DBD 12.31.2012 - 10K
Table of Contents


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 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)
(I.R.S. Employer Identification No.)
 
 
5995 Mayfair Road,
P.O. Box 3077, North Canton, Ohio
44720-8077
(Address of principal
executive offices)
(Zip Code)
Registrants telephone number, including area code (330) 490-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered:
Common Shares $1.25 Par Value
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  Yes o  No x
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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  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 o
Smaller reporting company o
(do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No x

Approximate aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2012, based upon the closing price on the New York Stock Exchange on June 30, 2012, was $2,322,293,045.

Number of shares of common stock outstanding as of February 8, 2013 was 63,249,000.

DOCUMENTS INCORPORATED BY REFERENCE
Listed hereunder are the documents, portions of which are incorporated by reference, and the parts of this Form 10-K into which such portions are incorporated:
Diebold, Incorporated Proxy Statement for 2013 Annual Meeting of Shareholders to be held on April 25, 2013, portions of which are incorporated by reference into Part III of this Form 10-K.





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Table of Contents

PART I

ITEM 1: BUSINESS
(dollars in thousands)

GENERAL
Diebold, Incorporated (collectively with its subsidiaries, the Company) was incorporated under the laws of the state of Ohio in August 1876, succeeding a proprietorship established in 1859.

The Company is a global leader in providing integrated software-led services and self-service delivery and security systems to primarily the financial, commercial, government and retail markets. The Company’s vision is to be recognized as the essential partner in creating and implementing ideas that optimize convenience, efficiency and security. This vision is the guiding principle behind the Company’s transformation to becoming a more software-led services company. Services comprise more than 50 percent of the Company’s revenue. The Company expects that this percentage will continue to grow over time as the Company continues to build on its strong base of maintenance and advanced services to deliver world-class integrated services. Sales of systems and equipment are made directly to customers by the Company’s sales personnel, manufacturers’ representatives and distributors globally. The sales and support organizations work closely with customers and their consultants to analyze and fulfill the customers’ needs.

SERVICE AND PRODUCT SOLUTIONS
The Company has two core lines of business: Self-Service Solutions and Security Solutions, which the Company integrates based on its customers’ needs. Financial information for the service and product solutions can be found in note 19 to the consolidated financial statements, which is contained in Item 8 of this annual report on Form 10-K.

Self-Service Solutions
One popular example of self-service solutions is the automated teller machine (ATM). The Company offers an integrated line of self-service technologies and services, including comprehensive ATM outsourcing, ATM security, deposit and payment terminals and software. The Company is a leading global supplier of ATMs and related services and holds the leading market position in many countries around the world.

Self-Service Support and Managed Services
From analysis and consulting to monitoring and repair, the Company provides value and support to its customers every step of the way. Services include installation and ongoing maintenance of our products, OpteView® remote services, availability management, branch transformation and distribution channel consulting. Additionally, service revenue includes services and parts the Company provides on a billed-work basis that are not covered by warranty or service contract. The Company also provides outsourced and managed services including remote monitoring, troubleshooting for self-service customers, transaction processing, currency management, maintenance services and full support via person to person or online communication.

Self-Service Products
The Company offers a wide variety of self-service solutions. Self-service products comprise a full range of ATMs and teller automation, including deposit automation technology such as check-cashing machines, bulk cash recyclers and bulk check deposit.

Self-Service Software
The Company offers software solutions consisting of multiple applications that process events and transactions. These solutions are delivered on the appropriate platform, allowing the Company to meet customer requirements while adding new functionality in a cost-effective manner.

Security Solutions
From the safes and vaults that the Company first manufactured in 1859 to the full range of advanced electronic security offerings it provides today, the Company’s integrated security solutions contain best-in-class products and award-winning services for its customers’ unique needs. The Company provides its customers with the latest technological advances to better protect their assets, improve their workflow and increase their return on investment. These solutions are backed with experienced sales, installation and service teams. The Company is a leader in providing physical and electronic security systems as well as assisted transactions, providing total security systems solutions to financial, retail, commercial and government markets.



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Physical Security and Facility Products
The Company provides security solutions and facility products, pneumatic tube systems for drive-up lanes, vaults, safes, depositories, bullet-resistive items and undercounter equipment.

Electronic Security Products
The Company provides a broad range of electronic security products including digital surveillance, access control systems, biometric technologies, alarms and remote monitoring and diagnostics.

Monitoring and Services
The Company provides security monitoring solutions including fire, managed access control, energy management and remote video management and storage, as well as logical security.

Integrated Solutions
The Company provides end-to-end outsourcing solutions with a single point of contact to help customers maximize their self-service channel by incorporating new technology, meeting compliance and regulatory mandates, protecting their institutions, and reducing costs, all while ensuring a high level of service for their customers. Each unique solution may include hardware, software, services or a combination of all three components. The Company provides value to its customers by offering a comprehensive array of hardware-agnostic integrated services and support. The Company’s service organization provides strategic analysis and planning of new systems, systems integration, architectural engineering, consulting and project management that encompass all facets of a successful financial self-service implementation. The Company also provides design, products, service, installation, project management and monitoring of electronic security products to financial, government, retail and commercial customers.

Election Systems
The Company is a provider of voting equipment and related products and services in Brazil. The Company provides elections equipment, networking, tabulation and diagnostic software development, training, support and maintenance.

OPERATIONS
The principal raw materials used by the Company in its manufacturing operations are steel, plastics, and electronic parts and components, which are purchased from various major suppliers. These materials and components are generally available in ample quantities. Within the Company's services operations, fuel is a significant cost factor.

The Company’s operating results and the amount and timing of revenue are affected by numerous factors including production schedules, customer priorities, sales volume and sales mix. During the past several years, the Company has changed the focus of its self-service business to that of a total solutions and integrated services approach. The value of unfilled orders is not a meaningful indicator of future revenues due to the significant portion of revenues derived from the Company’s growing service-based business, for which order information is not available. Therefore, the Company believes that backlog information is not material to an understanding of its business.

The Company carries working capital mainly related to trade receivables and inventories. Inventories generally are only manufactured or purchased as orders are received from customers. The Company’s normal and customary payment terms generally range from net 30 to 90 days from date of invoice. The Company generally does not offer extended payment terms. The Company also provides financing arrangements to customers that are largely classified and accounted for as sales-type leases. As of December 31, 2012, the Company’s net investment in finance lease receivables was $77,656.

SEGMENTS AND FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
The Company manages its businesses on a geographic basis and reports the following two segments: Diebold North America (DNA) and Diebold International (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 through wholly-owned subsidiaries, majority-owned joint ventures and independent distributors in most major countries throughout Europe, the Middle East, Africa, Latin America and in the Asia Pacific region (excluding Japan and Korea). Segment financial information can be found in note 19 to the consolidated financial statements, which is incorporated herein by reference.

Sales to customers outside the United States in relation to total consolidated net sales were $1,458,019 or 48.7 percent in 2012, $1,494,681 or 52.7 percent in 2011 and $1,560,879 or 55.3 percent in 2010.



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Property, plant and equipment, at cost, located in the United States totaled $468,575, $455,814 and $454,666 as of December 31, 2012, 2011 and 2010, respectively, and property, plant and equipment, at cost, located outside the United States totaled $193,335, $186,442 and $191,569 as of December 31, 2012, 2011 and 2010, respectively.

Additional financial information regarding the Company’s international operations is included in note 19 to the consolidated financial statements, which is incorporated herein by reference. The Company’s non-U.S. operations are subject to normal international business risks not generally applicable to domestic business. These risks include currency fluctuation, new and different legal and regulatory requirements in local jurisdictions, political and economic changes and disruptions, tariffs or other barriers, potentially adverse tax consequences and difficulties in staffing and managing foreign operations.

COMPETITION
The Company participates in many highly competitive businesses with some services and products in competition directly with similar services and products and others with alternative products that have similar uses or produce similar results. The Company distinguishes itself by providing unique value with a wide range of software-led services tailored to meet customers' needs. The Company believes, based upon outside independent industry surveys, that it is a leading service provider for and manufacturer of financial self-service systems in the United States and is also a market leader internationally. In the area of automated transaction systems, the Company competes on a global basis primarily with NCR Corporation and Wincor-Nixdorf. On a regional basis, the Company competes with many other hardware and software companies such as GRG Banking Equipment Co., Ltd. and Nautilus Hyosung in Asia Pacific and Itautec and Perto in Latin America. In the security service and product markets, the Company competes with national, regional and local security companies. Of these competitors, some compete in only one or two product lines, while others sell a broad spectrum of security services and products. The unavailability of comparative sales information and the large variety of individual services and products make it difficult to give reasonable estimates of the Company's competitive ranking in or share of the security market within the financial services, retail, commercial and government sectors. However, the Company is a uniquely positioned security service and solution provider to global, national, regional and local financial, commercial and industrial customers.  The Company also has a strong position in North America and in global markets as a premier security service provider that offers a full portfolio of security monitoring and managed services, as well as a full spectrum of systems integration and enterprise level capabilities. 

The Company provides elections systems product solutions and support to the Brazilian government. Competition in this market is limited and based upon technology pre-qualification demonstrations to the government. Due to the technology investment required in elections systems, barriers to entry in this market are high.

RESEARCH, DEVELOPMENT AND ENGINEERING
Customer demand for self-service and security technologies is growing. In order to meet this demand, the Company is focused on delivering innovation to its customers by continuing to invest in technology solutions that enable customers to reduce costs and improve efficiency. Expenditures for research, development and engineering initiatives were $85,881, $78,108 and $74,225 in 2012, 2011 and 2010, respectively. In 2012, the Company introduced the first concept ATM in the world to utilize 4G technology. In collaboration with Verizon, operator of the largest 4G network in the United States, Diebold integrated 4G LTE technology to create a new, additional channel for communication to and from the ATM. Traditionally, the ATM has communicated only with the financial institution or the transaction processor. With the addition of the 4G LTE channel, the ATM also has the potential to communicate directly with third parties, such as service providers or monitoring centers, which would potentially allow for increased efficiencies, enhanced security and improved customer service at the ATM.
 
PATENTS, TRADEMARKS, LICENSES
The Company owns patents, trademarks and licenses relating to certain products in the United States and internationally. While the Company regards these as items of importance, it does not deem its business as a whole, or any industry segment, to be materially dependent upon any one item or group of items.

ENVIRONMENTAL
Compliance with federal, state and local environmental protection laws during 2012 had no material effect upon the Company’s business, financial condition or results of operations.

EMPLOYEES
At December 31, 2012, the Company employed 16,751 associates globally. The Company’s service staff is one of the financial industry’s largest, with professionals in more than 600 locations and representation in nearly 90 countries worldwide.



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EXECUTIVE OFFICERS
Refer to Part III, Item 10 of this annual report on Form 10-K for information on the Company's executive officers, which is incorporated herein by reference.

AVAILABLE INFORMATION
The Company uses its Investor Relations web site, www.diebold.com/investors, as a channel for routine distribution of important information, including news releases, analyst presentations and financial information. The Company posts filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the U.S. Securities and Exchange Commission (SEC), including its annual, quarterly, and current reports on Forms 10-K, 10-Q, and 8-K; its proxy statements; and any amendments to those reports or statements. All such postings and filings are available on the Company’s Investor Relations web site free of charge. In addition, this web site allows investors and other interested persons to sign up to automatically receive e-mail alerts when the Company posts news releases and financial information on its web site. Investors and other interested persons can also follow the Company on Twitter at http://twitter.com/dieboldinc. The SEC also maintains a web site, www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The content on any web site referred to in this annual report on Form 10-K is not incorporated by reference into this annual report unless expressly noted.

ITEM 1A: RISK FACTORS
(dollars in thousands)

The following are certain risk factors that could affect our business, financial condition, operating results and cash flows. These risk factors should be considered in connection with evaluating the forward-looking statements contained in this annual report on Form 10-K because they could cause actual results to differ materially from those expressed in any forward-looking statement. The risk factors highlighted below are not the only ones we face. If any of these events actually occur, our business, financial condition, operating results or cash flows could be negatively affected.

We caution the reader to keep these risk factors in mind and refrain from attributing undue certainty to any forward-looking statements, which speak only as of the date of this annual report on Form 10-K.

Demand for and supply of our services and products may be adversely affected by numerous factors, some of which we cannot predict or control. This could adversely affect our operating results.
Numerous factors may affect the demand for and supply of our services and products, including:

changes in the market acceptance of our services and products;
customer and competitor consolidation;
changes in customer preferences;
declines in general economic conditions;
changes in environmental regulations that would limit our ability to service and sell products in specific markets;
macro-economic factors affecting banks, credit unions and other financial institutions may lead to cost-cutting efforts by customers, which could cause us to lose current or potential customers or achieve less revenue per customer; and
availability of purchased products.

If any of these factors occur, the demand for and supply of our services and products could suffer, and this would adversely affect our results of operations.

Increased energy and raw material costs could reduce our income.
Energy prices, particularly petroleum prices, are cost drivers for our business. In recent years, the price of petroleum has been highly volatile, particularly due to the unstable political conditions in the Middle East and increasing international demand from emerging markets. Price increases in fuel and electricity costs, such as those increases which may occur from climate change legislation or other environmental mandates, will continue to increase our cost of operations. Any increase in the costs of energy
would also increase our transportation costs.

The primary raw materials in our financial self-service, security and election systems product solutions are steel, plastics and electronic parts and components. The majority of our raw materials are purchased from various local, regional and global suppliers pursuant to supply contracts. However, the price of these materials can fluctuate under these contracts in tandem with the pricing of raw materials.


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Although we attempt to pass on higher energy and raw material costs to our customers, it is often not possible given the competitive markets in which we operate.

