Edgar Filing: DIEBOLD INC

DBD 9.30.2013 10Q

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, 2013



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 October 31, 2013 was 63,838,305.

Table of Contents

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q

INDEX



PART I – FINANCIAL INFORMATION	3
ITEM 1: FINANCIAL STATEMENTS	3
CONDENSED CONSOLIDATED BALANCE SHEETS – September 30, 2013 (Unaudited) and December 31, 2012	3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) – Three and Nine Months Ended September, 2013 and 2012	4
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited) – Three and Nine Months Ended September 30, 2013 and 2012	5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30, 2013 and 2012	6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)	7
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	25
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	38
ITEM 4: CONTROLS AND PROCEDURES	38
PART II – OTHER INFORMATION	39
ITEM 1: LEGAL PROCEEDINGS	39
ITEM 1A: RISK FACTORS	40
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	40
ITEM 3: DEFAULTS UPON SENIOR SECURITIES	40
ITEM 4: MINE SAFETY DISCLOSURES	40
ITEM 5: OTHER INFORMATION	40
ITEM 6: EXHIBITS	41
SIGNATURES	42
EXHIBIT INDEX	43

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PART I – FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

DIEBOLD, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands)



	September 30, 2013			December 31, 2012
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	205,921		$	368,792
Short-term investments	199,703			261,886
Trade receivables, less allowances for doubtful accounts of $25,560 and $27,854, respectively	515,703			488,373
Inventories	480,420			412,996
Deferred income taxes	109,560			143,248
Prepaid expenses	23,544			35,614
Prepaid income taxes	37,344			16,357
Other current assets	134,038			87,591
Total current assets	1,706,233			1,814,857
Securities and other investments	76,865			77,101
Property, plant and equipment, at cost	603,699			661,910
Less accumulated depreciation and amortization	439,558			477,565
Property, plant and equipment, net	164,141			184,345
Goodwill	182,862			272,951
Deferred income taxes	11,002			76,375
Other assets	158,634			167,358
Total assets	$	2,299,737		$	2,592,987
LIABILITIES AND EQUITY
Current liabilities
Notes payable	$	26,773		$	34,212
Accounts payable	210,472			224,973
Deferred revenue	224,182			222,343
Payroll and other benefits liabilities	76,436			69,814
Other current liabilities	362,038			306,002
Total current liabilities	899,901			857,344
Long-term debt	561,595			617,534
Pensions and other benefits	76,318			198,241
Post-retirement and other benefits	23,229			22,904
Deferred income taxes	20,863			34,250
Other long-term liabilities	40,173			35,892
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, 78,376,572 and 77,661,118 issued shares, 63,838,305 and 63,240,667 outstanding shares, respectively	97,971			97,076
Additional capital	381,720			358,281
Retained earnings	782,705			978,345
Treasury shares, at cost (14,538,267 and 14,420,451 shares, respectively)	(554,849		)	(551,189		)
Accumulated other comprehensive loss	(50,913		)	(91,039		)
Total Diebold, Incorporated shareholders' equity	656,634			791,474
Noncontrolling interests	21,024			35,348
Total equity	677,658			826,822
Total liabilities and equity	$	2,299,737		$	2,592,987

See accompanying notes to condensed consolidated financial statements.

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DIEBOLD, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share amounts)



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Net sales
Services	$	405,238		$	402,305		$	1,200,672		$	1,196,079
Products	300,186			307,614			845,376			955,519
	705,424			709,919			2,046,048			2,151,598
Cost of sales
Services	290,121			301,787			904,167			881,275
Products	242,498			236,555			681,646			723,203
	532,619			538,342			1,585,813			1,604,478
Gross profit	172,805			171,577			460,235			547,120
Selling and administrative expense	111,683			120,892			394,401			359,450
Research, development and engineering expense	21,957			22,167			66,404			61,140
Impairment of assets	70,000			7,930			70,642			14,631
Gain on sale of assets, net	(582		)	(437		)	(3,421		)	(397		)
	203,058			150,552			528,026			434,824
Operating (loss) profit	(30,253		)	21,025			(67,791		)	112,296
Other income (expense)
Investment income	6,695			9,298			21,060			29,292
Interest expense	(7,918		)	(7,615		)	(22,027		)	(22,684		)
Foreign exchange gain (loss), net	2,977			930			(1,453		)	2,577
Miscellaneous, net	355			607			(434		)	948
(Loss) income before taxes	(28,144		)	24,245			(70,645		)	122,429
Income tax expense	(7,940		)	7,394			67,293			34,246
Net (loss) income	(20,204		)	16,851			(137,938		)	88,183
Net income attributable to noncontrolling interests	1,486			630			2,233			2,722
Net (loss) income attributable to Diebold, Incorporated	$	(21,690	)	$	16,221		$	(140,171	)	$	85,461

Basic weighted-average shares outstanding	63,825			63,211			63,648			63,003
Diluted weighted-average shares outstanding	63,825			64,134			63,648			63,930

Net (loss) income attributable to Diebold, Incorporated:
Basic (loss) earnings per share	$	(0.34	)	$	0.26		$	(2.20	)	$	1.36
Diluted (loss) earnings per share	$	(0.34	)	$	0.25		$	(2.20	)	$	1.34

See accompanying notes to condensed consolidated financial statements.

