FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2009
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-4879
Diebold, Incorporated
(Exact name of registrant as specified in its charter)
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Ohio
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34-0183970 |
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(State or other jurisdiction of incorporation or organization)
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(IRS Employer Identification Number) |
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5995 Mayfair Road, PO Box 3077, North Canton, Ohio
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44720-8077 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (330) 490-4000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ
No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ |
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Accelerated filer o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o
No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
Common Stock, $1.25 Par Value 66,248,140 shares as of May 1, 2009
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
INDEX
2
PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
DIEBOLD, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
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March 31, |
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December 31, |
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2009 |
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2008 |
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(Unaudited) |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
221,754 |
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$ |
241,436 |
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Short-term investments |
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103,515 |
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121,387 |
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Trade receivables, less allowances
for doubtful accounts of $23,731
and $25,060, respectively |
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434,156 |
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447,079 |
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Inventories |
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539,463 |
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540,971 |
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Deferred income taxes |
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96,126 |
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95,086 |
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Prepaid expenses |
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45,711 |
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42,909 |
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Other current assets |
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124,836 |
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125,250 |
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Total current assets |
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1,565,561 |
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1,614,118 |
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Securities and other investments |
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70,428 |
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70,914 |
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Property, plant and equipment, at cost |
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581,537 |
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579,951 |
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Less accumulated depreciation and
amortization |
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382,309 |
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376,357 |
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Property, plant and equipment, net |
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199,228 |
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203,594 |
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Goodwill |
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400,942 |
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408,303 |
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Other assets |
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249,273 |
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241,007 |
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Total assets |
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$ |
2,485,432 |
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$ |
2,537,936 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities |
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Notes payable |
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$ |
12,610 |
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$ |
10,596 |
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Accounts payable |
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157,532 |
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195,483 |
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Deferred revenue |
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239,991 |
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195,164 |
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Other current liabilities |
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321,267 |
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334,154 |
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Total current liabilities |
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731,400 |
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735,397 |
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Notes payable long term |
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584,203 |
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594,588 |
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Pensions and other benefits |
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119,759 |
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131,792 |
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Postretirement and other benefits |
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31,914 |
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32,857 |
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Deferred income taxes |
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34,964 |
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35,307 |
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Other long-term liabilities |
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44,354 |
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43,737 |
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Commitments and contingencies |
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Shareholders equity |
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Diebold, Incorporated shareholders equity |
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Preferred shares, no par value,
1,000,000 authorized shares, none
issued |
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Common shares, 125,000,000
authorized
shares, 75,991,964 and 75,801,434
issued shares, 66,232,141
and 66,114,560 outstanding
shares, respectively |
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94,990 |
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94,752 |
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Additional capital |
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281,266 |
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278,135 |
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Retained earnings |
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1,039,175 |
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1,054,873 |
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Treasury shares, at cost
(9,759,823
and 9,686,874 shares, respectively) |
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(410,001 |
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(408,235 |
) |
Accumulated other comprehensive
loss |
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(87,092 |
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(72,924 |
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Total Diebold,
Incorporated
shareholders equity |
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918,338 |
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946,601 |
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Noncontrolling interests |
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20,500 |
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17,657 |
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Total shareholders equity |
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938,838 |
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964,258 |
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Total liabilities and shareholders equity |
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$ |
2,485,432 |
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$ |
2,537,936 |
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See accompanying Notes to condensed consolidated financial statements.
3
DIEBOLD, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
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Three months ended |
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March 31, |
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2009 |
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2008 |
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Net sales |
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Products |
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$ |
301,533 |
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$ |
308,479 |
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Services |
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361,617 |
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383,429 |
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663,150 |
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691,908 |
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Cost of sales |
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Products |
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228,324 |
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219,592 |
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Services |
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282,790 |
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299,754 |
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511,114 |
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519,346 |
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Gross profit |
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152,036 |
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172,562 |
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Selling and administrative expense |
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97,291 |
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127,009 |
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Research, development and engineering expense |
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16,471 |
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19,141 |
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Impairment of assets |
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4,376 |
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113,762 |
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150,526 |
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Operating profit |
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38,274 |
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22,036 |
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Other income (expense) |
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Investment income |
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5,826 |
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6,529 |
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Interest expense |
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(9,958 |
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(10,788 |
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Miscellaneous, net |
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(25,543 |
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4,028 |
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Income from continuing operations before taxes |
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8,599 |
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21,805 |
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Taxes on income |
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2,136 |
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5,664 |
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Income from continuing operations |
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6,463 |
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16,141 |
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Loss from discontinued operations, net of tax |
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(2,706 |
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(608 |
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Net income |
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3,757 |
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15,533 |
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Less: Net income attributable to noncontrolling interests |
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(2,109 |
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(1,738 |
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Net income attributable to Diebold, Incorporated |
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$ |
1,648 |
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$ |
13,795 |
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Basic weighted-average shares outstanding |
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66,176 |
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66,018 |
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Diluted weighted-average shares outstanding |
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66,586 |
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66,306 |
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Basic earnings per share: |
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Net income from continuing operations |
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$ |
0.06 |
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$ |
0.22 |
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Loss from discontinued operations |
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(0.04 |
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(0.01 |
) |
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Net income attributable to Diebold, Incorporated |
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$ |
0.02 |
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$ |
0.21 |
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Diluted earnings per share: |
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Net income from continuing operations |
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$ |
0.06 |
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$ |
0.22 |
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Loss from discontinued operations |
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(0.04 |
) |
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(0.01 |
) |
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Net income attributable to Diebold, Incorporated |
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$ |
0.02 |
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$ |
0.21 |
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Amounts attributable to Diebold, Incorporated |
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Income from continuing operations, net of tax |
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$ |
4,354 |
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$ |
14,403 |
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Discontinued operations, net of tax |
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(2,706 |
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(608 |
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Net income attributable to Diebold, Incorporated |
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$ |
1,648 |
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$ |
13,795 |
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See accompanying Notes to condensed consolidated financial statements.
4
DIEBOLD, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
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Three months ended |
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March 31, |
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2009 |
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2008 |
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Cash flow from operating activities: |
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Net income attributable to Diebold, Incorporated |
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$ |
1,648 |
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$ |
13,795 |
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Adjustments to reconcile net income to cash provided by operating activities: |
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Loss from discontinued operations |
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2,706 |
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608 |
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Noncontrolling interests |
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2,109 |
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1,738 |
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Depreciation and amortization |
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18,973 |
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18,331 |
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Share-based compensation |
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2,924 |
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|
3,003 |
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Excess tax benefits from share-based compensation |
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(41 |
) |
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Deferred income taxes |
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(1,280 |
) |
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(552 |
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Impairment of asset |
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4,376 |
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Cash provided (used) by changes in certain assets and liabilities: |
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Trade receivables |
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4,920 |
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(30,483 |
) |
Inventories |
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(10,489 |
) |
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(16,061 |
) |
Prepaid expenses |
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(3,030 |
) |
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(1,938 |
) |
Other current assets |
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243 |
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(10,119 |
) |
Accounts payable |
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(31,921 |
) |
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(6,859 |
) |
Deferred revenue |
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48,347 |
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|
46,820 |
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Certain other assets and liabilities |
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(15,572 |
) |
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(4,093 |
) |
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Net cash provided by operating activities |
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19,537 |
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|
18,566 |
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Cash flow from investing activities: |
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Payments for acquisitions, net of cash acquired |
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(4,014 |
) |
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(3,733 |
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Proceeds from maturities of investments |
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74,070 |
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|
84,226 |
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Payments for purchases of investments |
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(59,803 |
) |
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(100,994 |
) |
Capital expenditures |
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(12,544 |
) |
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(11,168 |
) |
Increase in certain other assets |
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(7,053 |
) |
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(6,774 |
) |
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Net cash used by investing activities |
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(9,344 |
) |
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(38,443 |
) |
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Cash flow from financing activities: |
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Dividends paid |
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(17,346 |
) |
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(16,572 |
) |
Notes payable borrowings |
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123,573 |
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|
121,171 |
|
Notes payable repayments |
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(131,592 |
) |
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(150,245 |
) |
Distribution of affiliates earnings to noncontrolling interest holder |
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(467 |
) |
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Excess tax benefits from share-based compensation |
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41 |
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Net cash used by financing activities |
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(25,791 |
) |
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(45,646 |
) |
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Effect of exchange rate changes on cash |
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(4,084 |
) |
|
|
1,204 |
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|
Decrease in cash and cash equivalents |
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|
(19,682 |
) |
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|
(64,319 |
) |
Cash and cash equivalents at the beginning of the period |
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|
241,436 |
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|
|
206,334 |
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Cash and cash equivalents at the end of the period |
|
$ |
221,754 |
|
|
$ |
142,015 |
|
|
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|
See accompanying Notes to condensed consolidated financial statements
5
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of MARCH 31, 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share amounts)
NOTE 1: CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of Diebold, Incorporated and
its subsidiaries (collectively, the Company) have been prepared in accordance with the instructions
to Form 10-Q and therefore do not include all information and footnotes necessary for a fair
presentation of financial position, results of operations and cash flows in conformity with U.S.
generally accepted accounting principles (GAAP); however, such information reflects all adjustments
(consisting solely of normal recurring adjustments), which are, in the opinion of management,
necessary for a fair statement of the results for the interim periods.
The condensed consolidated financial statements should be read in conjunction with the consolidated
financial statements and Notes thereto together with managements discussion and analysis of
financial condition and results of operations contained in the Companys annual report on Form 10-K
for the year ended December 31, 2008. In the opinion of management, the accompanying condensed
consolidated financial statements reflect all adjustments of a normal recurring nature considered
necessary to fairly state the financial position of the Company at March 31, 2009 and December 31,
2008, the results of its operations for the three-month periods ended March 31, 2009 and March 31,
2008, and its cash flows for the three-month periods ended March 31, 2009 and March 31, 2008.
In addition, some of the Companys statements in this quarterly report on Form 10-Q may be
considered forward-looking and involve risks and uncertainties that could significantly impact
expected results. The results of operations for the three-month period ended March 31, 2009 are not
necessarily indicative of results to be expected for the full year.
The Company has reclassified the presentation of certain prior-year information to conform to the
current presentation.
On January 1, 2009, the Company adopted the Financial Accounting Standards Board Staff Position
(FSP) Emerging Task Force (EITF) No. 03-6-1, Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities. Under the FSP, unvested share-based payment
awards that contain rights to receive nonforfeitable dividends (whether paid or unpaid) are
participating securities, and should be included in the two-class method of computing earnings per
share. The adoption of FSP EITF No. 03-6-1 did not have a material impact on the Companys
condensed consolidated financial statements.
On January 1, 2009, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 162
(SFAS 162), The Hierarchy of Generally Accepted Accounting Principles. SFAS 162 identifies the
sources of accounting principles used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting principles (the US
GAAP hierarchy). The adoption of SFAS 162 did not have a material effect on the Companys condensed
consolidated financial statements.
On January 1, 2009, the Company adopted FSP No. 142-3, Determination of the Useful Life of
Intangible Assets, which amends the list of factors an entity should consider in developing renewal
or extension assumptions used in determining the useful life of recognized intangible assets under
SFAS No. 142, Goodwill and Other Intangible Assets. The position applies to intangible assets that
are acquired individually or with a group of other assets and both intangible assets acquired in
business combinations and asset acquisitions. The adoption of FSP No. 142-3 did not have a
material impact on the Companys condensed consolidated financial statements.
On January 1, 2009, the Company adopted SFAS No. 161 (SFAS 161), Disclosures about Derivatives
Instruments and Hedging Activities an amendment of FASB Statement No. 133. SFAS 161 applies to
all entities and requires specified disclosures for derivative instruments and related hedged items
accounted for under SFAS 133, Accounting for Derivative Instruments and Hedging Activities
(SFAS 133). SFAS 161 amends and expands SFAS 133s existing disclosure requirements to provide
financial statement users with a better understanding of how and why an entity uses derivatives,
how derivative instruments and related hedged items are accounted for under SFAS 133, and how
derivative instruments and related hedged items affect an entitys financial position, financial
performance and cash flows. The adoption of SFAS 161 did not have a material impact on the
Companys condensed consolidated financial statements; however, the Company provided additional
disclosure as required by SFAS 161 in Note 9.
On January 1, 2009, the Company adopted SFAS No. 160 (SFAS 160), Noncontrolling Interests in
Consolidated Financial Statements an Amendment of ARB 51. SFAS 160 applies to all entities that
have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a
subsidiary. Under SFAS 160, noncontrolling interests in a subsidiary that are currently recorded
within mezzanine (or temporary) equity or as a liability will be included in the equity section
of the balance sheet. In
6
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of MARCH 31, 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(in thousands, except per share amounts)
addition, this statement requires expanded disclosures in the financial statements that clearly
identify and distinguish between the interests of the parents owners and the interest of the
non-controlling owners of the subsidiary. The adoption of SFAS 160 did not have a material impact
on the Companys condensed consolidated financial statements. However, as a result of the adoption
of this standard, the condensed consolidated financial statements are reclassified to report
noncontrolling interests as required by SFAS 160.
On January 1, 2009, the Company adopted SFAS 141
(revised 2007) (SFAS 141(R)), Business Combinations, which amends the accounting and reporting requirements for business combinations.
SFAS 141(R) places greater reliance on fair value information, requiring more acquired assets and
liabilities to be measured at fair value as of the acquisition date. The pronouncement also
requires acquisition-related transaction and restructuring costs to be expensed rather than treated
as a capitalized cost of acquisition. The adoption of SFAS 141(R) did not have a material impact on
the Companys condensed consolidated financial statements.
On
January 1, 2009, the Company adopted the FSP 141(R)-1 (SFAS
141(R)-1), Accounting for Assets Aquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies, which amends and
clarifies the initial recognition and measurement, subsequent
measurement and accounting, and related disclosures of assets and
liabilities arising from contingencies in a business combination under
SFAS 141(R), Business Combinations. The adoption of SFAS
141(R)-1 had no impact on the Companys condensed consolidated
financial statements.
NOTE 2: EARNINGS PER SHARE
Basic and diluted earnings per share are calculated in accordance with Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings Per Share. On January 1, 2009, the Company adopted
Financial Accounting Standards Board Staff Position (FSP) Emerging Issues Task Force (EITF) No.
03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities. Under this FSP, unvested share-based payment awards that contain rights
to receive non-forfeitable dividends are considered participating securities and the two-class
method of computing earnings per share is required for all periods presented.
The Companys participating securities include restricted stock units, deferred shares and shares
that were vested but deferred by the employee. The Company has calculated basic and diluted
earnings per share under both the treasury stock method and the two-class method. For the three
months ended March 31, 2009 and 2008, there was no impact in the per share amounts calculated under
the two methods, therefore the treasury stock method continues to be disclosed below.