Our business may be affected by general economic conditions, cyclicality and uncertainty and could be adversely affected during economic downturns.

Demand for our services and products is affected by general economic conditions and the business conditions of the industries in which we sell our services and products. The business of most of our customers, particularly our financial institution customers, is, to varying degrees, cyclical and has historically experienced periodic downturns. Under difficult economic conditions, customers may seek to reduce discretionary spending by forgoing purchases of our services and products. This risk is magnified for capital goods purchases such as ATMs and physical security products. In addition, downturns in our customer’s industries, even during periods of strong general economic conditions, could adversely affect the demand for our services and products, and our sales and operating results.

In particular, economic difficulties in the U.S. credit markets and the global markets have led to an economic recession in some or all of the markets in which we operate. As a result of these difficulties and other factors, financial institutions have failed and may continue to fail resulting in a loss of current or potential customers, or deferred or canceled orders, including orders previously placed. Any customer deferrals or cancellations could materially affect our sales and operating results.

Additionally, the unstable political conditions in the Middle East or the sovereign debt concerns of certain countries could lead to further financial, economic and political instability, and this could lead to an additional deterioration in general economic conditions.

We may be unable to achieve, or may be delayed in achieving, our cost-cutting initiatives, and this may adversely affect our operating results and cash flow.
We have launched a number of cost-cutting initiatives, including restructuring initiatives, to improve operating efficiencies and reduce operating costs. Although we have achieved a substantial amount of annual cost savings associated with these cost-cutting initiatives, we may be unable to sustain the cost savings that we have achieved. In addition, if we are unable to achieve, or have any unexpected delays in achieving, additional cost savings, our results of operations and cash flow may be adversely affected. Even if we meet our goals as a result of these initiatives, we may not receive the expected financial benefits of these initiatives.

We face competition that could adversely affect our sales and financial condition.
All phases of our business are highly competitive. Some of our products are in direct competition with similar or alternative products provided by our competitors. We encounter competition in price, delivery, service, performance, product innovation, product recognition and quality.

Because of the potential for consolidation in any market, our competitors may become larger, which could make them more efficient and permit them to be more price-competitive. Increased size could also permit them to operate in wider geographic areas and enhance their abilities in other areas such as research and development and customer service. As a result, this could also reduce our profitability.

We expect that our competitors will continue to develop and introduce new and enhanced services and products. This could cause a decline in market acceptance of our services and products. In addition, our competitors could cause a reduction in the prices for some of our services and products as a result of intensified price competition. Also, we may be unable to effectively anticipate and react to new entrants in the marketplace competing with our services and products.

Competitive pressures can also result in the loss of major customers. An inability to compete successfully could have an adverse effect on our operating results, financial condition and cash flows in any given period.

Additional tax expense or additional tax exposures could affect our future profitability.
We are subject to income taxes in both the United States and various non-U.S. jurisdictions, and our domestic and international tax liabilities are dependent upon the distribution of income among these different jurisdictions. If we change our intention to repatriate cash and cash equivalents and short-term investments residing in international tax jurisdictions, there could be a negative impact on foreign and domestic taxes. Our tax expense includes estimates of additional tax that may be incurred for tax exposures and reflects various estimates and assumptions, including assessments of future earnings of the Company that could affect the valuation of our net deferred tax assets. Our future results could be adversely affected by changes in the effective tax rate as a result of a change in the mix of earnings in countries with differing statutory tax rates, changes in the overall profitability of the


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Company, changes in tax legislation, changes in the valuation of deferred tax assets and liabilities, the results of audits and examinations of previously filed tax returns and continuing assessments of our income tax exposures.

Additionally, our future results could be adversely affected by the results of indirect tax audits and examinations, and continuing assessments of our indirect tax exposures. For example, in August 2012, one of our Brazilian subsidiaries was notified of a tax assessment of approximately $133,000, including penalties and interest, regarding certain Brazilian federal indirect taxes 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. We have filed administrative defenses with the tax authorities and are awaiting an administrative level decision that could negatively impact Brazilian federal indirect taxes in other years that remain open under statute. It is reasonably possible that we could be required to pay taxes, penalties and interest related to this matter, which could be material to our consolidated financial statements.

In international markets, we compete with local service providers that may have competitive advantages.
In a number of international markets, especially those in Asia Pacific and Latin America, we face substantial competition from local service providers that offer competing services and products. Some of these companies may have a dominant market share in their territories and may be owned by local stakeholders. This could give them a competitive advantage. Local providers of competing services and products may also have a substantial advantage in attracting customers in their country due to more established branding in that country, greater knowledge with respect to the tastes and preferences of customers residing in that country and/or their focus on a single market. Further, the local providers may have greater regulatory and operational flexibility since we are subject to both U.S. and foreign regulatory requirements.

Because our operations are conducted worldwide, they are affected by risks of doing business abroad.
We generate a significant percentage of revenue from operations conducted outside the United States. Revenue from international operations amounted to approximately 48.7 percent in 2012, 52.7 percent in 2011 and 55.3 percent in 2010 of total revenue during these respective years.

Accordingly, international operations are subject to the risks of doing business abroad, including the following:

fluctuations in currency exchange rates;
transportation delays and interruptions;
political and economic instability and disruptions;
restrictions on the transfer of funds;
the imposition of duties and tariffs;
import and export controls;
changes in governmental policies and regulatory environments;
disadvantages of competing against companies from countries that are not subject to U.S. laws and regulations, including the Foreign Corrupt Practices Act (FCPA);
labor unrest and current and changing regulatory environments;
the uncertainty of product acceptance by different cultures;
the risks of divergent business expectations or cultural incompatibility inherent in establishing joint ventures with foreign partners;
difficulties in staffing and managing multi-national operations;
limitations on the ability to enforce legal rights and remedies;
reduced protection for intellectual property rights in some countries; and
potentially adverse tax consequences, including repatriation of profits.

Any of these events could have an adverse effect on our international operations by reducing the demand for our services and products or decreasing the prices at which we can sell our services and products, thereby adversely affecting our financial condition or operating results. We may not be able to continue to operate in compliance with applicable customs, currency exchange control regulations, transfer pricing regulations or any other laws or regulations to which we may be subject. In addition, these laws or regulations may be modified in the future, and we may not be able to operate in compliance with those modifications.

Additionally, there are ongoing concerns regarding the short- and long-term stability of the euro and its ability to serve as a single currency for a variety of individual countries. These concerns could lead individual countries to revert, or threaten to revert, to their former local currencies, which could lead to the dissolution of the euro. Should this occur, the assets we hold in a country that re-introduces its local currency could be significantly devalued. Furthermore, the dissolution of the euro could cause significant volatility and disruption to the global economy, which could impact our financial results. Finally, if it were necessary for us to


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conduct our business in additional currencies, we would be subjected to additional earnings volatility as amounts in these currencies are translated into U.S. dollars.

We may be exposed to liabilities under the Foreign Corrupt Practices Act, and any determination that the Company or any of its subsidiaries has violated the Foreign Corrupt Practices Act could have a material adverse effect on our business.
We are subject to compliance with various laws and regulations, including the FCPA and similar worldwide anti-bribery laws, which generally prohibit companies and their intermediaries from engaging in bribery or making other improper payments to foreign officials for the purpose of obtaining or retaining business or gaining an unfair business advantage.  The FCPA also requires proper record keeping and characterization of such payments in our reports filed with the SEC.  

While our employees and agents are required to comply with these laws, we operate in many parts of the world that have experienced governmental and commercial corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices.  Foreign companies, including some that may compete with us, may not be subject to the FCPA. Accordingly, such companies may be more likely to engage in activities prohibited by the FCPA, which could have a significant adverse impact on our ability to compete for business in such countries. 

Despite our commitment to legal compliance and corporate ethics, we cannot ensure that our policies and procedures will always protect us from intentional, reckless or negligent acts committed by our employees or agents.  Violations of these laws, or allegations of such violations, could disrupt our business and result in financial penalties, debarment from government contracts and other consequences that may have a material adverse effect on our business, financial condition or results of operations.

In particular, 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 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. 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.

In addition, our business opportunities in select geographies have been or may be adversely affected by these reviews and any subsequent findings.  Some countries in which we do business may also initiate their own reviews and impose penalties, including prohibition of our participating in or curtailment of business operations in those jurisdictions.  If it is determined that a violation of the FCPA has occurred, such violation may give rise to an event of default under our loan agreements.  We could also face third-party claims in connection with any such violation or as a result of the outcome of the current or any future government reviews.  Our disclosure, internal review, any current or future governmental review and any findings regarding any alleged violation of the FCPA could, individually or in the aggregate, have a material adverse affect on our reputation and our ability to obtain new business or retain existing business from our current clients and potential clients, to attract and retain employees and to access the capital markets.

We may expand operations into international markets in which we may have limited experience or rely on business partners.
We continually look to expand our services and products into international markets. We have currently developed, through joint ventures, strategic investments, subsidiaries and branch offices, service and product offerings in over 90 countries outside of the United States. As we expand into new international markets, we will have only limited experience in marketing and operating services and products in such markets. In other instances, we may rely on the efforts and abilities of foreign business partners in such markets. Certain international markets may be slower than domestic markets in adopting our services and products, and our operations in international markets may not develop at a rate that supports our level of investment.



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An inability to effectively manage acquisitions, divestitures and other significant transactions successfully could harm our operating results, business and prospects.
As part of our business strategy, we frequently engage in discussions with third parties regarding possible investments, acquisitions, strategic alliances, joint ventures, divestitures and outsourcing arrangements, and we enter into agreements relating to such transactions in order to further our business objectives. In order to pursue this strategy successfully, we must identify suitable candidates, successfully complete transactions, some of which may be large and complex, and manage post-closing issues such as the integration of acquired companies or employees. Integration and other risks of these transactions can be more pronounced in larger and more complicated transactions, or if multiple transactions are pursued simultaneously. If we fail to identify and successfully complete transactions that further our strategic objectives, we may be required to expend resources to develop products and technology internally. This may put us at a competitive disadvantage, and we may be adversely affected by negative market perceptions any of which may have a material adverse effect on our revenue, gross margin and profitability.

Integration issues are complex, time-consuming and expensive and, without proper planning and implementation, could significantly disrupt our business. The challenges involved in integration include:

combining service and product offerings and entering into new markets in which we are not experienced;
convincing customers and distributors that the transaction will not diminish client service standards or business focus, preventing customers and distributors from deferring purchasing decisions or switching to other suppliers or service providers(which could result in additional obligations to address customer uncertainty), and coordinating service, sales, marketing and distribution efforts;
consolidating and rationalizing corporate information technology infrastructure, which may include multiple legacy systems from various acquisitions and integrating software code;
minimizing the diversion of management attention from ongoing business concerns;
persuading employees that business cultures are compatible, maintaining employee morale and retaining key employees, integrating employees into our Company, correctly estimating employee benefit costs and implementing restructuring programs;
coordinating and combining administrative, service, manufacturing, research and development and other operations, subsidiaries, facilities and relationships with third parties in accordance with local laws and other obligations while maintaining adequate standards, controls and procedures; and
achieving savings from supply chain and administration integration.

We evaluate and enter into these types of transactions on an ongoing basis. We may not fully realize all of the anticipated benefits of any transaction, and the timeframe for achieving benefits of a transaction may depend partially upon the actions of employees, suppliers or other third parties. In addition, the pricing and other terms of our contracts for these transactions require us to make estimates and assumptions at the time we enter into these contracts, and, during the course of our due diligence, we may not identify all of the factors necessary to estimate costs accurately. Any increased or unexpected costs, unanticipated delays or failure to achieve contractual obligations could make these agreements less profitable or unprofitable.

Managing these types of transactions requires varying levels of management resources, which may divert our attention from other business operations. These transactions could result in significant costs and expenses and charges to earnings, including those related to severance pay, early retirement costs, employee benefit costs, asset impairment charges, charges from the elimination of duplicative facilities and contracts, in-process research and development charges, inventory adjustments, assumed litigation and other liabilities, legal, accounting and financial advisory fees, and required payments to executive officers and key employees under retention plans. Moreover, we could incur additional depreciation and amortization expense over the useful lives of certain assets acquired in connection with these transactions, and, to the extent that the value of goodwill or intangible assets with indefinite lives acquired in connection with a transaction becomes impaired, we may be required to incur additional material charges relating to the impairment of those assets. In order to complete an acquisition, we may issue common stock, potentially creating dilution for existing shareholders, or borrow funds, affecting our financial condition and potentially our credit ratings. Any prior or future downgrades in our credit rating associated with a transaction could adversely affect our ability to borrow and result in more restrictive borrowing terms. In addition, our effective tax rate on an ongoing basis is uncertain, and such transactions could impact our effective tax rate. We also may experience risks relating to the challenges and costs of closing a transaction and the risk that an announced transaction may not close. As a result, any completed, pending or future transactions may contribute to financial results that differ from the investment community’s expectations.



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We have a significant amount of long-term assets, including goodwill and other intangible assets, and any future impairment charges could adversely impact our results of operations.
We review long-lived assets, including property, plant and equipment and identifiable intangible assets, for impairment whenever changes in circumstances or events may indicate that the carrying amounts are not recoverable. If the fair value is less than the carrying amount of the asset, a loss is recognized for the difference. Factors which may cause an impairment of long-lived assets include significant changes in the manner of use of these assets, negative industry or market trends, a significant underperformance relative to historical or projected future operating results, or a likely sale or disposal of the asset before the end of its estimated useful life.