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DIEBOLD, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

(in thousands)



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Net (loss) income	$	(20,204	)	$	16,851		$	(137,938	)	$	88,183
Other comprehensive income (loss), net of tax:
Translation adjustment	(6,269		)	2,878			(52,771		)	(37,460		)
Foreign currency hedges	(445		)	1,936			2,223			1,806
Interest rate hedges:
Net gain (loss) recognized in other comprehensive income	66			(133		)	608			(64		)
Less: reclassification adjustment for net gains	48			82			159			252
	18			(215		)	449			(316		)
Pension and other post-retirement benefits:
Net actuarial loss amortization	1,940			4,330			8,875			12,967
Net prior service benefit amortization	(171		)	(65		)	(301		)	(194		)
Net actuarial gain occurring during the period (note 11)	45,539			—			45,539			—
Curtailment (note 11)	34,558			—			35,257			—
	81,866			4,265			89,370			12,773
Unrealized gain (loss) on securities, net:
Net gain recognized in other comprehensive income	277			132			2,327			3,049
Less: reclassification adjustment for net gains	1,012			1,728			1,139			3,236
	(735		)	(1,596		)	1,188			(187		)
Other	8			2			22			12
Other comprehensive income (loss), net of tax	74,443			7,270			40,481			(23,372		)
Comprehensive income (loss)	54,239			24,121			(97,457		)	64,811
Less: comprehensive income attributable to noncontrolling interests	1,507			944			2,588			2,806
Comprehensive income (loss) attributable to Diebold, Incorporated	$	52,732		$	23,177		$	(100,045	)	$	62,005

See accompanying notes to condensed consolidated financial statements.

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DIEBOLD, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)



	Nine Months Ended
	September 30,
	2013			2012
Cash flow from operating activities:
Net (loss) income	$	(137,938	)	$	88,183
Adjustments to reconcile net (loss) income to cash flow used in operating activities:
Depreciation and amortization	64,085			56,909
Share-based compensation	14,070			9,860
Excess tax benefits from share-based compensation	(378		)	(1,705		)
Devaluation of Venezuelan balance sheet	1,584			—
Gain on sale of assets, net	(3,421		)	(397		)
Impairment of assets	70,642			14,631
Equity in earnings of an investee	—			(702		)
Cash flow from changes in certain assets and liabilities:
Trade receivables	(41,789		)	(49,683		)
Inventories	(79,492		)	(55,397		)
Prepaid expenses	11,481			(1,698		)
Prepaid income taxes	(20,987		)	3,823
Other current assets	(42,544		)	(28,049		)
Accounts payable	(10,660		)	(2,013		)
Deferred revenue	5,168			(34,053		)
Deferred income tax	40,164			2,480
Certain other assets and liabilities	70,973			(30,945		)
Net cash used in operating activities	(59,042		)	(28,756		)
Cash flow from investing activities:
Payments for acquisitions, net of cash acquired	—			(23,625		)
Proceeds from maturities of investments	379,889			261,817
Proceeds from sale of investments	22,711			33,437
Payments for purchases of investments	(363,710		)	(299,265		)
Proceeds from sale of assets	4,353			1,851
Capital expenditures	(25,648		)	(35,856		)
Collections on purchased finance receivables	6,105			12,296
Increase in certain other assets	(10,006		)	(9,105		)
Net cash provided by (used in) investing activities	13,694			(58,450		)
Cash flow from financing activities:
Dividends paid	(55,469		)	(54,573		)
Revolving debt borrowings, net	11,007			139,000
Other debt borrowings	38,591			94,602
Other debt repayments	(112,140		)	(139,269		)
Distributions of affiliates earnings to noncontrolling interest holders	(6,380		)	(2,092		)
Excess tax benefits from share-based compensation	378			1,705
Issuance of common shares	10,264			16,651
Repurchase of common shares	(3,660		)	(3,076		)
Net cash (used in) provided by financing activities	(117,409		)	52,948
Effect of exchange rate changes on cash and cash equivalents	(114		)	2,888
Decrease in cash and cash equivalents	(162,871		)	(31,370		)
Cash and cash equivalents at the beginning of the period	368,792			333,920
Cash and cash equivalents at the end of the period	$	205,921		$	302,550

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

See accompanying notes to condensed consolidated financial statements.

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DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q as of September 30, 2013

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, 2012. 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, 2013 are not necessarily indicative of results to be expected for the full year.

Error Correction and Reclassification The Company continues to work to remediate an internal control weakness pertaining to manufacturing and supply chain processes related to indirect tax incentives in one of its Brazilian subsidiaries. As part of remediation, during the second quarter of 2013, the Company identified an error related to prior year periods for Brazilian indirect tax incentives previously not appropriately recognized in product cost of goods sold. Prior-year amounts of product cost of sales, income tax expense, other current liabilities and retained earnings have been adjusted as management determined that the correction for each respective year is not material to each prior year period. This correction was recorded within the Company's operations in Brazil, included in the Diebold International (DI) reporting segment. As a result of applying the correction retrospectively, previously reported product cost of sales for the three and nine months ended September 30, 2012 increased by $1,633 and $4,899, respectively, and previously reported net income and diluted earnings per share decreased by $1,213 and $0.02 and $3,638 and $0.05, respectively. The aggregated amount of the correction reflected in other current liabilities and retained earnings as of December 31, 2012 was $18,489. There was no impact of the correction on previously reported cash flows from operations for the prior period.

The Company has also reclassified the presentation of certain prior-year information to conform to the current presentation.

