DBD 9.30.2012 10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
__________________________________________________
Form 10-Q
__________________________________________________ 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
OR
o
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)
_________________________________________________ 
Ohio
 
34-0183970
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification Number)
 
 
 
5995 Mayfair Road, PO Box 3077, North Canton, Ohio
 
44720-8077
(Address of principal executive offices)
 
(Zip Code)
Registrant’s 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  x     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  x    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.
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
(Do not check if a smaller reporting company)
o
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  x
Number of shares of common stock outstanding as of November 5, 2012 was 63,219,054.


Table of Contents

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q

INDEX
 
PART II – OTHER INFORMATION
ITEM 1A: RISK FACTORS
ITEM 6: EXHIBITS


Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS
DIEBOLD, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
 
 
September 30,
2012
 
December 31,
2011
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
302,550

 
$
333,920

Short-term investments
 
269,614

 
286,853

Trade receivables, less allowances for doubtful accounts of $24,245 and $22,128, respectively
 
462,498

 
414,969

Inventories
 
490,691

 
440,900

Deferred income taxes
 
109,737

 
114,250

Prepaid expenses
 
33,745

 
31,452

Other current assets
 
119,235

 
110,011

Total current assets
 
1,788,070

 
1,732,355

Securities and other investments
 
74,840

 
74,869

Property, plant and equipment, at cost
 
649,857

 
642,256

Less accumulated depreciation and amortization
 
467,031

 
449,562

Property, plant and equipment, net
 
182,826

 
192,694

Goodwill
 
271,911

 
253,063

Deferred income taxes
 
89,856

 
91,090

Other assets
 
188,251

 
173,372

Total assets
 
$
2,595,754

 
$
2,517,443

LIABILITIES AND EQUITY
 
 
 
 
Current liabilities
 
 
 
 
Notes payable
 
$
75,000

 
$
21,722

Accounts payable
 
219,446

 
221,964

Deferred revenue
 
208,693

 
241,992

Payroll and other benefits liabilities
 
71,229

 
79,854

Other current liabilities
 
247,065

 
258,685

Total current liabilities
 
821,433

 
824,217

Long-term debt
 
647,863

 
606,154

Pensions and other benefits
 
135,264

 
148,399

Post-retirement and other benefits
 
23,531

 
23,196

Deferred income taxes
 
35,349

 
32,029

Other long-term liabilities
 
38,836

 
25,188

Commitments and contingencies
 

 

Equity
 
 
 
 
Diebold, Incorporated shareholders' equity
 
 
 
 
Preferred shares, no par value, 1,000,000 authorized shares, none issued
 

 

Common shares, $1.25 par value, 125,000,000 authorized shares, 77,627,102 and 76,840,956 issued shares, 63,219,054 and 62,513,615 outstanding shares, respectively
 
97,034

 
96,051

Additional capital
 
353,332

 
327,805

Retained earnings
 
1,025,736

 
991,210

Treasury shares, at cost (14,408,048 and 14,327,341 shares, respectively)
 
(550,813
)
 
(547,737
)
Accumulated other comprehensive loss
 
(63,799
)
 
(40,343
)
Total Diebold, Incorporated shareholders' equity
 
861,490

 
826,986

Noncontrolling interests
 
31,988

 
31,274

Total equity
 
893,478

 
858,260

Total liabilities and equity
 
$
2,595,754

 
$
2,517,443

See accompanying notes to condensed consolidated financial statements.

3

Table of Contents

DIEBOLD, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
 

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2012
 
2011
 
2012
 
2011
Net sales
 
 
 
 
 
 
 
 
Services
 
$
402,305

 
$
388,986

 
$
1,196,079

 
$
1,142,311

Products
 
307,614

 
320,336

 
955,519

 
843,550

 
 
709,919

 
709,322

 
2,151,598


1,985,861

Cost of sales
 
 
 
 
 
 
 
 
Services
 
301,787

 
277,558

 
881,275

 
841,571

Products
 
234,922

 
237,378

 
718,304

 
631,010

 
 
536,709

 
514,936

 
1,599,579

 
1,472,581

Gross profit
 
173,210

 
194,386

 
552,019

 
513,280

Selling and administrative expense
 
120,455

 
121,508

 
359,053

 
364,670

Research, development and engineering expense
 
22,167

 
18,466

 
61,140

 
57,265

Impairment of assets
 
7,930

 

 
14,631

 
2,962

 
 
150,552

 
139,974

 
434,824

 
424,897

Operating profit
 
22,658

 
54,412

 
117,195

 
88,383

Other income (expense)
 
 
 
 
 
 
 
 
Investment income
 
9,298

 
8,538

 
29,292

 
29,105

Interest expense
 
(7,615
)
 
(8,110
)
 
(22,684
)
 
(26,298
)
Foreign exchange gain (loss), net
 
930

 
(349
)
 
2,577

 
97

Miscellaneous, net
 
607

 
(447
)
 
948

 
1,010

Income from continuing operations before taxes
 
25,878

 
54,044

 
127,328

 
92,297

Taxes on income
 
7,814

 
11,262

 
35,507

 
23,767

Income from continuing operations
 
18,064

 
42,782

 
91,821

 
68,530

Income from discontinued operations, net of tax
 

 

 

 
518

Net income
 
18,064

 
42,782

 
91,821

 
69,048

Net income attributable to noncontrolling interests
 
630

 
1,027

 
2,722

 
3,988

Net income attributable to Diebold, Incorporated
 
$
17,434

 
$
41,755

 
$
89,099

 
$
65,060

 
 
 
 
 
 
 
 
 
Basic weighted-average shares outstanding
 
63,211

 
63,626

 
63,003

 
64,797

Diluted weighted-average shares outstanding
 
64,134

 
64,186

 
63,930

 
65,304

 
 
 
 
 
 
 
 
 
Basic earnings per share
 
 
 
 
 
 
 
 
Income from continuing operations, net of tax
 
$
0.28

 
$
0.66

 
$
1.41

 
$
0.99

Income from discontinued operations, net of tax
 

 

 

 
0.01

Net income attributable to Diebold, Incorporated
 
$
0.28

 
$
0.66

 
$
1.41

 
$
1.00

 
 
 
 
 
 
 
 
 
Diluted earnings per share
 
 
 
 
 
 
 
 
Income from continuing operations, net of tax
 
$
0.27

 
$
0.65

 
$
1.39

 
$
0.99

Income from discontinued operations, net of tax
 

 

 

 
0.01

Net income attributable to Diebold, Incorporated
 
$
0.27

 
$
0.65

 
$
1.39

 
$
1.00

 
 
 
 
 
 

 

Amounts attributable to Diebold, Incorporated
 
 
 
 
 

 

Income from continuing operations, net of tax
 
$
17,434

 
$
41,755

 
$
89,099

 
$
64,542

Income from discontinued operations, net of tax
 

 

 

 
518

Net income attributable to Diebold, Incorporated
 
$
17,434

 
$
41,755

 
$
89,099

 
$
65,060

See accompanying notes to condensed consolidated financial statements.


