contracts where services are provided prior to billing, the Company recognizes a contract asset within trade receivables and other current assets.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and that are collected by the Company from a customer are excluded from revenue.
The Company recognizes shipping and handling fees billed when products are shipped or delivered to a customer and includes such amounts in net sales. Although infrequent, shipping and handling associated with outbound freight after control over a product has transferred to a customer is not a separate performance obligation, rather is accounted for as a fulfillment cost. Third-party freight payments are recorded in cost of sales.
The Company includes a warranty in connection with certain contracts with
customers, which are not considered to be separate performance obligations. The
Company provides its customers a manufacturer's warranty and records, at the
time of the sale, a corresponding estimated liability for potential warranty
costs. For additional information on product warranty refer to note 9. The
Company also has extended warranty and service contracts available for its
customers, which are recognized as separate performance obligations. Revenue is
recognized on these contracts ratably as the Company has a stand-ready
obligation to provide services when or as needed by the customer. This input
method is the most accurate assessment of progress toward completion the Company
can apply.
Product revenue is recognized at the point in time that the customer obtains
control of the product, which could be upon delivery or upon completion of
installation services, depending on contract terms. The Company's software
licenses are functional in nature (the IP has significant stand-alone
functionality); as such, the revenue recognition of distinct software license
sales is at the point in time that the customer obtains control of the rights
granted by the license.
Professional services integrate the commercial solution with the customer's
existing infrastructure and helps define the optimal user experience, improve
business processes, refine existing staffing models and deploy technology to
meet branch and store automation objectives. Revenue from professional services
are recognized over time, because the customer simultaneously receives and
consumes the benefits of the Company's performance as the services are performed
or when the Company's performance creates an asset with no alternative use and
the Company has an enforceable right to payment for performance completed to
date. Generally revenue will be recognized using an input measure, typically
costs incurred. The typical contract length for service is generally one year
and is billed and paid in advance except for installations, among others.
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Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2019
DIEBOLD NIXDORF, INCORPORATED AND SUBSIDIARIES
(unaudited)
(in millions, except per share amounts)
Services may be sold separately or in bundled packages. For bundled packages,
the Company accounts for individual services separately if they are distinct. A
distinct service is separately identifiable from other items in the bundled
package if a customer can benefit from it on its own or with other resources
that are readily available to the customer. The consideration (including any
discounts) is allocated between separate services or distinct obligations in a
bundle based on their stand-alone selling prices. The stand-alone selling prices
are determined based on the prices at which the Company separately sells the
products or services. For items that are not sold separately, the Company
estimates stand-alone selling prices using the cost plus expected margin
approach. Revenue on service contracts is recognized ratably over time,
generally using an input measure, as the customer simultaneously receives and
consumes the benefits of the Company's performance as the services are
performed. In some circumstances, when global service supply chain services are
not included in a term contract and rather billed as they occur, revenue on
these billed work services are recognized at a point in time as transfer of
control occurs.
The following is a description of principal solutions offered within the Company's two main customer segments that generate the Company's revenue.
Banking
Products. Products for banking customers consist of cash recyclers and dispensers, intelligent deposit terminals, teller automation tools and kiosk technologies, as well as physical security solutions. The Company provides its banking customers front-end applications for consumer connection points and back-end platforms that manage channel transactions, operations and integration and facilitate omnichannel transactions, endpoint monitoring, remote asset management, customer marketing, merchandise management and analytics. These offerings include highly configurable, API enabled software that automates legacy banking transactions across channels. Services. The Company provides its banking customers product-related services which include proactive monitoring and rapid resolution of incidents through remote service capabilities or an on-site visit. First and second line maintenance, preventive maintenance and on-demand services keep the distributed assets of the Company's customers up and running through a standardized incident management process. Managed services and outsourcing consists of the end-to-end business processes, solution management, upgrades and transaction processing. The Company also provides a full array of cash management services, which optimizes the availability and cost of physical currency across the enterprise through efficient forecasting, inventory and replenishment processes.