Recently Adopted Accounting Guidance

In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU 2013-02), which required entities to disclose additional information for items reclassified out of accumulated other comprehensive income (AOCI). For items reclassified out of AOCI and into net income in their entirety, entities are required to disclose the effect of the reclassification on each affected net income line item. For AOCI reclassification items that are not reclassified in their entirety into net income, a cross-reference to other required U.S. GAAP disclosures is required. This information may be provided either in the notes or parenthetically on the face of the statement that reports net income as long as all the information is disclosed in a single location. However, an entity is prohibited from providing this information parenthetically on the face of the statement that reports net income if it has items that are not reclassified in their entirety into net income. The adoption of this update did not have a material impact on the Company's condensed consolidated financial statements; however, the Company provided additional disclosures as required by ASU 2013-02 in the condensed consolidated statements of comprehensive income (loss).

In March 2013, the FASB issued ASU 2013-05, Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (ASU 2013-05). The objective of ASU 2013-05 is to resolve the diversity in practice regarding the release into net income of the cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. The Company elected to early adopt ASU 2013-05 during the three months ended March 31, 2013, which did not have any impact on its condensed consolidated financial statements.

Recently Issued Accounting Guidance

In July 2013, the FASB issued 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU 2013-11), which requires entities to present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss (“NOL”) or tax credit carryforward whenever the NOL or tax

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credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed. This accounting standard update requires entities to assess whether to net the unrecognized tax benefit with a deferred tax asset as of the reporting date. This guidance is effective for fiscal years beginning after December 15, 2013, with early adoption permitted. The Company will early adopt this guidance during the fourth quarter of 2013, and is not anticipating adoption of this update to have a material impact on the Company's consolidated financial statements.

NOTE 2: (LOSS) EARNINGS PER SHARE

Basic (loss) earnings per share is based on the weighted-average number of common shares outstanding. Diluted (loss) earnings per share includes the dilutive effect of potential common shares outstanding. Under the two-class method of computing (loss) 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 (loss) earnings per share under both the treasury stock method and the two-class method. For the three and nine months ended September 30, 2013 and 2012, 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 (loss) 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,
	2013			2012		2013			2012
Numerator:
(Loss) income used in basic and diluted earnings per share:
Net (loss) income attributable to Diebold, Incorporated	$	(21,690	)	$	16,221	$	(140,171	)	$	85,461
Denominator:
Weighted-average number of common shares used in basic earnings per share	63,825			63,211		63,648			63,003
Effect of dilutive shares (1)	—			923		—			927
Weighted-average number of shares used in diluted earnings per share	63,825			64,134		63,648			63,930
Net (loss) income attributable to Diebold, Incorporated:
Basic (loss) earnings per share	$	(0.34	)	$	0.26	$	(2.20	)	$	1.36
Diluted (loss) earnings per share	$	(0.34	)	$	0.25	$	(2.20	)	$	1.34
Anti-dilutive shares (in thousands):
Anti-dilutive shares not used in calculating diluted weighted-average shares	2,846			2,174		3,057			2,208

(1) Incremental shares of 479 thousand and 560 thousand were excluded from the computation of diluted (loss) earnings per share for the three and nine months ended September 30, 2013, respectively, because their effect is anti-dilutive due to the net loss attributable to Diebold, Incorporated.

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DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q as of September 30, 2013

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,
	2013			2012			2013			2012
Diebold, Incorporated shareholders' equity
Balance at beginning of period	$	620,122		$	834,674		$	791,474		$	813,348
Comprehensive income (loss) attributable to Diebold, Incorporated	52,732			23,177			(100,045		)	62,005
Common shares	172			45			895			983
Additional capital	3,850			4,758			23,439			25,527
Treasury shares	(1,692		)	(180		)	(3,660		)	(3,076		)
Dividends paid	(18,550		)	(18,260		)	(55,469		)	(54,573		)
Balance at end of period	$	656,634		$	844,214		$	656,634		$	844,214

Noncontrolling interests
Balance at beginning of period	$	32,965		$	32,024		$	35,348		$	31,274
Comprehensive income attributable to noncontrolling interests	1,507			944			2,588			2,806
Distributions/payable to noncontrolling interest holders	(13,448		)	(980		)	(16,912		)	(2,092		)
Balance at end of period	$	21,024		$	31,988		$	21,024		$	31,988

Reclassification adjustments recognized in AOCI for net gains on interest rate hedges and available-for-sale securities are included in interest expense and investment income, respectively, in the condensed consolidated statement of operations. Pension and other postretirement benefits AOCI components are included in the computation of net periodic benefit cost (refer to note 11 to the condensed consolidated financial statements).

NOTE 4: SHARE-BASED COMPENSATION

The Company’s share-based compensation payments to employees are recognized 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 $3,100 and $4,156 for the three months ended September 30, 2013 and 2012, respectively, and $14,070 and $9,860 for the nine months ended September 30, 2013 and 2012, respectively. Share-based compensation expense for the nine months ended September 30, 2013 included accelerated expense of $2,982 related to executive severance.

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DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q as of September 30, 2013

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(dollars in thousands, except per share amounts)

Options outstanding and exercisable as of September 30, 2013 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, 2013, 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, 2013	2,668		$	37.56
Expired or forfeited	(318	)	36.97
Exercised	(386	)	26.56
Granted	338		30.46
Outstanding at September 30, 2013	2,302		$	38.44	5	$	716
Options exercisable at September 30, 2013	1,624		$	41.07	3	$	634
Options vested and expected to vest at September 30, 2013	2,272		$	38.53	5	$	713

(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 2013 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, 2013. 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.