7
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of MARCH 31, 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(in thousands, except per share amounts)
The following data provides the amounts used in computing earnings per share under the treasury
stock method and the effect on the weighted-average number of shares of dilutive potential common
stock:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
Numerator: |
|
|
|
|
|
|
|
|
Income used in basic and diluted earnings per share: |
|
|
|
|
|
|
|
|
Income from continuing operations net of tax attributable to Diebold, Incorporated |
|
$ |
4,354 |
|
|
$ |
14,403 |
|
Loss from discontinued operations net of tax |
|
|
(2,706 |
) |
|
|
(608 |
) |
|
|
|
|
|
|
|
Net income attributable to Diebold, Incorporated |
|
|
1,648 |
|
|
|
13,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Weighted-average number of common shares used in basic earnings per share |
|
|
66,176 |
|
|
|
66,018 |
|
Effect of dilutive shares |
|
|
410 |
|
|
|
288 |
|
|
|
|
|
|
|
|
Weighted-average number of common shares and dilutive potential common shares
used in diluted earnings per share |
|
|
66,586 |
|
|
|
66,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
Income from continuing operations net of tax attributable to Diebold, Incorporated |
|
$ |
0.06 |
|
|
$ |
0.22 |
|
Loss from discontinued operations net of tax |
|
|
(0.04 |
) |
|
|
(0.01 |
) |
|
|
|
|
|
|
|
Net income attributable to Diebold, Incorporated |
|
$ |
0.02 |
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
Income from continuing operations net of tax attributable to Diebold, Incorporated |
|
$ |
0.06 |
|
|
$ |
0.22 |
|
Loss from discontinued operations net of tax |
|
|
(0.04 |
) |
|
|
(0.01 |
) |
|
|
|
|
|
|
|
Net income attributable to Diebold, Incorporated |
|
$ |
0.02 |
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive shares not used in calculating diluted weighted-average shares |
|
|
3,292 |
|
|
|
2,759 |
|
NOTE 3: OTHER COMPREHENSIVE (LOSS) INCOME
Items considered to be other comprehensive (loss) income include adjustments made for foreign
currency translation under SFAS 52, Foreign Currency Translation, pensions under SFAS 87, Employers Accounting for Pensions, and SFAS 158, Employers Accounting for Postretirement Benefits other than Pensions, and hedging activities
under SFAS 133, Accounting for Derivative Instruments and Hedging Activities.
Components of comprehensive (loss) income consist of the following:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
Net income |
|
$ |
3,757 |
|
|
$ |
15,533 |
|
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
Translation adjustment |
|
|
(14,006 |
) |
|
|
21,858 |
|
Realized and unrealized gain (loss) on hedges |
|
|
184 |
|
|
|
(2,391 |
) |
Pension adjustment |
|
|
855 |
|
|
|
328 |
|
|
|
|
|
|
|
|
Comprehensive (loss) income |
|
|
(9,210 |
) |
|
|
35,328 |
|
|
|
|
|
|
|
|
Less: comprehensive income attributable to noncontrolling interests |
|
$ |
3,310 |
|
|
$ |
2,590 |
|
|
|
|
|
|
|
|
Comprehensive (loss) income attributable to Diebold, Incorporated |
|
$ |
(12,520 |
) |
|
$ |
32,738 |
|
|
|
|
|
|
|
|
8
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of MARCH 31, 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(in thousands, except per share amounts)
The following table provides a reconciliation of total shareholders equity attributable to
Diebold, Incorporated and the noncontrolling interests for the three months ended March 31, 2009
and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Diebold, |
|
|
|
|
|
|
Total |
|
|
Incorporated |
|
|
Noncontrolling |
|
|
|
shareholders equity |
|
|
shareholders equity |
|
|
interests |
|
December 31, 2007 |
|
$ |
1,128,591 |
|
|
$ |
1,114,834 |
|
|
$ |
13,757 |
|
Adjustment to retained earnings (1) |
|
|
(3,971 |
) |
|
|
(3,971 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
15,533 |
|
|
|
13,795 |
|
|
|
1,738 |
|
Other comprehensive (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment |
|
|
21,858 |
|
|
|
21,006 |
|
|
|
852 |
|
Realized and unrealized loss on hedges |
|
|
(2,391 |
) |
|
|
(2,391 |
) |
|
|
|
|
Pension adjustment |
|
|
328 |
|
|
|
328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
35,328 |
|
|
|
32,738 |
|
|
|
2,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares |
|
|
267 |
|
|
|
267 |
|
|
|
|
|
Additional paid in capital |
|
|
9,329 |
|
|
|
9,329 |
|
|
|
|
|
Treasury stock |
|
|
(2,191 |
) |
|
|
(2,191 |
) |
|
|
|
|
Dividends declared |
|
|
(16,572 |
) |
|
|
(16,572 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
$ |
1,150,781 |
|
|
$ |
1,134,434 |
|
|
$ |
16,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
$ |
964,258 |
|
|
$ |
946,601 |
|
|
$ |
17,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
3,757 |
|
|
|
1,648 |
|
|
|
2,109 |
|
Other comprehensive (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment |
|
|
(14,006 |
) |
|
|
(15,207 |
) |
|
|
1,201 |
|
Realized and unrealized loss on hedges |
|
|
184 |
|
|
|
184 |
|
|
|
|
|
Pension adjustment |
|
|
855 |
|
|
|
855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income |
|
|
(9,210 |
) |
|
|
(12,520 |
) |
|
|
3,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares |
|
|
238 |
|
|
|
238 |
|
|
|
|
|
Additional paid in capital |
|
|
3,131 |
|
|
|
3,131 |
|
|
|
|
|
Treasury stock |
|
|
(1,766 |
) |
|
|
(1,766 |
) |
|
|
|
|
Dividends declared |
|
|
(17,813 |
) |
|
|
(17,346 |
) |
|
|
(467 |
) |
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
$ |
938,838 |
|
|
$ |
918,338 |
|
|
$ |
20,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Beginning retained earnings adjustment of $1,387 related to the remeasurement of pension plan
assets and benefit obligation in order to transition to a fiscal year-end measurement date in
accordance with SFAS No. 158 (SFAS 158), Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106 and 132(R).
Beginning retained earnings adjustment of $2,584 related to the Companys adoption of EITF
Issue No. 06-10, Accounting for Collateral Assignment Split-Dollar Life Insurance and EITF
Issue No. 06-4, Accounting for Deferred Compensation and Post Retirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements. |
NOTE 4: SHARE-BASED COMPENSATION
The Companys share-based compensation awards are accounted for in accordance with the requirements
of Statement of Financial Accounting Standards No. 123 (revised 2004) (SFAS 123(R)), Share-Based
Payment, which requires that all share-based payments to employees be recognized in the statement
of income based on their grant-date fair values during the period in which the employee is required
to provide services in exchange for the award.
Share-based compensation was recognized as a component of selling and administrative expenses.
Total share-based compensation expense for the three months ended March 31, 2009 and 2008 was
$2,924 and $3,003, respectively.
9
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of MARCH 31, 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(in thousands, except per share amounts)
Options outstanding and exercisable under the Companys 1991 Equity and Performance Incentive Plan
as of March 31, 2009, and
changes during the three months ended March 31, 2009, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of |
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Price |
|
|
Term |
|
|
Value (1) |
|
|
|
|
|
|
(per share) |
|
|
(in years) |
|
|
|
|
Outstanding at January 1, 2009 |
|
|
2,929 |
|
|
$ |
39.43 |
|
|
|
|
|
|
|
|
|
Options expired or forfeited |
|
|
(177 |
) |
|
|
35.51 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted |
|
|
437 |
|
|
|
24.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2009 |
|
|
3,189 |
|
|
$ |
37.64 |
|
|
|
6 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at March 31, 2009 |
|
|
2,218 |
|
|
$ |
40.87 |
|
|
|
4 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The aggregate intrinsic value represents the total pre-tax intrinsic
value (the difference between the closing price of the Companys
common shares on the last trading day of the first quarter of 2009 and
the exercise price, multiplied by the number of in-the-money
options) that would have been received by the option holders had all
option holders exercised their options on March 31, 2009. The amount
of aggregate intrinsic value will change based on the fair market
value of the Companys common shares. |
The following tables summarize information on unvested restricted stock units and performance
shares outstanding for the three month period ended March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
Number of |
|
|
Grant-Date |
|
RSUs: |
|
Shares |
|
|
Fair Value |
|
Unvested at January 1, 2009 |
|
|
389 |
|
|
$ |
38.36 |
|
Forfeited |
|
|
(5 |
) |
|
|
38.36 |
|
Vested |
|
|
(71 |
) |
|
|
39.43 |
|
Granted |
|
|
171 |
|
|
|
24.71 |
|
|
|
|
|
|
|
|
Unvested at March 31, 2009 |
|
|
484 |
|
|
$ |
33.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
Number of |
|
|
Grant-Date |
|
Performance Shares: |
|
Shares |
|
|
Fair Value |
|
Unvested at January 1, 2009 |
|
|
605 |
|
|
$ |
44.31 |
|
Forfeited |
|
|
(84 |
) |
|
|
48.83 |
|
Vested |
|
|
(110 |
) |
|
|
48.31 |
|
Granted |
|
|
306 |
|
|
|
29.25 |
|
|
|
|
|
|
|
|
Unvested at March 31, 2009 |
|
|
717 |
|
|
$ |
36.74 |
|
|
|
|
|
|
|
|
Unvested performance shares are based on a maximum potential payout. Actual shares granted at the
end of the performance period may be less than the maximum potential payout level depending on
achievement of performance share objectives.
At March 31, 2009, there were 38 deferred shares outstanding with a weighted-average grant-date
fair value of $42.24.
10
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of MARCH 31, 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(in thousands, except per share amounts)
NOTE 5: INCOME TAXES
The effective tax rate on continuing operations for the three months ended March 31, 2009 was 24.8
percent compared to 26.0 percent
for the same period in 2008. The decrease in the rate was
primarily due to discrete benefits recorded in the first quarter of 2009. The benefits would have
had an immaterial impact on the rate for the quarter but for the fact that pre-tax book income for
the first quarter of 2009 was significantly lower than the first quarter of 2008 as a result of the
$25,000 charge related to an agreement in principle with the U.S.
Securities and Exchange Commission (SEC) (refer to Note 10). Excluding the discrete items, the effective tax rate on
continuing operations for the three months ended March 31, 2009 and March 31, 2008 would have been
28.4 percent and 22.3 percent respectively. The increase in the rate excluding discrete items was
due largely to the $25,000 non-deductible charge.
This non-deductible charge will continue to negatively impact the tax
rate in future quarters during 2009.
NOTE 6: INVENTORIES
The Company primarily values inventories at the lower of cost or market applied on a first-in,
first-out (FIFO) basis, with the notable exceptions of Brazil
and Premier Election Solutions, Inc. that
value inventory using the average cost method, which approximates FIFO. At each reporting period,
the Company identifies and writes down its excess or obsolete inventory to its net realizable value
based on forecasted usage, orders 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.
Major classes of inventories are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
Finished goods |
|
$ |
268,320 |
|
|
$ |
276,439 |
|
Service parts |
|
|
142,087 |
|
|
|
144,742 |
|
Work in process |
|
|
64,329 |
|
|
|
54,752 |
|
Raw materials |
|
|
64,727 |
|
|
|
65,038 |
|
|
|
|
|
|
|
|
Total inventories |
|
$ |
539,463 |
|
|
$ |
540,971 |
|
|
|
|
|
|
|
|
NOTE 7: BENEFIT PLANS
Plans that cover salaried employees provide pension benefits based on the employees compensation
during the ten years before retirement. The Companys funding policy for salaried plans is to
contribute annually based on actuarial projections and applicable regulations. Plans covering
hourly employees and union members generally provide benefits of stated amounts for each year of
service. The Companys funding policy for hourly plans is to make at least the minimum annual
contributions required by applicable regulations. Employees of the Companys operations in
countries outside of the United States participate to varying degrees in local pension plans, which
in the aggregate are not significant.
In addition to providing pension benefits, the Company provides healthcare and life insurance
benefits (referred to as other benefits) for certain retired employees. Eligible employees may be
entitled to these benefits based upon years of service with the Company, age at retirement and
collective bargaining agreements. Currently, the Company has made no commitments to increase these
benefits for existing retirees or for employees who may become eligible for these benefits in the
future. There are no plan assets and the Company funds the benefits as the claims are paid.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
Pension Benefits |
|
|
Other Benefits |
|
Components of Net Periodic Benefit Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
2,726 |
|
|
$ |
2,460 |
|
|
$ |
|
|
|
$ |
1 |
|
Interest cost |
|
|
7,237 |
|
|
|
7,012 |
|
|
|
282 |
|
|
|
305 |
|
Expected return on plan assets |
|
|
(9,243 |
) |
|
|
(8,937 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
68 |
|
|
|
95 |
|
|
|
(129 |
) |
|
|
(129 |
) |
Recognized net actuarial loss |
|
|
806 |
|
|
|
255 |
|
|
|
110 |
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension benefit cost |
|
$ |
1,594 |
|
|
$ |
885 |
|
|
$ |
263 |
|
|
$ |
284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows
Previously, the Company disclosed expected payments related to the 2009 plan year of $14,812 to its
qualified and non-qualified
11
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of MARCH 31, 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(in thousands, except per share amounts)
pension plans and $1,993 to its other postretirement benefit plan.
There have been no significant changes to the 2009 plan year contribution amounts previously
disclosed. As of March 31, 2009 and 2008, contributions of $12,684 and $700 were made to the
qualified and non-qualified pension plans, respectively.
NOTE 8: GUARANTEES AND PRODUCT WARRANTIES
In connection with the construction of certain manufacturing facilities, the Company guaranteed
repayment of principal and interest on variable-rate industrial development revenue bonds by
obtaining letters of credit. The bonds were issued with a 20-year original term and are scheduled
to mature in 2017. At March 31, 2009, the carrying value of the
liability was $11,900 which approximated fair market value.
The Company provides its global operations guarantees and standby letters of credit through various
financial institutions to suppliers, regulatory agencies and insurance providers. If the Company is
not able to make payment, the suppliers, regulatory agencies and insurance providers may draw on
the pertinent bank. At March 31, 2009, the maximum future payment obligations related to these
various guarantees totaled $71,450, of which $19,528 represented standby letters of credit to
insurance providers. At March 31, 2008, the maximum future payment obligations relative to these
various guarantees totaled $65,550, of which $22,628 represented standby letters of credit to
insurance providers. There was no associated liability recorded for any guarantees as of March 31,
2009 and 2008.
The Company provides its customers a standard manufacturers warranty and records, at the time of
the sale, a corresponding estimated liability for potential warranty costs. Estimated future
obligations due to warranty claims are based upon historical factors such as labor rates, average
repair time, travel time, number of service calls per machine and cost of replacement parts.
Changes in the Companys warranty liability balance are illustrated in the following table:
|
|
|
|
|
|
|
|
|
Warranty liability |
|
2009 |
|
|
2008 |
|
Balance at January 1 |
|
$ |
43,009 |
|
|
$ |
26,494 |
|
Current period accruals |
|
|
14,489 |
|
|
|
10,696 |
|
Current period settlements |
|
|
(11,645 |
) |
|
|
(8,803 |
) |
|
|
|
|
|
|
|
Balance at March 31 |
|
$ |
45,853 |
|
|
$ |
28,387 |
|
|
|
|
|
|
|
|
NOTE 9: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company uses derivatives to mitigate the negative economic consequences associated with the
fluctuations in currencies and interest rates. Statement of Financial Accounting Standards No. 133,
(SFAS 133) Accounting for Derivative Instruments and Hedging Activities, requires that all
derivative instruments be recorded on the balance sheet at fair value and that the changes in the
fair value be recognized currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows derivative gains and losses to be reflected in the
income statement together with the hedged exposure, and requires that a company formally document,
designate and assess the effectiveness of transactions that receive hedge accounting treatment. The
Company does not enter into any speculative positions with regard to derivative instruments.
