Diebold Incorporated (NYSE: DBD) today reported fourth quarter 2012 net loss from continuing operations attributable to Diebold, net of tax, of $(7.5) million, or $(0.12) per basic share.
This compares with fourth quarter 2011 net income of $79.8 million, or $1.26 per diluted share. Fourth quarter 2012 included $21.9 million of pre-tax, non-routine expenses related to early buyout payments made to certain eligible pension participants. Also during the quarter, the company recorded $18.0 million of pre-tax, non-routine expense primarily related to increasing its accrual for the eventual resolution of the previously disclosed Foreign Corrupt Practices Act (FCPA) investigation. Fourth quarter 2012 revenue was $840.1 million, down 1.2% from the fourth quarter 2011.
Non-GAAP* income from continuing operations attributable to Diebold, net of tax, in the fourth quarter 2012 was $0.45 per diluted share, compared with $1.40 per diluted share from the fourth quarter 2011.
"The 2012 results and the present outlook for 2013 are disappointing, and we need to improve," said Henry D.G. Wallace, Diebold executive chairman. "Recently, we named George S. Mayes, Jr. to the newly created position of chief operating officer. George has a strong track record of operational excellence, and together we are committed to improving our financial position in the short term, as well as initiating longer-term structural improvements throughout our global operations. This will be undertaken with a sense of urgency without jeopardizing our ability to provide outstanding products and services."
Mayes said, "I am excited to take on the COO role and confident in our ability to achieve further, meaningful operational improvements across our global operations. We are passionately committed to our customers, and remain dedicated to delivering innovative solutions and services that add value to their businesses."
Wallace concluded, "As previously communicated, we expect 2013 non-GAAP earnings to be flat to down modestly from 2012, and revenuep;from 2012, and revenue to be relatively flat. I am also expecting the first quarter to be weak and well below the first quarter of last year, which benefited from strong regional bank demand. Looking forward, there are some bright spots in Asia Pacific, Latin America and U.S. national accounts. However, the uncertainty surrounding U.S. regional bank activity and the outcome of some major business awards in Brazil could significantly affect the range of outcomes this year. Therefore, the company is not including a specific EPS range in its guidance for 2013 at this time. However, I want to assure you that we have a strong team, we are focused on the tasks ahead, and I am confident in our ability to return Diebold to a long-term sustainable growth plan."
Results of Operations
Total revenue for the fourth quarter 2012 decreased 1.2% compared with the fourth quarter 2011, with growth in EMEA and security offset by a decline in Brazil voting revenue and a net negative currency impact of more than 2%.
Total gross margin for the fourth quarter 2012 was 21.9%, a decrease of 4.3 percentage points from the fourth quarter of 2011, with declines in both product and service. Both product and service margins were impacted by the shift in business from regional banks to the lower-margin national bank space in the United States and associated declines in billed-work services. Also impacting service gross margin were increases to insurance reserves and increased costs and project deferrals associated with Hurricane Sandy. In addition, Brazil margins were impacted by the lower voting and lottery volume.
Total operating expenses were $176.6 million, or 21.0% of revenue, for the fourth quarter 2012, an increase of 2.7 percentage points from the fourth quarter of 2011.
Fourth quarter 2012 operating expenses also included non-routine expenses of $22.9 million. These expenses included the previously disclosed pre-tax charge of $21.9 million for the early buyout payments made to eligible pension participants and a pre-tax charge of $1.0 million for legal, consultative, and audit costs related to the previously disclosed FCPA investigation. In addition, the company incurred a non-cash impairment charge of $1.0 million related to the company's decision to cancel the new corporate headquarters project.
Operating expenses in the fourth quarter 2012 included $4.1 million of net restructuring charges primarily related to the company's global realignment plan, including realignment of resources in the U.S. and certain international facilities to better support opportunities in target markets. Operating expenses in the fourth quarter 2011 included $2.2 million of net restructuring charges primarily associated with restructuring efforts in EMEA, and an adjustment of $(2.2) million from the previously accrued settlement and legal fees related to a prior employment class-action lawsuit. Fourth quarter 2011 operating expenses also included non-routine expenses of $2.4 million for legal, consultative, and audit costs related to the FCPA investigation.