The following table summarizes information on non-vested RSUs, performance shares and deferred shares for the nine months ended September 30, 2013:



	Number of Shares		Weighted-Average Grant-Date Fair Value
	(in thousands)
RSUs:
Non-Vested at January 1, 2013	732		$	33.33
Forfeited	(107	)	33.72
Vested	(252	)	32.74
Granted	238		30.10
Non-Vested at September 30, 2013	611		$	32.27
Performance Shares (1):
Non-Vested at January 1, 2013	729		$	40.41
Forfeited	(328	)	38.00
Vested	(31	)	35.49
Granted	277		29.15
Non-Vested at September 30, 2013	647		$	37.04
Director Deferred Shares:
Non-Vested at January 1, 2013	20		$	40.54
Forfeited	(3	)	40.54
Vested	(17	)	40.54
Granted	31		29.73
Non-Vested at September 30, 2013	31		$	29.73
Vested at September 30, 2013	103		$	35.55
Outstanding at September 30, 2013	134		$	34.20


(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.

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DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q as of September 30, 2013

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(dollars in thousands, except per share amounts)

NOTE 5: INCOME TAXES

The effective tax rate on the loss for the three months ended September 30, 2013 was 28.2 percent. The effective rate on the the income for the three months ended September 30, 2012 was 30.5 percent. The decrease was mainly due to the reduced tax benefit attributable to the non-deductible portion of the Company's Brazil goodwill impairment, partially offset by additional non-recurring discrete tax items recorded in the quarter.

The effective tax rate on the loss before taxes was (95.3) percent for the nine months ended September 30, 2013. The negative tax rate for 2013 is a result of tax expense of approximately $47,000 related to the repatriation of previously undistributed earnings and the establishment of a valuation allowance of approximately $39,200 on deferred tax assets in the Company's Brazilian manufacturing facility, both in the second quarter of 2013. The tax impact of the goodwill impairment recorded in the third quarter of 2013 offset a portion of the previous quarter discrete tax expense, reducing the negative effective tax rate. The effective tax rate on income was 28.0 percent for the nine months ended September 30, 2012.

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 AOCI. Realized gains and losses are recognized in investment income and are determined using the specific identification method. Realized gains, net from the sale of securities were $1,533 and $1,728 for the three months ended September 30, 2013 and 2012, respectively, and $1,725 and $3,236 for the nine months ended September 30, 2013 and 2012, respectively. Proceeds from the sale of available-for-sale securities were $22,711 and $33,437 during the nine months ended September 30, 2013 and 2012, respectively.

The Company’s investments, excluding cash surrender value of insurance contracts of $69,729 and $70,318 as of September 30, 2013 and December 31, 2012, respectively, consist of the following:



	Cost Basis		Unrealized Gain			Fair Value
As of September 30, 2013
Short-term investments:
Certificates of deposit	$	160,286	$	—		$	160,286
U.S. dollar indexed bond funds	37,498		1,919			39,417
	$	197,784	$	1,919	....	$	199,703
Long-term investments:
Assets held in a rabbi trust	$	5,867	$	1,269		$	7,136

As of December 31, 2012
Short-term investments:
Certificates of deposit	$	258,518	$	—		$	258,518
U.S. dollar indexed bond funds	3,249		119			3,368
	$	261,767	$	119		$	261,886
Long-term investments:
Assets held in a rabbi trust	$	6,266	$	517		$	6,783

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.

Table of Contents

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q as of September 30, 2013

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(dollars in thousands, except per share amounts)

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 for the nine months ended September 30, 2013 and 2012:



	Finance Leases			Notes Receivable			Total
Allowance for credit losses
Balance at January 1, 2013	$	525		$	2,047		$	2,572
Provision for credit losses	8			—			8
Recoveries	3			—			3
Write-offs	(90		)	(2,047		)	(2,137		)
Balance at September 30, 2013	$	446		$	—		$	446

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

The Company's allowance of $446 and $2,566 at September 30, 2013 and 2012, respectively, all resulted from individual impairment evaluation. As of September 30, 2013, balances of finance leases and notes receivable were $88,216 and $16,343, respectively. As of September 30, 2012, balances of finance leases and notes receivable were $100,436 and $12,882, respectively.

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, 2013 and December 31, 2012, the recorded investment in past-due financing receivables on nonaccrual status was $2,489 and $2,060, respectively, and there were no recorded investments in finance receivables past due 90 days or more and still accruing interest. The recorded investment in impaired notes receivable was $0 as of September 30, 2013 and was $2,047 as of December 31, 2012 ,which was fully reserved. The following table summarizes the Company’s aging of past-due notes receivable balances:



	September 30, 2013		December 31, 2012
30-59 days past due	$	—	$	—
60-89 days past due	—		—
> 89 days past due	—		1,840
Total past due	$	—	$	1,840

Table of Contents

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q as of September 30, 2013

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(dollars in thousands, except per share amounts)

NOTE 8: INVENTORIES

Major classes of inventories are summarized as follows:



	September 30, 2013		December 31, 2012
Finished goods	$	228,931	$	183,286
Service parts	144,157		151,189
Raw materials and work in process	107,332		78,521
Total inventories	$	480,420	$	412,996

NOTE 9: GOODWILL AND OTHER ASSETS

Goodwill In 2012, goodwill was reviewed for impairment based on a two-step test, which resulted in no impairment in any of the Company's reporting units. Due to deteriorating macro-economic outlook, structural changes to an auction-based purchasing environment and new competitors entering the market over the past several quarters, management reduced its earnings outlook for the Brazil business unit during the third quarter of 2013. As a result, the Company performed an other-than-annual assessment for its Brazil reporting unit based on a two-step impairment test and concluded that the goodwill within the Brazil reporting unit was partially impaired. The Company recorded a $70,000 pre-tax, non-cash goodwill impairment charge during the third quarter of 2013.