Retail
Products. The retail product portfolio includes modular, integrated and mobile POS and SCO terminals that meet evolving automation and omnichannel requirements of consumers. Supplementing the POS system is a broad range of peripherals, including printers, scales and mobile scanners, as well as the cash management portfolio which offers a wide range of banknote and coin processing systems. Also in the portfolio, the Company provides SCO terminals and ordering kiosks which facilitate an efficient and user-friendly purchasing experience. The Company's hybrid product line can alternate from an attended operator to self-checkout with the press of a button as traffic conditions warrant throughout the business day.
The Company's platform software is installed within retail data centers to facilitate omnichannel transactions, endpoint monitoring, remote asset management, customer marketing, merchandise management and analytics.
Services. The Company provides its retail customers product-related services
which include on-demand services and professional services. Diebold Nixdorf
AllConnect Services for retailers include maintenance and availability services
to continuously improve retail self-service fleet availability and performance.
These include: total implementation services to support both current and new
store concepts; managed mobility services to centralize asset management and
ensure effective, tailored mobile capability; monitoring and advanced analytics
providing operational insights to support new growth opportunities; and store
life-cycle management to proactively monitors store IT endpoints and enable
improved management of internal and external suppliers and delivery
organizations.
Inventory Reserves. At each reporting period, the Company identifies and writes
down its excess and obsolete inventories to net realizable value based on usage
forecasts, order volume and inventory aging. With the development of new
products, the Company also rationalizes its product offerings and will
write-down discontinued product to the lower of cost or net realizable value.
The Company's significant accounting policies and inventories are described in
notes 1 and 5.
Acquisitions and Divestitures. Acquisitions are accounted for using the purchase
method of accounting. This method requires the Company to record assets and
liabilities of the business acquired at their estimated fair market values as of
the acquisition date. Any excess cost of the acquisition over the fair value of
the net assets acquired is recorded as goodwill. The Company generally uses
valuation specialists to perform appraisals and assist in the determination of
the fair values of the assets acquired and liabilities
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Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2019
DIEBOLD NIXDORF, INCORPORATED AND SUBSIDIARIES
(unaudited)
(in millions, except per share amounts)
assumed. These valuations require management to make estimates and assumptions that are critical in determining the fair values of the assets and liabilities.
For all divestitures, the Company considers assets to be held for sale when management approves and commits to a formal plan to actively market the assets for sale at a price reasonable in relation to their estimated fair value, the assets are available for immediate sale in their present condition, an active program to locate a buyer and other actions required to complete the sale have been initiated, the sale of the assets is probable and expected to be completed within one year (or, if it is expected that others will impose conditions on the sale of the assets that will extend the period required to complete the sale, that a firm purchase commitment is probable within one year) and it is unlikely that significant changes will be made to the plan. Upon designation as held for sale, the Company records the assets at the lower of their carrying value or their estimated fair value, reduced for the cost to dispose of the assets, and ceases to record depreciation expense on the assets. Assets and liabilities are reclassified as held for sale in the period the held for sale criteria are met.