On January 1, 2009, the Company adopted Statement of Financial Accounting Standards No. 161 (SFAS
161), Disclosures about Derivatives Instruments and Hedging Activities an amendment of FASB
Statement No. 133. SFAS 161 amends and expands SFAS 133s existing disclosure requirements to
provide financial statement users with a better understanding of how and why an entity uses
derivatives, how derivative instruments and related hedged items are accounted for under SFAS 133,
and how derivative instruments and related hedged items affect an entitys financial position,
financial performance and cash flows.
The Company periodically evaluates its monetary asset and liability positions denominated in
foreign currencies. The impact of the Company and the Companys counterparties credit risk on the
fair value of the contracts is considered as well as the ability of each party to execute its
obligations under the contract. The Company uses investment grade financial counterparties in
these transactions and believes that the resulting credit risk under these hedging strategies is not significant.
FOREIGN EXCHANGE CONTRACTS
Non-Designated Hedges A substantial portion of the Companys operations and revenues are
international. As a result, changes in foreign exchange rates can create substantial foreign
exchange gains and losses from the revaluation of non-functional currency
12
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of MARCH 31, 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(in thousands, except per share amounts)
monetary assets and
liabilities. The Companys policy allows the use of foreign exchange forward contracts with
maturities of up to 24 months to mitigate the impact of currency fluctuations on those foreign
currency asset and liability balances. The Company elected not to apply hedge accounting to its
foreign exchange forward contracts under SFAS 133. Thus, derivative gains/losses offset revaluation
gains/losses in other income (expense). For the three months ended March 31, 2009, there were 269
non-designated foreign exchange contracts that settled. As of March 31, 2009, there were 61
non-designated foreign exchange contracts outstanding, primarily euro, British pound, Swiss franc
and Hungarian forint, totaling $574,339, which represents the absolute value of notional amounts.
Net Investment Hedges The Company has international subsidiaries with assets in excess of
liabilities that generate the risk of cumulative translation adjustments within other comprehensive
income. The Company uses derivatives to manage potential adverse changes in value of its net
investments in Brazil. The Companys policy is to selectively enter into foreign exchange forward
contracts with variable maturities documented as net investment hedges to offset certain net
investment exchange rate movements. The Company calculates each hedges effectiveness quarterly by
comparing the cumulative change in the forward contract to the cumulative change in the hedged
portion of the net investment on a forward to forward basis. Changes in value that are deemed
effective are accumulated in other comprehensive income where they will remain until they are
reclassified to income together with the gain or loss on the entire investment upon substantial
liquidation of the subsidiary. There was no ineffectiveness recorded in the first quarter ended
March 31, 2009. For the three months ended March 31, 2009, there were three net investment hedge
contracts that settled. As of March 31, 2009, there was one net investment hedge contract
outstanding, in Brazilian real, with a notional amount of $9,373.
INTEREST RATE CONTRACTS
Cash Flow Hedges The Company has variable rate debt and is subject to fluctuations in interest
related cash flows due to changes in market interest rates. The Companys policy allows derivative
instruments designated as cash flow hedges which fix a portion of future variable-rate interest
expense. The Company has executed two pay-fixed receive-variable interest rate swaps, with a total
notional amount of $50,000, to hedge against changes in the London Interbank Offered Rate (LIBOR)
benchmark interest rate on a portion of the Companys LIBOR-based credit facility.
The Company calculates each hedges effectiveness quarterly by comparing the cumulative change in
the interest rate swaps to the cumulative change in hypothetical interest rate swaps with critical
terms that match the credit facility. Changes in value that are deemed effective are accumulated in
other comprehensive income and reclassified to interest expense when the hedged interest is
accrued. There was no ineffectiveness from over-performance of the interest rate swaps recorded in
interest expense in the first quarter ended March 31, 2009. To the extent that it becomes probable
that the Companys variable rate borrowings will not occur, the gains or losses on the related cash
flow hedges will be reclassified from other comprehensive income to interest expense.
In December 2005 and January 2006, the Company executed pre-issuance cash flow hedges by entering
into receive-variable and pay-fixed interest rate swaps, with a total notional amount of $200,000,
related to the anticipated debt issuance in March 2006. Amounts previously recorded in other
comprehensive income related to the pre-issuance cash flow hedges will continue to be reclassified
to income on a straight-line basis through February 2016.
13
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of MARCH 31, 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(in thousands, except per share amounts)
The following table summarizes the fair value of derivative instruments designated and not
designated as hedging instruments under SFAS 133 and their respective balance sheet location as of
March 31, 2009.
|
|
|
|
|
|
|
|
|
Balance sheet location |
|
Fair value |
|
Derivatives designated as hedging instruments |
|
|
|
|
|
|
|
Liability derivatives: |
|
|
|
|
|
|
Foreign exchange contracts |
|
Other current liabilities |
|
$ |
(294 |
) |
Interest rate contracts |
|
Other current liabilities |
|
|
(1,758 |
) |
Interest rate contracts |
|
Other long-term liabilities |
|
|
(3,561 |
) |
|
|
|
|
|
|
Total liability derivatives |
|
|
|
$ |
(5,613 |
) |
|
|
|
|
|
|
|
Total hedging instruments |
|
|
|
$ |
(5,613 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset derivatives: |
|
|
|
|
|
|
Foreign exchange contracts |
|
Other current assets |
|
$ |
7,338 |
|
Foreign exchange contracts |
|
Other current liabilities |
|
|
460 |
|
|
|
|
|
|
|
Total asset derivatives |
|
|
|
$ |
7,798 |
|
|
|
|
|
|
|
|
Liability derivatives: |
|
|
|
|
|
|
Foreign exchange contracts |
|
Other current assets |
|
$ |
(874 |
) |
Foreign exchange contracts |
|
Other current liabilities |
|
|
(3,487 |
) |
|
|
|
|
|
|
Total liability derivatives |
|
|
|
$ |
(4,361 |
) |
|
|
|
|
|
|
|
Total derivatives not designated |
|
|
|
$ |
3,437 |
|
|
|
|
|
|
|
|
Total derivatives |
|
|
|
$ |
(2,176 |
) |
|
|
|
|
|
|
The balance sheet location noted above represents the balance sheet line item where
the respective contract types are reported using a net basis due to master netting
agreements with counterparties. However, the asset and liability categories noted
above represent the Companys derivative positions on a gross contract by contract
basis.
The
following table summarizes the impact of derivative instruments
included in comprehensive income (loss)
(pre-tax) for the three months ended March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain (loss) |
|
|
|
|
|
|
Amount of gain (loss) |
|
|
|
|
|
|
Balance |
|
|
recognized in OCI |
|
|
Income statement |
|
|
reclassified from accumulated |
|
|
Balance |
|
Hedging Relationship |
|
January 1, 2009 |
|
|
(effective portion) |
|
|
location |
|
|
OCI (effective portion) |
|
|
March 31, 2009 |
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
(7,516 |
) |
|
$ |
(383 |
) |
|
N/A |
|
|
$ |
|
|
|
$ |
(7,899 |
) |
Interest rate contracts |
|
|
(2,877 |
) |
|
|
(91 |
) |
|
Interest expense |
|
|
275 |
|
|
|
(2,693 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(10,393 |
) |
|
$ |
(474 |
) |
|
|
|
|
|
$ |
275 |
|
|
$ |
(10,592 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The company anticipates reclassifying $1,429 from other comprehensive income to interest expense
within the next 12 months.
14
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of MARCH 31, 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(in thousands, except per share amounts)
The following table summarizes the impact of non-designative derivative instruments on income for
the three months ended March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
Income statement |
|
|
Amount of gain (loss) |
|
Hedging Relationship |
|
location |
|
|
recognized in income |
|
|
|
|
|
Foreign exchange contracts |
|
Interest expense |
|
$ |
(3,491 |
) |
Foreign exchange contracts |
|
Miscellaneous, net |
|
|
8,792 |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
5,301 |
|
|
|
|
|
|
|
|
|
NOTE
10: RESTRUCTURING AND OTHER CHARGES
The following table summarizes the Companys restructuring charges by plan for the three months
ended March 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
DCM Plan |
|
$ |
482 |
|
|
$ |
886 |
|
Germany Plan |
|
|
40 |
|
|
|
|
|
RIF Plan |
|
|
887 |
|
|
|
2,795 |
|
Newark Plan |
|
|
946 |
|
|
|
|
|
Other |
|
|
2,101 |
|
|
|
9 |
|
|
|
|
|
|
|
|
Total |
|
$ |
4,456 |
|
|
$ |
3,690 |
|
|
|
|
|
|
|
|
Diebold Cassis Manufacturing (DCM) Plan
During the first quarter of 2006, the Company announced a plan (DCM Plan) to close its production
facility in Cassis, France in an effort to optimize its global manufacturing operations. As of
March 31, 2009, the Company anticipates remaining total costs related to the closure of this
facility to be approximately $942. For the three months ended March 31, 2009, the Company incurred
$468 through product cost of sales and $14 through selling and
administrative expense. The accrual balance
as of March 31, 2009 was immaterial to the Company.
15
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of MARCH 31, 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(in thousands, except per share amounts)
There were no restructuring expenses related to the Companys Diebold Election Systems (ES) & Other
operating segment during the three months ended March 31, 2009 for the DCM Plan. Restructuring
expenses for the DCM Plan are presented for Diebold North America
(DNA) and Diebold International (DI) operating segments in the following table:
|
|
|
|
|
|
|
|
|
|
|
DNA |
|
|
DI |
|
Total amount expected to be incurred |
|
|
|
|
|
|
|
|
Employee severance costs |
|
$ |
|
|
|
$ |
19,068 |
|
Other (1) |
|
|
886 |
|
|
|
11,132 |
|
|
|
|
|
|
|
|
Total expected costs |
|
$ |
886 |
|
|
$ |
30,200 |
|
|
|
|
|
|
|
|
Gain on sale of building |
|
|
|
|
|
|
(6,438 |
) |
|
|
|
|
|
|
|
Total net expected costs |
|
$ |
886 |
|
|
$ |
23,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount incurred during the three-months ended March 31, 2009 |
|
|
|
|
|
|
|
|
Employee severance costs |
|
$ |
|
|
|
$ |
358 |
|
Other (1) |
|
|
|
|
|
|
124 |
|
|
|
|
|
|
|
|
Total costs |
|
$ |
|
|
|
$ |
482 |
|
|
|
|
|
|
|
|
|
Amount incurred to date under the plan |
|
|
|
|
|
|
|
|
Employee severance costs |
|
$ |
|
|
|
$ |
18,882 |
|
Other (1) |
|
|
886 |
|
|
|
10,376 |
|
|
|
|
|
|
|
|
Total costs incurred to date |
|
$ |
886 |
|
|
$ |
29,258 |
|
|
|
|
|
|
|
|
Gain on sale of building |
|
|
|
|
|
|
(6,438 |
) |
|
|
|
|
|
|
|
Total net costs incurred to date |
|
$ |
886 |
|
|
$ |
22,820 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other costs include legal and contract termination fees, asset
impairment costs, and costs to transfer usable inventory and
equipment. |
Germany Plan
During the third quarter of 2007, the Company announced a plan (Germany Plan) to downsize its
operations in Germany in an effort to remove excess capacity. During the first quarter of 2008, the
plan was modified to initiate a full closure of operations in Germany in light of further declines
in sales opportunities resulting from a fully mature market. For the three months ended March 31,
2009, the Company incurred total restructuring charges of $40 mostly through selling and
administrative expense. As of March 31, 2009, the Company anticipates remaining total costs to be
approximately $342. The accrual balance as of March 31, 2009 was immaterial to the Company.
There were no restructuring expenses related to the Companys ES & Other operating segment during
the three months ended March 31, 2009 for the Germany Plan. Restructuring expenses for the Germany
Plan are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
DNA |
|
|
DI |
|
Total amount expected to be incurred |
|
|
|
|
|
|
|
|
Employee severance costs |
|
$ |
|
|
|
$ |
3,798 |
|
Other (1) |
|
|
466 |
|
|
|
5,366 |
|
|
|
|
|
|
|
|
Total expected Costs |
|
$ |
466 |
|
|
$ |
9,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount incurred during the three-months ended March 31, 2009 |
|
|
|
|
|
|
|
|
Other (1) |
|
|
|
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount incurred to date under the plan |
|
|
|
|
|
|
|
|
Employee severance costs |
|
$ |
|
|
|
$ |
3,657 |
|
Other (1) |
|
|
466 |
|
|
|
5,165 |
|
|
|
|
|
|
|
|
Total costs incurred to date |
|
$ |
466 |
|
|
$ |
8,822 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other costs include consulting and legal fees, contract termination fees, penalties and asset impairment costs. |
16
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of MARCH 31, 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(in thousands, except per share amounts)
Reduction-In-Force (RIF) Plan
During the first quarter of 2008, the Company announced a plan to reduce its global workforce (RIF
Plan), including consolidation of certain international facilities, in an effort to optimize
overall operational performance. As of March 31, 2009, the Company anticipates remaining total
costs of approximately $1,315 to be incurred through the end of the third quarter of 2009. For the
three months ended March 31, 2009 the company incurred total restructuring charges of $887: $57
through product cost of sales, $410 through service cost of sales and $420 through selling and
administrative. Restructuring expenses for the RIF Plan are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DNA |
|
|
DI |
|
|
ES & Other |
|
Total amount expected to be incurred |
|
|
|
|
|
|
|
|
|
|
|
|
Employee severance costs |
|
$ |
5,365 |
|
|
$ |
14,843 |
|
|
$ |
663 |
|
Other (1) |
|
|
|
|
|
|
2,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expected costs |
|
$ |
5,365 |
|
|
$ |
17,396 |
|
|
$ |
663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount incurred during the three-months ended March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Employee severance costs |
|
$ |
348 |
|
|
$ |
539 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount incurred to date under the plan |
|
|
|
|
|
|
|
|
|
|
|
|
Employee severance costs |
|
$ |
4,964 |
|
|
$ |
13,929 |
|
|
$ |
663 |
|
Other (1) |
|
|
|
|
|
|
2,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs incurred to date |
|
$ |
4,964 |
|
|
$ |
16,482 |
|
|
$ |
663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other costs include legal fees, contract termination fees and asset impairment costs. |
The restructuring accrual related to the RIF Plan is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance |
|
|
Liabilities |
|
|
Liabilities |
|
|
Balance |
|
|
|
January 1, 2009 |
|
|
Incurred |
|
|
Paid/Settled |
|
|
March 31, 2009 |
|
|
|
|
Employee severance costs |
|
$ |
7,705 |
|
|
$ |
887 |
|
|
$ |
2,879 |
|
|
$ |
5,713 |
|
Other |
|
|
1,982 |
|
|
|
|
|
|
|
|
|
|
|
1,982 |
|
|
|
|
Total |
|
$ |
9,687 |
|
|
$ |
887 |
|
|
$ |
2,879 |
|
|
$ |
7,695 |
|
|
|
|
Newark Plan
During the second quarter of 2008, the Company announced a plan (Newark Plan) to close its
manufacturing facility in Newark, Ohio as part of its continued focus on its strategic global
manufacturing realignment. As of March 31, 2009, the Company anticipates remaining total costs
related to the closure of this facility to be approximately $598. The Company anticipates the
closure of this facility to be substantially complete by the end of 2009. For the quarter ended
March 31, 2009, the Company incurred $946 through product cost of sales.