As of December 31, 2012, we had $272,951 of goodwill. We assess all existing goodwill at least annually for impairment on a “reporting unit” basis. The Company’s five reporting units are defined as Domestic and Canada, Brazil, Latin America, Asia Pacific, and Europe, Middle East and Africa (EMEA). The techniques used in our qualitative and quantitative assessment and goodwill impairment tests incorporate a number of estimates and assumptions that are subject to change; although we believe these estimates and assumptions are reasonable and reflect market conditions forecast at the assessment date. Any changes to these assumptions and estimates due to market conditions or otherwise may lead to an outcome where impairment charges would be required in future periods. In particular, the amount of goodwill in our Brazil reporting unit was $120,571 as of December 31, 2012, with excess fair value of approximately $113,348 or 22.0 percent when compared to its carrying amount. Because actual results may vary from our forecasts and such variations may be material and unfavorable, we may need to record future impairment charges with respect to the goodwill attributed to any reporting unit, which could adversely impact our results of operations.

System security risks and systems integration issues could disrupt our internal operations or services provided to customers, and any such disruption could adversely affect revenue, increase costs, and harm our reputation and stock price.
Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate our own confidential information or that of our customers, corrupt data, create system disruptions or cause shutdowns. A network security breach could be particularly harmful if it remained undetected for an extended period of time. Groups of hackers may also act in a coordinated manner to launch distributed denial of service attacks, or other coordinated attacks, that may cause service outages or other interruptions. We could incur significant expenses in addressing problems created by network security breaches, such as the expenses of deploying additional personnel, enhancing or implementing new protection measures, training employees or hiring consultants. Further, such corrective measures may later prove inadequate. Moreover, actual or perceived security vulnerabilities in our services and products could cause significant reputational harm, causing us to lose existing or potential customers. Reputational damage could also result in diminished investor confidence. Actual or perceived vulnerabilities may also lead to claims against us. Although our license agreements typically contain provisions that eliminate or limit our exposure to such liability, there is no assurance these provisions will withstand legal challenges. We could also incur significant expenses in connection with customers’ system failures.

In addition, sophisticated hardware and operating system software and applications that we produce or procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of the system. The costs to eliminate or alleviate security problems, viruses and bugs could be significant, and the efforts to address these problems could result in interruptions, delays or cessation of service that could impede sales, manufacturing, distribution or other critical functions.

Portions of our information technology infrastructure also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems, and transitioning data and other aspects of the process could be expensive, time consuming, disruptive and resource-intensive. Such disruptions could adversely impact the ability to fulfill orders and interrupt other processes. Delayed sales, lower margins, lost customers or diminished investor confidence resulting from these disruptions could adversely affect financial results, stock price and reputation.

An inability to attract, retain and motivate key employees could harm current and future operations.
In order to be successful, we must attract, retain and motivate executives and other key employees, including those in managerial, professional, administrative, technical, sales, marketing and information technology support positions. We also must keep employees focused on our strategies and goals. Hiring and retaining qualified executives, engineers and qualified sales representatives are critical to our future, and competition for experienced employees in these areas can be intense. The failure to hire or loss of key employees could have a significant impact on our operations.



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We may not be able to generate sufficient cash flows to fund our operations and make adequate capital investments, or to pay dividends or continue dividend increases.
Our cash flows from operations depend primarily on sales and service margins. To develop new service and product technologies, support future growth, achieve operating efficiencies and maintain service and product quality, we must make significant capital investments in manufacturing technology, facilities and capital equipment, research and development, and service and product technology. In addition to cash provided from operations, we have from time to time utilized external sources of financing. Depending upon general market conditions or other factors, we may not be able to generate sufficient cash flows to fund our operations and make adequate capital investments, or to continue our trend of annual dividend increases or to continue to pay dividends at all, either in whole or in part. In addition, due to the recent economic downturn there has been a tightening of the credit markets, which may limit our ability to obtain alternative sources of cash to fund our operations.

New service and product developments may be unsuccessful.
We are constantly looking to develop new services and products that complement or leverage the underlying design or process technology of our traditional service and product offerings. We make significant investments in service and product technologies and anticipate expending significant resources for new software-led services and product development over the next several years. There can be no assurance that our service and product development efforts will be successful, that we will be able to cost effectively develop or manufacture these new services and products, that we will be able to successfully market these services and products or that margins generated from sales of these services and products will recover costs of development efforts.

An adverse determination that our services, products or manufacturing processes infringe the intellectual property rights of others could have a materially adverse effect on our business, operating results or financial condition.
As is common in any high technology industry, others have asserted from time to time, and may assert in the future, that our services, products or manufacturing processes infringe their intellectual property rights. A court determination that our services, products or manufacturing processes infringe the intellectual property rights of others could result in significant liability and/or require us to make material changes to our services, products and/or manufacturing processes. We are unable to predict the outcome of assertions of infringement made against us. Any of the foregoing could have a materially adverse effect on our business, operating results or financial condition.

Changes in laws or regulations or the manner of their interpretation or enforcement could adversely impact our financial performance and restrict our ability to operate our business or execute our strategies.
New laws or regulations, or changes in existing laws or regulations or the manner of their interpretation or enforcement, could increase our cost of doing business and restrict our ability to operate our business or execute our strategies. This includes, among other things, the possible taxation under U.S. law of certain income from foreign operations, compliance costs and enforcement under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), and costs associated with complying with the Patient Protection and Affordable Care Act of 2010 and the regulations promulgated thereunder. For example, under Section 1502 of the Dodd-Frank Act, the SEC has adopted additional disclosure requirements related to the source of certain “conflict minerals” for issuers for which such “conflict minerals” are necessary to the functionality or product manufactured, or contracted to be manufactured, by that issuer. The metals covered by the rules include tin, tantalum, tungsten and gold, commonly referred to as “3TG.” Our suppliers may use some or all of these materials in their production processes. The SEC's rules require us to perform supply chain due diligence on every member of our supply chain, including the mine owner and operator. Global supply chains can have multiple layers, thus the costs of complying with these new requirements could be substantial. These new requirements may also reduce the number of suppliers who provide conflict free metals, and may affect our ability to obtain products in sufficient quantities or at competitive prices. Compliance costs and the unavailability of raw materials could have a material adverse effect on our results of operations.

Anti-takeover provisions could make it more difficult for a third party to acquire us.
Certain provisions of our charter documents, including provisions limiting the ability of shareholders to raise matters at a meeting of shareholders without giving advance notice and permitting cumulative voting, may make it more difficult for a third party to gain control of our Board of Directors and may have the effect of delaying or preventing changes in our control or management. This could have an adverse effect on the market price of our common stock. Additionally, Ohio corporate law provides that certain notice and informational filings and special shareholder meeting and voting procedures must be followed prior to consummation of a proposed “control share acquisition,” as defined in the Ohio Revised Code. Assuming compliance with the prescribed notice and information filings, a proposed control share acquisition may be made only if, at a special meeting of shareholders, the acquisition is approved by both a majority of our voting power represented at the meeting and a majority of the voting power remaining after excluding the combined voting power of the “interested shares,” as defined in the Ohio Revised Code. The application of these provisions of the Ohio Revised Code also could have the effect of delaying or preventing a change of control.


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Any actions or other governmental investigations or proceedings related to or arising from the matters that resulted in the 2009 SEC settlement, including the related SEC investigation and Department of Justice investigation, could result in substantial costs to defend enforcement or other related actions that could have a materially adverse effect on our business, operating results or financial condition.
The Company had previously reached an agreement in principle in 2009 with the staff of the SEC to settle civil charges stemming from the staff's enforcement inquiry.  We could incur substantial additional costs to defend and resolve third-party litigation or other governmental actions, investigations or proceedings arising out of, or related to, the completed investigations or the SEC settlement.  In addition, we could be exposed to enforcement or other actions with respect to these matters by the SEC's Division of Enforcement or the DOJ.  The diversion of resources to address issues arising out of any such third-party or governmental actions may harm our business, operating results and financial condition in the future.

Our ability to maintain effective internal control over financial reporting may be insufficient to allow us to accurately report our financial results or prevent fraud, and this could cause our financial statements to become materially misleading and adversely affect the trading price of our common stock.
We require effective internal control over financial reporting in order to provide reasonable assurance with respect to our financial reports and to effectively prevent fraud. Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we cannot provide reasonable assurance with respect to our financial statements and effectively prevent fraud, our financial statements could become materially misleading which could adversely affect the trading price of our common stock.

Management identified control deficiencies during 2012 that constituted a material weakness. In August 2012, one of our Brazilian subsidiaries was notified of a tax assessment of approximately $133,000, including penalties and interest, regarding certain Brazilian federal indirect taxes for 2008 and 2009, alleging improper importation of certain components into the country's free trade zone that would nullify certain indirect tax incentives. After evaluating relevant controls, we concluded that controls pertaining to manufacturing and supply chain processes that could materially impact indirect tax incentives in the Brazilian subsidiary and roles and responsibilities within this Brazilian subsidiary pertaining to the operation of these controls were not designed and/or operating effectively, and controls designed to ensure adequate and effective communication by operational management to regional and corporate management were not operating effectively. In 2012, we have enhanced, and in 2013 will continue to enhance, our internal control over financial reporting. As of December 31, 2012, we had not remediated the material weakness. If we are not able to maintain the adequacy of our internal control over financial reporting, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business, financial condition and operating results could be harmed.

Any material weakness could affect investor confidence in the accuracy and completeness of our financial statements. As a result, our ability to obtain any additional financing, or additional financing on favorable terms, could be materially and adversely affected. This, in turn, could materially and adversely affect our business, financial condition and the market value of our securities and require us to incur additional costs to improve our internal control systems and procedures. In addition, perceptions of our Company among customers, lenders, investors, securities analysts and others could also be adversely affected.

We can give no assurances that any additional material weaknesses will not arise in the future due to our failure to implement and maintain adequate internal control over financial reporting. In addition, although we have been successful historically in strengthening our controls and procedures, those controls and procedures may not be adequate to prevent or identify irregularities or ensure the fair presentation of our financial statements included in our periodic reports filed with the SEC.

Low investment performance by our domestic pension plan assets may result in an increase to our net pension liability and expense, which may require us to fund a portion of our pension obligations and divert funds from other potential uses.
We sponsor several defined benefit pension plans that cover certain eligible employees. Our pension expense and required contributions to our pension plans are directly affected by the value of plan assets, the projected rate of return on plan assets, the actual rate of return on plan assets and the actuarial assumptions we use to measure the defined benefit pension plan obligations.

A significant market downturn could occur in future periods resulting in a decline in the funded status of our pension plans and actual asset returns to be below the assumed rate of return used to determine pension expense. If return on plan assets in future periods perform below expectations, future pension expense will increase. Further, as a result of global economic instability in recent years, our pension plan investment portfolio has been volatile.



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We establish the discount rate used to determine the present value of the projected and accumulated benefit obligations at the end of each year based upon the available market rates for high quality, fixed income investments. We match the projected cash flows of our pension plans against those generated by high-quality corporate bonds. The yield of the resulting bond portfolio provides a basis for the selected discount rate. An increase in the discount rate would reduce the future pension expense and, conversely, a decrease in the discount rate would increase the future pension expense.

Based on current guidelines, assumptions and estimates, including investment returns and interest rates, we plan to make contributions of $3,343 to our pension plans in 2013. Changes in the current assumptions and estimates could result in contributions in years beyond 2013 that are greater than the projected 2013 contributions required. We cannot predict whether changing market or economic conditions, regulatory changes or other factors will further increase our pension expenses or funding obligations, diverting funds we would otherwise apply to other uses.

Our businesses are subject to inherent risks, some for which we maintain third-party insurance and some for which we self-insure. We may incur losses and be subject to liability claims that could have a material adverse effect on our financial condition, results of operations or cash flows.
We maintain insurance policies that provide limited coverage for some, but not all, of the potential risks and liabilities associated with our businesses. The policies are subject to deductibles and exclusions that result in our retention of a level of risk on a self-insurance basis. For some risks, we may not obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented. As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially, and in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. As a result, we may not be able to renew our existing insurance policies or procure other desirable insurance on commercially reasonable terms, if at all. Even where insurance coverage applies, insurers may contest their obligations to make payments. Our financial condition, results of operations and cash flows could be materially and adversely affected by losses and liabilities from un-insured or under-insured events, as well as by delays in the payment of insurance proceeds, or the failure by insurers to make payments. We also may incur costs and liabilities resulting from claims for damages to property or injury to persons arising from our operations.

Our assumptions used to determine our self-insurance liability could be wrong and materially impact our business.
We evaluate our self-insurance liability based on historical claims experience, demographic factors, severity factors and other actuarial assumptions. However, if future occurrences and claims differ from these assumptions and historical trends, our business, financial results and financial condition could be materially impacted by claims and other expenses.

We are currently subject to a purported shareholder class action, the unfavorable outcome of which might have a material adverse effect on our financial condition, operating results and cash flow.
A purported shareholder class action lawsuit has been filed against us and certain current former officers alleging violations of federal securities laws. Although we believe this lawsuit is without merit, and we intend to vigorously defend against the claim, we cannot determine with certainty the outcome or resolution of the claim or any future related claims, or the timing for their resolution. In addition to the expense and burden incurred in defending this litigation and any damages that we may suffer, management’s efforts and attention may be diverted from the ordinary business operations in order to address these claims. It is reasonably possible that the resolution of this shareholder class action lawsuit could be material to the Company's consolidated financial statements.

ITEM 1B: UNRESOLVED STAFF COMMENTS

None.

