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|Diebold Reports 2008 Third Quarter Financial Results|
Third quarter net income of $46.5 million up 65.2 percent from 2007
NORTH CANTON, Ohio, Oct. 30 /PRNewswire-FirstCall/ -- Diebold, Incorporated (NYSE: DBD) today reported 2008 third quarter revenue of $890.3 million, an increase of 20.2 percent from the third quarter of 2007. The company also reported net income of $46.5 million during the third quarter of 2008, compared to net income of $28.1 million in the comparable period in 2007, an increase of 65.2 percent. Earnings for the third quarter of 2008 were $.70 per share, compared to $.42 per share in the third quarter of 2007, an increase of 66.7 percent.
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The third quarter 2008 results included restructuring charges of $.17 per share, compared to $.01 per share in the third quarter of 2007. These restructuring charges related primarily to severance and reorganization costs from the previously announced reduction in the company's global workforce. In addition, the company also incurred $.29 per share in non-routine expenses in the third quarter 2008, compared to $.04 per share in the third quarter 2007. These non-routine expenses primarily consisted of legal, audit and consultation fees related to the completion of the internal review of other accounting items, the restatement of financial statements and the ongoing Securities and Exchange Commission (SEC) and U.S. Department of Justice (DOJ) investigations, as well as other advisory fees. Of the $.29 per share in non- routine expenses in the third quarter of 2008, $.16 per share was related to a fee owed to financial advisor Goldman Sachs as a result of the withdrawal of the unsolicited takeover bid from United Technologies Corp. Excluding these restructuring charges and non-routine expenses, diluted earnings per share in the third quarter of 2008 would have been $1.16 versus $.47 in the third quarter 2007*, an increase of 146.8 percent.
Cash from operating activities in the third quarter of 2008 was $56.3 million, compared to a cash use from operating activities of $24.4 million in the third quarter of 2007. Free cash flow during the third quarter of 2008 was $43.4 million, compared to free cash use of $34.7 million during the third quarter of 2007*.
"I am very pleased with the strong results we generated in the third quarter. We continue to make solid progress on our key initiatives to reduce costs and improve profitability, and this is reflected in our results," said Thomas W. Swidarski, Diebold president and chief executive officer. "While the quarter was very strong, it benefited from 2008 Brazilian election revenue, a business opportunity which historically occurs every other year.
"Also, we benefited from a large order in China, in which revenue was expected to be recognized during the fourth quarter but occurred during the third quarter due to customer acceptance occurring sooner than planned. Including this order, we anticipate revenue in China will increase more than 20 percent in the full-year 2008.
"In addition to the unique events that occurred during the quarter, we executed our business plans very effectively. As a result of our strong performance, we are again raising our full-year earnings guidance," Swidarski continued. "While this guidance reflects an exceptional year, it does result in fourth-quarter earnings expectations that are lower than what we historically realize. As we have communicated in prior quarters, our typical earnings seasonality has been affected by purchases in China coming early in the year in 2008, rather than being concentrated in the fourth quarter. We anticipate our more historical earnings seasonality returning in 2009."
Swidarski concluded, "Clearly, since our last earnings announcement on August 11, we have witnessed unprecedented change in the financial services industry -- both in the United States and internationally. In the United States, the federal government's Troubled Asset Recovery Program is reshaping the financial landscape almost daily. While our orders and backlog remain very strong, these day-to-day changes in our core industry make it difficult to assess the impact on 2009 financial results. Given this uncertainty, we are further accelerating our efforts to reduce costs, increase operational efficiencies and improve productivity. We expect to be in a better position to provide insight to 2009 financial expectations in our year-end earnings announcement."
Third Quarter Orders (constant currency)
Total product and services orders for financial self-service and security were up into the low double-digit range compared to the prior-year period. Financial self-service orders increased in excess of 20 percent, with double-digit growth in each of the geographic regions. Security orders, however, decreased in the low double-digit range as new bank branch construction and retail store openings remain weak in the United States.
Total revenue for the 2008 third quarter was up 20.2 percent. Financial self-service products and services revenue increased 18.3 percent over the prior period, while total security revenue decreased 6.4 percent. During the quarter, election systems revenue in Brazil was $58.6 million, representing more than 85 percent of the increase in total election systems revenue. Of the 20.2 percent increase in total revenue, the net positive currency impact was 3.4 percentage points.
Total gross margin for the quarter was 26.2 percent, compared to 23.9 percent in the third quarter of 2007. These gross margins included restructuring charges of $10.7 million in the third quarter of 2008 and $1.0 million in the third quarter of 2007.