17
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of MARCH 31, 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(in thousands, except per share amounts)
There were
no restructuring expenses related to the Companys DI
and ES &
Other operating segments during the quarter ended March 31, 2009 for the Newark Plan. Restructuring
expenses for the Newark Plan are presented in the following table:
|
|
|
|
|
|
|
DNA |
|
Total amount expected to be incurred |
|
|
|
|
Employee severance costs |
|
$ |
1,011 |
|
Other (1) |
|
|
9,658 |
|
|
|
|
|
Total expected costs |
|
$ |
10,669 |
|
|
|
|
|
|
|
|
|
|
Amount incurred during the three-months ended March 31, 2009 |
|
|
|
|
Employee severance costs |
|
$ |
43 |
|
Other (1) |
|
|
903 |
|
|
|
|
|
Total costs |
|
$ |
946 |
|
|
|
|
|
|
|
|
|
|
Amount incurred to date under the plan |
|
|
|
|
Employee severance costs |
|
$ |
1,011 |
|
Other (1) |
|
|
9,060 |
|
|
|
|
|
Total costs incurred to date |
|
$ |
10,071 |
|
|
|
|
|
|
|
|
(1) |
|
Other costs include pension obligation, legal and professional fees, travel, training, asset movement and cost of facility. |
The restructuring accrual related to the Newark Plan is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance |
|
|
Liabilities |
|
|
Liabilities |
|
|
Balance |
|
|
|
January 1, 2009 |
|
|
Incurred |
|
|
Paid/Settled |
|
|
March 31, 2009 |
|
|
|
|
Employee severance costs |
|
$ |
602 |
|
|
$ |
43 |
|
|
$ |
292 |
|
|
$ |
353 |
|
Other |
|
|
6,735 |
|
|
|
903 |
|
|
|
903 |
|
|
|
6,735 |
|
|
|
|
Total |
|
$ |
7,337 |
|
|
$ |
946 |
|
|
$ |
1,195 |
|
|
$ |
7,088 |
|
|
|
|
Other Restructuring Charges
During the three months ended March 31, 2009, the Company incurred other restructuring charges of
$2,101: $64 through product cost of sales, $1,190 through service cost of sales and $847 through
selling and administrative. Of these charges, $412 was incurred in
the DNA
segment and $1,689 was incurred in the DI segment. The majority of other charges in the DI
segment were employee severance costs related to the sale of certain assets and liabilities in
Argentina.
Other Charges
Non-routine expenses of $16,328 and $8,715 impacted the first quarter of 2009 and 2008,
respectively. Non-routine expenses in the first quarter 2009 included $1,328 in legal and other
consultation fees recorded in selling and administrative expense related to government investigations and a $25,000
charge, recorded in miscellaneous net, related to an agreement
in principle with the staff of the SEC to settle civil charges
stemming from the staffs pending enforcement inquiry. The agreement in principle with the staff
of the SEC remains subject to the final approval of the SEC, and there can be no assurance that the
SEC will accept the terms of the settlement negotiated with the staff. In addition, first quarter
2009 selling and administrative expense benefited from a $10,000 expense recovery accrual from one of the Companys
director and officer (D&O) insurance carriers related to legal and other expenses incurred as part
of the government investigations. The Company continues to pursue reimbursement of the remaining
incurred legal and other expenditures with its other D&O insurance carriers.
Non-routine charges in the first quarter 2008 were primarily from legal, audit and consultation
fees related to the internal review of other accounting items, restatement of financial statements
and the SEC and U.S. Department of Justice (DOJ) investigations and other advisory fees. Also,
during the first quarter of 2008, the Company incurred an impairment charge of $4,376 related to
the write
18
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of MARCH 31, 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(in thousands, except per share amounts)
down of intangible assets from the 2004 acquisition of TFE Technology Holdings, a
maintenance provider of network and hardware service solutions to federal and state government
agencies and commercial firms.
NOTE 11: FAIR VALUE OF ASSETS AND LIABILITIES
Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157,
Fair Value Measurements (SFAS 157), for its financial assets and liabilities, as required. In
February 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. 157-2
which deferred the effective date of SFAS 157 for nonfinancial assets and liabilities except for
those recognized or disclosed on a recurring basis. SFAS 157 establishes a common definition for
fair value to be applied to U.S. GAAP guidance requiring the use of fair value, establishes a framework
for measuring fair value, and expands disclosure requirements about such fair value measurements.
The standard does not require any new fair value measurements, but rather applies to all other
accounting pronouncements that require or permit fair value measurements. The Company adopted SFAS
157-2 on January 1, 2009 with respect to non-financial assets and liabilities that are measured at
fair value. The adoption of SFAS 157-2 had no impact on the condensed consolidated financial
statements.
The hierarchy that prioritizes the inputs to valuation techniques used to measure fair value is
divided into three levels:
|
§ |
|
Level 1 Unadjusted quoted prices in active markets for identical assets or
liabilities. |
|
|
§ |
|
Level 2 Unadjusted quoted prices in active markets for similar assets or
liabilities, unadjusted quoted prices for identical or similar assets or liabilities in
markets that are not active or inputs, other than quoted prices in active markets, that are
observable either directly or indirectly. |
|
|
§ |
|
Level 3 Unobservable inputs for which there is little or no market data. |
The Company measures its financial assets and liabilities using one or more of the following three
valuation techniques outlined in SFAS 157:
|
§ |
|
Market approach Prices and other relevant information generated by market
transactions involving identical or comparable assets or liabilities. |
|
|
§ |
|
Cost approach Amount that would be required to replace the service capacity of
an asset (replacement cost). |
|
|
§ |
|
Income approach Techniques to convert future amounts to a single present
amount based upon market expectations. |
The Company has no financial assets or liabilities for which fair value was measured using Level 3
inputs. Assets and liabilities subject to fair value measurement are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Significant |
|
|
|
|
|
|
|
Active Markets |
|
|
Other |
|
|
|
|
|
|
|
for Identical |
|
|
Observable |
|
|
|
Fair Value as of |
|
|
Assets |
|
|
Inputs |
|
|
|
March 31, 2009 |
|
|
(Level 1) |
|
|
(Level 2) |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
$ |
103,515 |
|
|
$ |
103,515 |
|
|
$ |
|
|
Foreign exchange forward contracts |
|
|
6,464 |
|
|
|
|
|
|
|
6,464 |
|
Deferred compensation plan |
|
|
7,240 |
|
|
|
7,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
117,219 |
|
|
$ |
110,755 |
|
|
$ |
6,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts |
|
$ |
3,321 |
|
|
$ |
|
|
|
$ |
3,321 |
|
Interest rate swaps |
|
|
5,319 |
|
|
|
|
|
|
|
5,319 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,640 |
|
|
$ |
|
|
|
$ |
8,640 |
|
|
|
|
|
|
|
|
|
|
|
Short-Term Investments The Company has investments in certificates of deposit that are recorded at
cost, which approximates fair value due to their short-term nature and lack of volatility.
19
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of MARCH 31, 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(in thousands, except per share amounts)
Deferred Compensation Plan The fair value of the Companys deferred compensation plan is derived
from investments in a mix of money market, fixed income and equity funds managed by Vanguard.
Foreign Exchange Forward Contracts A substantial portion of the Companys operations and revenues
are international. As a result, changes in foreign exchange rates can create substantial foreign
exchange gains and losses from the revaluation of non-functional currency monetary assets and
liabilities. The foreign exchange contracts are valued using the market approach based on
observable market transactions of forward rates.
Interest Rate Swaps The Company has variable rate debt and is subject to fluctuations in interest
related cash flows due to changes in market interest rates. The Companys policy allows it to
periodically enter into derivative instruments designated as cash flow hedges to fix some portion
of future variable rate based interest expense. The Company has executed two pay-fixed
receive-variable plain vanilla interest rate swaps to hedge against changes in the LIBOR benchmark
interest rate on a portion of the Companys LIBOR- based credit facility. The fair value of the
swap is determined using the income approach and is calculated based on LIBOR rates at the
reporting date.
NOTE 12: SEGMENT INFORMATION
The Companys segments are comprised of its three main sales channels: DNA, DI and ES & Other.
These sales channels are evaluated based on revenue from customers and operating profit
contribution to the total corporation. The reconciliation between segment information and the
condensed consolidated financial statements is disclosed. Revenue summaries by geographic segment
and product and service solutions are also disclosed. All income and expense items below operating
profit are not allocated to the segments and are not disclosed.
The DNA segment sells and services financial and retail systems in the United States and Canada.
The DI segment sells and services financial and retail systems over the remainder of the globe. The
ES & Other segment includes the operating results of Premier Election Solutions, Inc. and the
voting and lottery related business in Brazil. Each of the sales channels buys the goods it sells
from the Companys manufacturing plants or through external suppliers. Intercompany sales between
legal entities are eliminated in consolidation and intersegment revenue is not significant. Each
year, intercompany pricing is agreed upon which drives sales channel operating profit contribution.
As permitted under Statement of Financial Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information, certain information not routinely used in the management
of these segments, information not allocated back to the segments or information that is
impractical to report is not shown. Items not allocated are as follows: interest income, interest
expense, noncontrolling interests, discontinued operations, income tax expense or benefit and other
non-current assets.
The following table presents the Companys revenue by reportable segment for the three-month
periods ended March 31, 2009 and 2008,
respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DNA |
|
DI |
|
ES & Other |
|
Total |
As of and for the three months ended March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer revenue |
|
$ |
355,683 |
|
|
$ |
300,741 |
|
|
$ |
6,726 |
|
|
$ |
663,150 |
|
Operating profit (loss) |
|
|
20,535 |
|
|
|
24,895 |
|
|
|
(7,156 |
) |
|
|
38,274 |
|
Capital expenditures |
|
|
6,574 |
|
|
|
5,734 |
|
|
|
236 |
|
|
|
12,544 |
|
Depreciation |
|
|
5,859 |
|
|
|
5,772 |
|
|
|
584 |
|
|
|
12,215 |
|
Property, plant and equipment, at cost |
|
|
431,876 |
|
|
|
135,916 |
|
|
|
13,745 |
|
|
|
581,537 |
|
Total assets |
|
|
1,233,463 |
|
|
|
1,175,690 |
|
|
|
76,279 |
|
|
|
2,485,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the three months ended March 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer revenue |
|
$ |
357,566 |
|
|
$ |
316,357 |
|
|
$ |
17,985 |
|
|
$ |
691,908 |
|
Operating profit (loss) |
|
|
14,139 |
|
|
|
9,934 |
|
|
|
(2,037 |
) |
|
|
22,036 |
|
Capital expenditures |
|
|
5,343 |
|
|
|
5,692 |
|
|
|
133 |
|
|
|
11,168 |
|
Depreciation |
|
|
6,220 |
|
|
|
4,885 |
|
|
|
853 |
|
|
|
11,958 |
|
Property, plant and equipment, at cost |
|
|
417,857 |
|
|
|
158,896 |
|
|
|
12,870 |
|
|
|
589,623 |
|
Total assets |
|
|
1,145,055 |
|
|
|
1,394,730 |
|
|
|
102,536 |
|
|
|
2,642,321 |
|
20
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of MARCH 31, 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(in thousands, except per share amounts)
The following table presents the Companys revenue by geographic region for the three-month periods
ended March 31, 2009 and 2008, respectively.
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
The Americas |
|
$ |
493,248 |
|
|
$ |
495,349 |
|
Asia Pacific |
|
|
98,937 |
|
|
$ |
108,200 |
|
Europe, Middle East and Africa |
|
|
70,965 |
|
|
|
88,359 |
|
|
|
|
|
|
|
|
Revenue from customers |
|
$ |
663,150 |
|
|
$ |
691,908 |
|
|
|
|
|
|
|
|
The following table presents the Companys revenue by product and service solution for the
three-month periods ended March 31, 2009 and 2008, respectively.
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
Financial self-service: |
|
|
|
|
|
|
|
|
Products |
|
$ |
239,962 |
|
|
$ |
229,126 |
|
Services |
|
|
258,840 |
|
|
|
264,353 |
|
|
|
|
|
|
|
|
Total financial self-service |
|
|
498,802 |
|
|
|
493,479 |
|
Security: |
|
|
|
|
|
|
|
|
Products |
|
|
58,450 |
|
|
|
70,363 |
|
Services |
|
|
99,172 |
|
|
|
110,081 |
|
|
|
|
|
|
|
|
Total security |
|
|
157,622 |
|
|
|
180,444 |
|
|
|
|
|
|
|
|
Total financial self-service & security |
|
|
656,424 |
|
|
|
673,923 |
|
Election systems: |
|
|
|
|
|
|
|
|
Products |
|
|
2,294 |
|
|
|
5,700 |
|
Services |
|
|
3,605 |
|
|
|
8,994 |
|
|
|
|
|
|
|
|
Total election systems |
|
|
5,899 |
|
|
|
14,694 |
|
Lottery systems |
|
|
827 |
|
|
|
3,291 |
|
|
|
|
|
|
|
|
Revenue from customers |
|
$ |
663,150 |
|
|
$ |
691,908 |
|
|
|
|
|
|
|
|
NOTE 13: DISCONTINUED OPERATIONS
During the fourth quarter of 2008, the Company decided to discontinue its enterprise security
operations in the Europe, Middle East & Africa region. Results of operations of this enterprise security business, are
included in loss from discontinued operations, net of tax of $2,706 and $608 respectively, in the
Companys condensed consolidated statements of income for the three-month periods ended March
31, 2009 and 2008. The Company does not anticipate incurring additional material charges
associated with this closure.
21
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of March 31, 2009
(Unaudited)
(In thousands, except per share amounts)
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Managements
discussion and analysis is provided as a supplement and should be read in conjunction with the condensed
consolidated financial statements and accompanying Notes that appear elsewhere in this quarterly
report.
Introduction
Diebold, Incorporated is a global leader in providing integrated self-service delivery and security
systems and services to the financial, retail, commercial and government markets. Founded in 1859,
and celebrating 150 years of innovation in 2009, the Company today has more than 16,000 employees
with representation in nearly 90 countries worldwide.
During the past three years, the Companys management continued to execute against its strategic
roadmap developed in 2006 to strengthen operations and build a strong foundation for future success
in its two core lines of business: financial self-service and security solutions. This roadmap was
built around five key priorities: increase customer loyalty; improve quality; strengthen the supply
chain; enhance communications and teamwork; and rebuild profitability. Looking to the remainder of
2009, management has positioned the Company to withstand the challenges of a very difficult global
economy. The turmoil in the financial industry, in particular, may take some time to subside, but
the Company is in a unique position to deliver value to its customers by enabling them to reduce
costs and improve efficiency. Also, the Company will continue focusing on remediation of its
material weaknesses in its internal controls. Management estimates the total cost for remediation
efforts to be approximately $3,600, which includes $2,900 of consultation fees and $700 of internal
costs, including software purchases.
During the first quarter, the Company continued to experience solid market demand in Asia Pacific,
Latin America, including Brazil, and within the national bank segment in the United States. Demand
in the U.S. regional bank segment weakened significantly along with severe economic weakness in
Russia and Eastern Europe. Specifically in Diebolds security business, demand is being affected
by weak new bank branch construction and delayed facility renovations in the United States. For
the first quarter of 2009, income from continuing operations attributable to Diebold was $4,354, or
$0.06 per share, down 70 percent and 73 percent, respectively, from the first quarter of 2008.