ITEM 2: PROPERTIES

The Company's corporate offices are located in North Canton, Ohio. The Company owns manufacturing facilities in Lynchburg, Virginia and Lexington, North Carolina. The Company also has manufacturing facilities in Belgium, Brazil, China, Hungary and India. The Company has selling, service and administrative offices in the following locations: throughout the United States, and in Australia, Austria, Barbados, Belgium, Belize, Bolivia, Brazil, Canada, Chile, China, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, France, Greece, Guatemala, Haiti, Honduras, Hong Kong, Hungary, India, Indonesia, Italy, Jamaica, Kazakhstan, Malaysia, Mexico, Namibia, Netherlands, Nicaragua, Panama, Paraguay, Peru, Philippines, Portugal, Poland, Russia, Singapore, South Africa, Spain, Switzerland, Taiwan, Thailand, Turkey, the United Arab Emirates, the United Kingdom, Uruguay, Venezuela and Vietnam. The Company leases a majority of the selling, service and administrative offices under operating lease agreements.


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The Company considers that its properties are generally in good condition, are well maintained, and are generally suitable and adequate to carry on the Company's business.

ITEM 3: LEGAL PROCEEDINGS
(dollars in thousands)

At December 31, 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 is considered material by management in relation to the Company's financial position or results of operations. In management's opinion, the Company's consolidated financial statements would not be materially affected by the outcome of those legal proceedings, commitments, or asserted claims.

In addition to the routine legal proceedings noted above the Company was a party to the lawsuits described below at December 31, 2012:

Brazilian Federal Indirect 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. 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. Management believes that the possible range of loss associated with the Brazilian federal indirect tax assessment is $0 to $236,000.

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 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. It is reasonably possible that the resolution of this putative federal securities class action could be material to the Company's consolidated financial statements; however, management believes that any possible loss or range of loss cannot be estimated.

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 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. 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.

ITEM 4: MINE SAFETY DISCLOSURES

Not applicable.


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PART II

ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The common shares of the Company are listed on the New York Stock Exchange with a symbol of “DBD.” The price ranges of common shares of the Company for the periods indicated below are as follows:
 
2012
 
2011
 
2010
 
High
 
Low
 
High
 
Low
 
High
 
Low
1st Quarter
$
40.38

 
$
29.21

 
$
36.35

 
$
30.20

 
$
32.23

 
$
26.47

2nd Quarter
42.93

 
35.03

 
37.12

 
29.26

 
35.18

 
24.22

3rd Quarter
38.49

 
31.48

 
33.89

 
24.70

 
31.59

 
25.72

4th Quarter
34.33

 
27.66

 
33.59

 
25.83

 
33.29

 
29.79

Full Year
$
42.93

 
$
27.66

 
$
37.12

 
$
24.70

 
$
35.18

 
$
24.22


There were approximately 52,329 shareholders at December 31, 2012, which includes an estimated number of shareholders who have shares held in their accounts by banks, brokers, and trustees for benefit plans and the agent for the dividend reinvestment plan.

On the basis of amounts paid and declared, the annualized dividends per share were $1.14, $1.12 and $1.08 in 2012, 2011 and 2010, respectively.

Information concerning the Company’s share repurchases made during the fourth quarter of 2012:
Period
 
Total Number of Shares Purchased (1)
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans (2)
October
 
792

 
$
32.56

 

 
2,426,177

November
 
11,611

 
30.21

 

 
2,426,177

December
 

 

 

 
2,426,177

Total
 
12,403

 
$
30.36

 

 
 

(1)
All shares were surrendered or deemed surrendered to the Company in connection with the Company’s stock-based compensation plans.

(2)
The total number of shares repurchased as part of the publicly announced share repurchase plan was 13,450,772 as of December 31, 2012. The plan was approved by the Board of Directors in April 1997. The Company may purchase shares from time to time in open market purchases or privately negotiated transactions. The Company may make all or part of the purchases pursuant to accelerated share repurchases or Rule 10b5-1 plans. The plan has no expiration date. The following table provides a summary of Board of Director approvals to repurchase the Company's outstanding common shares:
 
 
Total Number of Shares
Approved for Repurchase
1997
 
2,000,000
2004
 
2,000,000
2005
 
6,000,000
2007
 
2,000,000
2011
 
1,876,949
2012
 
2,000,000
 
 
15,876,949









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PERFORMANCE GRAPH

The graph below compares the cumulative five-year total return to shareholders on Diebold, Inc.'s common stock relative to the cumulative total returns of the S&P 500 index, the S&P Midcap 400 index and two customized peer groups of twenty-five companies and twenty-four companies respectively, whose individual companies are listed in footnotes 1 and 2 below. The graph assumes that the value of the investment in our common stock, in each index, and in each of the peer groups (including reinvestment of dividends) was $100 on December 31, 2007 and tracks it through December 31, 2012.
(1)
There are twenty-five companies included in the company's old customized peer group which are: Actuant Corp., Benchmark Electronics Inc., Brady Corp., Cooper Industries, Coinstar Inc., Dover Corp., Fidelity National Information Services, Fiserv Inc., Flowserve Corp., Global Payments Inc., Imation Corp., International Game Technology, Logitech International SA, Mastercard Inc., Mettler Toledo International Inc., NCR Corp., Pitney-Bowes Inc., Rockwell Automation Inc., Sensata Technologies Holding NV, SPX Corp., The Brinks Company, The Timken Company, Unisys Corp., Western Union Company (The) and Woodward Inc.

(2)
The twenty-four companies included in the company's new customized peer group are: Actuant Corp., Benchmark Electronics Inc., Brady Corp., Coinstar Inc., DTS Inc., Fidelity National Information Services, Fiserv Inc., Flowserve Corp., Global Payments Inc., Harris Corp., Imation Corp., International Game Technology, Lexmark International Inc., Logitech International SA, Mettler Toledo International Inc., NCR Corp., Pitney-Bowes Inc., Sensata Technologies Holding NV, SPX Corp., The Brinks Company, The Timken Company, Unisys Corp., Western Union Company (The) and Woodward Inc. This peer group originally included Cooper Industries, Limited, however, in November 2012, Cooper Industries was acquired by Eaton Corp. and, as such, was dropped from the peer group.




17


ITEM 6: SELECTED FINANCIAL DATA

The following table should be read in conjunction with “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II — Item 8 — Financial Statements and Supplementary Data.”
 
Year Ended December 31,
 
2012
 
2011
 
2010
 
2009
 
2008
 
(in millions, except per share data)
Results of operations
 
 
 
 
 
 
 
 
 
Net sales
$
2,992

 
$
2,836

 
$
2,824

 
$
2,718

 
$
3,082

Cost of sales
2,256

 
2,100

 
2,104

 
2,068

 
2,307

Gross profit
$
736

 
$
736

 
$
720

 
$
650

 
$
775

 
 
 
 
 
 
 
 
 
 
Amounts attributable to Diebold, Incorporated
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations, net of tax
$
82

 
$
144

 
$
(21
)
 
$
73

 
$
108

(Loss) income from discontinued operations, net of tax
(3
)
 
1

 
1

 
(47
)
 
(19
)
Net income (loss) attributable to Diebold, Incorporated
$
78

 
$
145

 
$
(20
)
 
$
26

 
$
89

 
 
 
 
 
 
 
 
 
 
Basic earnings per common share:
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations, net of tax
$
1.29

 
$
2.24

 
$
(0.31
)
 
$
1.10

 
$
1.63

(Loss) income from discontinued operations, net of tax
(0.05
)
 
0.01

 

 
(0.71
)
 
(0.29
)
Net income (loss) attributable to Diebold, Incorporated
$
1.24

 
$
2.25

 
$
(0.31
)
 
$
0.39

 
$
1.34

 
 
 
 
 
 
 
 
 
 
Diluted earnings per common share:
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations, net of tax
$
1.28

 
$
2.23

 
$
(0.31
)
 
$
1.09

 
$
1.62

(Loss) income from discontinued operations, net of tax
(0.05
)
 
0.01

 

 
(0.70
)
 
(0.29
)
Net income (loss) attributable to Diebold, Incorporated
$
1.23

 
$
2.24

 
$
(0.31
)
 
$
0.39

 
$
1.33

 
 
 
 
 
 
 
 
 
 
Number of weighted-average shares outstanding
 
 
 
 
 
 
 
 
 
Basic shares
63

 
64

 
66

 
66

 
66

Diluted shares
64

 
65

 
66

 
67

 
66

 
 
 
 
 
 
 
 
 
 
Dividends
 
 
 
 
 
 
 
 
 
Common dividends paid
$
73

 
$
73

 
$
72

 
$
69

 
$
67

Common dividends paid per share
$
1.14

 
$
1.12

 
$
1.08

 
$
1.04

 
$
1.00

 
 
 
 
 
 
 
 
 
 
Consolidated balance sheet data (as of period end)
 
 
 
 
 
 
 
 
 
Current assets
$
1,815

 
$
1,732

 
$
1,714

 
$
1,588

 
$
1,614

Current liabilities
839

 
824

 
810

 
743

 
735

Net working capital
976

 
908

 
904

 
845

 
879

Property, plant and equipment, net
184

 
193

 
203

 
205

 
204

Total long-term liabilities
909

 
835

 
720

 
740

 
838

Total assets
2,593

 
2,517

 
2,520

 
2,555

 
2,538

Total equity
845

 
858

 
990

 
1,072

 
964




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Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2012
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)




ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW
Management's discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes that appear elsewhere in this annual report on Form 10-K.

Introduction
Diebold, Incorporated is a global leader in providing integrated self-service delivery and security systems and services primarily to the financial, commercial, government, and retail markets. Founded in 1859, the Company today has approximately 17,000 employees with representation in nearly 90 countries worldwide.

During the year, the Company accelerated its transformation into a world-class, software-led services provider aligned with the security, convenience and efficiency needs of its customers. Three essential pillars provide the Company a clear path toward reaching this future:
A strategy that leverages its leadership in software-led services, attuned with the needs of the Company's core global markets for financial self-service (FSS) and security solutions.
The financial capacity to implement that strategy and fund the investments necessary to drive growth, while preserving the ability to return value to shareholders in the form of reliable, growing dividends and, as appropriate, share repurchase.
A disciplined risk assessment process, focused on proactively identifying and mitigating potential risks to the Company's continued success.
The Company achieved six percent revenue growth in 2012 as well as operating profitability in Europe, Middle East and Africa (EMEA) for the full year after completing extensive restructuring efforts in the region, which began in 2008. The Company is also taking appropriate actions and making the necessary investments to reduce its overall cost structure and improve its near-term delivery and execution. In addition, the Company is sharpening its focus on the execution of its core strategies in FSS and electronic security and making the appropriate investments to deliver growth within these areas. The Company's strategic focus remains sound and the growing backlog in Asia-Pacific and U.S. national accounts is encouraging. However, the Company maintains a cautious outlook for 2013 given a difficult year-over-year comparison and an uncertain environment in the U.S. regional bank space.  In addition, the timing and outcome of large orders pending in Brazil could have a significant impact on the Company's earnings in 2013.

Income from continuing operations attributable to Diebold, Incorporated, net of tax, for the year ended December 31, 2012 was $81,579 or $1.28 per share, a decrease of $62,713 or $0.95 per share, respectively, from the year ended December 31, 2011. Total revenue for the year ended December 31, 2012 was $2,991,693, an increase of $155,845 from the year ended December 31, 2011. Income (loss) from continuing operations attributable to Diebold, Incorporated, net of tax, for the year ended December 31, 2011 was $144,292 or $2.23 per share, an increase of $164,819 or $2.54 per share respectively, from the year ended December 31, 2010. In 2010, the Company incurred a non-cash goodwill impairment charge of $168,714 associated with the Company’s EMEA business. Total revenue for the year ended December 31, 2011 was $2,835,848, up slightly compared to 2010.

Vision and strategy
The Company’s vision is to be recognized as the essential partner in creating and implementing ideas that optimize convenience, efficiency and security. This vision is the guiding principle behind the Company’s transformation to becoming a more software and services focused company. Services comprise more than 50 percent of the Company’s revenue and this percentage is expected to continue to grow over time as the Company builds on its strong base of maintenance and advanced services to deliver world-class integrated services.

Several years ago, the Company launched its Diebold Integrated Services outsourcing business in North America. Initially the scale was small, generating about $5,000 in contract value in year one. In the ensuing years, it has achieved substantial growth in this business. During 2012, the Company signed new integrated services contracts totaling approximately $300,000. The Company also made appropriate investments within its services infrastructure in 2012 to support the sizable outsourcing business


19

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2012
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)




secured in late 2011 from TD Bank Group, one of the largest financial institutions in North America, as well as the continued growth the Company expects in this space moving forward.

In addition to service and integrated services, another demand driver in the global ATM marketplace continued to be deposit automation. Among the largest U.S. national banks there has been extensive deployment of deposit automation-enabled terminals. Today, approximately 25 percent of ATMs globally are configured for automated deposits.
In its FSS business, during 2012, the Company's already strong solution set was further enhanced with the pilot of Concierge Video Services. The solution enables consumers with immediate access to bank call center representatives right at the ATM terminal for sales or bank account maintenance support. In addition to delivering a personal touch outside of regular business hours, Concierge Video Services ultimately assists financial institutions in maximizing operational efficiency, improving the consumer experience and enhancing the overall consumer relationship.
  
In its security business, the Company has an equal, if not greater, potential for a successful integrated services approach. Security challenges and the systems to address them have grown increasingly complex. That has created a greater appetite among financial institutions and commercial customers for outsourcing solutions, particularly in the areas of monitoring, services and software. Today the Company is bringing its expertise back into the financial sector and pursuing other areas, namely the commercial market, with a focused effort to secure large, complex and technologically demanding projects. The Company has customer-focused teams that possess the high levels of specialized expertise in logical and enterprise security required in this business. The Company is also leveraging best practices and some of the best talent to build the foundation for a new security outsourcing business.