The two-step impairment test was used to measure the amount of impairment loss to be recognized. In the first step, the Company compares the fair value of each reporting unit with its carrying value. The fair value is determined based upon discounted estimated future cash flows as well as the market approach or guideline public company method. The Company’s Step 1 impairment test of goodwill of a reporting unit is based upon the fair value of the reporting unit, defined as the price that would be received to sell the net assets or transfer the net liabilities in an orderly transaction between market participants at the assessment date. In the event that the net carrying amount exceeds the fair value, a Step 2 test must be performed whereby the fair value of the reporting unit’s goodwill must be estimated to determine if it is less than its net carrying amount. In its two-step test, the Company uses the discounted cash flow method and the guideline company method for determining the fair value of its reporting units. Under these methods, the determination of implied fair value of the goodwill for a particular reporting unit is the excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities in the same manner as the allocation in a business combination.

The techniques used in the Company's qualitative assessment and, if necessary, two-step impairment test have incorporated a number of assumptions that the Company believes to be reasonable and to reflect market conditions forecast at the assessment date. Assumptions in estimating future cash flows are subject to a high degree of judgment. The Company makes all efforts to forecast future cash flows as accurately as possible with the information available at the time a forecast is made. To this end, the Company evaluates the appropriateness of its assumptions as well as its overall forecasts by comparing projected results of upcoming years with actual results of preceding years and validating that differences therein are reasonable. Key assumptions, all of which are Level 3 inputs (refer to note 16), relate to price trends, material costs, discount rate, customer demand, and the long-term growth and foreign exchange rates. A number of benchmarks from independent industry and other economic publications were also used. Changes in assumptions and estimates after the assessment date may lead to an outcome where impairment charges would be required in future periods. Specifically, actual results may vary from the Company’s forecasts and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market conditions.

Other Assets Included in other assets are net capitalized software development costs of $41,674 and $49,513 as of September 30, 2013 and December 31, 2012, respectively. Amortization expense on capitalized software of $5,369 and $3,985 was included in product cost of sales for the three months ended September 30, 2013 and 2012, respectively, and $16,620 and $12,586 was included in product cost of sales for the nine months ended September 30, 2013 and 2012, respectively. Other long-term assets also consist of patents, trademarks, other intangible assets, and financing receivables. Where applicable, other assets are stated at cost and, if applicable, are amortized ratably over the relevant contract period or the estimated life of the assets. Fees to renew or extend the term of the Company’s intangible assets are expensed when incurred.

In August 2012, the Company acquired GAS Tecnologia (GAS), a Brazilian Internet banking, online payment and mobile banking security company. At June 30, 2013, the Company finalized the purchase accounting with respect to opening balance sheet valuations. Amortizable intangible assets resulting from the acquisition was $16,000.

Table of Contents

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q as of September 30, 2013

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(dollars in thousands, except per share amounts)

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.

NOTE 10: DEBT

Outstanding debt balances were as follows:



	September 30, 2013		December 31, 2012
Notes payable:
Uncommitted lines of credit	$	26,103	$	33,916
Other	670		296
	$	26,773	$	34,212
Long-term debt:
Credit facility	$	320,007	$	300,000
Senior notes	225,000		300,000
Industrial development revenue bonds	11,900		11,900
Other	4,688		5,634
	$	561,595	$	617,534

As of September 30, 2013, the Company had various international short-term uncommitted lines of credit with borrowing limits of $108,322. The weighted-average interest rate on outstanding borrowings on the short-term uncommitted lines of credit as of September 30, 2013 and December 31, 2012 was 3.96 percent and 2.81 percent, respectively. The increase 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, 2013 was $82,219.

As of September 30, 2013, the Company had borrowing limits under its five-year credit facility totaling $500,000, which expires in June 2016. 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, 2013 and December 31, 2012 was 1.34 percent and 1.33 percent, respectively, which is variable based on the London Interbank Offered Rate (LIBOR). The amount available under the credit facility as of September 30, 2013 was $179,993.

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. Additionally, the Company entered into a derivative transaction to hedge interest rate 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. The Company funded the repayment of $75,000 of the senior notes at maturity in March 2013 using its revolving credit facility. The maturity dates of the remaining senior notes are staggered, with $175,000 and $50,000 due in 2016 and 2018, respectively.

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 0.37 percent and 0.49 percent as of September 30, 2013 and December 31, 2012, 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, 2013, the Company was in compliance with the financial and other covenants in its debt agreements.

Table of Contents

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q as of September 30, 2013

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(dollars in thousands, except per share amounts)

NOTE 11: BENEFIT PLANS

Qualified Pension Benefits 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.