Total revenue during the quarter was $663,150, down 4 percent from the first quarter of 2008.
Given these developments, the Company has taken steps to accelerate its existing cost-reduction
initiatives as well as implement additional, near-term cost-savings actions. These additional
actions include implementing further headcount reductions through hiring restrictions, attrition
and job eliminations as well as further cuts in travel and other administrative and operating
expenses.
Vision and strategy
The Companys vision is, To be recognized as the essential partner in creating and implementing
ideas that optimize convenience, efficiency and security. This vision is the guiding principle
behind the Companys transformation of becoming a more services-oriented Company. Today, service
comprises more than 50 percent of the Companys revenue, and the Company expects that this
percentage will grow over time as the Companys integrated services business continues to gain
traction in the marketplace. For example, financial institutions are eager to reduce costs and
optimize management and productivity of their ATM channels and they are increasingly exploring
outsourced solutions. The Company remains uniquely positioned to provide the infrastructure
necessary to manage all aspects of an ATM network
hardware, software, maintenance, transaction processing, patch management and cash management
through its integrated product and services offerings.
Another area of focus within the financial self-service business is broadening the Companys
deposit automation solutions set, including check imaging, envelope-free currency acceptance,
teller automation, and payment and document imaging solutions. For example, check imaging is not only a
regulatory compliance imperative for financial institutions but a significant potential driver of
cost-savings. The Companys ImageWay® check-imaging solution fulfills an industry-wide
demand for cutting-edge technologies that enhance efficiencies. In 2008, the Company solidified its
competitive position in deposit automation technology with an increase in shipments of deposit
automation solutions by more than 50 percent from 2007 and expanded its solutions set with the
launch of a bulk check deposit capability. During the first quarter of 2009, the large banks in the
United States continued their brisk pace in deploying deposit automation. The Company has now
deployed its deposit automation solutions in all 50 states. Along these lines, the planned launch
of the Companys enhanced note acceptor this summer remains on schedule.
22
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of March 31, 2009
(Unaudited)
(In thousands, except per share amounts)
Within the security business, the Company is diversifying by expanding and enhancing service
offerings in its financial, government, commercial and retail markets. A critical area of focus is
bringing thought leadership to customers while becoming a long-term business partner in the key
growth areas of internet protocol security solutions, credential management, enterprise security
integration and expanded integrated solutions. One customer relationship that characterizes the
progress made in the government sector is the United States Postal Services contract to implement
a multi-site, technologically-advanced security program. This relationship underscores the
Companys commitment to elevate its presence and security integration capabilities beyond the
financial market, opening up new avenues of opportunity. As another example, the Company is in the
early phases of introducing an energy management solution that can control and monitor heating,
ventilation, air conditioning and lighting for its customers. This is another value-added service
that can help relieve customers of the every-day challenges in managing their facilities while also
reducing their costs and increasing environmental efficiency.
The focus during 2009 will be to continue to enhance and diversify the Companys offerings, realize
synergies where sensible and make prudent decisions taking swift action wherever necessary to
capture profitable growth opportunities. During the current global economic crisis, the Company
will focus on what it can control providing customers with the most innovative and highest
quality solutions and services, while maintaining an efficient cost structure.
The Company continues to face a variety of challenges and opportunities in responding to customer
needs within the election systems market. While the Company fully supports the subsidiary, Premier
Election Solutions, Inc., (PESI) it continues to pursue strategic alternatives to ownership of the subsidiary.
Cost savings initiatives
In 2006, the Company launched the SmartBusiness (SB) 100 initiative to deliver $100,000 in cost
savings by the end of 2008. This key milestone was achieved in November 2008 with significant
progress made in areas such as rationalization of product development, streamlining procurement,
realigning the Companys manufacturing footprint and improving logistics.
In September 2008, the Company announced a new goal to achieve an additional $100,000 in cost
savings called SB 200 with a goal of eliminating $70,000 by the middle of 2010 and the remainder to
be eliminated by the end of 2011. In 2009, in the face of this changing environment, the Company
is accelerating its cost-reduction initiatives with the goal to eliminate $35,000 by the end of
2009.
The Company is committed to making the strategic decisions that not only streamline operations, but
also enhance its ability to serve its customers. The Company remains confident in the ability to
continue to execute on cost-reduction initiatives, delivering solutions that help improve
customers businesses and creating shareholder value. Because of continued market weaknesses
during the first quarter 2009, the Company has taken steps to accelerate its existing
cost-reduction initiatives as well as implement additional, near-term cost-savings actions. These
additional actions include implementing further headcount reductions through hiring restrictions,
attrition and job eliminations representing an overall reduction of approximately 300 full-time
positions.
During the quarter, the Company incurred restructuring charges of $4,456 or $0.05 per share. The
majority of these charges were related to the sale of the Companys direct operation in Argentina
and severance costs from the previously announced 2008 reduction in the Companys global workforce.
And as previously disclosed, the Company closed its enterprise security operations in the Europe,
Middle East and Africa (EMEA) region during the fourth quarter
of 2008. As a result, the company
recorded a first quarter 2009 loss from discontinued operations of $2,706, net of tax. This
compares to a loss from discontinued operations of $608, net of tax, in the first quarter of 2008.
Non-routine expenses/income
Non-routine expenses of $16,328 or $0.28 per share and $8,715 or $0.10 per share impacted the first
quarter of 2009 and 2008, respectively. Non-routine expenses in the first quarter
of 2009 included
$1,328 in legal and other consultation fees recorded in selling and administrative expense related to government investigations and a $25,000
charge, recorded in miscellaneous, net, related to an agreement in principle with the staff of the
U.S. Securities and Exchange
Commission (SEC) to settle civil charges stemming from the staffs pending enforcement inquiry.
The agreement in principle with the staff of the SEC remains subject to the final approval of the
SEC, and there can be no assurance that the SEC will accept the terms of the settlement negotiated
with the staff. In addition, first quarter 2009 selling and administrative expense benefited from a $10,000
expense recovery accrual from one of the Companys director and officer (D&O) insurance carriers
related to legal and other expenses incurred as part of the government investigations. The Company
continues to pursue reimbursement of the remaining incurred legal and other expenditures with its
other D&O insurance carriers.
23
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of March 31, 2009
(Unaudited)
(In thousands, except per share amounts)
Non-routine
charges in the first quarter of 2008 were primarily from legal, audit and consultation
fees related to the internal review of other accounting items, restatement of financial statements
and the SEC and U.S. Department of Justice (DOJ) investigations and other advisory fees. Also,
during the first quarter of 2008, the Company incurred an impairment charge of $4,376 related to
the write down of intangible assets from the 2004 acquisition of TFE Technology Holdings, a
maintenance provider of network and hardware
service solutions to federal and state government agencies and commercial firms.
The following discussion of the Companys financial condition and results of operations provide
information that will assist in understanding the financial statements and the changes in certain
key items in those financial statements.
The business drivers of the Companys future performance include several factors that include, but
are not limited to:
|
|
|
timing of a self-service upgrade and/or replacement cycle in mature markets such as the
United States; |
|
|
|
|
high levels of deployment growth for new self-service products in emerging markets, such as
Asia Pacific; |
|
|
|
|
demand for new service offerings, including outsourcing or operating a network of ATMs; and |
|
|
|
|
demand beyond expectations for security products and services for the financial, retail and
government sectors. |
24
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of March 31, 2009
(Unaudited)
(In thousands, except per share amounts)
RESULTS OF OPERATIONS
The following table summarizes the results of our operations for the three-month periods ended
March 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Dollars |
|
|
Net sales |
|
|
Dollars |
|
|
Net sales |
|
Net sales |
|
$ |
663,150 |
|
|
|
100.0 |
|
|
$ |
691,908 |
|
|
|
100.0 |
|
Gross profit |
|
|
152,036 |
|
|
|
22.9 |
|
|
|
172,562 |
|
|
|
24.9 |
|
Operating expenses |
|
|
113,762 |
|
|
|
17.2 |
|
|
|
150,526 |
|
|
|
21.8 |
|
Operating profit |
|
|
38,274 |
|
|
|
5.8 |
|
|
|
22,036 |
|
|
|
3.2 |
|
Income from continuing operations |
|
|
6,463 |
|
|
|
1.0 |
|
|
|
16,141 |
|
|
|
2.3 |
|
Loss from discontinued operations net of tax |
|
|
(2,706 |
) |
|
|
(0.4 |
) |
|
|
(608 |
) |
|
|
(0.1 |
) |
Net income attributable to noncontrolling interests |
|
|
(2,109 |
) |
|
|
(0.3 |
) |
|
|
(1,738 |
) |
|
|
(0.3 |
) |
Net income attributable to Diebold, Incorporated |
|
|
1,648 |
|
|
|
0.2 |
|
|
|
13,795 |
|
|
|
2.0 |
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations |
|
$ |
0.06 |
|
|
|
N/A |
|
|
$ |
0.22 |
|
|
|
N/A |
|
Loss from discontinued operations |
|
|
(0.04 |
) |
|
|
N/A |
|
|
|
(0.01 |
) |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.02 |
|
|
|
N/A |
|
|
$ |
0.21 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter 2009 Comparisons with First Quarter 2008
Net Sales
The following table represents information regarding our net sales for the three-month periods
ended March 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
$ Change |
|
% Change |
Net sales |
|
$ |
663,150 |
|
|
$ |
691,908 |
|
|
$ |
(28,758 |
) |
|
|
(4.2 |
) |
The decrease in net sales included a net negative currency impact of approximately $41,855.
Financial self-service revenue in the first quarter of 2009 increased by $5,323 or 1.1 percent over
2008. There was strong growth in the Americas of 9.3 percent due to growth in the Brazilian and
U.S. geographies of 17.8 percent and 9.7 percent, respectively. The increase in Brazil resulted
from an increase in shipments offset by a negative currency impact of 38.8 percent. There were
offsetting decreases in financial self-service revenue within EMEA of 19.6 percent and Asia Pacific
of 5.8 percent, the majority of which was related to unfavorable currency impact. Security
solutions revenue decreased by $22,822 or 12.6 percent from the first quarter of 2008 due to
weakness in the U.S. banking segment which accounted for 82.6% of the decrease. Election systems
sales decreased $8,795 or 59.9 percent compared to 2008 due entirely to lower revenue in the
U.S.-based election systems business. The Brazilian lottery systems revenue of $827 was down
$2,464 from 2008.
Gross Profit
The following table represents information regarding our gross profit for the three-month periods
ended March 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
` |
|
Three months ended |
|
|
|
|
|
|
March 31, |
|
$ Change/ |
|
|
|
|
2009 |
|
2008 |
|
% Point Change |
|
% Change |
Gross profit |
|
$ |
152,036 |
|
|
$ |
172,562 |
|
|
$ |
(20,526 |
) |
|
|
(11.9 |
) |
Gross profit margin |
|
|
22.9 |
|
|
|
24.9 |
|
|
|
(2.0 |
) |
|
|
|
|
25
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of March 31, 2009
(Unaudited)
(In thousands, except per share amounts)
Product gross margin was 24.3 percent in 2009 compared to 28.8 percent in the same period of 2008.
Benefits realized from the cost savings initiatives in the first quarter of 2009 were more than
offset by unfavorable sales mix within North America and lower absorption. The unfavorable mix was
driven by a significant reduction in regional U.S. banking revenue and significantly higher
national account revenue. Additionally, product gross margin was adversely impacted by $1,536 of
restructuring charges in 2009 and $1,302 in 2008. Service gross margin for 2009 of 21.8 percent
was unchanged from 2008 as productivity and cost savings were offset by lower revenue and related
margins from PESI.
Operating Expenses
The following table represents information regarding our operating expenses for the three-month
periods ended March 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
Selling and administrative expense |
|
$ |
97,291 |
|
|
$ |
127,009 |
|
|
$ |
(29,718 |
) |
|
|
(23.4 |
) |
Research, development, and engineering expense |
|
|
16,471 |
|
|
|
19,141 |
|
|
|
(2,670 |
) |
|
|
(13.9 |
) |
Impairment of assets |
|
|
|
|
|
|
4,376 |
|
|
|
(4,376 |
) |
|
|
(100.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
113,762 |
|
|
$ |
150,526 |
|
|
$ |
(36,764 |
) |
|
|
(24.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expense was lower in 2009 due to approximately $3,000
of ongoing cost
reduction efforts, $7,387 of lower non-routine expenses,
approximately $7,000 from the strengthening of the
U.S. dollar, and a $10,000 reimbursement from one of the Companys D&O insurance carriers related
to legal and other expenses incurred as part of the government investigations. Non-routine
expenses included in 2009 were $1,328 compared to $8,715 in 2008. These non-routine expenses
consisted of legal, audit and consultation fees primarily related to the internal review of other
accounting items, restatement of financial statements and the ongoing SEC and DOJ investigations
and other advisory fees. Additionally, selling and administrative expense was adversely impacted
by $1,318 of restructuring charges in 2009 compared to $1,293 of restructuring charges in 2008.
Research, development, and engineering expense as a percent of net sales was 2.5 percent in 2009
and 2.8 percent in 2008. There were no restructuring charges included in research, development,
and engineering expense for 2009 as compared to $213 of restructuring charges in 2008. The Company
incurred a charge of $4,376 for the impairment of assets in the quarter ended March 31, 2008
related to the write down of intangible assets from the 2004 acquisition of TFE Technology
Holdings, a maintenance provider of network and hardware service solutions to federal and state
government agencies and commercial firms.
Operating Profit
The following table represents information regarding our operating profit for the three-month
periods ended March 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
March 31, |
|
$ Change/ |
|
|
|
|
2009 |
|
2008 |
|
% Point Change |
|
% Change |
Operating profit |
|
$ |
38,274 |
|
|
$ |
22,036 |
|
|
$ |
16,238 |
|
|
|
73.7 |
|
Operating profit margin |
|
|
5.8 |
|
|
|
3.2 |
|
|
|
2.6 |
|
|
|
|
|
The increase in operating profit resulted from lower operating expenses in 2009 due to ongoing cost
reduction efforts, lower non-routine expenses, strengthening of the U.S. dollar, and a $10,000
reimbursement from one of the Companys D&O insurance carriers related to legal and other expenses
incurred as part of the government investigations. These benefits were offset by lower gross
profit related to unfavorable product sales mix within North America, lower absorption, and a
decrease in service revenue.
Other Income (Expense)
The following table represents information regarding our other income (expense) for the three-month
periods ended March 31, 2009 and 2008:
26
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of March 31, 2009
(Unaudited)
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
March 31, |
|
|
$ Change/ |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Point Change |
|
|
% Change |
|
Investment income |
|
$ |
5,826 |
|
|
$ |
6,529 |
|
|
$ |
(703 |
) |
|
|
(10.8 |
) |
Interest expense |
|
|
(9,958 |
) |
|
|
(10,788 |
) |
|
|
830 |
|
|
|
(7.7 |
) |
Miscellaneous, net |
|
|
(25,543 |
) |
|
|
4,028 |
|
|
|
(29,571 |
) |
|
|
N/M |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
$ |
(29,675 |
) |
|
$ |
(231 |
) |
|
$ |
(29,444 |
) |
|
|
N/M |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of net sales |
|
|
(4.5 |
) |
|
|
|
|
|
|
(4.5 |
) |
|
|
|
|
The change in miscellaneous income/(expense) was due to recording a charge of $25,000
in the first quarter of 2009 as the Company reached an agreement in principle with the staff of the
SEC to settle the civil charges stemming from the staffs pending enforcement inquiry. In
addition, there was higher other income in 2008 due to a reduction in a reserve for a note that was
paid in full related to the 2005 sale of the Campus System business.