4

Table of Contents

DIEBOLD, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(in thousands)

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2012
 
2011
 
2012
 
2011
Net income
 
$
18,064

 
$
42,782

 
$
91,821

 
$
69,048

Other comprehensive income (loss), net of tax:
 


 


 
 
 
 
Foreign currency hedges and translation
 
4,814

 
(105,655
)
 
(35,654
)
 
(56,561
)
Interest rate hedges:
 


 


 
 
 
 
Net loss recognized in other comprehensive income
 
(133
)
 
(587
)
 
(64
)
 
(809
)
Less: reclassification adjustment for net gains included in net income
 
82

 
76

 
252

 
243

 
 
(215
)
 
(663
)
 
(316
)
 
(1,052
)
Pension and other post-retirement benefits:
 
 
 
 
 
 
 
 
Net actuarial loss amortization
 
4,330

 
2,447

 
12,967

 
7,441

Net prior service benefit amortization
 
(65
)
 
(65
)
 
(194
)
 
(194
)
Other
 
2

 
(772
)
 
12

 
(3,376
)
 
 
4,267

 
1,610

 
12,785

 
3,871

Unrealized gain (loss), net on securities:
 
 
 
 
 
 
 
 
Net gain recognized in other comprehensive income
 
132

 
2,969

 
3,049

 
965

Less: reclassification adjustment for net gain (loss) included in net income
 
1,728

 
(872
)
 
3,236

 
(2,340
)
 
 
(1,596
)
 
3,841

 
(187
)
 
3,305

Other comprehensive income (loss), net of tax
 
7,270

 
(100,867
)
 
(23,372
)
 
(50,437
)
Comprehensive income (loss)
 
25,334

 
(58,085
)
 
68,449

 
18,611

Less: comprehensive income attributable to noncontrolling interests
 
944

 
1,310

 
2,806

 
4,874

Comprehensive income (loss) attributable to Diebold, Incorporated
 
$
24,390

 
$
(59,395
)
 
$
65,643

 
$
13,737

See accompanying notes to condensed consolidated financial statements.

5

Table of Contents

DIEBOLD, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
 
 
Nine Months Ended
 
 
September 30,
 
 
2012
 
2011
Cash flow from operating activities:
 
 
 
 
Net income
 
$
91,821

 
$
69,048

Adjustments to reconcile net income to cash flow from operating activities:
 
 
 
 
Depreciation and amortization
 
56,909

 
58,638

Share-based compensation
 
9,860

 
10,506

Excess tax benefits from share-based compensation
 
(1,705
)
 
(1,390
)
Impairment of assets
 
14,631

 
2,962

Equity in earnings of an investee
 
(702
)
 
(1,448
)
Cash flow from changes in certain assets and liabilities:
 
 
 
 
Trade receivables
 
(49,683
)
 
(36,418
)
Inventories
 
(55,397
)
 
(84,179
)
Prepaid expenses
 
(1,698
)
 
5,170

Other current assets
 
(28,049
)
 
(40,309
)
Accounts payable
 
(2,013
)
 
3,271

Deferred revenue
 
(34,053
)
 
2,751

Certain other assets and liabilities
 
(28,677
)
 
(43,266
)
Net cash used in operating activities
 
(28,756
)
 
(54,664
)
Cash flow from investing activities:
 
 
 
 
Payments for acquisitions, net of cash acquired
 
(23,625
)
 

Proceeds from sale of discontinued operations
 

 
2,520

Proceeds from maturities of investments
 
261,817

 
206,283

Proceeds from sale of investments
 
33,437

 
43,182

Payments for purchases of investments
 
(299,265
)
 
(209,663
)
Proceeds from sale of assets
 
1,851

 
746

Capital expenditures
 
(35,856
)
 
(38,456
)
Collections on purchased finance receivables
 
12,296

 
17,826

Increase in certain other assets
 
(9,105
)
 
(18,092
)
Net cash (used in) provided by investing activities
 
(58,450
)
 
4,346

Cash flow from financing activities:
 
 
 
 
Dividends paid
 
(54,573
)
 
(55,146
)
Debt issuance costs
 

 
(1,864
)
Debt borrowings
 
646,602

 
477,331

Debt repayments
 
(552,269
)
 
(338,583
)
Distributions of affiliates earnings to noncontrolling interest holders
 
(2,092
)
 
(5,868
)
Excess tax benefits from share-based compensation
 
1,705

 
1,390

Issuance of common shares
 
16,651

 
4,017

Repurchase of common shares
 
(3,076
)
 
(104,852
)
Net cash provided by (used in) financing activities
 
52,948

 
(23,575
)
Effect of exchange rate changes on cash and cash equivalents
 
2,888

 
2,049

Decrease in cash and cash equivalents
 
(31,370
)
 
(71,844
)
Cash and cash equivalents at the beginning of the period
 
333,920

 
328,658

Cash and cash equivalents at the end of the period
 
$
302,550

 
$
256,814

 
 
 
 
 
Significant noncash investing activities:
 
 
 
 
Accrued holdback for acquisition
 
$
15,000

 
$

See accompanying notes to condensed consolidated financial statements.