Supplemental Executive Retirement Benefits The Company has non-qualified pension plans to provide supplemental executive retirement plan (SERP) benefits to certain officers. Benefits are payable at retirement based upon a percentage of the participant's compensation, as defined.

Plan Freeze and Re-measurement In July 2013, the Company's board of directors approved freezing certain pension and SERP plan benefits effective as of December 31, 2013 for U.S.-based salaried employees. The Company recognized the plan freeze in the three months ended September 30, 2013 as a curtailment, since it eliminates for a significant number of participants the accrual of defined benefits for all of their future services. The impact of the curtailment includes the one-time accelerated recognition of outstanding unamortized pre-tax prior service cost of $809 within general and administrative expense and a pre-tax reduction in AOCI of $52,462, attributable to the decrease in long-term pension liabilities. This curtailment event triggered a re-measurement for the affected benefit plans as of July 31, 2013 using a discount rate of 5.06 percent. The re-measurement resulted in a further reduction of long-term pension liabilities and AOCI (pre-tax) related to the actuarial gain occurring during the year of approximately $71,000. Freezing certain pension and SERP plan benefits, coupled with an anticipated increase in discount rate, is expected to result in a significant reduction of future pension expense.

Other Benefits 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
	2013			2012			2013			2012
Components of net periodic benefit cost
Service cost	$	2,647		$	2,862		$	—		$	—
Interest cost	6,865			7,957			157			204
Expected return on plan assets	(9,017		)	(10,205		)	—			—
Amortization of prior service (benefit) cost	(136		)	65			(122		)	(130		)
Recognized net actuarial loss	2,529			4,207			105			123
Curtailment loss	809			—			—			—
Net periodic pension benefit cost	$	3,697		$	4,886		$	140		$	197

Table of Contents

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q as of September 30, 2013

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
	2013			2012			2013			2012
Components of net periodic benefit cost
Service cost	$	9,308		$	8,585		$	—		$	—
Interest cost	20,778			23,873			471			611
Expected return on plan assets	(26,622		)	(30,616		)	—			—
Amortization of prior service (benefit) cost	(99		)	194			(366		)	(388		)
Recognized net actuarial loss	13,385			12,601			317			366
Curtailment loss (1)	1,968			—			—			—
Net periodic pension benefit cost	$	18,718		$	14,637		$	422		$	589

(1) The curtailment recognized during the nine months ended September 30, 2013 resulted from the departure of certain executive officers and the U.S. salary plan benefit freeze and was recorded within selling and administrative expense.

Contributions

There have been changes to the expected 2013 plan year contribution amounts previously disclosed. The benefit freeze of the defined-benefit pension plan for U.S.-based employees, coupled with higher discount rates, improved the funded status of the salaried plan and, therefore, the Company has no plans to make contributions to the pension plan for the next twelve months. For the nine months ended September 30, 2013 and 2012, contributions of $2,662 and $14,915, 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, 2013 and December 31, 2012.

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, 2013, the maximum future payment obligations related to these various guarantees totaled $86,883, of which $26,035 represented standby letters of credit to insurance providers, and no associated liability was recorded. At December 31, 2012, the maximum future payment obligations relative to these various guarantees totaled $80,662, of which $23,435 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:



	2013			2012
Balance at January 1	$	81,751		$	63,355
Current period accruals (a)	34,300			45,472
Current period settlements	(40,564		)	(39,917		)
Balance at September 30	$	75,487		$	68,910


(a)	includes the impact of foreign exchange rate fluctuations

Table of Contents

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q as of September 30, 2013

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(dollars in thousands, except per share amounts)

NOTE 13: COMMITMENTS AND CONTINGENCIES

Contractual Obligations

At September 30, 2013, the Company had purchase commitments due within one year of $15,420 for materials through contract manufacturing agreements at negotiated prices.

Indirect Tax Contingencies

The Company accrues non income-tax liabilities for indirect tax matters when management believes that a loss is probable and the amounts can be reasonably estimated, while contingent gains are recognized only when realized. In the event any losses are sustained in excess of accruals, they are charged against income. In evaluating indirect tax matters, management takes into consideration factors such as historical experience with matters of similar nature, specific facts and circumstances, and the likelihood of prevailing. Management evaluates and updates accruals as matters progress over time. It is reasonably possible that some of the matters for which accruals have not been established could be decided unfavorably to the Company and could require recognizing future expenditures. Also, statutes of limitations could expire without the Company paying the taxes for matters for which accruals have been established which could result in the recognition of future gains upon reversal of these accruals at that time.

At September 30, 2013, the Company was a party to several indirect tax claims from various taxing authorities globally 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 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 indirect tax claims and/or proceedings or asserted claims. In addition to these routine indirect tax matters, the Company was a party to the proceeding described below:

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 Brazil'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. 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. Additionally, in May 2013, the U.S. Securities and Exchange Commission (SEC) requested that the Company retain certain documents and produce certain records relating to the assessment, and the Company is complying with that request.

At September 30, 2013 and December 31, 2012, the Company had an accrual of approximately $26,000 for certain indirect tax positions in both periods. A loss contingency is reasonably possible if it has a more than remote but less than probable chance of occurring. Although management believes the Company has valid defenses with respect to its indirect tax positions, it is reasonably possible that a loss could occur in excess of the estimated accrual, for which the Company estimated the aggregate risk at September 30, 2013 to be up to approximately $381,000 for its material indirect tax matters.