Income from Continuing Operations
The following table represents information regarding our income from continuing operations for the
three-month periods ended March 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
March 31, |
|
$ Change/ |
|
|
|
|
2009 |
|
2008 |
|
% Point Change |
|
% Change |
Income from continuing operations |
|
$ |
6,463 |
|
|
$ |
16,141 |
|
|
$ |
(9,678 |
) |
|
|
(60.0 |
) |
Percent of net sales |
|
|
1.0 |
|
|
|
2.3 |
|
|
|
(1.3 |
) |
|
|
|
|
Effective tax rate |
|
|
24.8 |
|
|
|
26.0 |
|
|
|
(1.2 |
) |
|
|
|
|
The decrease in net income from continuing operations was related to higher other expense and lower
gross profit partially offset by lower operating expenses.
The decrease in the effective tax rate was primarily due to discrete
benefits recorded in the first quarter of 2009. The rate for the
quarter was impacted by these benefits because pre-tax book income
for the first quarter of 2009 was significantly lower than the first
quarter of 2008. Excluding discrete items, the rates for the
three months ended March 31, 2009 and 2008 would have been 28.4
percent and 22.3 percent, respectively, an increase of 6.1 percentage
points. This increase in the rate was due largely to the $25,000
non-deductible charge related to an agreement in principle with the
SEC. This non-deductible charge will continue to negatively impact
the tax rate in future quarters during 2009.
Loss from Discontinued Operations
The following table represents information regarding our loss from discontinued operations for the
three-month periods ended March 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
% Point Change |
|
% Change |
Loss from discontinued operations, net of tax |
|
$ |
(2,706 |
) |
|
$ |
(608 |
) |
|
$ |
(2,098 |
) |
|
|
N/M |
|
Percent of net sales |
|
|
(0.4 |
) |
|
|
(0.1 |
) |
|
|
(0.3 |
) |
|
|
|
|
Discontinued operations in the EMEA based enterprise security business negatively impacted net
income. This business was not achieving an acceptable level of profitability and, therefore, the
operations were closed entirely.
Net Income attributable to Diebold, Incorporated
The following table represents information regarding our net income for the three-month periods
ended March 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
% Point Change |
|
% Change |
Net income attributable to Diebold, Incorporated |
|
$ |
1,648 |
|
|
$ |
13,795 |
|
|
$ |
(12,147 |
) |
|
|
(88.1 |
) |
Percent of net sales |
|
|
0.2 |
|
|
|
2.0 |
|
|
|
(1.8 |
) |
|
|
|
|
Based on the results from continuing and discontinued operations discussed above, the Company
reported net income of $1,648 and $13,795 for the three-months ended March 31, 2009 and 2008.
27
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of March 31, 2009
(Unaudited)
(In thousands, except per share amounts)
Segment Analysis and Operating Profit Summary
Diebold North America (DNA) net sales of $355,683 for the first quarter of 2009 decreased $1,883 or
0.5 percent from the first quarter of 2008 net sales of $357,566. The decrease in DNA net sales was
due to decreased revenue from the security solutions product and service offerings offset by
increased financial self-service revenue. Diebold International (DI) net sales of $300,741 for the
first quarter of 2009 decreased by $15,616 or 4.9 percent compared to the first quarter of 2008 net
sales of $316,357. The decrease in DI net sales was due to lower revenue in all geographic regions
except Brazil. Election Systems (ES) & Other net sales of $6,726 for the first quarter of 2009
decreased $11,259 or 62.6 percent from the first quarter of 2008 net sales of $17,985. The decrease
was due to lower U.S.-based election systems revenue of $8,795 and lower Brazilian lottery systems
revenue of $827.
DNA operating profit for the first quarter of 2009 increased by $6,396 or 45.2 percent compared to
the first quarter of 2008. Operating profit was favorably affected by the Companys ongoing cost
reduction efforts, lower non-routine expenses in 2009, and a charge of $4,376 for the impairment of
assets in the quarter ended March 31, 2008. These benefits were offset by lower absorption and
unfavorable mix related to a significant reduction in regional U.S. banking revenue and
significantly higher national account revenue. DI operating profit for the first quarter of 2009
increased by $14,961 as a result of lower operating expenses, moving from an operating profit of
$9,934 in the first quarter of 2008
to an operating profit of $24,895 in the first quarter of 2009.
Operating profit for ES & Other decreased by $5,119, moving
from an operating loss of $2,037 in the first quarter of 2008 to an operating loss of $7,156 in the
first quarter of 2009. The decrease resulted from lower revenue and profitability for PESI.
Refer to Note 12 to the condensed consolidated financial statements for further details of segment
revenue and operating profit.
LIQUIDITY AND CAPITAL RESOURCES
Capital resources are obtained from income retained in the business, issuance of the Companys
senior notes, borrowings under the committed and uncommitted credit facilities, long-term
industrial revenue bonds, and operating and capital leasing arrangements. Management expects that
the Companys capital resources will be sufficient to finance planned working capital needs,
investments in facilities or equipment, dividends and the purchase of the Companys common shares
for at least the next twelve months. Part of the Companys growth strategy is to pursue strategic
acquisitions. The Company has made acquisitions in the past and intends to make acquisitions in the
future. The Company intends to finance any future acquisitions with either cash provided from
operations, borrowings under available credit facilities, proceeds from debt or equity offerings
and/or the issuance of common shares.
The following table summarizes the results of our condensed consolidated statement of cash flows
for the three-month periods ended March 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
Net cash flow provided (used) by: |
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
19,537 |
|
|
$ |
18,566 |
|
Investing activities |
|
|
(9,344 |
) |
|
|
(38,443 |
) |
Financing activities |
|
|
(25,791 |
) |
|
|
(45,646 |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
|
(4,084 |
) |
|
|
1,204 |
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
$ |
(19,682 |
) |
|
$ |
(64,319 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities during the first quarter of 2009 increased by $971 or 5.2
percent from the first quarter of 2008. Cash flows from operating activities are generated mainly
from net income and controlling the components of working capital. The primary reasons for the
increase were the changes in working capital and other assets and
liabilities, offset by a decrease in net income. Trade receivables decreased by $4,920 in the first quarter of 2009 as compared with
an increase of $30,483 in first quarter
of 2008, with days sales outstanding improving to 52 days at March 31, 2009 from 62 days at
March 31, 2008. The decrease in trade receivables in the first quarter of 2009 was attributed to
lower revenue as compared to the first quarter of 2008 as well as improvement in cash collections.
The decrease in accounts payable was $31,921 in the first quarter of 2009 as compared with $6,859
in the first quarter of 2008 due to the timing of payments primarily in the Companys EMEA region.
Cash used by changes in certain assets and liabilities
of $15,579 in the first quarter of 2009 was
primarily due to the Companys contributions to its pension plan of
28
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of March 31, 2009
(Unaudited)
(In thousands, except per share amounts)
$12,684 in the first quarter of
2009 compared to contributions of $700 in the first quarter of 2008. The change of $10,362 in
other current assets was primarily related to decreases in international sales tax recoverable in
2009 compared to increases in 2008 due to changes in product sales levels.
Net cash used for investing activities was $9,344 in the three months ended March 31, 2009, a
decrease of $29,099 from the same period in 2008. The decrease was primarily due to the $31,035
net change in investments, moving from net payments for purchases of investments of $16,768 during
the first quarter of 2008 to net proceeds from maturities of investments of $14,267 during the
first quarter of 2009.
Net cash used by financing activities was $25,791 during the three months ended March 31, 2009,
compared with net cash used of $45,646 during the three months ended March 31, 2008. The decrease
was primarily due to a decrease in net notes payable repayments of $21,055.
In March 2006, the Company secured fixed-rate long-term financing of $300,000 through the issuance
of senior notes in order to take advantage of attractive long-term interest rates. The maturity
dates of the senior notes are staggered, with $75,000, $175,000 and $50,000 becoming due in 2013,
2016 and 2018, respectively.
At March 31, 2009, the Company had U.S. dollar denominated
senior notes outstanding of
$300,000, U.S. dollar denominated outstanding bank credit lines approximating $212,439, euro
denominated outstanding bank credit lines approximating 55,998 (translated at $74,203) and Indian
rupee denominated outstanding bank credit lines approximating 515,957 (translated at $10,171). As
of March 31, 2009, an additional $214,562 was available under committed credit line agreements, and
$43,461 was available under uncommitted lines of credit. The Companys credit facility expires on
April 27, 2010.
The Companys financing agreements contain various restrictive financial covenants,
including net debt to capitalization and interest coverage ratios. As of March 31, 2009, the
Company was in compliance with the financial covenants in its debt agreements.
All contractual cash
obligations with initial and remaining terms in excess of one year and contingent liabilities
remained generally unchanged at March 31, 2009 compared to December 31, 2008.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Managements discussion and analysis of the Companys financial condition and results of operations
is based upon the Companys consolidated financial statements. The preparation of these financial
statements 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 the value of purchase consideration, valuation of trade receivables,
inventories, goodwill, intangible assets, and other long-lived assets, legal contingencies,
guarantee obligations, indemnifications, and assumptions used in the calculation of income taxes,
pension and other postretirement benefits, and customer incentives, among others. These estimates
and assumptions are based on managements best estimates and judgment. Management evaluates its
estimates and assumptions on an ongoing basis using historical experience and other factors,
including the current economic difficulties in the United States credit markets and the global
markets. Management monitors the economic condition and other factors and will adjust such
estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile
foreign currency and equity, and declines in the global economic environment have combined to
increase the uncertainty inherent in such estimates and assumptions. As future events and their
effects cannot be determined with precision, actual results could differ significantly from these
estimates. Changes in those estimates resulting from continuing changes in the economic environment
will be reflected in the financial statements in future periods.
Management believes there have been no significant changes during the quarter ended March 31, 2009
to the items that the Company disclosed as its critical accounting policies and estimates in
Managements Discussion and Analysis of Financial Condition and Results of Operations in the
Companys annual report on Form 10-K for the year ended December 31, 2008.
RECENT ACCOUNTING PRONOUNCEMENTS
In April
2009, the Financial Accounting Standards Board (FASB) issued three FASB staff positions: (FSP) FAS 157-4,
Determining Fair Value When the Volume and Level of Activity for
the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly (FSP FAS 157-4), FSP FAS 115-2, FAS
124-2 and EITF 99-20-2, Recognition and Presentation of
Other-Than-Temporary Impairments, and FSP FAS 107-1 and APB 28-1,
Interim Disclosures about Fair Value of Financial Instruments.
These FSPs clarify the guidance in SFAS 157 related to measuring
fair-value in inactive markets, modifying the recognition and
measurement of other-than-temporary impairments of debt securities,
and requiring public companies to disclose the fair values of
financial instruments in interim periods. All three FSPs are
effective for interim and annual periods ending after June 15, 2009
with early adoption permitted for periods ending after March 15, 2009.
29
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of March 31, 2009
(Unaudited)
(In thousands, except per share amounts)
In December 2008, the
FASB issued FSP No. 132(R)-1, Employers Disclosures about Postretirement Benefit Plan Assets,
which amends the FASB Statement No. 132 (revised 2003), Employers Disclosures about Pensions and
Other Postretirement Benefits. FSP No. 132(R)-1 provides guidance on an employers disclosures
about plan assets of a defined benefit pension or other postretirement plan. It requires companies
to disclose more information about how investment allocation decisions are made, major categories
of plan assets, including concentrations of risk and fair-value measurements, and the fair-value
techniques and inputs used to measure plan assets. FSP No. 132(R)-1 is effective for fiscal years
ending after December 15, 2009.
FORWARD-LOOKING STATEMENT DISCLOSURE
In this quarterly report on Form 10-Q, 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 Companys future operating performance, the Companys
share of new and existing markets, the Companys short- and long-term revenue and earnings growth
rates, the Companys implementation of cost-reduction
initiatives and measures to improve
pricing, including the optimization of the Companys 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,
except as otherwise required by law.
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:
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ability to reach definitive agreements with the SEC and DOJ regarding their respective investigations; |
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competitive pressures, including pricing pressures and technological developments; |
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changes in the Companys relationships with customers, suppliers, distributors and/or partners in its business ventures; |
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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 Companys operations,
including Brazil, where a significant portion of the Companys revenue is derived; |
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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, as well as adversely impact the availability and cost of
credit; |
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acceptance of the Companys product and technology introductions in the marketplace; |
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amount of cash and non-cash charges in connection with the planned closure of the Companys Newark, Ohio facility, and the closure of the Companys EMEA-based enterprise security operations; |
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unanticipated litigation, claims or assessments; |
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variations in consumer demand for financial self-service technologies, products and services; |
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challenges raised about reliability and security of the Companys election systems products, including the risk that
such products will not be certified for use or will be decertified; |
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changes in laws regarding the Companys election systems products and services; |
30
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of March 31, 2009
(Unaudited)
(In thousands, except per share amounts)
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potential security violations to the Companys information technology systems; |
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the investment performance of the Companys pension plan assets, which could require the Company to increase its pension contributions; |
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the Companys ability to successfully execute its strategy related to the elections systems business; and |
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the Companys ability to achieve benefits from its cost-reduction initiatives and other strategic changes. |
31
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of March 31, 2009
(In thousands)
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to foreign currency exchange rate risk inherent in its international
operations denominated in currencies other than the U.S. dollar. A hypothetical 10 percent movement
in the applicable foreign exchange rates would have resulted in an increase or decrease in 2009
year-to-date operating profit of approximately $2,089. The sensitivity model assumes an
instantaneous, parallel shift in the foreign currency exchange rates. Exchange rates rarely move in
the same direction. The assumption that exchange rates change in an instantaneous or parallel
fashion may overstate the impact of changing exchange rates on amounts denominated in a foreign
currency.
The Companys risk-management strategy uses derivative financial instruments such as forwards to
hedge certain foreign currency exposures. The intent is to offset gains and losses that occur on
the underlying exposures, with gains and losses on the derivative contracts hedging these
exposures. The Company does not enter into derivatives for trading purposes. The Companys primary
exposures to foreign exchange risk are movements in the dollar/euro, pound/dollar, dollar/forint,
dollar/franc and dollar/real rates. For the three months ended March 31, 2009, there were no
significant changes in the Companys foreign exchange risks compared with the prior period.
The Company manages interest rate risk with the use of variable rate borrowings under its committed
and uncommitted credit facilities and interest rate swaps. Variable rate borrowings under the
credit facilities totaled $302,805 at March 31, 2009, of which $50,000 was effectively converted to
fixed rate using interest rate swaps. A one percentage point increase or decrease in interest rates
would have resulted in an increase or decrease in interest expense for the three months ended March
31, 2009 of approximately $751 on the variable debt including the impact of the swap agreements.
The Companys primary exposure to interest rate risk is movement in the three month LIBOR. As
discussed in Note 9 to the condensed consolidated financial statements, the Company hedged $200,000
of the fixed rate borrowings under its senior notes, which was treated as a cash flow hedge. This
reduced the effective interest rate by 14 basis points from 5.50 to 5.36 percent.
ITEM 4: CONTROLS AND PROCEDURES
This quarterly report includes the certifications of our chief executive officer (CEO) and interim
chief financial officer (CFO) required by Rule 13a-14 of the Exchange Act. See Exhibits 31.1 and
31.2. This Item 4 includes information concerning the controls and control evaluations referred to
in those certifications.