Operating profit was $7.5 million, or 0.9% of net sales, in the fourth quarter 2012, a decrease of 7.0 percentage points from the fourth quarter 2011. Non-GAAP operating profit* in the fourth quarter 2012 was $42.5 million, or 5.1% of revenue, compared with $75.8 million, or 8.9% of revenue, in the fourth quarter 2011. Both quarters exclude applicable restructuring charges and non-routine expenses as well as impairment charges in fourth quarter 2012.
Fourth quarter 2012 income tax benefit on continuing operations including non-controlling interest was $5.9 million or 44.1% on a GAAP basis and 24.1% on a non-GAAP basis. The GAAP increase was primarily due to the fact that a portion of the FCPA charges are expected to be non-deductible for tax. Year to date taxes on income from continuing operations were $28.5 million. This resulted in a full-year 2012 income tax rate of 25.9% on a GAAP basis.
Income / (Loss) from Continuing Operations, net of tax (attributable to Diebold)
Loss from continuing operations, net of tax, was $(7.5) million, or 0.9% of revenue in the fourth quarter 2012, compared with income of $79.8 million, or 9.4%, in the fourth quarter 2011. Included in the fourth quarter 2012 net of tax results are $27.5 million in net non-routine expenses (pension early buy-out and FCPA related), net restructuring charges of $7.6 million and $0.6 million in impairment charges. Included in the fourth quarter 2011 net of tax results are net restructuring charges of $6.5 million and $2.4 million in net non-routine expenses.
Full-year 2012 income from continuing operations, net of tax, was $81.6 million, or 2.7% of revenue in 2012, a decrease of 2.4 percentage points versus prior year. Full-year 2012 income from continuing operations, net of tax, includes after-tax restructuring charges of $10.7 million, $28.7 million in net non-routine expenses (pension early buy-out and FCPA related) and $10.6 million in impairment charges. Full-year 2011 income from continuing operations, net of tax, includes after-tax restructuring charges of $20.7 million and $12.5 million in net non-routine and impairment charges.
Balance Sheet, Cash Flow and Liquidity
The company's net debt* was $21.5 million at December 31, 2012, an increase in net debt of $13.8 million from the net debt* position at December 31, 2011. The company's net debt to capital ratio was 1.5% at December 31, 2012, and 0.5% at December 31, 2011.
For the full-year 2012, net cash provided by operating activities was $135.5 million, a decrease of $79.9 million compared with full-year 2011. Free cash flow* in the fourth quarter 2012 was $150.4 million, a decrease of $103.4 million from the fourth quarter 2011. For the full year, free cash flow was $85.8 million, a decrease of $74.9 million from 2011. The company expects free cash flow* to improve in 2013.
In the fourth quarter 2012, the company did not repurchase any of its common shares. Diebold has approximately 2.4 million common shares remaining under its existing share repurchase authorization.
Full-year 2013 Outlook
The following statements are based on current expectations. These statements are forward-looking and actual results may differ materially. These statements do not include the potential impact of any currency fluctuations, future mergers, acquisitions, disposals or other business combinations, or any possible resolution to the FCPA matter.
While Diebold expects relatively flat revenue for 2013, the company is encouraged by growing backlog activity in certain areas, such as its Asia Pacific and U.S. national account sectors. However, the company faces difficult year-over-year comparisons, particularly in the first half of the year, and an uncertain environment in the U.S. regional bank space in 2013. In addition, the company expects improvements within its Brazil business with several significant tenders expected in the first half of 2013. However, the timing and outcome of the Brazil tenders could have a significant impact on earnings in 2013. As such, the company is reaffirming its prior full-year outlook for 2013, expecting non-GAAP earnings to be flat to down moderately from 2012 on relatively flat revenue.