Legal Contingencies

At September 30, 2013, 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 Company’s financial position or results of operations. In addition, the Company has indemnification obligations with certain former employees and costs associated with these indemnifications are expensed as incurred. 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 the legal proceedings described below:

Securities Action

On June 30, 2010, a shareholder filed a putative class action complaint in the United States District Court for the Northern District of Ohio alleging violations of the federal securities laws against the Company, certain current and former officers, and the Company's independent auditors (Louisiana Municipal Police Employees Retirement System v. KPMG et al., No. 10-CV-1461). The complaint seeks unspecified compensatory damages on behalf of a class of persons who purchased the Company's stock between June 30, 2005 and January 15, 2008 and fees and expenses related to the lawsuit. The complaint generally relates to the matters set forth

Table of Contents

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q as of September 30, 2013

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(dollars in thousands, except per share amounts)

in the court documents filed by the SEC in June 2010 finalizing the settlement of civil charges stemming from the investigation of the Company conducted by the Division of Enforcement of the SEC. In the second quarter 2013, the Company recorded a $30,000 pre-tax charge within selling and administrative expense related to an agreement in principle to settle this matter, which is included in other current liabilities. Additionally, the Company recorded an offsetting $12,755 pre-tax credit within selling and administrative expense related to the Company's estimate of anticipated insurance recovery, which is included in other current assets.

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 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 global compliance with the FCPA.

The Company voluntarily self-reported its findings to the SEC and the U.S. Department of Justice (DOJ) and cooperated 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.

The Company has reached agreement with the DOJ and the SEC to the terms of a settlement of their inquiries, which terms were filed in federal court on October 22, 2013. These terms include combined payments to the U.S. government of $48,000 in disgorgement, penalties, and pre-judgment interest and the appointment of an independent compliance monitor for a minimum period of 18 months. As a result, in the second quarter of 2013, the Company recorded a $28,000 pre-tax charge within selling and administrative expense for additional estimated losses related to this matter. As of September 30, 2013 and December 31, 2012, the total accrual for estimated losses was $48,000 and $20,000, respectively. The Company remitted the combined payments to the U.S. government in November 2013.

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 AOCI. 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 AOCI 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 $(1,136) and $0 as of September 30, 2013 and December 31, 2012, respectively. The net (loss) gain recognized in AOCI on net investment hedge derivative instruments was $(3,764) and $(463) in the three months ended September 30, 2013 and 2012, respectively, and $223 and $1,805 in the nine months ended September 30, 2013 and 2012, 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 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 $(256) and $47 as of September 30, 2013 and December 31, 2012, respectively.

Table of Contents

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q as of September 30, 2013

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(dollars in thousands, except per share amounts)

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,
	2013			2012			2013			2012
Interest expense	$	(2,099	)	$	(1,121	)	$	(4,726	)	$	(3,787	)
Foreign exchange (loss) gain, net	(680		)	(3,108		)	10,275			(2,509		)
	$	(2,779	)	$	(4,229	)	$	5,549		$	(6,296	)

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, 2013, the Company had 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 AOCI 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 AOCI to interest expense. The fair value of the Company’s interest rate contracts was $(2,604) and $(3,558) as of September 30, 2013 and December 31, 2012, respectively.

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 AOCI related to the pre-issuance cash flow hedges will continue to be reclassified on a straight-line basis through February 2016.

The gain or loss on designated cash flow hedge derivative instruments for the three and nine months ended September 30, 2013 and 2012 were not material. Gains and losses related to interest rate contracts that are reclassified from AOCI are recorded in interest expense on the statements of operations. The Company anticipates reclassifying $942 from AOCI 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 operations:



	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2013		2012			2013		2012
Cost of sales – services	$	2,124	$	956		$	8,983	$	91
Cost of sales – products	212		(2,064		)	429		(1,959		)
Selling and administrative expense	1,859		2,454			9,375		5,654
Research, development and engineering expense	151		1,116			2,617		1,116
Total	$	4,346	$	2,462		$	21,404	$	4,902

Table of Contents

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q as of September 30, 2013

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(dollars in thousands, except per share amounts)

The following table summarizes the Company’s net restructuring charges for its Diebold North America (DNA) and DI reporting segments:



	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2013		2012			2013		2012
DNA
Severance	$	962	$	3,313		$	14,373	$	4,870
Other	224		—			224		—
DI
Severance	2,827		(621		)	6,334		(329		)
Other	333		(230		)	473		361
Total	$	4,346	$	2,462		$	21,404	$	4,902

During the first quarter of 2013, the Company announced a multi-year realignment plan. Certain aspects of this plan were previously disclosed under the Company's global realignment plan and global shared services plan. This multi-year realignment will focus on globalizing the Company's service organization, creating a unified center-led global organization for research and development as well as transform the Company's general and administrative cost structure. All restructuring charges for the three and nine months ended September 30, 2013 and 2012 related to the Company's multi-year realignment plan. As of September 30, 2013, the Company anticipates additional restructuring costs of $94,000 to $121,000 to be incurred through the end of 2014, inclusive of $48,000 to $59,000 of non-cash voluntary early retirement program restructuring charges to be incurred in the fourth quarter 2013. As management finalizes certain aspects of the realignment plan, the anticipated future costs related to this plan are subject to change. As of September 30, 2013, cumulative total restructuring costs for the multi-year realignment plan were $26,179 and $13,955 in DNA and DI, respectively.