As of
Goodwill .Goodwill is the cost in excess of the net assets of acquired businesses (refer to note 8). The Company tests all existing goodwill at least annually as ofOctober 31 for impairment on a reporting unit basis. The Company tests for interim impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the carrying value of a reporting unit below its reported amount. Beginning with the second quarter of 2018, the Company's reportable operating segments are based on the conclusion of the assessment on the following solutions: Eurasia Banking, Americas Banking and Retail with comparative periods reclassified for consistency. Each year, the Company may elect to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. In evaluating whether it is more likely than not the fair value of a reporting unit is less than its carrying amount, the Company considers the following events and circumstances, among others, if applicable: (a) macroeconomic conditions such as general economic conditions, limitations on accessing capital or other developments in equity and credit markets; (b) industry and market considerations such as competition, multiples or metrics and changes in the market for the Company's products and services or regulatory and political environments; (c) cost factors such as raw materials, labor or other costs; (d) overall financial performance such as cash flows, actual and planned revenue and earnings compared with actual and projected results of relevant prior periods; (e) other relevant events such as changes in key personnel, strategy or customers; (f) changes in the composition of a reporting unit's assets or expected sales of all or a portion of a reporting unit; and (g) any sustained decrease in share price. If the Company's qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying value, or if management elects to perform a quantitative assessment of goodwill, an impairment test is used to identify potential goodwill impairment and measure the amount of any impairment loss to be recognized. The Company compares the fair value of each reporting unit with its carrying value and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. The fair value of the reporting units is determined based upon a combination of the income valuation and market approach in valuation methodology. The income approach uses discounted estimated future cash flows, whereas the market approach or guideline public company method utilizes market data of similar publicly traded companies. The fair value of the reporting unit is defined as the price that would be received to sell the net assets or transfer the net liabilities in an orderly transaction between market participants at the assessment date. The techniques used in the Company's qualitative assessment incorporate a number of assumptions that the Company believes to be reasonable and to reflect market conditions forecast at the assessment date. Assumptions in estimating future cash flows are subject to a high degree of judgment. The Company makes all efforts to forecast future cash flows as accurately as possible with the information available at the time the forecast is made. To this end, the Company evaluates the appropriateness of its assumptions as well as its overall forecasts by comparing projected results of upcoming years with actual results of preceding years and validating that differences therein are reasonable. Key assumptions, all of which are Level 3 inputs, relate to price trends, material costs, discount rate, customer demand and the long-term growth and foreign exchange rates. A number of benchmarks from independent industry and other economic publications were also used. Changes in assumptions and estimates after the assessment date may lead to an outcome where impairment charges would be required in future periods. Specifically, actual results may vary from the Company's forecasts and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market conditions. Long-Lived Assets. Impairment of long-lived assets is recognized when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the expected future undiscounted cash flows are less than the carrying amount of the asset, an impairment loss is recognized at that time to reduce the asset to the lower of its fair value or its net book value. The Company tests all existing indefinite-lived intangibles at least annually for impairment as ofOctober 31 . Taxes on Income. Deferred taxes are provided on an asset and liability method, whereby deferred tax assets are recognized for deductible temporary differences, operating loss carry-forwards and tax credits. Deferred tax liabilities are recognized for taxable 39
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2019
DIEBOLD NIXDORF, INCORPORATED AND SUBSIDIARIES
(unaudited)
(in millions, except per share amounts)
temporary differences and undistributed earnings in certain jurisdictions.
Deferred tax assets are reduced by a valuation allowance when, based upon the
available evidence, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Determination of a valuation allowance
involves estimates regarding the timing and amount of the reversal of taxable
temporary differences, expected future taxable income and the impact of tax
planning strategies. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
The Company operates in numerous taxing jurisdictions and is subject to
examination by various federal, state and foreign jurisdictions for various tax
periods. Additionally, the Company has retained tax liabilities and the rights
to tax refunds in connection with various acquisitions and divestitures of
businesses. The Company's income tax positions are based on research and
interpretations of the income tax laws and rulings in each of the jurisdictions
in which the Company does business. Due to the subjectivity of interpretations
of laws and rulings in each jurisdiction, the differences and interplay in tax
laws between those jurisdictions, as well as the inherent uncertainty in
estimating the final resolution of complex tax audit matters, the Company's
estimates of income tax liabilities may differ from actual payments or
assessments.
The Company assesses its position with regard to tax exposures and records
liabilities for these uncertain tax positions and any related interest and
penalties, when the tax benefit is not more likely than not realizable. The
Company has recorded an accrual that reflects the recognition and measurement
process for the financial statement recognition and measurement of a tax
position taken or expected to be taken on a tax return. Additional future income
tax expense or benefit may be recognized once the positions are effectively
settled.