Moving forward, the Company intends to create shareholder value by leveraging its growing advantage in software and services capabilities, taking advantage of key market opportunities around the world and further leveraging opportunities in the security business. To this extent, the Company made two strategic acquisitions in 2012, Altus in Turkey and GAS Tecnologia in Brazil. Altus, an industry-leading multi-vendor service provider in Turkey, will allow the Company to better capitalize on the growth opportunities provided by one of the fastest growing ATM markets in the world. GAS Tecnologia, a leading Internet banking, online payment and mobile banking security company in Brazil, adds a meaningful addition to the Company's security portfolio as the Company looks to build upon its expertise within this space and expand into other international markets. Many additional opportunities lie ahead, and the Company will continue to invest in developing new software, services and security solutions, particularly in emerging markets.

Cost savings initiatives, restructuring and other charges
Over the past several years, the Company’s SmartBusiness (SB) initiatives have led to rationalization of product development, streamlined procurement, realignment of the Company’s manufacturing footprint and improved logistics. Building on that success, the Company's SB 300 initiatives in 2011 shifted the focus from reducing cost of sales to lowering operating expenses and are targeted to achieve an additional $100,000 in efficiencies by the end of 2013.

The Company is committed to making the strategic decisions that not only streamline operations, but also enhance its ability to serve its customers. The Company remains confident in its ability to continue to execute on cost-reduction initiatives, deliver solutions that help improve customers’ businesses and create shareholder value. During the years ended December 31, 2012, 2011 and 2010, the Company incurred pre-tax net restructuring charges of $15,241 or $0.17 per share, $26,182 or $0.32 per share and $4,183 or $0.05 per share, respectively. Restructuring charges in 2012 primarily 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. Also , the Company's shared services plan in 2012 entailed expanding the global shared services center and transferred IT and financial services-related jobs residing in other geographies to India. Restructuring charges in 2011 primarily related to the Company’s EMEA reorganization plan, which realigns resources and further leverages the existing shared services center. Restructuring charges in 2010 were primarily related to reduction in the Company’s global workforce.

Other charges consist of items that the Company has determined are non-routine in nature and are not expected to recur in future operations. Net non-routine expenses of $42,328 or $0.45 per share impacted the year ended December 31, 2012 compared to $14,981 or $0.16 per share and $16,234 or $0.21 per share in the same period of 2011 and 2010, respectively. Net non-routine expenses for 2012 primarily related to the FCPA investigation, including $16,750 within miscellaneous, net of estimated pre-tax losses related to the potential outcome of this matter and $21,907 within selling and administrative expense of pre-tax non-routine


20

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2012
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)




expenses related to early pension buy-out payments made to certain deferred terminated vested participants. Net non-routine expenses for 2011 consisted primarily of legal and compliance costs related to the FCPA investigation and were recorded in selling and administrative expense and miscellaneous, net. Net non-routine expenses for 2010 consisted primarily of a settlement and legal fees related to a previously disclosed employment class-action lawsuit as well as legal and compliance costs related to the FCPA investigation.

Business Drivers
The business drivers of the Company’s future performance include, but are not limited to:

demand for new service offerings, including software-led services and integrated services (i.e. outsourcing);
demand for security products and services for the financial, commercial, retail and government sectors;
demand for products and solutions related to bank branch transformation opportunities;
timing of self-service equipment upgrades and/or replacement cycles, including deposit automation in mature markets such as the United States; and
high levels of deployment growth for new self-service products in emerging markets, such as Asia Pacific.



21

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2012
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)




The table below presents the changes in comparative financial data for the years ended December 31, 2012, 2011 and 2010. Comments on significant year-to-year fluctuations follow the table. The following discussion should be read in conjunction with the consolidated financial statements and the accompanying notes that appear elsewhere in this annual report on Form 10-K.
 
 
Year ended December 31,
 
 
2012
 
2011
 
2010
 
 
 
 
% of Net Sales
 
% Change
 
 
 
 % of Net Sales
 
% Change
 
 
 
 % of Net Sales
Net sales
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Services
 
$
1,626,521

 
54.4
 
4.8
 
$
1,552,358

 
54.7
 
3.9
 
$
1,493,425

 
52.9
Products
 
1,365,172

 
45.6
 
6.4
 
1,283,490

 
45.3
 
(3.5)
 
1,330,368

 
47.1
 
 
2,991,693

 
100.0
 
5.5
 
2,835,848

 
100.0
 
0.4
 
2,823,793

 
100.0
Cost of sales
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Services
 
1,215,673

 
40.6
 
6.8
 
1,138,213

 
40.1
 
3.4
 
1,100,305

 
39.0
Products
 
1,039,867

 
34.8
 
8.1
 
961,706

 
33.9
 
(4.2)
 
1,003,923

 
35.6
 
 
2,255,540

 
75.4
 
7.4
 
2,099,919

 
74.0
 
(0.2)
 
2,104,228

 
74.5
Gross profit
 
736,153

 
24.6
 
 
735,929

 
26.0
 
2.3
 
719,565

 
25.5
Selling and administrative expense
 
510,979

 
17.1
 
2.0
 
501,186

 
17.7
 
6.0
 
472,956

 
16.7
Research, development and
     engineering expense
 
85,881

 
2.9
 
10.0
 
78,108

 
2.8
 
5.2
 
74,225

 
2.6
Impairment of assets
 
15,783

 
0.5
 
N/M
 
2,962

 
0.1
 
N/M
 
175,849

 
6.2
Gain on sale of assets, net
 
(1,202
)
 
 
(37.4)
 
(1,921
)
 
(0.1)
 
15.5
 
(1,663
)
 
(0.1)
 
 
611,441

 
20.4
 
5.4
 
580,335

 
20.5
 
(19.6)
 
721,367

 
25.5
Operating profit (loss)
 
124,712

 
4.2
 
(19.8)
 
155,594

 
5.5
 
N/M
 
(1,802
)
 
(0.1)
Other (expense) income, net
 
(7,286
)
 
(0.2)
 
N/M
 
8,798

 
0.3
 
N/M
 
(595
)
 
Income (loss) from continuing
     operations before taxes
 
117,426

 
3.9
 
(28.6)
 
164,392

 
5.8
 
N/M
 
(2,397
)
 
(0.1)
Taxes on income
 
29,905

 
1.0
 
133.4
 
12,815

 
0.5
 
(12.0)
 
14,561

 
0.5
Income (loss) from continuing
      operations
 
87,521

 
2.9
 
(42.3)
 
151,577

 
5.3
 
N/M
 
(16,958
)
 
(0.6)
(Loss) income from discontinued
     operations, net of tax
 
(3,125
)
 
(0.1)
 
N/M
 
523

 
 
90.2
 
275

 
Net income (loss)
 
84,396

 
2.8
 
(44.5)
 
152,100

 
5.4
 
N/M
 
(16,683
)
 
(0.6)
Net income attributable to
     noncontrolling interests
 
5,942

 
0.2
 
(18.4)
 
7,285

 
0.3
 
104.1
 
3,569

 
0.1
Net income (loss) attributable to
     Diebold, Incorporated
 
$
78,454

 
2.6
 
(45.8)
 
$
144,815

 
5.1
 
N/M
 
$
(20,252
)
 
(0.7)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amounts attributable to
     Diebold, Incorporated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing
     operations, net of tax
 
$
81,579

 
2.7
 
 
 
$
144,292

 
5.1
 
 
 
$
(20,527
)
 
(0.7)
(Loss) income from discontinued
     operations, net of tax
 
(3,125
)
 
(0.1)
 
 
 
523

 
 
 
 
275

 
Net income (loss) attributable to
     Diebold, Incorporated
 
$
78,454

 
2.6
 
 
 
$
144,815

 
5.1
 
 
 
$
(20,252
)
 
(0.7)


22

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2012
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)




RESULTS OF OPERATIONS
2012 comparison with 2011
Net Sales
The following table represents information regarding our net sales for the years ended December 31:
 
2012
 
2011
 
$ Change
 
% Change
Net sales
$
2,991,693

 
$
2,835,848

 
$
155,845

 
5.5

FSS sales in 2012 improved $174,356 or 8.2 percent compared to 2011. The increase in FSS sales included a net unfavorable currency impact of $85,545 or 4.5 percent, of which approximately 56 percent related to the Brazilian real. The following division highlights include the impact of foreign currency. DNA sales increased $181,576 or 20.9 percent as a result of significant growth within the U.S. regional and national bank business influenced by the Americans with Disabilities Act compliance and a focus on deposit automation technology. With the expiration of the Americans with Disabilities Act compliance deadline, the rate of growth in regional sales has slowed and led to a higher concentration of national bank sales. DI sales decreased by $7,220 or 0.6 percent related to the following: EMEA decreased $20,085 or 5.8 percent; Latin America, including Brazil, increased $9,228 or 1.8 percent; and Asia Pacific increased $3,637 or 0.9 percent. The decrease in EMEA was driven by an unfavorable currency impact, particularly the euro and rand, partially offset with growth in South Africa compared to the prior year. The increase in Latin America, including Brazil, was influenced by higher volume across most of the geographies despite the currency headwinds related to the Brazilian real. The improvement in Asia Pacific was driven by higher volume in Thailand, partially offset by an unfavorable currency impact associated mostly with the Indian rupee.
Security solutions sales in 2012 increased by $18,135 or 3.0 percent compared to 2011. DNA increased $3,938 or 0.7 percent compared to the prior year combined with improvement in DI of $14,197 or 20.4 percent. The DNA variance was driven from an increase in infrastructure projects for government agency and commercial customers, partially offset by lower volume with financial customers compared to the prior year. The DI variance was a result of higher volume in Latin America, mostly in Colombia and Chile, combined with an increase in Asia Pacific related to growth in India that was partially offset by lower volume in Australia.
The Brazilian-based election and lottery systems sales in 2012 decreased by $36,646 or 39.5 percent compared to 2011, inclusive of a $13,608 net unfavorable currency impact. The decrease was driven by a $46,116 reduction in election system sales primarily due to lower volume, partially offset with an increase in lottery unit sales compared to 2011.

Gross Profit
The following table represents information regarding our gross profit for the years ended December 31:
 
2012
 
2011
 
$ Change
 
% Change
Gross profit - services
$
410,848

 
$
414,145

 
$
(3,297
)
 
(0.8)
Gross profit - products
325,305

 
321,784

 
3,521

 
1.1
Total gross profit
$
736,153

 
$
735,929

 
$
224

 
 
 
 
 
 
 
 
 
Gross margin - services
25.3
%
 
26.7
%
 

 
 
Gross margin - products
23.8
%
 
25.1
%
 


 
 
Total gross margin
24.6
%
 
26.0
%
 


 
 

The decrease in service gross margin for 2012 compared to 2011 was driven by DNA and Latin America, including Brazil, partially offset with improvement in EMEA. In DNA, service margin was down compared to the prior year due to the increased competitive environment and associated pricing impact coupled with higher compensation and benefits, scrap, and insurance charges. The decrease in Latin America, including Brazil, was driven by an increase in warranty expense combined with higher restructuring charges in 2012. In EMEA, service margin improved as fewer net restructuring charges were incurred in 2012 related to the EMEA reorganization paired with a favorable customer mix. Total service gross margin for 2012 included $6,226 of net restructuring charges compared to $10,678 of net restructuring charges in 2011.



23

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2012
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)




The decrease in product gross margin was driven by product and customer mix differences in Latin America, including Brazil, as well as continued pricing pressure in the Asia Pacific region. Partially offsetting these decreases, DNA product revenue was significantly higher in 2012, which caused a favorable shift in revenue mix between DNA and DI that improved product gross margin. Total product gross margin for 2012 included $1,849 of net restructuring accrual benefits compared to $3,905 of net restructuring charges in 2011 related mainly to the EMEA reorganization.

Operating Expenses
The following table represents information regarding our operating expenses for the years ended December 31:
 
2012
 
2011
 
$ Change
 
% Change
Selling and administrative expense
$
510,979

 
$
501,186

 
$
9,793

 
2.0
Research, development and engineering expense
85,881

 
78,108

 
7,773

 
10.0
Impairment of assets
15,783

 
2,962

 
12,821

 
N/M
Gain on sale of assets, net
(1,202
)
 
(1,921
)
 
719

 
(37.4)
Total operating expenses
$
611,441

 
$
580,335

 
$
31,106

 
5.4

Selling and administrative expense increased $9,793 or 2.0 percent in 2012 compared to 2011. The increase was due to higher non-routine expenses, compensation and benefits increase, and legal expenses, partially offset by a favorable currency impact of $13,848 and lower restructuring charges. Selling and administrative expense in 2012 and 2011 included non-routine expenses of $24,792 and $13,230, respectively. The majority of non-routine expenses in 2012 were related to early pension buy-out payments made to certain deferred terminated vested participants while most of the non-routine expenses in 2011 pertained to legal, consultative, and audit costs related to the global FCPA investigation. In addition, selling and administrative expense included $9,037 and $11,607 of restructuring charges in 2012 and 2011, respectively. The 2012 restructuring charges related to the Company's global realignment and global shared services plans. The 2011 restructuring charges related mainly to the EMEA reorganization.
Research, development and engineering expense as a percent of net sales in 2012 and 2011 were 2.9 percent and 2.8 percent, respectively and increased $7,773 year over year. The increase in operational spend was associated with key initiatives such as the development of next generation hardware and software platforms. Research, development and engineering expense also included higher restructuring charges associated with the Company's global realignment plan.
During the second quarter of 2012, the Company impaired previously capitalized software and software-related costs of $6,701 due to changes in the global ERP system implementation plan related to configuration and design. In the third quarter of 2012, the Company recorded an impairment of $7,930 related to its 50 percent ownership in Shanghai Diebold King Safe Company, Ltd. In the fourth quarter of 2012, the Company recorded an impairment of $1,012 related to the Company's decision to cancel the new corporate headquarters project. The impairment charge of $2,962 in 2011 resulted from a non-cash intangible asset impairment related to a prior acquisition.