Product gross margin was 27.9 percent in the quarter, compared to 26.5 percent in the third quarter 2007. Included in product gross margins were restructuring charges of $8.4 million in the third quarter of 2008 and $0.8 million in the third quarter of 2007. Despite the higher restructuring charges, product gross margin improved during the period. The gross profit associated with the Brazil voting business positively impacted product gross margin in the quarter by 2.2 percentage points. In addition, gross profit margin was negatively impacted by higher restructuring expenses, increased commodity costs, unfavorable security product revenue mix and lower overall volume in the security business. This negative impact was partially offset by the company's ongoing cost-reduction efforts and a higher mix of revenue from China. The China revenue included the large order in which revenue was expected to be recognized during the fourth quarter but occurred during the third quarter.
Service gross margin in the quarter was 24.4 percent, compared to 21.4 percent in the third quarter of 2007. Included in service gross margins were restructuring charges of $2.3 million in the third quarter of 2008 and $0.2 million in the third quarter of 2007. The year-over-year improvement in service margin was driven by better product quality, improved international margins as a result of previous restructuring actions, and continued gains in productivity and efficiency, partially offset by higher restructuring charges.
Operating expenses as a percentage of revenue in the third quarter of 2008 were 18.9 percent, compared to 18.4 percent in the third quarter of 2007. Included in the third quarter 2008 operating expenses were restructuring charges of $3.8 million and non-routine expenses of $24.7 million. This compares to $0.2 million in restructuring charges and $3.3 million in non-routine expenses in the third quarter of 2007. The third quarter 2008 non-routine expenses included a $13.5 million fee owed to financial advisor Goldman Sachs as a result of the withdrawal of the unsolicited takeover bid from United Technologies Corp.
The company reported net income of $46.5 million in the third quarter 2008, or 5.2 percent of revenue, compared to net income of $28.1 million in the third quarter 2007, or 3.8 percent of revenue. The increase in net income was a result of higher gross profits and a lower effective tax rate, partially offset by higher operating expense levels. The third quarter 2008 effective tax rate was positively affected by a $3.7 million discrete benefit related to a China technology tax credit.
On a net of tax basis, the fee to Goldman Sachs adversely impacted net income by $10.6 million, while restructuring charges adversely impacted net income by $11.4 million in the third quarter of 2008 and by $0.9 million in the third quarter of 2007. Finally, other non-routine expenses, net of tax, were $8.8 million in the third quarter of 2008 and $2.4 million in the third quarter of 2007.
Net Debt and Cash Flow
The company's net debt* was $378.4 million at September 30, 2008 compared to $389.9 million at September 30, 2007, a decrease of $11.5 million over the last 12 months.
Net cash provided by operating activities increased $24.0 million, moving from $37.8 million in the nine months ended September 30, 2007 to $61.8 million in the nine months ended September 30, 2008. The primary reason for this increase was higher net income and a net increase in certain other assets/liabilities, partially offset by an increase in trade receivable balances. The net increase in certain other assets/liabilities was primarily due to collection of refundable income taxes, increases in the accruals for non-routine expenses, and increases in warranty reserves and VAT taxes as a result of increased product revenue. The increase in trade receivables was due to significantly higher revenue levels. Days sales outstanding (DSO) was 52 days at September 30, 2008 compared to 61 days at September 30, 2007, while inventory turns moved to 4.2 turns at September 30, 2008 from 3.7 turns at September 30, 2007. As a result of the change in net cash provided by operating activities, free cash flow increased by $25.7 million, moving to $29.2 million at September 30, 2008 from $3.5 million at September 30, 2007*.
The company incurred third quarter 2008 restructuring charges totaling $14.5 million, or $.17 per share. These charges were primarily related to severance costs from the previously announced ongoing reduction in the company's global workforce, which is on track to be completed by the end of 2008. Cash payments related to restructuring in the third quarter of 2008 were $6.0 million. Taking into consideration the previously announced manufacturing and supply chain restructuring and the global workforce reduction, Diebold expects full-year restructuring charges to be in the range of $40 million to $45 million, or $.50 per share to $.56 per share. While the majority of the anticipated 2008 restructuring charges are ultimately expected to result in cash payments, the company cannot currently predict the timing of these payments.