At the end of each interim reporting period, the Company estimates the effective
tax rate expected to apply to the full fiscal year. The estimated effective tax
rate contemplates the expected jurisdiction where income is earned, as well as
tax planning alternatives. Current and projected growth in income in higher tax
jurisdictions may result in an increasing effective tax rate over time. If the
actual results differ from estimates, the Company may adjust the effective tax
rate in the interim period if such determination is made.
Contingencies. Liabilities for loss contingencies arising from claims,
assessments, litigation, fines, and penalties and other sources are recorded
when it is probable that a liability has been incurred and the amount can be
reasonably estimated. Legal costs incurred in connection with loss contingencies
are expensed as incurred. There is no liability recorded for matters in which
the liability is not probable and reasonably estimable. Attorneys in the
Company's legal department monitor and manage all claims filed against the
Company and review all pending investigations. Generally, the estimate of
probable loss related to these matters is developed in consultation with
internal and outside legal counsel representing the Company. These estimates are
based upon an analysis of potential results, assuming a combination of
litigation and settlement strategies. The Company attempts to resolve these
matters through settlements, mediation and arbitration proceedings when
possible. If the actual settlement costs, final judgments, or fines, after
appeals, differ from the estimates, the future results may be materially
impacted. Adjustments to the initial estimates are recorded when a change in the
estimate is identified.
Pensions and Other Post -retirement Benefits. Annual net periodic expense and
benefit liabilities under the Company's defined benefit plans are determined on
an actuarial basis. Assumptions used in the actuarial calculations have a
significant impact on plan obligations and expense. Members of the management
investment committee periodically review the actual experience compared with the
more significant assumptions used and make adjustments to the assumptions, if
warranted. The discount rate is determined by analyzing the average return of
high-quality (i.e., AA-rated), fixed-income investments and the year-over-year
comparison of certain widely used benchmark indices as of the measurement date.
The expected long-term rate of return on plan assets is determined using the
plans' current asset allocation and their expected rates of return based on a
geometric averaging over 20 years. The rate of compensation increase assumptions
reflects the Company's long-term actual experience and future and near-term
outlook. Pension benefits are funded through deposits with trustees. Other
post-retirement benefits are not funded and the Company's policy is to pay these
benefits as they become due.
The following table represents assumed healthcare cost trend rates at
2019 2018
Healthcare cost trend rate assumed for next year 6.5 %
6.5 % Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
5.0 % 5.0 %
Year that rate reaches ultimate trend rate 2025 2025
The healthcare trend rates for the postemployment benefits plans in theU.S. are reviewed based upon the results of actual claims experience. The Company used initial healthcare cost trends of 6.5 percent and 6.5 percent in 2019 and 2018, respectively, with an ultimate trend rate of 5.0 percent reach in 2025. Assumed healthcare cost trend rates have a modest effect on the amounts reported for the healthcare plans. 40
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2019
DIEBOLD NIXDORF, INCORPORATED AND SUBSIDIARIES
(unaudited)
(in millions, except per share amounts)
Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. A one-percentage-point change in assumed healthcare cost trend rates would have the following effects:
One-Percentage-Point
Increase Decrease
Effect on other post-retirement benefit obligation $ 0.3 $ (0.3 )
During 2019, the Society of Actuaries released new mortality tables (Pri-2012)
and projection scales (MP-2019) resulting from recent studies measuring
mortality rates for various groups of individuals. As of December 31, 2019 , the
Company adopted for the pension plan in the U.S. , the use of the Pri-2012
mortality tables and the MP-2019 mortality projection scales. For the plans
outside the U.S. , the mortality tables used are those either required or
customary for local accounting and/or funding purposes.