INTRODUCTION
During 2008, management spent considerable time and resources performing extensive and additional
analyses and substantive procedures to support the audit process to complete five sets of financial
statements for each of the periods from the second quarter of 2007 through the second quarter of
2008 to become a current filer with the SEC. In light of these efforts, management was unable to
remediate all of its material weaknesses; however, we continue to invest significant time and
resources to engage in actions to remediate weaknesses in our internal control over financial
reporting. Based on the extensive and additional analyses and substantive procedures performed by
management that are designed to facilitate the reliability of financial reporting but that are not
part of the internal control over financial reporting, management believes that the unaudited
condensed consolidated financial statements fairly present, in all material respects, the Companys
financial position, results of operations and cash flows as of the dates, and for the periods,
presented. Refer to Note 1 in Notes to condensed consolidated financial statements.
DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under
the Exchange Act) are designed to ensure that information required to be disclosed in the reports
filed or submitted under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SECs rules and forms and that such information is accumulated
and communicated to management, including the CEO and CFO as appropriate, to allow timely decisions
regarding required disclosures.
In connection with the preparation of this quarterly report, the Companys management, under the
supervision and with the participation of the CEO and CFO, conducted an evaluation of disclosure
controls and procedures, including the remedial actions described below, as of the end of the
period covered by this report. Based on that evaluation, certain material weaknesses in internal
control over financial reporting, as discussed in detail below and disclosed in previous filings,
have not been remediated. As a result, the CEO and CFO concluded that the Companys disclosure
controls and procedures were not effective as of March 31, 2009, and through the filing of this
quarterly report. As described in detail throughout this Item 4, the Companys management continues
to take
32
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of March 31, 2009
(In thousands)
actions to remediate material weaknesses in our internal control over financial reporting.
We continue to use our management certification process to identify matters that might require
disclosure and to encourage transparency and accountability with respect to the accuracy of our
disclosures in order to strengthen our disclosure controls and procedures. Our process requires
multiple levels of management to provide sub-certifications, all of which are aggregated and
reported to the CEO and CFO for assessment prior to the filing of the quarterly condensed
consolidated financial statements. We utilized this process in preparing this quarterly report.
Management notes that the following previously identified control deficiencies constitute material
weaknesses as of March 31, 2009:
Selection, Application and Communication of Accounting Policies: The Company did not have
effective controls over compliance with accounting policies and procedures. In addition, the
Company did not effectively communicate accounting policies to the Companys personnel for
consistent application. This entity-level control over financial reporting contributed to other
material weaknesses disclosed herein.
Manual Journal Entries: The Company did not maintain effective controls over manual journal
entries. Specifically, the retention of proper supporting documentation as well as managerial
review and approval procedures, which are designed to validate the completeness, accuracy and
appropriateness of the entries recorded in the accounting records, were not operating effectively.
Further, the Company did not have sufficient monitoring activities in place to detect when controls
over manual journal entries were not operating effectively.
Contractual Agreements: The Company did not maintain effective controls over non-routine
contractual agreements and/or related supporting information with financial reporting implications.
Specifically, there is no standard process to ensure the review and analysis of the accounting
impact of non-routine contractual agreements in a timely manner by accounting personnel.
Account Reconciliations: The Companys controls over account reconciliation controls were
not operating effectively. Specifically, the issues that occurred in various accounts involved the
Company personnel not taking the steps necessary for an adequate reconciliation in accordance with
the Companys policy. Among some of the issues noted were associates not maintaining supporting
documentation, performance of the account reconciliation not occurring timely and/or management
review and approval of the reconciliation not occurring timely. In addition, the Company did not
have sufficient monitoring activities in place to timely detect when controls over account
reconciliations were not operating effectively.
These material weaknesses resulted in material errors in the Companys historical financial
statements. These material errors were corrected by management prior to the issuance of the
Companys consolidated financial statements for the applicable periods.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
As previously disclosed under Item 9A Controls and Procedures in our annual report on Form 10-K
for the year ended December, 31, 2008, management concluded that our internal control over
financial reporting was not effective based on the material weaknesses identified. Management has
worked on remediation efforts since the filing of that annual report.
During the quarter ended March 31, 2009, management made the following changes in our internal
control over financial reporting related to our five previously reported material weaknesses:
Monitoring: As of March 31, 2009, management believes it has sufficient evidence to
conclude that the previously disclosed material weakness pertaining to monitoring the Companys
balance sheet has been fully remediated. Beginning in December 2008, at each of the Companys
global entities, management executed a new monitoring control process that includes the completion
of a detailed analytical review by related finance management at a level of precision designed to
detect errors in the financial statements that could be material. This process includes an
additional review by the applicable division chief financial officer as well as a review by
corporate accounting and finance management. The process includes a review to identify
inconsistencies in application of U.S. GAAP, reporting misclassifications of balances, and/or
validates that variances in balance sheet accounts are consistent with fluctuations in related
income statement accounts. This process is designed to supplement other control processes, such as
review and approval of manual journal entries and account reconciliations to validate the accuracy
of reported amounts.
During the quarter ended March 31, 2009, changes in our internal control over financial reporting
occurred related to the following four material weaknesses which continue to exist as of March 31,
2009:
33
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of March 31, 2009
(In thousands)
Selection,
Application and Communication of Accounting Policies: Management
continued to make personnel
changes in the accounting and financial reporting functions. Actions were taken, related to
appropriate remedial actions with respect to certain employees, including
reassignments, reprimands, increased supervision, and the imposition of financial penalties in the
form of compensation adjustments. In addition, management continued to enhance its accounting and
finance organization personnel to better align individuals with job responsibilities commensurate
with skill-sets, experience, and capabilities. The Company continued to evaluate and make changes
to the structure of the finance department, to further align and segregate, where necessary, the
responsibilities within the accounting, financial reporting, planning and forecasting functions. In
addition, the Company has continued to design and implement retention programs to assure that
personnel with this background and experience can be retained. In March 2009, management finalized
and published a policy to clarify requirements related to proper revenue recognition to facilitate
global compliance with its existing revenue recognition policy. This policy formalized the
Companys previously communicated requirements and extensive training was conducted throughout the
Company at all levels.
Manual Journal Entries: Management continued to enforce policies and procedures to manually
monitor compliance with its global journal entry accounting policy, which governs requirements for
support, review and approval of manual journal entries. The Company continued development and
testing of system application control functionality in order to implement the automation of manual
journal entry approvals within its global accounting close process to systematically enforce the
Companys policy. In addition, as part of our standard period-end financial closing procedures,
management continued to enhance the monitoring process and controls related to manual journal
entries by continuing to conduct proper managerial reviews and approvals for completeness, accuracy,
and appropriateness of the entries recorded in the accounting records.
Contractual Agreements: Management substantially completed the
design and development phases related to a more
standardized process supported by a new global non-routine contractual agreement database for monitoring,
updating, and disseminating
these agreements to facilitate a complete and timely
review by appropriate accounting and other relevant personnel. These
additional controls, upon global deployment, are
intended to facilitate managements review and accounting evaluation related to existence,
completeness, approval, and retention of global non-routine contractual agreements amongst its various
functional departments.
Account
Reconciliations: Management continues to enforce policies and procedures to
manually monitor compliance with its global account reconciliation policy, which governs
requirements for content, format, and review and approval of account reconciliations. Management
has continued its implementation of a global account reconciliation database and compliance
monitoring tool related to existence, completeness, accuracy and retention of account
reconciliations. In the first quarter of 2009, the tool was utilized by Canada, Mexico and
substantially all entities in the Companys Europe, Middle East and Africa business unit to
complete over 50 percent of their account reconciliations. In addition, setup efforts were
substantially completed related to the deployment of this compliance monitoring tool for China,
Brazil, and several other Asia-Pacific entities.
REMEDIATION STEPS TO ADDRESS MATERIAL WEAKNESSES
Management is committed to remediating our material weaknesses in a timely fashion. Our
Sarbanes-Oxley compliance function is responsible for helping to monitor our short-term and
long-term remediation plans. In addition, we have assigned an executive owner to direct the
necessary remedial changes to the overall design of our internal control over financial reporting
and to address the root causes of our material weaknesses. Our leadership team is committed to
achieving and maintaining a strong control environment, high ethical standards and financial
reporting integrity. This commitment will continue to be communicated to and reinforced with our
associates.
Our remediation efforts, outlined below, are intended to address the identified material weaknesses
in internal control over financial reporting.
The Companys management believes the remediation measures described below will remediate the
identified control deficiencies and strengthen the Companys internal control over financial
reporting. As management continues to evaluate and work to improve its internal control over
financial reporting, it may be determined that additional measures must be taken to address control
deficiencies or it may be determined that the Company needs to modify, or in appropriate
circumstances not to complete, certain of the remediation measures described below.
Selection, Application and Communication of Accounting Policies: At this time, the Company
anticipates that the remediation efforts related to the issuance of certain other accounting
policies pertaining to analytical reviews, non-routine contractual agreements, accounting for
inventory, and accounting for prepaid assets and accruals, along with related training, will be fully implemented
globally by the quarter ending June 30, 2009.
34
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of March 31, 2009
(In thousands)
Manual Journal Entries: Management is planning the utilization of systematic application
controls for manual journal entry approvals within its global accounting close process. In
addition, as part of our standard period end financial closing procedures, management will continue
to enhance the monitoring process and controls related to manual journal entry approvals by
continuing to conduct proper managerial reviews and approvals of the completeness, accuracy, and
appropriateness of the entries recorded in the accounting records. At this time, the Company
anticipates that the remediation efforts will be fully implemented globally by the end of 2009.
Contractual Agreements: Management plans to issue a formal policy related to the review of
non-routine contractual agreements
and globally deploy and train associates on
the formalized process for monitoring, updating, and disseminating these types of
contractual agreements to facilitate a complete and timely review by accounting personnel. The
additional controls include the implementation of a global contractual agreement database to
facilitate managements review and accounting evaluation related to existence, completeness,
approval, and retention of global non-routine contractual agreements amongst the various
departments. At this time, the Company anticipates that the remediation efforts will be fully
implemented globally by the quarter ending June 30, 2009.
Account Reconciliations:
Management plans to continue global
deployment of an account reconciliation compliance monitoring tool related to existence,
completeness, accuracy and retention of account reconciliations. By the end of the second quarter
of 2009, it is planned that deployment of this compliance monitoring tool will be completed for a
significant portion of the Companys entities, and these entities will complete over 75 percent of
their account reconciliations within the tool. At this time, the Company anticipates that the
remediation efforts will be fully implemented globally by the end of 2009. In the meantime,
management utilizes manual monitoring processes to assure that reconciliations are completed,
reviewed and approved in a timely fashion.
The four material weaknesses identified by management and discussed above are not fully remediated
as of the date of the filing of this quarterly report. Substantive procedures that are not a
component of our internal control over financial reporting have been performed by the Company in
consultation with external accounting advisors to assure the underlying transactions within this
quarterly report are supported and the financial statements are fairly stated as of the date of the
filing of this quarterly report. Under the direction of the Audit Committee, management has
developed a detailed plan and timetable for the implementation of the above-referenced remedial
measures, and will continue to monitor their implementation. In addition, under the direction of
the Audit Committee, management will continue to review and make necessary changes to the overall
design of our internal control over financial reporting, as well as policies and procedures to
improve the overall effectiveness of our internal control over financial reporting.
Management estimates the total cost for remediation efforts to be approximately $3,600, which
includes $2,900 of consultation fees and $700 of internal costs, including software purchases.
35
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of March 31, 2009
PART II OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
(Dollars in thousands)
At March 31, 2009, the Company was a party to several lawsuits that were incurred in the normal
course of business, none of which individually or in the aggregate is considered material by
management in relation to the Companys financial position or results of operations. In
managements opinion, the Companys condensed consolidated financial statements would not be
materially affected by the outcome of any present legal proceedings, commitments, or asserted
claims.
In addition to the routine legal proceedings noted above, the Company has been served with various
lawsuits, filed against it and certain current and former officers and directors, by shareholders
and participants in the Companys 401(k) savings plan, alleging violations of the federal
securities laws and breaches of fiduciary duties with respect to the 401(k) plan. These complaints
seek compensatory damages in unspecified amounts, fees and expenses related to such lawsuits and
the granting of extraordinary equitable and/or injunctive relief. For each of these lawsuits, the
date each complaint was filed, the name of the plaintiff and the federal court in which such
lawsuit is pending are as follows:
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Konkol v. Diebold Inc., et al., No. 5:05CV2873 (N.D. Ohio, filed December 13,
2005). |
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Ziolkowski v. Diebold Inc., et al., No. 5:05CV2912 (N.D. Ohio, filed December 16,
2005). |
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New Jersey Carpenters Pension Fund v. Diebold, Inc., No. 5:06CV40 (N.D. Ohio,
filed January 6, 2006). |
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Rein v. Diebold, Inc., et al., No. 5:06CV296 (N.D. Ohio, filed February 9, 2006). |
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Graham v. Diebold, Inc., et al., No. 5:05CV2997 (N.D. Ohio, filed December 30,
2005). |
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McDermott v. Diebold, Inc., et al., No. 5:06CV170 (N.D. Ohio, filed January 24,
2006). |
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Barnett v. Diebold, Inc., et al., No. 5:06CV361 (N.D. Ohio, filed February 15,
2006). |
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Farrell v. Diebold, Inc., et al., No. 5:06CV307 (N.D. Ohio, filed February 8,
2006). |
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Forbes v. Diebold, Inc., et al., No. 5:06CV324 (N.D. Ohio, filed February 10,
2006). |
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Gromek v. Diebold, Inc., et al., No. 5:06CV579 (N.D. Ohio, filed March 14, 2006). |
The Konkol, Ziolkowski, New Jersey Carpenters Pension Fund, Rein and Graham cases, which allege
violations of the federal securities laws, have been consolidated into a single proceeding. The
McDermott, Barnett, Farrell, Forbes and Gromek cases, which allege breaches of fiduciary duties
under the Employee Retirement Income Security Act of 1974 with respect to the 401(k) plan, likewise
have been consolidated into a single proceeding. The Company and the individual defendants deny the
allegations made against them, regard them as without merit, and intend to defend themselves
vigorously. In May 2009, the Company agreed to settle the 401(k) class action litigation for $4,500, to be paid out of the Companys insurance policies. The settlement is subject to final documentation and approval of the court. On August 22, 2008, the court dismissed the consolidated amended complaint in the
consolidated securities litigation and entered a judgment in favor of the defendants. On
September 16, 2008, the plaintiffs in the consolidated securities litigation filed a notice of
appeal with the U.S. Court of Appeals for the Sixth Circuit.
The Company, including certain of its subsidiaries, filed a lawsuit on May 30, 2008 (Premier
Election Solutions, Inc., et al. v. Board of Elections of Cuyahoga County, et al., Case
No. 08-CV-05-7841, (Franklin Cty. Ct Common Pleas)) against the Board of Elections of Cuyahoga
County, Ohio, the Board of County Commissioners of Cuyahoga County, Ohio, (collectively, the
County), and Ohio Secretary of State Jennifer Brunner (Secretary) regarding several Ohio contracts
under which the Company provided voting equipment and related services to the State of Ohio and a
number of its counties. The lawsuit was precipitated by the Countys threats to sue the Company for
unspecified damages. The complaint seeks a declaration that the Company met its contractual
obligations. In response, on July 15, 2008, the County filed an answer and counterclaim alleging
that the voting system was defective and seeking declaratory relief and unspecified damages under
several theories of recovery. In addition, the County is trying to pierce the Companys corporate
veil and hold Diebold, Incorporated directly liable for acts and omissions alleged to have been
committed by its subsidiaries (even though Diebold, Incorporated is not a party to the contracts.)