Operating Profit
The following table represents information regarding our operating profit for the years ended December 31:
 
2012
 
2011
 
$ Change
 
% Change
Operating profit
$
124,712

 
$
155,594

 
$
(30,882
)
 
(19.8)
Operating profit margin
4.2
%
 
5.5
%
 

 
 

The decrease in operating profit in 2012 compared to 2011 was influenced by a decrease in both service and product gross margins paired with the increase in operating expenses noted above. All of these items combined to produce a 1.3 percentage point decrease in operating profit margin in 2012 compared to 2011.




24

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2012
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)




Other Income (Expense)
The following table represents information regarding our other income (expense) for the years ended December 31:
 
2012
 
2011
 
$ Change
 
% Change
Investment income
$
37,593

 
$
41,663

 
$
(4,070
)
 
(9.8)
Interest expense
(30,330
)
 
(34,456
)
 
(4,126
)
 
(12.0)
Foreign exchange gain (loss), net
2,654

 
3,095

 
(441
)
 
14.2
Miscellaneous, net
(17,203
)
 
(1,504
)
 
(15,699
)
 
N/M
Other income (expense)
$
(7,286
)
 
$
8,798

 
$
(16,084
)
 
N/M

Miscellaneous expense was unfavorable $15,699 driven primarily from non-routine expenses of $16,750 and $3,250 in 2012 and 2011, respectively. These non-routine expenses related to the Company's estimate of losses associated with the potential outcome of the FCPA investigation. Interest expense in 2012 was favorable compared to 2011 due to lower interest rates and favorable foreign exchange hedge activity. Investment income declined in 2012 from the influence of a net unfavorable currency impact in DI.

Income from Continuing Operations
The following table represents information regarding our income (loss) from continuing operations for the years ended December 31:
 
2012
 
2011
 
$ Change
 
% Change
Income from continuing operations, net of tax
$
87,521

 
$
151,577

 
$
(64,056
)
 
42.3
Percent of net sales
2.9
%
 
5.3
%
 

 
 
Effective tax rate
25.5
%
 
7.8
%
 


 
 

The decrease in net income from continuing operations in 2012 compared to 2011 was driven by the reduction in operating profit margin, a decrease in other income, and the increase in the effective tax rate. The 17.7 percentage point increase in the effective tax rate was due to the 2011 benefit of valuation allowance released in Brazil, offset by 2012 net income in jurisdictions with a lower tax rate.

Segment Revenue and Operating Profit Summary
The following table represents information regarding our revenue by reporting segment for the years ended December 31:
 
2012
 
2011
 
$ Change
 
% Change
DNA
$
1,590,532

 
$
1,405,018

 
$
185,514

 
13.2
DI
1,401,161

 
1,430,830

 
(29,669
)
 
(2.1)
Total net sales
$
2,991,693

 
$
2,835,848

 
$
155,845

 
5.5

The increase in DNA net sales was driven by growth in the FSS business, particularly related to higher product volume in both the U.S. regional and national bank business. The higher FSS product volume influenced growth in service installations and software-led services. Partially offsetting these increases was a reduction in security product volume in the U.S. national bank business.

The decrease in DI net sales was influenced by a net unfavorable currency impact of $99,131, of which approximately 62 percent related to the Brazilian real. Operationally, DI realized higher FSS volumes in Latin America, including Brazil, Asia Pacific, and EMEA. In addition, Latin America generated a higher volume of security sales, particularly Colombia and Chile, while Brazil benefited from an increase in lottery unit sales in 2012 compared to 2011. These increases were partially offset with fewer election system sales in Brazil for 2012.





25

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2012
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)




The following table represents information regarding our operating profit by reporting segment for the years ended December 31:
 
2012
 
2011
 
$ Change
 
% Change
DNA
$
103,596

 
$
123,033

 
$
(19,437
)
 
(15.8)
DI
21,116

 
32,561

 
(11,445
)
 
(35.1)
Total operating profit
$
124,712

 
$
155,594

 
$
(30,882
)
 
(19.8)

DNA operating profit for 2012 decreased by $19,437 compared to 2011. The decrease was driven by a lower margin in traditional maintenance services related to competitive pricing and higher compensation and benefits, scrap, and insurance charges. Operating expenses were also higher in DNA related to an increase in non-routine expenses and restructuring charges, higher compensation and benefit costs, impairment charges, and research, development and engineering expense. These decreases were partially offset by higher FSS product volume in the U.S. regional bank business.
DI operating profit for 2012 decreased by $11,445 compared to 2011. The decrease was driven by customer and product mix differences in Latin America, including Brazil as well as fewer election system sales compared to the prior year. In addition, pricing pressures continued in the Asia Pacific region. Partially offsetting these decreases, EMEA benefited from fewer restructuring charges related to the 2011 reorganization combined with operational improvement related to customer and product mix. An improvement in operating expenses was realized across a mix of geographies, inclusive of a favorable currency impact and higher impairment charges.
Refer to note 19 to the consolidated financial statements for further details of segment revenue and operating profit.

2011 comparison with 2010
Net Sales
The following table represents information regarding our net sales for the years ended December 31:
 
2011
 
2010
 
$ Change
 
% Change
Net sales
$
2,835,848

 
$
2,823,793

 
$
12,055

 
0.4

FSS sales in 2011 increased by $91,156 or 4.5 percent compared to 2010. The increase in FSS sales included a net favorable currency impact of $45,972, of which approximately 50 percent related to the Brazilian real. The following division highlights include the impact of foreign currency. DNA increased $107,193 or 14.1 percent due to continued growth within the U.S. regional bank business with customer demand focused on meeting regulatory requirements and providing deposit automation technology. DI sales decreased by $16,037 or 1.2 percent related to the following: Latin America, including Brazil, decreased $58,343 or 10.0 percent, EMEA decreased $5,487 or 1.6 percent and Asia Pacific increased $47,793 or 13.6 percent. The decrease in Latin America, including Brazil, was driven mainly from lower volume in Brazil paired with improvement across most of Latin America. The decrease in EMEA was influenced by lower volumes in Europe, partially offset with growth in Africa. The increase in Asia Pacific resulted from additional volume in several countries most notably China and India.
Security solutions sales in 2011 decreased by $24,843 or 3.9 percent compared to 2010. DNA decreased $22,756 or 4.1 percent compared to the prior year and DI decreased by $2,087 or 2.9 percent. The reduction in DNA was influenced by lower product volumes in the U.S. regional and national bank business. The DI variance was due to a reduction in Asia Pacific mostly from Australia, partially offset by improvement in Latin America compared to 2010.
The Brazil-based lottery and election systems sales decreased $54,258 or 36.9 percent in 2011 compared to 2010. This decrease was driven by a $47,767 reduction in election sales as well as a $6,491 decrease in lottery sales compared to 2010. Election sales decreased due to cyclical purchasing decisions within the country.





26

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2012
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)




Gross Profit
The following table represents information regarding our gross profit for the years ended December 31:
 
2011
 
2010
 
$ Change
 
% Change
Gross profit - services
414,145

 
393,120

 
21,025

 
5.3
Gross profit - products
321,784

 
326,445

 
(4,661
)
 
(1.4)
Total gross profit
$
735,929

 
$
719,565

 
$
16,364

 
2.3
 
 
 
 
 
 
 
 
Gross margin - services
26.7
%
 
26.3
%
 

 
 
Gross margin - products
25.1
%
 
24.5
%
 

 
 
Total gross margin
26.0
%
 
25.5
%
 

 
 

The increase in service gross margin resulted from operational cost efficiencies in Brazil as well as growth in DNA, Asia Pacific and Latin America. Partially offsetting these increases, EMEA realized lower margin mostly due to higher restructuring charges in 2011 related to the EMEA reorganization. Total service gross margin for 2011 included $10,678 of restructuring charges compared to $540 of charges in the same period of 2010.
The increase in product gross margin was driven by DNA with higher volumes and favorable customer mix, primarily from the U.S. regional bank business as well as favorable absorption in the U.S. manufacturing plants due to higher production volume. Partially offsetting these improvements, a reduction in DI was related mostly to lower volume in Brazil paired with lower margins across most of the other geographies. Additionally, the total product gross margin in 2011 and 2010 included restructuring charges of $3,905 and $1,163, respectively.
Operating Expenses
The following table represents information regarding our operating expenses for the years ended December 31:
 
2011
 
2010
 
$ Change
 
% Change
Selling and administrative expense
$
501,186

 
$
472,956

 
$
28,230

 
6.0
Research, development and engineering expense
78,108

 
74,225

 
3,883

 
5.2
Impairment of assets
2,962

 
175,849

 
(172,887
)
 
(98.3)
Gain on sale of assets, net
(1,921
)
 
(1,663
)
 
(258
)
 
15.5
Total operating expenses
$
580,335

 
$
721,367

 
$
(141,032
)
 
(19.6)

Selling and administrative expense increased in 2011 compared to 2010 due to higher compensation and benefits, $7,976 of unfavorable currency impact, higher restructuring expenses and lower non-routine income, partially offset with a reduction in non-routine expenses. Selling and administrative expense in 2011 and 2010 included net, non-routine expense of $13,230 and $16,234, respectively. Net non-routine expense in 2011 primarily pertained to legal, consultative, audit and severance costs related to the FCPA investigation. Net non-routine expense in 2010 included settlement and legal fees related to an employment class action lawsuit and legal and professional fees driven by the FCPA investigation, partially offset by non-routine income of $4,148 consisting of reimbursements from the Company's director and officer insurance carriers. In addition, selling and administrative expense included $11,607 and $3,809 of restructuring charges in 2011 and 2010, respectively. The 2011 restructuring charges related primarily to the EMEA reorganization.
Research, development and engineering expense as a percent of net sales in 2011 and 2010 was 2.8 percent and 2.6 percent, respectively. The increase as a percent of net sales was due to higher project volume and focus on innovation.
The impairment charges in 2011 resulted from non-cash intangible asset impairments related primarily to prior acquisitions. The impairment charges in 2010 resulted from a $168,714 non-cash goodwill impairment charge associated with the Company's EMEA business, an impairment related to customer contract intangible assets and an other-than-temporary impairment related to a cost method investment.



27

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2012
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)




Operating (Loss) Profit
The following table represents information regarding our operating (loss) profit for the years ended December 31:
 
2011
 
2010
 
$ Change
 
% Change
Operating profit (loss)
$
155,594

 
$
(1,802
)
 
$
157,396

 
N/M
Operating profit (loss) margin
5.5
%
 
(0.1
)%
 

 
 

The increase in operating profit in 2011 compared to 2010 resulted from a decrease in operating expenses mostly related to a reduction in impairment charges in EMEA, partially offset by an increase in other operating expenses noted above. In addition, operating profit increased due to improved product and service margins and an increased service revenue base.

Other Income (Expense)
The following table represents information regarding our other income (expense) for the years ended December 31:
 
2011
 
2010
 
$ Change
 
 % Change
Investment income
$
41,663

 
$
34,545

 
$
7,118

 
20.6
Interest expense
(34,456
)
 
(37,887
)
 
(3,431
)
 
(9.1)
Foreign exchange gain (loss), net
3,095

 
(1,301
)
 
(4,396
)
 
N/M
Miscellaneous, net
(1,504
)
 
4,048

 
(5,552
)
 
N/M
Other income (expense)
$
8,798

 
$
(595
)
 
$
9,393

 
N/M

Investment income in 2011 was favorable compared to 2010, driven primarily by Brazil, with a combination of increased investment and favorable currency impact. The improvement in foreign exchange was influenced by the realization of favorable currency positions. Interest expense was favorable compared to the same period in 2010 due to favorable interest rates and lower fees.
 
Income (Loss) from Continuing Operations
The following table represents information regarding our income from continuing operations for the years ended December 31:
 
2011
 
2010
 
$ Change
 
% Change
Income (loss) from continuing operations, net of tax
151,577

 
(16,958
)
 
168,535

 
N/M
Percent of net sales
5.3

 
(0.6
)
 


 
 
Effective tax rate
7.8
%
 
607.5
 %
 

 
 

The increase in net income from continuing operations in 2011 compared to 2010 resulted from lower operating expenses related to the 2010 non-cash goodwill impairment charge that did not recur in 2011, higher gross profit and favorable other income. The effective tax rate in 2011 was positively impacted by an approximately $28,000 valuation allowance released in Brazil. Sustained improvement in operating results, combined with a more favorable outlook for business in Brazil, triggered the release of this valuation allowance on deferred tax assets. The effective tax rate in 2010 was negatively impacted by the impairment of non-deductible goodwill.

Segment Revenue and Operating Profit Summary
The following table represents information regarding our revenue by reporting segment for the years ended December 31:
 
2011
 
2010
 
$ Change
 
% Change
DNA
$
1,405,018

 
$
1,320,581

 
$
84,437

 
6.4
DI
1,430,830

 
1,503,212

 
(72,382
)
 
(4.8)
Total net sales
$
2,835,848

 
$
2,823,793

 
$
12,055

 
0.4

The increase in DNA net sales was due to higher FSS product volume in both the U.S. regional and national bank business. In addition, higher volume was also realized in managed and other services. Partially offsetting the increases, a reduction in security products was realized in both the U.S. regional and national bank business.


28

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2012
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)




The decrease in DI net sales was due primarily to lower FSS and election systems volume in Brazil, partially offset by a net favorable currency impact of $58,917, of which approximately 59 percent related to Brazil. These decreases were also partially offset by service revenue growth in Asia Pacific compared to 2010.