RECENTLY ISSUED ACCOUNTING GUIDANCE
Refer to note 1 for information on recently issued accounting guidance.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2019
DIEBOLD NIXDORF, INCORPORATED AND SUBSIDIARIES
(unaudited)
(in millions, except per share amounts)
FORWARD-LOOKING STATEMENT DISCLOSURE
In this annual report on Form 10-K, statements that are not reported financial results or other historical information are "forward-looking statements." Forward-looking statements give current expectations or forecasts of future events and are not guarantees of future performance. These forward-looking statements include, but are not limited to, statements regarding the Company's expected future performance (including expected results of operations and financial guidance) future financial condition, operating results, strategy and plans. Forward-looking statements may be identified by the use of the words "anticipates," "expects," "intends," "plans," "will," "believes," "estimates," "potential," "target," "predict," "project," "seek," and variations thereof or similar expressions. These statements are used to identify forward-looking statements. These forward-looking statements reflect the current views of the Company with respect to future events and involve significant risks and uncertainties that could cause actual results to differ materially. Although the Company believes that these forward-looking statements are based upon reasonable assumptions regarding, among other things, the economy, its knowledge of its business, and key performance indicators that impact the Company, these forward-looking statements involve risks, uncertainties and other factors that may cause actual results to differ materially from those expressed in or implied by the forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Some of the risks, uncertainties and other factors that could cause actual results to differ materially from those expressed in or implied by the forward-looking statements include, but are not limited to:
• the outcome of the appraisal proceedings initiated in connection with the
implementation of the DPLTA with the former Diebold Nixdorf AG and the
merger/squeeze-out;
• the Company's ability to achieve benefits from its cost-reductioninitiatives and other strategic initiatives, such as DN Now, including its
planned restructuring actions, as well as its business process outsourcing
initiative;
• the success of the Company's new products, including its DN Series line;
• the Company's ability to comply with the covenants contained in the
agreements governing its debt;
• the Company's ability to successfully refinance its debt when necessary or
desirable;
• the ultimate outcome of the Company's pricing, operating and taxstrategies applied to former Diebold Nixdorf AG and the ultimate ability
to realize cost reductions and synergies;
• the Company's ability to successfully operate its strategic alliances in
• changes in political, economic or other factors such as currency exchange
rates, inflation rates, recessionary or expansive trends, taxes and
regulations and laws affecting the worldwide business in each of the
Company's operations;
• the Company's reliance on suppliers and any potential disruption to the
Company's global supply chain;
• the impact of market and economic conditions, including any additional
deterioration and disruption in the financial and service markets,
including the bankruptcies, restructurings or consolidations of financial
institutions, which could reduce our customer base and/or adversely affect
our customers' ability to make capital expenditures, as well as adversely
impact the availability and cost of credit;
• interest rate and foreign currency exchange rate fluctuations, including
the impact of possible currency devaluations in countries experiencing
high inflation rates;
• the acceptance of the Company's product and technology introductions in
the marketplace;
• competitive pressures, including pricing pressures and technological
developments;
• changes in the Company's relationships with customers, suppliers,
distributors and/or partners in its business ventures;
• the effect of legislative and regulatory actions in the U.S. and
internationally and the Company's ability to comply with government
regulations;
• the impact of a security breach or operational failure on the Company's
business;
• the Company's ability to successfully integrate other acquisitions into
its operations;
• the Company's success in divesting, reorganizing or exiting non-core
and/or non-accretive businesses;
• the Company's ability to maintain effective internal controls;
• changes in the Company's intention to further repatriate cash and cash
equivalents and short-term investments residing in international taxjurisdictions, which could negatively impact foreign and domestic taxes;
• unanticipated litigation, claims or assessments, as well as the
outcome/impact of any current/pending litigation, claims or assessments;
• the investment performance of the Company's pension plan assets, which
could require the Company to increase its pension contributions, and
significant changes in healthcare costs, including those that may result
from government action; and
• the amount and timing of repurchases of the Company's common shares, if any.
Except to the extent required by applicable law or regulation, the Company
undertakes no obligation to update these forward-looking statements to reflect
future events or circumstances or to reflect the occurrence of unanticipated
events.
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