6

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2012
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars 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 contained in the Company’s annual report on Form 10-K for the year ended December 31, 2011. In addition, some of the Company’s statements in this quarterly report on Form 10-Q may involve risks and uncertainties that could significantly impact expected future results. The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of results to be expected for the full year.
RECENTLY ADOPTED ACCOUNTING GUIDANCE
In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-05, Presentation of Comprehensive Income (ASU 2011-05), which eliminates the option to present components of other comprehensive income (OCI) as part of the statement of changes in stockholders’ equity. The amendments in this standard require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Subsequently, in December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income (ASU 2011-12), which indefinitely defers the requirement in ASU 2011-05 to present on the face of the financial statements reclassification adjustments for items that are reclassified from OCI to net income in the statement(s) where the components of net income and the components of OCI are presented. The Company has provided the required statements of comprehensive income for the three and nine months ended September 30, 2012 and 2011.
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04). ASU 2011-04 amended Accounting Standards Codification 820, Fair Value Measurements and Disclosures, to converge the fair value measurement guidance in U.S. GAAP and International Financial Reporting Standards (IFRSs). ASU 2011-04 changes the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Disclosure requirements have been expanded to include additional information about transfers between level 1 and level 2 of the fair value hierarchy and level 3 measurements regarding the sensitivity of fair value to changes in unobservable inputs and any interrelationships between those inputs. Additionally, ASU 2011-04 clarifies the FASB’s intent about the application of existing fair value measurements including: (a) the application of the highest and best use valuation premise concepts; (b) measuring the fair value of an instrument classified in a reporting entity's stockholders' equity; and (c) quantitative information required for fair value measurements categorized within level 3. The adoption of this guidance did not have an impact on the Company's condensed consolidated financial statements; however, the Company provided additional disclosure as required by ASU 2011-04 in note 16.
RECENTLY ISSUED ACCOUNTING GUIDANCE
In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, which requires certain additional disclosure requirements about financial instruments and derivatives instruments that are subject to netting arrangements. The new disclosures are required for annual reporting periods beginning on or after January 1, 2013, and interim periods within those periods. The adoption of this update will not have an impact on the financial statements of the Company.
In July 2012, the FASB issued ASU 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment, which allows assessment of qualitative factors to determine if it is more likely than not that the fair value of indefinite-lived intangible assets are less than their carrying amount. If that assessment indicates no impairment, the quantitative impairment test is not required. The FASB issued similar guidance for testing goodwill for impairment in September 2011. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The adoption of this update is not expected to have a material impact on the financial statements of the Company.




7

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2012
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)

NOTE 2: EARNINGS PER SHARE
Basic earnings per share is based on the weighted-average number of common shares outstanding. Diluted earnings per share includes the dilutive effect of potential common shares outstanding. Under the two-class method of computing earnings per share, non-vested share-based payment awards that contain rights to receive non-forfeitable dividends are considered participating securities. The Company’s participating securities include restricted stock units (RSUs), deferred shares and shares that were vested, but deferred by the employee. The Company calculated basic and diluted earnings per share under both the treasury stock method and the two-class method. For the three and nine months ended September 30, 2012 and 2011, there was no impact in the per share amounts calculated under the two methods. Accordingly, the treasury stock method is disclosed below.
The following represents amounts used in computing earnings per share and the effect on the weighted-average number of shares of dilutive potential common shares:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2012
 
2011
 
2012
 
2011
Numerator:
 
 
 
 
 
 
 
 
Income used in basic and diluted earnings per share:
 
 
 
 
 
 
 
 
Income from continuing operations, net of tax
 
$
17,434

 
$
41,755

 
$
89,099

 
$
64,542

Income from discontinued operations, net of tax
 

 

 

 
518

Net income attributable to Diebold, Incorporated
 
$
17,434

 
$
41,755

 
$
89,099

 
$
65,060

Denominator (in thousands):
 
 
 
 
 
 
 
 
Weighted-average number of common shares used in basic earnings per share
 
63,211

 
63,626

 
63,003

 
64,797

Effect of dilutive shares
 
923

 
560

 
927

 
507

Weighted-average number of shares used in diluted earnings per share
 
64,134

 
64,186

 
63,930

 
65,304

Basic earnings per share:
 
 
 
 
 
 
 
 
Income from continuing operations, net of tax
 
$
0.28

 
$
0.66

 
$
1.41

 
$
0.99

Income from discontinued operations, net of tax
 

 

 

 
0.01

Net Income attributable to Diebold, Incorporated
 
$
0.28

 
$
0.66

 
$
1.41

 
$
1.00

Diluted earnings per share:
 
 
 
 
 
 
 
 
Income from continuing operations, net of tax
 
$
0.27

 
$
0.65

 
$
1.39

 
$
0.99

Income from discontinued operations, net of tax
 

 

 

 
0.01

Net income attributable to Diebold, Incorporated
 
$
0.27

 
$
0.65

 
$
1.39

 
$
1.00

Anti-dilutive shares (in thousands):
 
 
 
 
 
 
 
 
Anti-dilutive shares not used in calculating diluted weighted-average shares
 
2,174

 
2,280

 
2,208

 
2,278


 















8

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2012
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)

NOTE 3: EQUITY
The following table presents changes in shareholders' equity attributable to Diebold, Incorporated and the noncontrolling interests:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Diebold, Incorporated shareholders' equity
 
 
 
 
 
 
 
Balance at beginning of period
$
850,737

 
$
951,308

 
$
826,986

 
$
961,155

Comprehensive income (loss) attributable to Diebold, Incorporated
24,390

 
(59,395
)
 
65,643

 
13,737

Common shares
45

 
5

 
983

 
585

Additional capital
4,758

 
4,117

 
25,527

 
15,239

Treasury shares
(180
)
 
(47,261
)
 
(3,076
)
 
(104,852
)
Dividends declared and paid
(18,260
)
 
(18,056
)
 
(54,573
)
 
(55,146
)
Balance at end of period
$
861,490

 
$
830,718

 
$
861,490

 
$
830,718

 
 
 
 
 
 
 
 
Noncontrolling interests
 
 
 
 
 
 
 
Balance at beginning of period
$
32,024

 
$
31,178

 
$
31,274

 
$
28,659

Comprehensive income attributable to noncontrolling interests
944

 
1,310

 
2,806

 
4,874

Distributions to noncontrolling interest holders
(980
)
 
(4,823
)
 
(2,092
)
 
(5,868
)
Balance at end of period
$
31,988

 
$
27,665

 
$
31,988

 
$
27,665


NOTE 4: SHARE-BASED COMPENSATION
The Company’s share-based compensation payments to employees are 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 is recognized as a component of selling and administrative expense. Total share-based compensation expense was $4,154 and $3,889 for the three months ended September 30, 2012 and 2011, respectively, and $9,858 and $10,506 for the nine months ended September 30, 2012 and 2011, respectively.

Options outstanding and exercisable as of September 30, 2012 under the Company’s 1991 Equity and Performance Incentive Plan (as Amended and Restated as of April 13, 2009) and changes during the nine months ended September 30, 2012, were as follows:
 
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value (1)
 
 
(in thousands)
 
(per share)
 
(in years)
 
 
Outstanding at January 1, 2012
 
3,201

 
$
36.70

 
 
 
 
Expired or forfeited
 
(449
)
 
37.26

 
 
 
 
Exercised
 
(553
)
 
30.12

 
 
 
 
Granted
 
576

 
34.98

 
 
 
 
Outstanding at September 30, 2012
 
2,775

 
$
37.56

 
5
 
$
4,798

Options exercisable at September 30, 2012
 
1,665

 
$
40.83

 
3
 
$
2,869

Options vested and expected to vest (2) at September 30, 2012
 
2,744

 
$
37.62

 
5
 
$
4,738

(1)
The aggregate intrinsic value (the difference between the closing price of the Company’s common shares on the last trading day of the third quarter of 2012 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 September 30, 2012. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s common shares.
(2)
The options expected to vest are the result of applying the pre-vesting forfeiture rate assumption to total outstanding non-vested options.