The Secretary has also filed an answer and counterclaim seeking declaratory relief and unspecified
damages under several theories of recovery. The Butler County Board of
36
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of March 31, 2009
Elections has joined in, and
incorporated by reference, the Secretarys counterclaim. The Company has not yet responded to the
counterclaims.
The Company has filed motions to dismiss and for more definite statement of the counterclaims. The
motions are fully briefed and are awaiting a decision by the court. The Secretary has also added
ten Ohio counties as additional defendants, claiming that those counties also experienced problems
with the voting systems, but many of those counties have moved for dismissal.
Management is unable to determine the financial statement impact, if any, of the federal securities
class action and the electronic voting systems action.
The Company was informed during the first quarter of 2006 that the staff of the SEC had begun an
informal inquiry relating to the Companys revenue recognition policy. In the second quarter of
2006, the Company was informed that the SECs inquiry had been converted to a formal, non-public
investigation. In the fourth quarter of 2007, the Company also learned that the DOJ had begun a
parallel investigation. On May 1, 2009, the Company reached an agreement in principle with the
staff of the SEC to settle civil charges stemming from the staffs pending investigation. In
addition, the Company has been informed by the U.S. Attorneys Office for the Northern District of
Ohio that it will not bring criminal charges against the Company for the transactions and
accounting issues that are the subject of the SEC investigation.
Under the terms of the agreement in principle with the staff of the SEC, the Company will neither
admit nor deny civil securities fraud charges, will pay a penalty of $25,000 and will agree to an
injunction against committing or causing any violations or future violations of certain specified
provisions of the federal securities laws. The agreement in principle with the staff of the SEC
remains subject to the final approval of the SEC, and there can be no assurance that the SEC will
accept the terms of the settlement negotiated with the staff.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Information concerning the Companys share repurchases made during the first quarter of 2009:
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Total Number of |
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Maximum |
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Shares Purchased |
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Number of Shares |
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Total Number of |
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as Part of Publicly |
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that May Yet Be |
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Shares |
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Average Price |
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Announced Plans |
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Purchased Under |
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Period |
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Purchased (1) |
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Paid Per Share |
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(2) |
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the Plans (2) |
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January |
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|
2,860 |
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$ |
28.77 |
|
|
|
|
|
|
|
2,926,500 |
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February |
|
|
70,089 |
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|
|
24.02 |
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|
|
|
|
|
2,926,500 |
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March |
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|
|
|
|
|
|
|
|
|
|
|
|
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2,926,500 |
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|
|
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Total |
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72,949 |
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$ |
24.21 |
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2,926,500 |
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(1) |
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Includes 2,860 and 70,089 shares in January and February,
respectively, surrendered or deemed surrendered to the Company in
order to satisfy tax withholding obligations in connection with the
distribution of common shares under employee share-based compensation
plans. |
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(2) |
|
The total number of shares repurchased as part of the publicly
announced share repurchase plan was 9,073,500 as of March 31, 2009.
The plan was approved by the Board of Directors in April 1997 and
authorized the repurchase of up to two million shares. The plan was
amended in June 2004 to authorize the repurchase of an additional two
million shares, and was further amended in August and December 2005 to
authorize the repurchase of an additional six million shares. On
February 14, 2007, the Board of Directors approved an increase in the
Companys share repurchase program by authorizing the repurchase of up
to an additional two million of the Companys outstanding common
shares. The plan has no expiration date. |
ITEM 3: EXHIBITS
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3.1(i)
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Amended and Restated Articles of Incorporation of Diebold, Incorporated incorporated by reference to Exhibit
3.1(i) to Registrants Annual Report on Form 10-K for the year ended December 31, 1994 (Commission File No.
1-4879) |
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3.1(ii)
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Amended and Restated Code of
Regulations incorporated by reference to Exhibit 3.1(ii)
to Registrants Quarterly
|
37
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of March 31, 2009
|
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|
|
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Report on Form 10-Q for the quarter ended March 31, 2007 of Diebold, Incorporated (Commission File No. 1-4879) |
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3.2
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Certificate of Amendment by Shareholders to Amended Articles of Incorporation of Diebold, Incorporated
incorporated by reference to Exhibit 3.2 to Registrants Form 10-Q for the quarter ended March 31, 1996
(Commission File No. 1-4879) |
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3.3
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Certificate of Amendment to Amended Articles of Incorporation of Diebold, Incorporated incorporated by
reference to Exhibit 3.3 to Registrants Form 10-K for the year ended December 31, 1998 (Commission File No.
1-4879) |
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4.1
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Rights Agreement dated as of February 11, 1999 between Diebold, Incorporated and The Bank of New York
incorporated by reference to Exhibit 4.1 to Registrants Registration Statement on Form 8-A, filed on February
2, 1999 (Commission File No. 1-4879) |
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*10.1
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Form of Amended and Restated Employment Agreement incorporated by reference to Exhibit 10.1 to Registrants
Form 10-K for the year ended December 31, 2008 (Commission File No. 1-4879) |
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*10.5(i)
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Supplemental Employee Retirement Plan I as amended and restated January 1, 2008 incorporated by reference to
Exhibit 10.5(i) to Registrants Form 10-K for the year ended December 31, 2008 (Commission File No. 1-4879) |
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*10.5(ii)
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Supplemental Employee Retirement Plan II as amended and restated July 1, 2002 incorporated by reference to
Exhibit 10.5(ii) to Registrants Form 10-Q for the quarter ended September 30, 2002 (Commission File No. 1-4879) |
|
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*10.5(iii)
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Pension Restoration Supplemental Executive Retirement Plan incorporated by reference to Exhibit 10.5(iii) to
Registrants Form 10-K for the year ended December 31, 2008 (Commission File No. 1-4879) |
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*10.5(iv)
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Pension Supplemental Executive Retirement Plan incorporated by reference to Exhibit 10.5(iv) to Registrants
Form 10-K for the year ended December 31, 2008 (Commission File No. 1-4879) |
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*10.5(v)
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401(k) Restoration Supplemental Executive Retirement Plan incorporated by reference to Exhibit 10.5(v) to
Registrants Form 10-K for the year ended December 31, 2008 (Commission File No. 1-4879) |
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*10.5(vi)
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401(k) Supplemental Executive Retirement Plan incorporated by reference to Exhibit 10.5(vi) to Registrants
Form 10-K for the year ended December 31, 2008 (Commission File No. 1-4879) |
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*10.7(i)
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|
1985 Deferred Compensation Plan for Directors of Diebold, Incorporated incorporated by reference to Exhibit
10.7(i) to Registrants Annual Report on Form 10-K for the year ended December 31, 1992 (Commission File No.
1-4879) |
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*10.7(ii)
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|
Amendment No. 1 to the Amended and Restated 1985 Deferred Compensation Plan for Directors of Diebold,
Incorporated incorporated by reference to Exhibit 10.7 (ii) to Registrants Form 10-Q for the quarter ended
March 31, 1998 (Commission File No. 1-4879) |
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*10.7(iii)
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|
Amendment No. 2 to the Amended and Restated 1985 Deferred Compensation Plan for Directors of Diebold,
Incorporated incorporated by reference to Exhibit 10.7 (ii) to Registrants Form 10-Q for the quarter ended
March 31, 2003 (Commission File No. 1-4879) |
|
|
|
*10.7(iv)
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|
Deferred Compensation Plan No. 2 for Directors of Diebold, Incorporated incorporated by reference to Exhibit
10.7(iv) to Registrants Form 10-K for the year ended December 31, 2008 (Commission File No. 1-4879) |
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|
*10.8
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|
1991 Equity and Performance
Incentive Plan as Amended and Restated as of April 13, 2009 incorporated by
reference to Exhibit 10.1 to Registrants Form 8-K
filed on April 29, 2009 (Commission File No. 1-4879) |
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|
|
*10.9
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Long-Term Executive Incentive Plan incorporated by reference to Exhibit 10.9 to Registrants Annual Report on
Form 10-K for the year ended December 31, 1993 (Commission File No. 1-4879) |
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*10.10
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Deferred Incentive Compensation Plan No. 2 incorporated by reference to Exhibit 10.10 to Registrants Form
10-K for the year ended December 31, 2008 (Commission File No. 1-4879) |
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*10.11
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Annual Incentive Plan incorporated by reference to Exhibit 10.11 to Registrants Annual Report on Form 10-K
for the year ended December 31, 2000 (Commission File No. 1-4879) |
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|
*10.13(i)
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|
Forms of Deferred Compensation Agreement and Amendment No. 1 to Deferred Compensation Agreement incorporated
by reference to Exhibit 10.13 to Registrants Annual Report on Form 10-K for the year ended December 31, 1996
(Commission File No. 1-4879) |
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*10.13(ii)
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Section 162(m) Deferred Compensation Agreement (as amended and restated January 29, 1998) incorporated by
reference to Exhibit 10.13 (ii) to Registrants Form 10-Q for the quarter ended March 31, 1998 (Commission File
No. 1-4879) |
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*10.14
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Deferral of Stock Option Gains Plan incorporated by reference to Exhibit 10.14 to the Registrants Annual
Report on Form 10-K for the year ended December 31, 1998 (Commission File No. 1-4879) |
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10.17(i)
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|
Amended and Restated Loan Agreement dated as of April 30, 2003 among Diebold, Incorporated, the Subsidiary
Borrowers, the Lenders and Bank One, N.A. incorporated by reference to Exhibit 10.17 to Registrants Form
10-Q for the quarter ended June 30, 2003 (Commission File No. 1-4879) |
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10.17(ii)
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First Amendment to Loan Agreement, dated as of April 28, 2004 among Diebold, Incorporated, the Subsidiary
Borrowers, the Lenders and Bank One, N.A. incorporated by reference to Exhibit 10.17 (ii) to Registrants
Form 10-Q for the quarter ended June 30, 2004 (Commission File No. 1-4879) |
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10.17(iii)
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Second Amendment to Loan Agreement, dated as of April 27, 2005 among Diebold, Incorporated, the Subsidiary
Borrowers, the Lenders and JPMorgan Chase Bank N.A. (successor by merger to Bank One, N.A.) incorporated by |
38
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of March 31, 2009
|
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reference to Exhibit 10.1 to Registrants Form 8-K filed on May 3, 2005 (Commission File No. 1-4879) |
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10.17(iv)
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|
Third Amendment to Loan Agreement, dated as of November 16, 2005 among Diebold, Incorporated, the Subsidiary
Borrowers, the Lenders and JPMorgan Chase Bank N.A. (successor by merger to Bank One, N.A.) incorporated by
reference to Exhibit 10.1 to Registrants Form 8-K filed on November 22, 2005 (Commission File No. 1-4879) |
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10.17(v)
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|
Fourth Amendment to Loan Agreement, dated November 27, 2006 among Diebold, Incorporated, the Subsidiary
Borrowers, the Lenders and JPMorgan Chase Bank N.A. incorporated by reference to Exhibit 10.17(v) to
Registrants Form 10-K for the year ended December 31, 2006. (successor by merger to Bank One, N.A.) (Commission
File No. 1-4879) |
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|
|
10.20(i)
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|
Transfer and Administration Agreement, dated as of March 30, 2001 by and among DCC Funding LLC, Diebold Credit
Corporation, Diebold, Incorporated, Receivables Capital Corporation and Bank of America, National Association
and the financial institutions from time to time parties thereto incorporated by reference to Exhibit 10.20(i)
to Registrants Form 10-Q for the quarter ended March 31, 2001 (Commission File No. 1-4879) |
|
|
|
10.20(ii)
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|
Amendment No. 1 to the Transfer and Administration Agreement, dated as of May 2001, by and among DCC Funding
LLC, Diebold Credit Corporation, Diebold, Incorporated, Receivables Capital Corporation and Bank of America,
National Association and the financial institutions from time to time parties thereto incorporated by
reference to Exhibit 10.20 (ii) to Registrants Form 10-Q for the quarter ended March, 31, 2001 (Commission File
No. 1-4879) |
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|
*10.22
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Form of Non-Qualified Stock Option Agreement incorporated by reference to Exhibit 10.22 to Registrants
Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 (Commission File No. 1-4879) |
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|
10.23
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|
Form of Restricted Share Agreement incorporated by reference to Exhibit 10.2 to Registrants Form 8-K filed
on February 16, 2005 (Commission File No. 1-4879) |
|
|
|
*10.24
|
|
Form of RSU Agreement incorporated by reference to Exhibit 10.24 to Registrants Form 10-K for the year ended
December 31, 2008 (Commission File No. 1-4879) |
|
|
|
*10.25
|
|
Form of Performance Share Agreement incorporated by reference to Exhibit 10.25 to Registrants Form 10-K for
the year ended December 31, 2008 (Commission File No. 1-4879) |
|
|
|
*10.26
|
|
Diebold, Incorporated Annual Cash Bonus Plan incorporated by reference to Exhibit A to Registrants Proxy
Statement on Schedule 14A filed on March 16, 2005 (Commission File No. 1-4879) |
|
|
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10.27
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|
Form of Note Purchase Agreement incorporated by reference to Exhibit 10.1 to Registrants Form 8-K filed on
March 8, 2006 (Commission File No. 1-4879) |
|
|
|
*10.28
|
|
Amended and Restated Employment Agreement between Diebold, Incorporated and Thomas W. Swidarski, as amended as
of December 29, 2008 incorporated by reference to Exhibit 10.28 to Registrants Form 10-K for the year ended
December 31, 2008 (Commission File No. 1-4879) |
|
|
|
*10.29
|
|
Amended and Restated Employment [Change in Control] Agreement between Diebold, Incorporated and Thomas W.
Swidarski, as amended as of December 29, 2008 incorporated by reference to Exhibit 10.29 to Registrants Form
10-K for the year ended December 31, 2008 (Commission File No. 1-4879) |
|
|
|
*10.30
|
|
Form of Deferred Shares Agreement incorporated by reference to Exhibit 10.30 to Registrants Form 10-K for
the year ended December 31, 2008 (Commission File No. 1-4879) |
|
|
|
31.1
|
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1
|
|
Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350 |
|
|
|
32.2
|
|
Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350 |
|
|
|
* |
|
Reflects management contract or other compensatory arrangement. |
39
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of March 31, 2009
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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|
|
DIEBOLD, INCORPORATED |
|
|
|
|
|
(Registrant) |
|
|
|
|
|
|
|
|
Date: May 8, 2009 |
By: |
/s/ Thomas W. Swidarski
|
|
|
|
Thomas W. Swidarski |
|
|
|
President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
|
Date : May 8, 2009 |
By: |
/s/ Leslie A. Pierce
|
|
|
|
Leslie A. Pierce |
|
|
|
Vice President and Corporate Controller
Interim
Chief Financial Officer
(Principal Financial Officer) |
|
|
40
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of March 31, 2009
EXHIBIT INDEX
|
|
|
EXHIBIT NO. |
|
DOCUMENT DESCRIPTION |
|
|
|
31.1
|
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350. |
|
|
|
32.2
|
|
Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350. |
41