The company incurred third quarter 2008 non-routine expenses totaling $24.7 million, or $.29 per share, compared to $3.3 million, or $.04 per share in the third quarter of 2007. These expenses primarily consisted of legal, audit and consultation fees related to the previously announced internal review of other accounting items, restatement of financial statements and the ongoing government investigations, as well as other advisory fees. Diebold estimates these non-routine expenses for the full year will be in the range of $45 million to $47 million, or $.53 per share to $.55 per share. Cash payments related to these non-routine expenses in the third quarter of 2008 were $8.2 million, compared to $0.8 million in the third quarter of 2007.
Full-year 2008 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 future mergers, acquisitions, disposals or other business combinations.
Expectations for the full year 2008 include: -- Revenue Revenue growth Previous guidance Current guidance (provided August 11, 2008) Total revenue 8 to 10 percent 8 to 10 percent Financial self-service 9 to 10 percent 9 to 10 percent Security 1 to 3 percent Flat Election systems (including Brazil) $120 million to $135 million to $130 million $140 million (with approximately half (with approximately half coming from Brazil) coming from Brazil) Brazilian lottery $10 million to $10 million to $13 million $13 million -- Earnings per share Previous guidance Current guidance (provided Sept. 30, 2008) 2008 EPS (GAAP) $1.62 - $1.52 $1.45 - $1.42 (a) Restructuring charges $.45 - $.56 $.50 - $.56 Non-routine expenses $.28 - $.32 $.53 - $.55 Impairment $.05 $.05 2008 EPS non-GAAP $2.40 - $2.45 $2.53 - $2.58 (a) -- Included in the revised full-year earnings guidance is a potential inventory valuation adjustment in the fourth quarter of approximately $.10 to $.15 per share primarily related to select voting equipment within Premier Election Systems. This inventory may require a reduction in value, contingent upon order volumes received in the fourth quarter.
Thomas W. Swidarski and Kevin J. Krakora will discuss the company's financial performance during a conference call today at 10:00 a.m. (ET). Access is available from Diebold's Web site at www.diebold.com. The replay can also be accessed on the site for up to three months after the call.
*See accompanying notes for non-GAAP measures. Revenue Summary by Product, Service and Geographic Area (In Thousands -- Quarter Ended September 30) % YTD YTD % Q3 2008 Q3 2007 Change 9/30/2008 9/30/2007 Change Financial Self-Service Products $324,414 $270,509 19.9% $812,732 $720,823 12.8% Services 290,225 249,227 16.5% 844,769 733,361 15.2% Total Fin. self-service 614,639 519,736 18.3% 1,657,501 1,454,184 14.0% Security solutions Products 78,755 86,509 -9.0% 227,890 238,158 -4.3% Services 120,116 125,941 -4.6% 352,202 350,789 0.4% Total Security 198,871 212,450 -6.4% 580,092 588,947 -1.5% Total Fin. self-service & security 813,510 732,186 11.1% 2,237,593 2,043,131 9.5% Election systems Products 69,326 2,954 2246.9% 92,199 19,648 369.3% Services 6,698 5,713 17.2% 25,648 19,545 31.2% Total Election systems 76,024 8,667 777.2% 117,847 39,193 200.7% Brazilian lottery systems 756 - n/a 4,047 - n/a Total Revenue $890,290 $740,853 20.2% $2,359,487 $2,082,324 13.3% Revenue Summary by Geographic Segment % YTD YTD % Q3 2008 Q3 2007 Change 9/30/2008 9/30/2007 Change The Americas 642,990 525,600 22.3% 1,692,514 1,503,814 12.5% Asia Pacific 123,442 79,899 54.5% 316,923 220,465 43.8% Europe, Middle East, Africa 123,858 135,354 -8.5% 350,050 358,045 -2.2% Total Revenue $890,290 $740,853 20.2% $2,359,487 $2,082,324 13.3% Notes for Non-GAAP Measures 1. Reconciliation of GAAP EPS to non-GAAP measures: YTD YTD Q3 2008 Q3 2007 9/30/08 9/30/07 Total EPS (GAAP measure) $0.70 $0.42 $1.32 $0.74 Restructuring Charges 0.17 0.01 0.37 0.21 Non-routine expenses 0.29 0.04 0.49 0.05 Impairment 0.00 0.00 0.05 0.00 Total EPS (non-GAAP measure) $1.16 $0.47 $2.23 $1.00 The company's management believes excluding restructuring charges, non-routine expenses and impairment is useful to investors because it provides an overall understanding of the company's historical financial performance and future prospects. Management believes operating EPS (non-GAAP) is an indication of the company's base-line performance before gains, losses or other charges that are considered by management to be outside the company's core operating results. Exclusion of these items permits evaluation and comparison of results for the company's core business operations, and it is on this basis that management internally assesses the company's performance. 