9

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2012
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)

The following table summarizes information on non-vested RSUs, performance shares and deferred shares for the nine months ended September 30, 2012:
 
 
Number of
Shares
 
Weighted-Average
Grant-Date Fair
Value
 
 
(in thousands)
 
 
RSUs:
 
 
 
 
Non-Vested at January 1, 2012
 
717

 
$
30.69

Forfeited
 
(55
)
 
30.61

Vested
 
(130
)
 
24.96

Granted
 
246

 
35.24

Non-Vested at September 30, 2012
 
778

 
$
33.09

Performance Shares (1):
 
 
 
 
Non-Vested at January 1, 2012
 
727

 
$
34.70

Forfeited
 
(216
)
 
31.01

Vested
 
(86
)
 
29.25

Granted
 
303

 
44.25

Non-Vested at September 30, 2012
 
728

 
$
40.42

Director Deferred Shares:
 
 
 
 
Non-Vested at January 1, 2012
 
19

 
$
33.98

Vested
 
(19
)
 
33.98

Granted
 
28

 
40.54

Non-Vested at September 30, 2012
 
28

 
$
40.54

Vested at September 30, 2012
 
107

 
$
33.87

Outstanding at September 30, 2012
 
135

 
$
35.27

(1)
Non-vested 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.


NOTE 5: INCOME TAXES
The effective tax rate on continuing operations for the three months ended September 30, 2012 was 30.2 percent compared to 20.8 percent for the same period of 2011. The 9.4 percentage point increase was mainly due to non-recurring discrete items, including adjustments from an IRS exam, which reduced the effective tax rate for the three months ended September 30, 2011.
The effective tax rate on continuing operations for the nine months ended September 30, 2012 was 27.9 percent compared to 25.8 percent for the same period of 2011. The 2.1 percentage point increase was mainly due to various discrete items, including the IRS exam adjustments and state tax benefits, partially offset by operating losses in certain Europe, Middle East and Africa (EMEA) jurisdictions for which no tax benefit was recognized, which reduced the effective tax rate for the nine months ended September 30, 2011.

NOTE 6: INVESTMENTS
The Company’s investments, primarily in Brazil, consist of certificates of deposit and U.S. dollar indexed bond funds, which are classified as available-for-sale and stated at fair value based upon quoted market prices and net asset values, respectively. Unrealized gains and losses are recorded in OCI. Realized gains and losses are recognized in investment income and are determined using the specific identification method. Realized gains (losses), net from the sale of securities were $1,728 and $(872) for the three months ended September 30, 2012 and 2011, respectively, and $3,236 and $(2,340) for the nine months ended September 30, 2012 and 2011, respectively. Proceeds from the sale of available-for-sale securities were $33,437 and $43,182 during the nine months ended September 30, 2012 and 2011, respectively.


10

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2012
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)

The Company’s investments, excluding cash surrender value of insurance contracts of $67,789 and $67,699 as of September 30, 2012 and December 31, 2011, respectively, consist of the following:
 
 
Cost Basis
 
Unrealized
Gain (Loss)
 
Fair Value
As of September 30, 2012
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
Certificates of deposit
 
$
252,124

 
$

 
$
252,124

U.S. dollar indexed bond funds
 
16,339

 
1,151

 
17,490

 
 
$
268,463

 
$
1,151

 
$
269,614

Long-term investments:
 
 
 
 
 
 
Assets held in a rabbi trust
 
$
6,572

 
$
479

 
$
7,051

As of December 31, 2011
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
Certificates of deposit
 
$
269,033

 
$

 
$
269,033

U.S. dollar indexed bond funds
 
16,482

 
1,338

 
17,820

 
 
$
285,515

 
$
1,338

 
$
286,853

Long-term investments:
 
 
 
 
 
 
Assets held in a rabbi trust
 
$
7,428

 
$
(258
)
 
$
7,170


NOTE 7: ALLOWANCE FOR CREDIT LOSSES
Trade Receivables The Company evaluates the collectability of trade receivables based on (1) a percentage of sales related to historical loss experience and current trends and (2) periodic adjustments for known events such as specific customer circumstances and changes in the aging of accounts receivable balances. After all efforts at collection have been unsuccessful, the account is deemed uncollectible and is written off.

Financing Receivables The Company evaluates the collectability of notes and finance lease receivables (collectively, financing receivables) on a customer-by-customer basis and evaluates specific customer circumstances, aging of invoices, credit risk changes and payment patterns and historical loss experience. When the collectability is determined to be at risk based on the above criteria, the Company records the allowance for credit losses, which represents the Company’s current exposure less estimated reimbursement from insurance claims. After all efforts at collection have been unsuccessful, the account is deemed uncollectible and is written off. The following table summarizes the Company’s allowance for credit losses and recorded investment in financing receivables for the nine months ended September 30, 2012:
 
 
Finance
Leases
 
Notes
Receivable
 
Total
Allowance for credit losses
 
 
 
 
 
 
Balance at January 1, 2012
 
$
210

 
$
2,047

 
$
2,257

Provision for credit losses
 
261

 

 
261

Recoveries
 
48

 

 
48

Write-offs
 

 

 

Balance at September 30, 2012
 
$
519

 
$
2,047

 
$
2,566

 
 
 
 
 
 
 
Allowance resulting from individual impairment evaluation
 
$
519

 
$
2,047

 
$
2,566

Allowance resulting from collective impairment evaluation
 

 

 

 
 
 
 
 
 
 
Financing receivables individually evaluated for impairment
 
$
100,436

 
$
12,882

 
$
113,318

Financing receivables collectively evaluated for impairment
 

 

 





11

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2012
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)

The following table summarizes the Company’s allowance for credit losses and recorded investment in financing receivables for the nine months ended September 30, 2011:
 
 
Finance
Leases
 
Notes
Receivable
 
Total
Allowance for credit losses
 
 
 
 
 
 
Balance at January 1, 2011
 
$
378

 
$
470

 
$
848

Provision for credit losses
 
47

 
1,872

 
1,919

Recoveries
 
111

 
5,454

 
5,565

Write-offs
 
(365
)
 
(5,956
)
 
(6,321
)
Balance at September 30, 2011
 
$
171

 
$
1,840

 
$
2,011

 
 
 
 
 
 
 
Allowance resulting from individual impairment evaluation
 
$
171

 
$
1,840

 
$
2,011

Allowance resulting from collective impairment evaluation
 

 

 

 
 
 
 
 
 