The following table represents information regarding our operating profit (loss) by reporting segment for the years ended December 31:
 
2011
 
2010
 
$ Change
 
% Change
DNA
123,033

 
81,022

 
42,011

 
51.9
DI
32,561

 
(82,824
)
 
115,385

 
(139.3)
Total operating profit (loss)
155,594

 
(1,802
)
 
157,396

 
N/M
DNA operating profit for 2011 increased by $42,011 or 51.9 percent compared to 2010. The increase was driven primarily by higher FSS product volume in the U.S. regional bank business, improvement in U.S. installation related to higher volume and cost efficiencies as well as a reduction in non-routine expenses. These increases were partially offset with an increase in operating expense related mostly to higher compensation and benefits as well as lower non-routine income.
DI operating profit for 2011 increased by $115,385 compared to 2010 primarily due to a non-cash goodwill impairment charge of $168,714 incurred in 2010 associated with the Company's EMEA business. Partially offsetting this improvement were lower FSS and election systems sales in Brazil, higher restructuring expenses related mostly to the EMEA reorganization and higher operational expenses across most geographies.
Refer to note 19 to the consolidated financial statements for further details of segment revenue and operating profit.
LIQUIDITY AND CAPITAL RESOURCES
Capital resources are obtained from income retained in the business, borrowings under the Company’s senior notes, committed and uncommitted credit facilities, long-term industrial revenue bonds and operating and capital leasing arrangements. Management expects that the Company’s capital resources will be sufficient to finance planned working capital needs, research and development activities, investments in facilities or equipment, pension contributions, the payment of dividends on the Company’s common shares and the purchase of the Company’s common shares for at least the next 12 months. At December 31, 2012, approximately $614,000 or 97 percent of the Company’s cash and cash equivalents and short-term investments reside in international tax jurisdictions. Repatriation of these funds could be negatively impacted by potential foreign and domestic taxes. Part of the Company’s growth strategy is to pursue strategic acquisitions. The Company has made acquisitions in the past and intends to make acquisitions in the future. The Company intends to finance any future acquisitions with either cash and short-term investments, cash provided from operations, borrowings under available credit facilities, proceeds from debt or equity offerings and/or the issuance of common shares.

The following table summarizes the results of our consolidated statement of cash flows for the years ended December 31:
Net cash flow provided by (used in):
2012
 
2011
 
2010
Operating activities
$
135,508

 
$
215,397

 
$
273,353

Investing activities
(72,831
)
 
(90,706
)
 
(164,756
)
Financing activities
(36,227
)
 
(123,535
)
 
(111,100
)
Effect of exchange rate changes on cash and cash equivalents
8,422

 
4,106

 
2,735

Net increase in cash and cash equivalents
$
34,872

 
$
5,262

 
$
232


During 2012, the Company generated $135,508 in cash from operating activities, a decrease of $79,889 from 2011. Cash flows from operating activities are generated primarily from operating income and managing the components of working capital. Cash flows from operating activities during the year ended December 31, 2012 compared to the year ended December 31, 2011, were negatively impacted by a $67,704 decrease in net income, as well as unfavorable changes in trade receivables, prepaid expenses, refundable income taxes, other current assets, accounts payable and deferred revenue. These changes were partially offset by favorable changes in inventories, deferred income taxes, pension and postretirement benefits and certain other assets and liabilities, including the sale of finance receivables.


29

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2012
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)




Net cash used in investing activities was $72,831 in 2012, a decrease of $17,875 from 2011. The decrease was primarily due to a $43,681 change in net investment security activity, a $8,309 decrease in other asset expenditures and a decrease of $5,011 in capital expenditures. These activities were partially offset by $28,292 paid for acquisitions in 2012 and a $6,086 decrease in collections on purchased finance receivables.
Net cash used in financing activities was $36,227 in 2012, a decrease of $87,308 from 2011. The decrease was primarily due to a decrease of common share repurchases of $108,363, an increase in the issuance of common shares related to share-based compensation activity of $12,636 and a decrease of $3,776 in distributions to noncontrolling interest holders. This was partially offset by a $39,566 increase in net borrowings.
Benefit Plans The Company expects to contribute $3,343 to its pension plans during the year ending December 31, 2013. Beyond 2013, minimum statutory funding requirements for the Company's U.S. pension plans may become significant. However, the actual amounts required to be contributed are dependent upon, among other things, interest rates, underlying asset returns and the impact of legislative or regulatory actions related to pension funding obligations. The Company has adopted a pension investment policy designed to achieve an adequate funded status based on expected benefit payouts and to establish an asset allocation that will meet or exceed the return assumption while maintaining a prudent level of risk. The plan's target asset allocation adjusts based on the plan's funded status. As the funded status improves or declines, the debt security target allocation will increase and decrease, respectively.
Payments due under the Company's other postretirement benefit plans are not required to be funded in advance, but are paid as medical costs are incurred by covered retirees, and are principally dependent upon the future cost of retiree medical benefits under these plans. We expect the other postretirement benefit plan payments to approximate $1,607 in 2013, net of a benefit of approximately $191 from the Medicare prescription subsidy. Refer to note 12 to the consolidated financial statements for further discussion of the Company's pension and other postretirement benefit plans.
Dividends The Company paid dividends of $72,830, $72,901 and $71,900 in the years ended December 31, 2012, 2011 and 2010, respectively. Annualized dividends per share were $1.14, $1.12 and $1.08 for the years ended December 31, 2012, 2011 and 2010, respectively. The quarterly 2013 cash dividend, which represents $1.15 per share on an annualized basis, marks the Company's 60th consecutive annual dividend increase.

Contractual Obligations The following table summarizes the Company’s approximate obligations and commitments to make future payments under contractual obligations as of December 31, 2012:
 
 
 
Payment due by period
 
Total
 
Less than 1 year
 
1-3 years
 
3-5 years
 
More than 5 years
Minimum operating lease obligations
$
224,205

 
$
41,932

 
$
57,195

 
$
35,659

 
$
89,419

Debt
651,746

 
109,212

 
2,437

 
490,090

 
50,007

Interest on debt (1)
93,684

 
21,161

 
49,277

 
12,038

 
11,208

Purchase commitments
9,772

 
9,772

 

 

 

Total
$
979,407

 
$
182,077

 
$
108,909

 
$
537,787

 
$
150,634

(1)
Amounts represent estimated contractual interest payments on outstanding long-term debt and notes payable. Rates in effect as of December 31, 2012 are used for variable rate debt.

At December 31, 2012, the Company also had uncertain tax positions of $13,178, for which there is a high degree of uncertainty as to the expected timing of payments (refer to note 4 to the consolidated financial statements).

As of December 31, 2012, the Company had various short-term uncommitted lines of credit with borrowing limits of $111,337. The weighted-average interest rate on outstanding borrowings on the short-term uncommitted lines of credit as of December 31, 2012 and 2011 was 2.81 percent and 4.23 percent, respectively. The decline in the weighted-average interest rate is attributable to the change in geographic mix of borrowings. Short-term uncommitted lines mature in less than one year. The amount available under the short-term uncommitted lines at December 31, 2012 was $77,421.

In June 2011, the Company entered into a five-year credit facility, which replaced its previous credit facility. As of December 31, 2012, the Company had borrowing limits under the credit facility totaling $500,000. Under the terms of the credit facility agreement,


30

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2012
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)




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 subfacility. The weighted-average interest rate on outstanding credit facility borrowings as of December 31, 2012 and 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 December 31, 2012 was $200,000. The Company incurred $1,876 of fees related to its credit facility in 2011, which are amortized as a component of interest expense over the term of the facility.

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. As of December 31, 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. Additionally, the Company entered into a pre-issuance cash flow hedge to offset interest rate risk on $200,000 of the senior notes, which reduced the effective interest rate by 14 basis points from 5.50 to 5.36 percent.

The Company’s financing agreements contain various restrictive financial covenants, including net debt to capitalization and net interest coverage ratios. As of December 31, 2012, the Company was in compliance with the financial covenants in its debt agreements.

Off-Balance Sheet Arrangements The Company enters into various arrangements not recognized in the consolidated balance sheets that have or could have an effect on its financial condition, results of operations, liquidity, capital expenditures or capital resources. The principal off-balance sheet arrangements that the Company enters into are guarantees and sales of finance receivables. The Company provides its global operations guarantees and standby letters of credit through various financial institutions to suppliers, regulatory agencies and insurance providers. If the Company is not able to make payment, the suppliers, regulatory agencies and insurance providers may draw on the pertinent bank. Refer to note 14 to the consolidated financial statements for further details of guarantees. The Company has sold finance receivables to financial institutions while continuing to service the receivables. The Company records these sales by removing finance receivables from the consolidated balance sheets and recording gains and losses in the consolidated statement of operations. Refer to note 6 to the consolidated financial statements for further details on finance lease receivables.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s consolidated financial statements. The consolidated financial statements of the Company are prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). The preparation of the accompanying consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities and reported amounts of revenues and expenses. Such estimates include revenue recognition, the valuation of trade and financing receivables, inventories, goodwill, intangible assets, other long-lived assets, legal contingencies, guarantee obligations, and assumptions used in the calculation of income taxes, pension and postretirement benefits and customer incentives, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors. Management monitors the economic conditions and other factors and will adjust such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.

The Company’s significant accounting policies are described in note 1 to the consolidated financial statements. Management believes that, of its significant accounting policies, its policies concerning revenue recognition, allowances for credit losses, inventory reserves, goodwill, taxes on income and pensions and postretirement benefits are the most critical because they are affected significantly by judgments, assumptions and estimates. Additional information regarding these policies is included below.

Revenue Recognition In general, the Company records revenue when it is realized, or realizable and earned. The application of U.S. GAAP revenue recognition principles to the Company's customer contracts requires judgment, including the determination of whether an arrangement includes multiple deliverables such as hardware, software, maintenance and/or other services. For contracts that contain multiple deliverables, total arrangement consideration is allocated at the inception of the arrangement to each deliverable based on the relative selling price method. The relative selling price method is based on a hierarchy consisting of vendor specific objective evidence (VSOE) (price sold on a stand-alone basis), if available, or third-party evidence (TPE), if


31

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2012
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)




VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE is available. The Company's ESP is consistent with the objective of determining VSOE, which is the price at which we would expect to transact on a stand-alone sale of the deliverable. The determination of ESP is based on applying significant judgment to weigh a variety of company-specific factors including our pricing practices, customer volume, geography, internal costs and gross margin objectives, information gathered from experience in customer negotiations, recent technological trends and competitive landscape. In contracts that involve multiple deliverables, maintenance services are typically accounted for under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 605-20 Separately Priced Extended Warranty and Product Maintenance Contracts. There have been no material changes to these estimates for the periods presented and the Company believes that these estimates generally should not be subject to significant changes in the future. However, changes to deliverables in future arrangements could materially impact the amount of earned or deferred revenue.

For sales of software, which excludes software required for the equipment to operate as intended, the Company applies the software revenue recognition principles within FASB ASC 985-605, Software - Revenue Recognition. For software and software-related deliverables (software elements), the Company allocates revenue based upon the relative fair value of these deliverables as determined by VSOE. If the Company cannot obtain VSOE for any undelivered software element, revenue is deferred until all deliverables have been delivered or until VSOE can be determined for any remaining undelivered software elements. When the fair value of a delivered element has not been established, but fair value evidence exists for the undelivered software elements, the Company uses the residual method to recognize revenue. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement consideration is allocated to the delivered elements and recognized as revenue. Determination of amounts deferred for software support requires judgment about whether the deliverables can be divided into more than one unit of accounting and whether the separate deliverables have value to the customer on a stand-alone basis. There have been no material changes to these deliverables for the periods presented. However, changes to deliverables in future arrangements and the ability to establish VSOE could affect the amount and timing of revenue recognition.

Allowances for Credit Losses The Company maintains allowances for potential credit losses, and such losses have been minimal and within management’s expectations. Since the Company’s receivable balance is concentrated primarily in the financial and government sectors, an economic downturn in these sectors could result in higher than expected credit losses. The concentration of credit risk in the Company’s trade receivables with respect to financial and government customers is largely mitigated by the
Company’s credit evaluation process and the geographical dispersion of sales transactions from a large number of individual customers.

Inventory Reserves At each reporting period, the Company identifies and writes down its excess and obsolete inventories to net realizable value based on usage forecasts, order volume and inventory aging. With the development of new products, the Company also rationalizes its product offerings and will write-down discontinued product to the lower of cost or net realizable value.

Goodwill Goodwill is the cost in excess of the net assets of acquired businesses (refer to note 10 to the consolidated financial statements). The Company tests all existing goodwill at least annually as of November 30 for impairment on a “reporting unit” basis. The Company tests for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the carrying value of a reporting unit below its reported amount. The Company’s reporting units are defined as Domestic and Canada, Brazil, Latin America, Asia Pacific, and Europe, Middle East and Africa (EMEA). Each year, the Company may elect to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. In evaluating whether it is more likely than not the fair value of a reporting unit is less than its carrying amount, the Company considers the following events and circumstances, among others, if applicable: (a) macroeconomic conditions such as general economic conditions, limitations on accessing capital or other developments in equity and credit markets; (b) industry and market considerations such as competition, multiples or metrics and changes in the market for the Company's products and services or regulatory and political environments; (c) cost factors such as raw materials, labor or other costs; (d) overall financial performance such as cash flows, actual and planned revenue and earnings compared with actual and projected results of relevant prior periods; (e) other relevant events such as changes in key personnel, strategy or customers; (f) changes in the composition of a reporting unit's assets or expected sales of all or a portion of a reporting unit; and (g) any sustained decrease in share price.

If the Company's qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying value, or if management elects to perform a quantitative assessment of goodwill, a two-step impairment test is used to identify potential goodwill impairment and measure the amount of any 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


32

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2012
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)




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 18 to the consolidated financial statements), 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.