2. Free cash flow/(use) is calculated as follows: YTD YTD Q3 2008 Q3 2007 9/30/08 9/30/07 Net cash provided (used) by operating activities (GAAP measure) $56,297 $(24,432) $61,846 $37,848 Capital expenditures (12,859) (10,296) (32,637) (34,323) Free cash flow (use) (non-GAAP measure) $43,438 $(34,728) $29,209 $3,525 The company's management believes that free cash flow is useful to investors because it is a meaningful indicator of cash generated from operating activities that is available for the execution of its business strategy, including service of debt principal, dividends, share repurchase and acquisitions. Free cash flow is not an indicator of residual cash available for discretionary spending, because it does not take into account mandatory debt service or other non-discretionary spending requirements that are deducted in the calculation of free cash flow. 3. Net (debt) is calculated as follows: September 30, December 31, September 30, 2008 2007 2007 Cash, cash equivalents and other investments (GAAP measure) $330,251 $311,310 $233,604 Less Industrial development revenue bonds and other (11,900) (11,950) (11,950) Less Notes payable (696,702) (624,071) (611,508) Net (debt) (non-GAAP measure) $ (378,351) $ (324,711) $ (389,854) The company's management believes that given the net debt, the significant cash, cash equivalents and other investments on its balance sheet, that net cash against outstanding debt is a meaningful debt calculation. 4. Reconciliation of GAAP Operating Margin to non-GAAP measures YTD YTD Q3 2008 Q3 2007 9/30/08 9/30/07 GAAP Operating Margin $65,531 $40,619 $132,764 $81,658 GAAP Operating Margin % 7.4% 5.5% 5.6% 3.9% Restructuring $14,483 $1,219 $29,560 $19,037 Non-routine Expenses $24,665 $3,323 $41,840 $4,212 Impairment $- $- $4,376 $- Non GAAP Operating Margin $104,679 $45,161 $208,540 $104,907 Non GAAP Operating Margin % 11.8% 6.1% 8.8% 5.0% The company's management believes excluding restructuring charges, non-routine expenses and impairment from operating margins is an indication of the company's baseline performance before gains, losses, or other charges that are considered by management to be outside the company's core operating results. The exclusion of these items permits evaluation and comparison of results for the company's core business operations and it is on this basis that the company's management internally assesses the company's performance.
In this press release, statements that are not reported financial results or other historical information are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give current expectations or forecasts of future events and are not guarantees of future performance. These forward-looking statements relate to, among other things, the company's future operating performance, the company's share of new and existing markets, the company's short- and long-term revenue and earnings growth rates, and the company's implementation of cost-reduction initiatives and measures to improve pricing, including the optimization of the company's manufacturing capacity. The use of the words "will," "believes," "anticipates," "expects," "intends" and similar expressions is intended to identify forward-looking statements that have been made and may in the future be made by or on behalf of the company. 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 on 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. The company is not obligated to update forward-looking statements, whether as a result of new information, future events or otherwise.
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 results of the SEC and DOJ investigations; -- 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; -- 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, including Brazil, where a significant portion of the company's revenue is derived; -- the effects of the sub-prime mortgage crisis and the disruptions in the financial 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; -- acceptance of the company's product and technology introductions in the marketplace; -- the amount of cash and non-cash charges in connection with the planned closure of the company's Newark, Ohio facility; -- unanticipated litigation, claims or assessments; -- variations in consumer demand for financial self-service technologies, products and services; -- challenges raised about reliability and security of the company's election systems products, including the risk that such products will not be certified for use or will be decertified; -- changes in laws regarding the company's election systems products and services; -- potential security violations to the company's information technology systems; -- the company's ability to successfully execute its strategy related to the election systems business; and -- the company's ability to achieve benefits from its cost-reduction initiatives and other strategic changes.
Diebold, Incorporated is a global leader in providing integrated self-service delivery and security systems and services. Diebold employs more than 17,000 associates with representation in nearly 90 countries worldwide and is headquartered in Canton, Ohio, USA. Diebold is publicly traded on the New York Stock Exchange under the symbol 'DBD.' For more information, visit the company's Web site at www.diebold.com.
