Diebold, Incorporated (NYSE: DBD) today reported second quarter 2014 net income attributable to Diebold of $41.6 million, or $0.64 per share.
This compares with second quarter 2013 net loss of $(105.0) million, or $(1.65) per share. Second quarter 2014 results include a gain of $12.7 million net of tax, or $0.20 per share, related to the company's divestiture of its Diebold Eras check and payment processing subsidiary. Second quarter 2014 revenue was $733.5 million, up 3.7% from the second quarter 2013, or 5.5% on a constant currency basis.
Non-GAAP income attributable to Diebold in the second quarter 2014 was $0.47 per share compared with a net loss of $(0.35) per share in the second quarter 2013, which included a valuation allowance on Brazil deferred tax assets of $(0.61) per share.
Management Commentary "We delivered strong performance during the second quarter, with solid revenue growth in line with our expectations," said Andy W. Mattes, Diebold president and chief executive officer. "In our services business, the positive performance trend continued as gross margin improved over the prior-year period. In addition, net cost savings were higher than expected, as the rate of our reinvestments in the business will be weighted more toward the second half of 2014. This resulted in higher-than-anticipated earnings during the quarter. Finally, I'm encouraged with our order book, as we're seeing positive growth in virtually every region across the globe."
Mattes continued, "We're pleased with our performance in the first half of the year and will accelerate the pace of our investments in innovation, IT infrastructure, back-office transformation, service, sales and marketing, in the second half of 2014. In addition, we've seen upward pressure on our non-GAAP effective tax rate year to date. Taking all these items into consideration, we are reaffirming our full-year revenue and earnings guidance.
"We feel good about the progress we're making in our Diebold 2.0 transformation," Mattes concluded. "While we remain in the 'crawl' phase of our 'crawl, walk, run' journey, we are meeting our near-terwe are meeting our near-term objectives and remain confident in our long-term outlook."
Results of Operations Gross Margin Total gross margin for the second quarter 2014 was 25.5%, an increase of 3.2 percentage points from the second quarter of 2013, with service margin reflecting a 7.5 percentage point improvement and product margin decreasing 2.2 percentage points. The service margin improvement was primarily attributable to the company's global service transformation efforts. The product gross margin decrease was primarily the result of geographic mix.
Operating Expenses Total operating expenses were $129.6 million, or 17.7% of revenue, for the second quarter 2014, compared with $181.0 million, or 25.6% of revenue, in the second quarter of 2013. Operating expenses in the second quarter 2014 included a net benefit of $11.6 million in restructuring and net non-routine income, mainly from a gain on sale of $13.7 million related to the company's divestiture of its Diebold Eras subsidiary. Operating expenses in the second quarter 2013 included $49.2 million in restructuring and non-routine charges, comprised primarily of $28.0 million in additional losses related to the settlement of the Foreign Corrupt Practices Act (FCPA) investigation and $17.5 million for the settlement of the securities class action.
Operating Profit / (Loss) Operating profit of $57.2 million, or 7.8% of revenue, was realized in the second quarter 2014, compared with an operating loss of $(23.6) million, or (3.3)% of revenue, in the second quarter 2013. Non-GAAP operating profit* in the second quarter 2014 was $45.8 million, or 6.2% of revenue, compared with $30.1 million, or 4.3% of revenue, in the second quarter 2013.
Income Tax The effective tax rate on continuing operations for the three months ended June 30, 2014 was 29.5%, compared with (307.6)% for the same period of 2013. The second quarter 2014 tax rate benefited from a $2.4 million release of a valuation allowance against excess capital losses due to the divestiture of its Diebold Eras subsidiary. The second quarter 2013 tax rate was primarily the result of deferred tax expense of $42.8 million related to the repatriation of undistributed foreign earnings and the establishment of a valuation allowance of $39.1 million on certain Brazil deferred tax assets.
Net Income / (Loss) Attributable to Diebold Net income attributable to Diebold was $41.6 million, or 5.7% of revenue, in the second quarter 2014, compared with net loss of $(105.0) million, or (14.9)% of revenue, in the second quarter 2013. Included in the second quarter 2014 net of tax results was a gain of $12.7 million related to the company's divestiture of its Diebold Eras subsidiary. Included in the second quarter 2013 net of tax results were deferred tax expense of $42.8 million related to the repatriation of undistributed foreign earnings, $39.1 million for the establishment of a valuation allowance on certain Brazil deferred tax assets, $23.2 million in additional losses related to the settlement of the FCPA investigation and $11.0 million for the settlement of the securities class action. Balance Sheet, Cash Flow and Liquidity The company's net debt* was $177.8 million at June 30, 2014, an increase in net debt of $127.0 million from the net debt* position at December 31, 2013. The company's net debt to capital ratio was 15% at June 30, 2014, 5% at December 31, 2013 and 12% at June 30, 2013.
Free cash flow (use)* in the second quarter 2014 was $(71.3) million, compared with $(40.5) million in the second quarter 2013.
Full-year 2014 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 significant currency fluctuations, future mergers, acquisitions, disposals or other business combinations, the Brazil tax assessment or related indirect tax reserves.
The company is maintaining its outlook for full-year 2014 revenue to grow in the mid-single digits and reaffirms EPS in the range of $1.65 to $1.85 on a non-GAAP* basis. Diebold is focused on executing its transformation initiatives and increasing investment levels in the areas of development, sales and marketing, information technology and back-end office support.