 
Financing receivables individually evaluated for impairment
 
$
105,468

 
$
12,768

 
$
118,236

Financing receivables collectively evaluated for impairment
 

 

 

The Company records interest income and any fees or costs related to financing receivables using the effective interest method over the term of the lease or loan. The Company reviews the aging of its financing receivables to determine past due and delinquent accounts. Credit quality is reviewed at inception and is re-evaluated as needed based on customer-specific circumstances. Receivable balances 60 days to 89 days past due are reviewed and may be placed on nonaccrual status based on customer-specific circumstances. Receivable balances are placed on nonaccrual status upon reaching greater than 89 days past due. Upon receipt of payment on nonaccrual financing receivables, interest income is recognized and accrual of interest is resumed once the account has been made current or the specific circumstances have been resolved.
As of September 30, 2012 and December 31, 2011, the recorded investment in past-due finance lease receivables on nonaccrual status was $5,268 and $1,740, respectively. The recorded investment in finance lease receivables past due 90 days or more and still accruing interest was $0 and $114 as of September 30, 2012 and December 31, 2011, respectively. The recorded investment in impaired notes receivable as of September 30, 2012 and December 31, 2011 was $2,047 and $2,047, respectively, and was fully reserved. The following table summarizes the Company’s aging of past-due notes receivable balances:
 
 
September 30, 2012
 
December 31, 2011
30-59 days past due
 
$

 
$

60-89 days past due
 

 

> 89 days past due
 
1,702

 
1,495

Total past due
 
$
1,702

 
$
1,495


NOTE 8: INVENTORIES
Major classes of inventories are summarized as follows:
 
 
September 30, 2012
 
December 31, 2011
Finished goods
 
$
233,195

 
$
188,571

Service parts
 
157,001

 
152,597

Raw materials and work in process
 
100,495

 
99,732

Total inventories
 
$
490,691

 
$
440,900

 
NOTE 9: OTHER ASSETS
Included in other assets are net capitalized software development costs of $51,107 and $51,117 as of September 30, 2012 and December 31, 2011, respectively. Amortization expense on capitalized software of $3,985 and $4,663 was included in product cost of sales for the three months ended September 30, 2012 and 2011, respectively, and $12,586 and $14,071 for the nine months ended September 30, 2012 and 2011, respectively. Other long-term assets also consist of patents, trademarks and other intangible assets. Where applicable, other assets are stated at cost and, if applicable, are amortized ratably over the relevant contract period

12

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2012
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)

or the estimated life of the assets. Fees to renew or extend the term of the Company’s intangible assets are expensed when incurred.
During the three months ended September 30, 2012, the Company acquired $15,744 of amortizable intangible assets (refer to note 18) with an estimated weighted-average amortization period of eight years.
Impairment of long-lived assets is recognized when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the expected future undiscounted cash flows are less than the carrying amount of the asset group, an impairment loss may be recognized at that time to reduce the asset to the lower of its fair value or its net book value. The Company recorded $2,962 of software intangible asset impairment charges within Diebold North America (DNA) continuing operations in the nine months ended September 30, 2011.
Investment in Affiliate Investment in the Company’s non-consolidated affiliate was accounted for under the equity method and consists of a 50 percent ownership in Shanghai Diebold King Safe Company, Ltd. The balance of this investment as of September 30, 2012 and December 31, 2011 was $3,000 and $11,461, respectively. Equity earnings from the non-consolidated affiliate was included in miscellaneous, net in the condensed consolidated statements of income and was $110 and $589 for the three months ended September 30, 2012 and 2011, respectively, and $702 and $1,448 for the nine months ended September 30, 2012 and 2011, respectively. The non-consolidated affiliate paid dividends of $1,233 for both the three and nine months ended September 30, 2012. During the quarter ended September 30, 2012, the Company determined the investment was partially impaired and recorded an impairment charge of $7,930, which was allocated to DNA and Diebold International (DI) continuing operations. The Company determined the fair value of its investment using level three inputs (refer to note 16) such as price trends, material costs, discount rate, customer demand, and the long term growth rate. Additionally, the Company suspended the equity method of accounting for the investment during the quarter ended September 30, 2012.

NOTE 10: DEBT
Outstanding debt balances were as follows:
 
 
September 30, 2012
 
December 31, 2011
Notes payable:
 
 
 
 
Uncommitted lines of credit
 
$
74,784

 
$
21,572

Other
 
216

 
150

 
 
$
75,000

 
$
21,722

Long-term debt:
 
 
 
 
Credit facility
 
$
333,000

 
$
291,000

Senior notes
 
300,000

 
300,000

Industrial development revenue bonds
 
11,900

 
11,900

Other
 
2,963

 
3,254

 
 
$
647,863

 
$
606,154

As of September 30, 2012, the Company had various international short-term uncommitted lines of credit with borrowing limits of $106,319. The weighted-average interest rate on outstanding borrowings on the short-term uncommitted lines of credit as of September 30, 2012 and December 31, 2011 was 2.41 percent and 4.23 percent, respectively. The decline in the weighted-average interest rate is attributable to the change in mix of borrowings in foreign entities. Short-term uncommitted lines mature in less than one year. The amount available under the short-term uncommitted lines at September 30, 2012 was $31,535.
In June 2011, the Company entered into a five-year credit facility, which replaced its previous credit facility. As of September 30, 2012, the Company had borrowing limits under the credit facility totaling $500,000. Under the terms of the credit facility agreement, the Company has the ability, subject to various approvals, to increase the borrowing limits by $250,000. Up to $50,000 of the revolving credit facility is available under a swing line sub-facility. The weighted-average interest rate on outstanding credit facility borrowings as of September 30, 2012 and December 31, 2011 was 1.33 percent and 1.49 percent, respectively, which is variable based on the London Interbank Offered Rate (LIBOR). The amount available under the credit facility as of September 30, 2012 was $167,000.

In March 2006, the Company issued senior notes in an aggregate principal amount of $300,000 with a weighted-average fixed interest rate of 5.50 percent. 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. Additionally, the Company entered into a derivative transaction to hedge interest rate

13

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2012
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)

risk on $200,000 of the senior notes, which was treated as a cash flow hedge. This reduced the effective interest rate from 5.50 percent to 5.36 percent. As of September 30, 2012, although due within twelve months, $75,000 of the senior notes remain classified as long-term debt because of the Company's intent and ability to fund the repayment using amounts available under its credit facility, unless an alternative source of financing with more favorable terms is available upon maturity.
In 1997, industrial development revenue bonds were issued on behalf of the Company. The proceeds from the bond issuances were used to construct new manufacturing facilities in the United States. The Company guaranteed the payments of principal and interest on the bonds by obtaining letters of credit. The bonds were issued with a 20-year original term and are scheduled to mature in 2017. Each industrial development revenue bond carries a variable interest rate, which is reset weekly by the remarketing agents. The weighted-average interest rate on the bonds was 0.75 percent and 0.77 percent as of September 30, 2012 and December 31, 2011, respectively.
The Company’s debt agreements contain various restrictive financial covenants, including net debt to capitalization and net interest coverage ratios. As of September 30, 2012, the Company was in compliance with the financial and other covenants in its debt agreements.