The following table summarizes the Company’s restructuring accrual balances:



	2013			2012
Balance at January 1	$	11,844		$	10,136
Liabilities incurred	21,404			4,902
Liabilities paid	(27,239		)	(5,347		)
Balance at September 30	$	6,009		$	9,691

Impairment and Other Charges

During the third quarter of 2013, the Company recorded a $70,000 pre-tax, non-cash goodwill impairment charge related to its Brazil reporting unit (refer to note 9) within DI.

During the third quarter of 2012, the Company determined an investment related to its 50 percent ownership in Shanghai Diebold King Safe Company, Ltd. was partially impaired and recorded an impairment charge of $7,930, which was allocated to the DNA and DI segments. During the second quarter of 2012, the Company recorded an impairment charge 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.

Other charges consist of items that the Company determines are non-routine in nature. Net non-routine expenses of $56,364 and $1,913 impacted the nine months ended September 30, 2013 and 2012, respectively. Non-routine expenses within selling and administrative expense for the first nine months of 2013 included $28,000 of estimated pre-tax losses related to the potential outcome of the FCPA investigation in addition to related legal fees, a $17,245 pre-tax net charge related to settlement of the securities legal action (refer to note 13), and executive severance costs, including accelerated share-based compensation expense of $2,982 (pre-tax). Non-routine income for 2013 related to a pre-tax gain of $2,191 from the sale of certain U.S. manufacturing operations to a long-time supplier. Net non-routine expenses for 2012 consisted primarily of legal and compliance costs related to the FCPA investigation.

Table of Contents

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q as of September 30, 2013

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(dollars in thousands, except per share amounts)

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.

Assets and Liabilities Recorded at Fair Value

Assets and liabilities subject to fair value measurement are as follows:



	September 30, 2013						December 31, 2012
			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	$	160,286	$	160,286	$	—	$	258,518	$	258,518	$	—
U.S. dollar indexed bond funds	39,417		—		39,417		3,368		—		3,368
Assets held in a rabbi trust	7,136		7,136		—		6,783		6,783		—
Foreign exchange forward contracts	469		—		469		960		—		960
Total	$	207,308	$	167,422	$	39,886	$	269,629	$	265,301	$	4,328
Liabilities
Deferred compensation	$	7,136	$	7,136	$	—	$	6,783	$	6,783	$	—
Foreign exchange forward contracts	1,861		—		1,861		913		—		913
Interest rate swaps	2,605		—		2,605		3,558		—		3,558
Total	$	11,602	$	7,136	$	4,466	$	11,254	$	6,783	$	4,471

The Company uses the end of period when determining the timing of transfers between levels. During the three and nine months ended September 30, 2013 and 2012, 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-

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DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q as of September 30, 2013

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(dollars in thousands, except per share amounts)

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.

Assets and Liabilities Not Measured at Fair Value on a Recurring Basis

In addition to assets and liabilities that are measured at fair value on a recurring basis, the Company also measures certain assets and liabilities at fair value on a nonrecurring basis. Our non-financial assets, including goodwill, intangible assets and property, plant and equipment, are measured at fair value when there is an indication of impairment. These assets are recorded at fair value, determined using level 3 inputs, only when an impairment charge is recognized. Further details regarding the Company's goodwill other-than-annual-impairment review appears in note 9.

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, 2013				December 31, 2012
	Fair Value		Carrying Value		Fair Value		Carrying Value
Notes payable	$	26,773	$	26,773	$	34,212	$	34,212
Long-term debt	567,918		561,595		630,450		617,534
Total debt instruments	$	594,691	$	588,368	$	664,662	$	651,746

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 service and product solutions are also disclosed. Certain information not routinely used in the management of the DNA and DI segments, not allocated back to the segments or information that is impractical to report is not shown. 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; and miscellaneous, net. The Company has reclassified the presentation of prior-year operating (loss) profit to conform to the current-year presentation due to changes in corporate allocations.

Table of Contents

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q as of September 30, 2013

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,
	2013			2012			2013			2012
DNA
Customer revenues	$	356,943		$	395,477		$	1,056,184		$	1,194,294
Intersegment revenues	21,265			14,737			60,157			41,638
Operating profit	28,295			22,424			35,831			113,020
Capital expenditures	4,192			8,262			15,391			20,862
Depreciation and amortization	16,253			12,940			46,583			40,055
Property, plant and equipment, at cost	418,562			465,570			418,562			465,570
Total assets	895,976			1,056,570			895,976			1,056,570
DI
Customer revenues	348,481			314,442			989,864			957,304
Intersegment revenues	3,784			5,414			19,485			39,893
Operating (loss) profit	(58,548		)	(1,399		)	(103,622		)	(724		)
Capital expenditures	3,300			6,925			10,257			14,994
Depreciation and amortization	5,638			5,174			17,502			16,854
Property, plant and equipment, at cost	185,137			184,287			185,137			184,287
Total assets	1,403,761			1,539,184			1,403,761			1,539,184
TOTAL
Customer revenues	705,424			709,919			2,046,048			2,151,598
Intersegment revenues	25,049			20,151			79,642			81,531
Operating (loss) profit	(30,253		)	21,025			(67,791		)	112,296
Capital expenditures	7,492			15,187			25,648			35,856
Depreciation and amortization	21,891			18,114			64,085			56,909
Property, plant and equipment, at cost	603,699