In 2012, goodwill was reviewed for impairment based on a two-step test (refer to note 1 to the consolidated financial statements), which resulted in no impairment in any of the Company's reporting units. As a result of the 2012 Step 1 impairment test, the Company concluded the Brazil reporting unit had excess fair value of approximately $113,348 or 22.0 percent when compared to its carrying amount. The amount of goodwill in the Company's Brazil reporting unit was $120,571 as of December 31, 2012. All other reporting units had excess fair value greater than 20 percent when compared to their carrying amounts.

In 2011, the Company performed a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. In the 2011 qualitative assessment, management concluded that the Company's reporting units were not at risk of failing step one and therefore the two-step impairment test was not performed.

In 2010, goodwill was reviewed for impairment based on a two-step test. In 2010, management concluded that all of the Company’s goodwill within the EMEA reporting unit was not recoverable and recorded a $168,714,000 non-cash impairment charge during the fourth quarter 2010.

Taxes on Income Deferred taxes are provided on an asset and liability method, whereby deferred tax assets are recognized for deductible temporary differences, operating loss carry-forwards and tax credits. Deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

The Company operates in numerous taxing jurisdictions and is subject to examination by various federal, state and foreign jurisdictions for various tax periods. Additionally, the Company has retained tax liabilities and the rights to tax refunds in connection with various divestitures of businesses. The Company’s income tax positions are based on research and interpretations of the income tax laws and rulings in each of the jurisdictions in which the Company does business. Due to the subjectivity of interpretations of laws and rulings in each jurisdiction, the differences and interplay in tax laws between those jurisdictions, as well as the inherent uncertainty in estimating the final resolution of complex tax audit matters, the Company’s estimates of income tax liabilities may differ from actual payments or assessments.

The Company regularly assesses its position with regard to tax exposures and records liabilities for these uncertain tax positions and related interest and penalties, if any, when the tax benefit is not more likely than not realizable. The Company has recorded an accrual that reflects the recognition and measurement process for the financial statement recognition and measurement of a tax


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Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2012
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)




position taken or expected to be taken on a tax return. Additional future income tax expense or benefit may be recognized once the positions are effectively settled.

At the end of each interim reporting period, the Company estimates the effective tax rate expected to apply to the full fiscal year. The estimated effective tax rate contemplates the expected jurisdiction where income is earned, as well as tax planning alternatives. Current and projected growth in income in higher tax jurisdictions may result in an increasing effective tax rate over time. If the actual results differ from estimates, the Company may adjust the effective tax rate in the interim period if such determination is made.

Contingencies Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. There is no liability recorded for matters in which the liability is not probable and reasonably estimable. Attorneys in the Company's legal department monitor and manage all claims filed against the Company and review all pending investigations. Generally, the estimate of probable loss related to these matters is developed in consultation with internal and outside legal counsel representing the Company. These estimates are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. The Company attempts to resolve these matters through settlements, mediation and arbitration proceedings when possible. If the actual settlement costs, final judgments, or fines, after appeals, differ from the estimates, the future results may be materially impacted. Adjustments to the initial estimates are recorded when a change in the estimate is identified.

Pensions and Other Postretirement Benefits Annual net periodic expense and benefit liabilities under the Company’s defined benefit plans are determined on an actuarial basis. Assumptions used in the actuarial calculations have a significant impact on plan obligations and expense. Members of the management investment committee periodically review the actual experience compared with the more significant assumptions used and make adjustments to the assumptions, if warranted. The discount rate is determined by analyzing the average return of high-quality (i.e., AA-rated) fixed-income investments and the year-over-year comparison of certain widely used benchmark indices as of the measurement date. The expected long-term rate of return on plan assets is determined using the plans’ current asset allocation and their expected rates of return based on a geometric averaging over 20 years. The rate of compensation increase assumptions reflects the Company’s long-term actual experience and future and near-term outlook. Pension benefits are funded through deposits with trustees. Other postretirement benefits are not funded and the Company’s policy is to pay these benefits as they become due.

The following table represents assumed health care cost trend rates at December 31:
 
2012
 
2011
Healthcare cost trend rate assumed for next year
8.0
%
 
8.0
%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
4.2
%
 
4.2
%
Year that rate reaches ultimate trend rate
2099

 
2099


The healthcare trend rates are reviewed based upon the results of actual claims experience. The Company used healthcare cost trends of 8.0 percent and 8.0 percent in 2013 and 2012, respectively, decreasing to an ultimate trend of 4.2 percent in 2099 for both medical and prescription drug benefits using the Society of Actuaries Long Term Trend Model with assumptions based on the 2008 Medicare Trustees’ projections. Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. A one-percentage-point change in assumed healthcare cost trend rates would have the following effects:
 
One-Percentage-Point Increase
 
One-Percentage-Point Decrease
Effect on total of service and interest cost
$
51

 
$
(46
)
Effect on other postretirement benefit obligation
911

 
(825
)

RECENTLY ISSUED ACCOUNTING GUIDANCE
Refer to note 1 to the consolidated financial statements of this annual report on Form 10-K for information on recently issued accounting guidance.



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Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2012
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)




FORWARD-LOOKING STATEMENT DISCLOSURE
In this annual report on Form 10-K, statements that are not reported financial results or other historical information are “forward-looking statements.” Forward-looking statements give current expectations or forecasts of future events and are not guarantees of future performance. These forward-looking statements relate to, among other things, the Company’s future operating performance, the Company’s share of new and existing markets, the Company’s short- and long-term revenue and earnings growth rates, the Company’s implementation of cost-reduction initiatives and measures to improve pricing, including the optimization of the Company’s manufacturing capacity. The use of the words "will," "believes," "anticipates," "plans," "projects," "expects," "intends" and similar expressions is intended to identify forward-looking statements that have been made and may in the future be made by or on behalf of the Company.

Although the Company believes that these forward-looking statements are based upon reasonable assumptions regarding, among other things, the economy, its knowledge of its business, and on key performance indicators that impact the Company, these forward-looking statements involve risks, uncertainties and other factors that may cause actual results to differ materially from those expressed in or implied by the forward-looking statements. The Company is not obligated to update forward-looking statements, whether as a result of new information, future events or otherwise.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Some of the risks, uncertainties and other factors that could cause actual results to differ materially from those expressed in or implied by the forward-looking statements include, but are not limited to:

competitive pressures, including pricing pressures and technological developments;
changes in the Company's relationships with customers, suppliers, distributors and/or partners in its business ventures;
changes in political, economic or other factors such as currency exchange rates, inflation rates, recessionary or expansive trends, taxes and regulations and laws affecting the worldwide business in each of the Company's operations, including Brazil, where a significant portion of the Company's revenue is derived;
global economic conditions, including any additional deterioration and disruptions in the financial markets, including bankruptcies, restructurings or consolidations of financial institutions, which could reduce our customer base and/or adversely affect our customers’ ability to make capital expenditures, as well as adversely impact the availability and cost of credit;
acceptance of the Company's product and technology introductions in the marketplace;
the Company’s ability to maintain effective internal controls;
changes in the Company’s intention to repatriate cash and cash equivalents and short-term investments residing in international tax jurisdictions could negatively impact foreign and domestic taxes;
unanticipated litigation, claims or assessments, as well as the outcome/impact of any current/pending litigation, claims or assessments, including with respect to the Company's Brazilian tax dispute;
variations in consumer demand for financial self-service technologies, products and services;
potential security violations to the Company's information technology systems;
the investment performance of the Company’s pension plan assets, which could require the Company to increase its pension contributions, and significant changes in health care costs, including those that may result from government action;
the amount and timing of repurchases of the Company’s common shares, if any;
the outcome of the company's global FCPA review and any actions taken by government agencies in connection with the company's self-disclosure, including the pending DOJ and SEC investigations;
the Company's ability to settle the FCPA investigation, and the ultimate amount of any losses incurred therewith;
the Company’s ability to achieve benefits from its cost-reduction initiatives and other strategic changes, including its restructuring actions; and
the risk factors described above under Item 1A "Risk Factors.”


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Table of Contents

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to foreign currency exchange rate risk inherent in its international operations denominated in currencies other than the U.S. dollar. A hypothetical 10 percent movement in the applicable foreign exchange rates would have resulted in an increase or decrease in 2012 and 2011 year-to-date operating profit of approximately $5,946 and $7,909, respectively. The sensitivity model assumes an instantaneous, parallel shift in the foreign currency exchange rates. Exchange rates rarely move in the same direction. The assumption that exchange rates change in an instantaneous or parallel fashion may overstate the impact of changing exchange rates on amounts denominated in a foreign currency.

The Company’s risk-management strategy uses derivative financial instruments such as forwards to hedge certain foreign currency exposures. The intent is to offset gains and losses that occur on the underlying exposures, with gains and losses on the derivative contracts hedging these exposures. The Company does not enter into derivatives for trading purposes. The Company’s primary exposures to foreign exchange risk are movements in the euro/U.S. dollar, U.S. dollar/Brazilian real, Australian dollar/U.S. dollar and Chinese yuan renmindbi/U.S. dollar. There were no significant changes in the Company’s foreign exchange risks in 2012 compared with 2011.

The Company’s Venezuelan operations consist of a fifty-percent owned subsidiary, which is consolidated. Venezuela is measured using the U.S. dollar as its functional currency because its economy is considered highly inflationary. In recent years, the Venezuelan bolivar has devalued. In the future, fluctuations in the bolivar may result in gains or losses in the statement of operations.

The Company manages interest rate risk with the use of variable rate borrowings under its committed and uncommitted credit facilities and interest rate swaps. Variable rate borrowings under the credit facilities totaled $345,816 and $324,472 at December 31, 2012 and 2011, respectively, of which $50,000 and $25,000, respectively, was effectively converted to fixed rate using interest rate swaps. A one percentage point increase or decrease in interest rates would have resulted in an increase or decrease in interest expense of approximately $2,662 and $2,896 for 2012 and 2011, respectively, including the impact of the swap agreements. The Company’s primary exposure to interest rate risk is movements in the London Interbank Offered Rate (LIBOR), which is consistent with prior periods.



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Table of Contents

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FINANCIAL STATEMENTS SCHEDULES
 
 
 
 
 
 
 
All other schedules are omitted because they are not applicable.



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Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Diebold, Incorporated:

We have audited the accompanying consolidated balance sheets of Diebold, Incorporated and subsidiaries (the Company) as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the years in the three-year period ended December 31, 2012. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule, Schedule II “Valuation and Qualifying Accounts.” These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Diebold, Incorporated and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 15, 2013 expressed an adverse opinion on the effectiveness of the Company's internal control over financial reporting.

/s/  KPMG LLP

Cleveland, Ohio
February 15, 2013



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Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Diebold, Incorporated:

We have audited Diebold, Incorporated's (the Company) internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Diebold, Incorporated's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting appearing under Item 9A(b) of the Company's December 31, 2012 annual report on Form 10-K. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures, as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness related to controls over indirect taxes and communication to corporate management has been identified in management's assessment. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Diebold, Incorporated and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the years in the three-year period ended December 31, 2012. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2012 consolidated financial statements, and this report does not affect our report dated February 15, 2013, which expressed an unqualified opinion on those consolidated financial statements.

In our opinion, because of the effect of the aforementioned material weakness on the achievement of the objectives of the control criteria, Diebold, Incorporated has not maintained effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

/s/  KPMG LLP

Cleveland, Ohio
February 15, 2013



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Table of Contents             
DIEBOLD, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)


 
 
December 31,
 
 
2012
 
2011
ASSETS
 
 
 
 
Current assets
 
 
 
 
 Cash and cash equivalents
 
$
368,792

 
$
333,920

 Short-term investments
 
261,886

 
286,853

 Trade receivables, less allowances for doubtful accounts of
$27,854 and $22,128, respectively
 
488,373

 
414,969

 Inventories
 
412,996

 
440,900

 Deferred income taxes
 
143,248

 
114,250

 Prepaid expenses
 
35,614

 
31,452

 Refundable income taxes
 
16,357

 
14,467

 Other current assets
 
87,591

 
95,544

 Total current assets
 
1,814,857

 
1,732,355

 Securities and other investments
 
77,101

 
74,869

 Property, plant and equipment at cost
 
661,910

 
642,256

 Less accumulated depreciation and amortization
 
477,565

 
449,562

 Property, plant and equipment, net
 
184,345

 
192,694

 Goodwill
 
272,951

 
253,063

 Deferred income taxes
 
76,375

 
91,090

 Other assets
 
167,358

 
173,372

 Total assets
 
$
2,592,987

 
$
2,517,443

 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
Current liabilities
 
 
 
 
 Notes payable
 
$
34,212

 
$
21,722

 Accounts payable
 
224,973

 
221,964

 Deferred revenue
 
222,343

 
241,992

 Payroll and benefits liabilities
 
69,814

 
79,854

 Other current liabilities
 
287,513

 
258,685

 Total current liabilities
 
838,855

 
824,217

 Long-term debt
 
617,534

 
606,154

 Pensions and other benefits
 
198,241

 
148,399

 Other postretirement benefits
 
22,904

 
23,196

 Deferred income taxes
 
34,250

 
32,029

 Other long-term liabilities
 
35,892

 
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,
77,661,118 and 76,840,956 issued shares,
63,240,667 and 62,513,615 outstanding shares, respectively
 
97,076

 
96,051

Additional capital
 
358,281

 
327,805

Retained earnings
 
996,834

 
991,210

Treasury shares, at cost (14,420,451 and 14,327,341 shares, respectively)
 
(551,189
)
 
(547,737
)
Accumulated other comprehensive loss
 
(91,039
)
 
(40,343
)
Total Diebold, Incorporated shareholders' equity
 
809,963

 
826,986

Noncontrolling interests
 
35,348

 
31,274

Total equity
 
845,311