NOTE 11: BENEFIT PLANS
The Company has pension plans covering certain U.S. employees that have been closed to new participants since July 1, 2003. Plans that cover certain salaried employees provide pension benefits based on the employee’s compensation during the ten years before retirement. The Company’s funding policy for salaried plans is to contribute annually based on actuarial projections and applicable regulations. Plans covering certain hourly employees and union members generally provide benefits of stated amounts for each year of service. The Company’s funding policy for hourly plans is to make at least the minimum annual contributions required by applicable regulations. Employees of the Company’s operations in countries outside of the U.S. 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.
The following table sets forth the net periodic benefit cost for the Company’s defined benefit pension plans and other benefits for the three months ended September 30:
 
 
Pension Benefits
 
Other Benefits
 
 
2012
 
2011
 
2012
 
2011
Components of net periodic benefit cost
 
 
 
 
 
 
 
 
Service cost
 
$
2,862

 
$
2,713

 
$

 
$

Interest cost
 
7,957

 
7,873

 
204

 
233

Expected return on plan assets
 
(10,205
)
 
(10,183
)
 

 

Amortization of prior service cost (benefit)
 
65

 
65

 
(130
)
 
(130
)
Recognized net actuarial loss
 
4,207

 
2,349

 
123

 
98

Net periodic pension benefit cost
 
$
4,886

 
$
2,817

 
$
197

 
$
201

 

14

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2012
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)

The following table sets forth the net periodic benefit cost for the Company’s defined benefit pension plans and other benefits for the nine months ended September 30:
 
 
Pension Benefits
 
Other Benefits
 
 
2012
 
2011
 
2012
 
2011
Components of net periodic benefit cost
 
 
 
 
 
 
 
 
Service cost
 
$
8,585

 
$
8,139

 
$

 
$

Interest cost
 
23,873

 
23,617

 
611

 
698

Expected return on plan assets
 
(30,616
)
 
(30,550
)
 

 

Amortization of prior service cost (benefit)
 
194

 
194

 
(388
)
 
(388
)
Recognized net actuarial loss
 
12,601

 
7,149

 
366

 
292

Net periodic pension benefit cost
 
$
14,637

 
$
8,549

 
$
589

 
$
602

Cash Flows
There have been no significant changes to the 2012 plan year contribution amounts previously disclosed. For the nine months ended September 30, 2012 and 2011, contributions of $14,915 and $22,503, respectively, were made to the qualified and non-qualified pension plans.

NOTE 12: GUARANTEES AND PRODUCT WARRANTIES
In 1997, industrial development revenue bonds were issued on behalf of the Company. The Company guaranteed the payments of principal and interest on the bonds (refer to note 10) by obtaining letters of credit. The carrying value of the bonds was $11,900 as of September 30, 2012 and December 31, 2011.
The Company provides its global operations guarantees and standby letters of credit through various financial institutions to suppliers, customers, regulatory agencies and insurance providers. If the Company is not able to make payment or fulfill contractual obligations, the suppliers, customers, regulatory agencies and insurance providers may draw on the pertinent bank. At September 30, 2012, the maximum future payment obligations related to these various guarantees totaled $71,302, of which $23,435 represented standby letters of credit to insurance providers, and no associated liability was recorded. At December 31, 2011, the maximum future payment obligations relative to these various guarantees totaled $71,321, of which $22,623 represented standby letters of credit to insurance providers, and no associated liability was recorded.
The Company provides its customers a manufacturer’s warranty and records, at the time of the sale, a corresponding estimated liability for potential warranty costs. 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 Company’s warranty liability balance are illustrated in the following table:
 
 
2012
 
2011
Balance at January 1
 
$
63,355

 
$
78,313

Current period accruals (a)
 
45,472

 
34,894

Current period settlements
 
(39,917
)
 
(50,375
)
Balance at September 30
 
$
68,910

 
$
62,832

(a)
includes the impact of foreign exchange rate fluctuations


NOTE 13: COMMITMENTS AND CONTINGENCIES
At September 30, 2012, 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 are considered material by management in relation to the Company’s financial position or results of operations. In management’s opinion, the condensed consolidated financial statements would not be materially affected by the outcome of these legal proceedings, commitments or asserted claims. In addition to these routine legal proceedings, the Company was a party to a securities action, which is described in note 15 of the consolidated financial statements contained in the Company's annual report on Form 10-K for the year ended December 31, 2011, as well as the legal proceedings described below.

15

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2012
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


Brazilian Federal Tax Assessment

In August 2012, one of the Company's Brazilian subsidiaries was notified of a tax assessment of approximately $133,000, including penalties and interest, regarding certain Brazilian federal indirect taxes (Industrialized Products Tax, Import Tax, Programa de Integração Social and Contribution to Social Security Financing) for 2008 and 2009. The assessment alleges improper importation of certain components into the country's free trade zone that would nullify certain indirect tax incentives. On September 10, 2012, the Company filed its administrative defenses with the tax authorities. This proceeding is currently pending an administrative level decision, which could negatively impact Brazilian federal indirect taxes in other years that remain open under statute. The Company has not recorded an accrual for this assessment, based in part on the determination that it has a valid tax position and it is more likely than not to prevail in the proceedings relating to this assessment. At this time, the Company cannot estimate any possible loss or range of loss; however, it is reasonably possible that the Company could be required to pay taxes, penalties and interest related to this matter, which could be material to the Company's consolidated financial statements.

Global Foreign Corrupt Practices Act (FCPA) Review
During the second quarter of 2010, while conducting due diligence in connection with a potential acquisition in Russia, the Company identified certain transactions and payments by its subsidiary in Russia (primarily during 2005 to 2008) that potentially implicate the Foreign Corrupt Practices Act (FCPA), particularly the books and records provisions of the FCPA. As a result, the Company conducted a global internal review and collected information related to its global FCPA compliance. In the fourth quarter of 2010, the Company identified certain transactions within its Asia Pacific operation that occurred over the past several years that may also potentially implicate the FCPA. The Company continues to monitor its ongoing compliance with the FCPA.
The Company has voluntarily self-reported its findings to the SEC and the U.S. Department of Justice (DOJ) and is cooperating with these agencies in their review. The Company was previously informed that the SEC's inquiry had been converted to a formal, non-public investigation. The Company also received a subpoena for documents from the SEC and a voluntary request for documents from the DOJ in connection with the investigation. As of September 30, 2012, the Company's accrued estimated loss related to the potential outcome of this matter is not considered material to the condensed consolidated financial statements. Because the SEC and DOJ investigations are ongoing, there can be no assurance that their review will not find evidence of additional transactions that potentially implicate the FCPA. The Company is continuing its discussions with the government toward a resolution to this matter. At this time, the Company cannot predict the results of the government investigations, and it is reasonably possible that the resolution of these matters with the SEC and the DOJ could result in changes in management's estimates of losses, which could be material to the Company’s consolidated financial statements.