DIEBOLD, INCORPORATED CONDENSED CONSOLIDATED INCOME STATEMENTS - UNAUDITED (IN THOUSANDS EXCEPT EARNINGS PER SHARE) Three months ended Nine months ended September 30, September 30, 2008 2007 2008 2007 Net Sales Product $473,251 $359,972 $1,136,868 $978,629 Service 417,039 380,881 1,222,619 1,103,695 Total 890,290 740,853 2,359,487 2,082,324 Cost of goods Product 341,306 264,494 821,261 732,982 Service 315,343 299,300 937,069 878,408 Total 656,649 563,794 1,758,330 1,611,390 Gross Profit 233,641 177,059 601,157 470,934 Percent of net sales 26.2% 23.9% 25.5% 22.6% Operating expenses Selling, general and administrative 147,774 117,532 405,774 342,568 Research, development and engineering 20,364 18,894 58,275 53,115 Impairment of Assets - - 4,376 - (Gain) Loss on sale of Assets (28) 14 (32) (6,407) Total 168,110 136,440 468,393 389,276 Percent of net sales 18.9% 18.4% 19.9% 18.7% Operating profit 65,531 40,619 132,764 81,658 Percent of net sales 7.4% 5.5% 5.6% 3.9% Other expense and minority interest, net (9,233) (6,223) (20,278) (11,183) Income before taxes 56,298 34,396 112,486 70,475 Percent of net sales 6.3% 4.6% 4.8% 3.4% Taxes on income (9,782) (6,247) (24,961) (20,874) Effective tax rate 17.4% 18.2% 22.2% 29.6% Net income $46,516 $28,149 $87,525 $49,601 Basic weighted average shares outstanding 66,101 65,926 66,073 65,798 Diluted weighted average shares outstanding 66,758 66,985 66,459 66,720 Basic Earnings Per Share $0.70 $0.43 $1.32 $0.75 Diluted Earnings Per Share $0.70 $0.42 $1.32 $0.74 DIEBOLD, INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED (IN THOUSANDS) September 30, December 31, 2008 2007 ASSETS Current assets Cash and cash equivalents $212,784 $206,334 Short-term investments 117,467 104,976 Trade receivables, net 591,162 544,501 Inventories 571,684 533,619 Other current assets 273,780 241,102 Total current assets 1,766,877 1,630,532 Securities and other investments 80,618 75,227 Property, plant and equipment, net 205,811 220,056 Goodwill 449,596 465,484 Other assets 235,936 239,827 $2,738,838 $2,631,126 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Notes payable $12,743 $14,807 Accounts payable 197,008 170,632 Other current liabilities 565,832 565,199 Total current liabilities 775,583 750,638 Long-term notes payable 683,959 609,264 Long-term liabilities 159,684 156,390 Total shareholders' equity 1,119,612 1,114,834 $2,738,838 $2,631,126 DIEBOLD, INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED (IN THOUSANDS) Nine months ended September 30, 2008 2007 Cash flow from operating activities: Net income $87,525 $49,601 Adjustments to reconcile net income to cash provided by operating activities: Minority share of income 6,800 5,579 Depreciation and amortization 61,211 53,366 Share-based compensation 9,166 10,945 Excess tax benefits from share-based compensation - (867) Deferred income taxes 610 14,892 Impairment of asset 4,376 - Gain on sale of assets, net (32) (6,407) Cash provided (used) by changes in certain assets and liabilities: Trade receivables (67,311) 92,589 Inventories (53,161) (48,164) Prepaid expenses (6,297) (12,686) Other current assets (24,403) (11,134) Accounts payable 29,748 18,085 Deferred revenue (61,057) (51,500) Certain other assets and liabilities 74,671 (76,451) Net cash provided by operating activities 61,846 37,848 Cash flow from investing activities: Payments for acquisitions, net of cash acquired (3,733) (10,028) Net investment activity (30,874) 22,921 Proceeds from sale of fixed assets 29 7,594 Capital expenditures (32,637) (34,323) Increase in certain other assets (17,035) (22,725) Net cash used by investing activities (84,250) (36,561) Cash flow from financing activities: Dividends paid (49,917) (46,820) Net borrowings 74,522 (73,294) Distribution of affiliates' earnings to minority interest holder - (15,440) Excess tax benefits from share-based compensation - 867 Issuance of common shares - 8,323 Net cash provided (used) in financing activities 24,605 (126,364) Effect of exchange rate changes on cash 4,249 12,859 Increase (Decrease) in cash and cash equivalents 6,450 (112,218) Cash and cash equivalents at the beginning of the period 206,334 253,968 Cash and cash equivalents at the end of the period $212,784 $141,750
SOURCE Diebold, Incorporated