NOTE 14: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company uses derivatives to mitigate the economic consequences associated with fluctuations in currencies and interest rates.
FOREIGN EXCHANGE
Net Investment Hedges The Company has international subsidiaries with net balance sheet positions that generate cumulative translation adjustments within OCI. The Company uses derivatives to manage potential changes in value of its net investments in Brazil. The Company uses the forward-to-forward method for its quarterly retrospective and prospective assessments of hedge effectiveness. No ineffectiveness results if the notional amount of the derivative matches the portion of the net investment designated as being hedged because the Company uses derivative instruments with underlying exchange rates consistent with its functional currency and the functional currency of the hedged net investment. Changes in value that are deemed effective are accumulated in OCI 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. The fair value of the Company’s net investment hedge contracts was $(433) and $1,768 as of September 30, 2012 and December 31, 2011, respectively. The net (loss) gain recognized in OCI on net investment hedge derivative instruments was $(463) and $1,805 in the three and nine months ended September 30, 2012, respectively. The gain recognized in OCI on net investment hedge derivative instruments was $1,780 and $1,780 in the three and nine months ended September 30, 2011, respectively.
Non-Designated Hedges A substantial portion of the Company’s 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 Company’s policy allows the use of foreign exchange forward contracts with maturities of up

16

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2012
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)

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. Thus, spot-based gains/losses offset revaluation gains/losses within foreign exchange loss, net and forward-based gains/losses represent interest expense. The fair value of the Company’s non-designated foreign exchange forward contracts was $(659) and $(1,558) as of September 30, 2012 and December 31, 2011, respectively.
The following table summarizes the (loss) gain recognized on non-designated foreign-exchange derivative instruments:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
Income Statement Location
 
2012
 
2011
 
2012
 
2011
Interest expense
 
$
(1,121
)
 
$
(1,920
)
 
$
(3,787
)
 
$
(5,796
)
Foreign exchange (loss) gain, net
 
(3,108
)
 
12,139

 
(2,509
)
 
10,401

 
 
$
(4,229
)
 
$
10,219

 
$
(6,296
)
 
$
4,605

INTEREST RATE
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 Company’s policy allows derivative instruments designated as cash flow hedges that fix a portion of future variable-rate interest expense. As of September 30, 2012, the Company has two pay-fixed receive-variable interest rate swaps, with a total notional amount of $50,000, to hedge against changes in the LIBOR benchmark interest rate on a portion of the Company’s LIBOR-based borrowings. Changes in value that are deemed effective are accumulated in OCI and reclassified to interest expense when the hedged interest is accrued. To the extent that it becomes probable that the Company’s variable rate borrowings will not occur, the gains or losses on the related cash flow hedges will be reclassified from OCI to interest expense.
In December 2005 and January 2006, the Company executed 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 senior notes issuance in March 2006. Amounts previously recorded in OCI related to the pre-issuance cash flow hedges will continue to be reclassified on a straight-line basis through February 2016.
 
The fair value of the Company’s interest rate contracts was $(3,870) and $(3,796) as of September 30, 2012 and December 31, 2011, respectively.
Gains and losses related to interest rate contracts that are reclassified from accumulated OCI are recorded in interest expense on the statement of income. The Company anticipates reclassifying $920 from OCI to interest expense within the next 12 months.

NOTE 15: RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES
Restructuring Charges
The following table summarizes the impact of the Company’s restructuring charges (accrual adjustments) on the condensed consolidated statements of income:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2012
 
2011
 
2012
 
2011
Cost of sales – services
 
$
956

 
$
(1,331
)
 
$
91

 
$
7,298

Cost of sales – products
 
(2,064
)
 
630

 
(1,959
)
 
1,004

Selling and administrative expense
 
2,454

 
2,131

 
5,654

 
9,402

Research, development and engineering expense
 
1,116

 
7

 
1,116

 
19

Total
 
$
2,462

 
$
1,437

 
$
4,902

 
$
17,723


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Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2012
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)

The following table summarizes the Company’s net restructuring charges (accrual adjustments) within continuing operations for its DNA and DI reporting segments:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2012
 
2011
 
2012
 
2011
DNA
 
 
 
 
 
 
 
 
Severance
 
$
3,313

 
$
391

 
$
4,870

 
$
1,186

Other
 

 
220

 

 
220

DI
 
 
 
 
 
 
 
 
Severance
 
(621
)
 
781

 
(329
)
 
15,230

Other (1)
 
(230
)
 
45

 
361

 
1,087

Total
 
$
2,462

 
$
1,437

 
$
4,902

 
$
17,723

(1)
Other costs in the DI segment include legal fees, accelerated depreciation and lease termination fees.
Restructuring charges of $4,770 for the three and nine months ended September 30, 2012, related to the Company’s global realignment plan, including realignment of resources and certain international facilities to better support opportunities in target markets and leverage software-led services technology to support customers in efforts to optimize overall operational performance. As of September 30, 2012, the Company anticipates additional restructuring costs of $9,600 in 2012 and $2,000 in future periods related to this plan. As management concludes on certain aspects of the global realignment plan, the anticipated future costs related to this plan are subject to change.
Restructuring charges of $689 and $2,789 for the three and nine months ended September 30, 2012 respectively, related to the Company’s global shared services plan, which entails expanding the Company's current information technology (IT) center in India to create a global shared services center that provides centralized IT and financial services for the Company. Expanding the shared services center requires transferring IT and financial services-related jobs residing in other geographies. As of September 30, 2012, the Company anticipates additional restructuring costs of $100 in 2012 and up to $8,000 in future periods. As management concludes on certain aspects of the global shared services plan, the anticipated future costs related to this plan are subject to change.
Restructuring (accrual adjustments) charges of $(2,840) and $(278) for the three months ended September 30, 2012 and 2011, respectively, and $(2,544) and $14,754 for the nine months ended September 30, 2012 and 2011, respectively, related to the Company's plan for the EMEA reorganization, which realigned resources and leveraged the exiting shared services center. The Company does not expect any material remaining costs related to this plan.
Other net restructuring (accrual adjustments) charges were $(157) and $1,715 for the three months ended September 30, 2012 and 2011, respectively, and $(113) and $2,969 for the nine months ended September 30, 2012 and 2011, respectively.

The following table summarizes the Company’s cumulative total restructuring costs for the significant plans:
 
 
Global Realignment
 
Global Shared Services
 
EMEA
Reorganization
Costs incurred to date:
 
 
 
 
 
 
DNA
 
$
2,873

 
$
2,527

 
$

DI
 
1,897

 
262

 
16,906

Total costs incurred to date
 
$
4,770

 
$
2,789

 
$
16,906

The following table summarizes the Company’s restructuring accrual balances and related activity:
Balance at January 1, 2012
 
$
10,136

Liabilities incurred
 
4,902

Liabilities paid
 
(5,347
)
Balance at September 30, 2012
 
$
9,691




18

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2012
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)

Impairment and Other Charges
During the three months ended September 30, 2012, the Company recorded an impairment charge of $7,930 related to its 50 percent ownership in Shanghai Diebold King Safe Company, Ltd. (refer to note 9). During the nine months ended September 30, 2012, the Company recorded impairment charges within DNA of $6,701 related to a portion of its global enterprise resource planning (ERP) system. Previously capitalized software and software-related costs were impaired due to changes in the ERP implementation plan related to configuration and design. In the nine months ended September 30, 2011, the Company recorded $2,962 of software intangible asset impairment charges within DNA.
Other charges consist of items that the Company determines are non-routine in nature. Net non-routine expenses of $1,913 and $13,064 were included in selling and administrative expense for the nine months ended September 30, 2012 and 2011, respectively. Net non-routine expenses for 2012 and 2011 consisted primarily of legal and compliance costs related to the global FCPA investigation.
NOTE 16: FAIR VALUE OF ASSETS AND LIABILITIES
The Company measures its financial assets and liabilities using one or more of the following three valuation techniques:
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 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.
 
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety.




19

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2012
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)

Assets and Liabilities Recorded at Fair Value
Assets and liabilities subject to fair value measurement are as follows:
 
 
September 30, 2012
 
December 31, 2011
 
 
 
 
Fair Value Measurements Using
 
 
 
Fair Value Measurements Using
 
 
Fair Value
 
Level 1
 
Level 2
 
Fair Value
 
Level 1
 
Level 2
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
 
$
252,124

 
$
252,124

 
$

 
$
269,033

 
$
269,033

 
$

U.S. dollar indexed bond funds
 
16,339

 

 
16,339

 
17,820

 

 
17,820

Assets held in a rabbi trust
 
7,051

 
7,051

 

 
7,170

 
7,170

 

Foreign exchange forward contracts
 
512

 

 
512

 
2,193

 

 
2,193

Total
 
$
276,026

 
$
259,175

 
$
16,851

 
$
296,216

 
$
276,203


$
20,013

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Deferred compensation
 
$
7,051

 
$
7,051

 
$

 
$
7,170

 
$
7,170

 
$

Foreign exchange forward contracts
 
1,604

 

 
1,604

 
1,983

 

 
1,983

Interest rate swaps
 
3,870

 

 
3,870

 
3,796

 

 
3,796

Total
 
$
12,525

 
$
7,051

 
$
5,474

 
$
12,949

 
$
7,170

 
$
5,779


The Company uses the end of period when determining the timing of transfers between levels. During the nine months ended September 30, 2012 and 2011, there were no transfers between levels.
Short-Term Investments The Company has investments in certificates of deposit that are recorded at cost, which approximates fair value. Additionally, the Company has investments in U.S. dollar indexed bond funds that are classified as available-for-sale and stated at fair value. U.S. dollar indexed bond funds are reported at net asset value, which is the practical expedient for fair value as determined by banks where funds are held.
Assets Held in a Rabbi Trust / Deferred Compensation The fair value of the assets held in a rabbi trust is derived from investments in a mix of money market, fixed income and equity funds managed by Vanguard. The related deferred compensation liability is recorded at fair value.
Foreign Exchange Forward Contracts A substantial portion of the Company’s 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 Company’s policy is 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 a pay-fixed receive-variable interest rate swap to hedge against changes in the LIBOR benchmark interest rate on a portion of the Company’s LIBOR-based borrowings. The fair value of the swap is determined using the income approach and is calculated based on LIBOR rates at the reporting date.







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Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2012
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)

Assets and Liabilities Recorded at Carrying Value
The fair value of the Company’s cash and cash equivalents, trade receivables and accounts payable, approximates the carrying value due to the relative short maturity of these instruments. The fair value and carrying value of the Company’s debt instruments are summarized as follows:
 
 
September 30, 2012
 
December 31, 2011
 
 
Fair Value
 
Carrying
Value
 
Fair Value
 
Carrying
Value
Notes payable
 
$
75,000

 
$
75,000

 
$
21,722

 
$
21,722

Long-term debt
 
661,805

 
647,863

 
612,551

 
606,154

Total debt instruments
 
$
736,805

 
$
722,863

 
$
634,273

 
$
627,876

The fair value of the Company’s industrial development revenue bonds are measured using unadjusted quoted prices in active markets for identical assets categorized as level 1 inputs. The fair value of the Company’s current notes payable and credit facility debt instruments approximates the carrying value due to the relative short maturity of the revolving borrowings under these instruments. The fair values of the Company’s long-term senior notes were estimated using market observable inputs for the Company’s comparable peers with public debt, including quoted prices in active markets, market indices and interest rate measurements, considered level 2 inputs.

NOTE 17: SEGMENT INFORMATION
The Company’s segments are comprised of two sales channels: DNA and DI. 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 as well as voting and lottery solutions in Brazil.
The reconciliation between segment information and the condensed consolidated financial statements is disclosed. Revenue summaries by geographic area and product and service solutions are also disclosed. Certain information not routinely used in the management of the DNA and DI segments are not allocated back to the segments. Items not allocated are as follows: investment income; interest expense; equity in the net income of investees accounted for by the equity method; income tax expense or benefit; foreign exchange gains and losses; miscellaneous, net; and discontinued operations. The Company has reclassified the presentation of prior-year operating profit (loss) to conform to the current year presentation due to changes in corporate allocations. 
 

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Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2012
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)

The following table presents information regarding the Company’s segments:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2012
 
2011
 
2012
 
2011
DNA
 
 
 
 
 
 
 
 
Customer revenues
 
$
395,477

 
$
364,144

 
$
1,194,294

 
$
1,008,100

Intersegment revenues
 
14,737

 
16,225

 
41,638

 
56,213

Operating profit
 
22,764