DBD 6.30.2013 10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
__________________________________________________
Form 10-Q
__________________________________________________ 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 1-4879 
_________________________________________________
Diebold, Incorporated
(Exact name of registrant as specified in its charter)
_________________________________________________ 
Ohio
 
34-0183970
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification Number)
 
 
 
5995 Mayfair Road, PO Box 3077, North Canton, Ohio
 
44720-8077
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (330) 490-4000
__________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x     No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
(Do not check if a smaller reporting company)
o
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
Number of shares of common stock outstanding as of August 2, 2013 was 78,343,072.


Table of Contents

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q

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


Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS
DIEBOLD, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
 
 
June 30,
2013

December 31,
2012
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents

$
282,569


$
368,792

Short-term investments

243,439


261,886

Trade receivables, less allowances for doubtful accounts of $27,635 and $27,854, respectively
 
522,047

 
488,373

Inventories
 
461,143

 
412,996

Deferred income taxes
 
84,321

 
143,248

Prepaid expenses
 
28,174

 
35,614

Prepaid income taxes
 
46,613

 
16,357

Other current assets
 
142,801

 
87,591

Total current assets
 
1,811,107

 
1,814,857

Securities and other investments
 
77,799

 
77,101

Property, plant and equipment, at cost
 
602,776

 
661,910

Less accumulated depreciation and amortization
 
433,764

 
477,565

Property, plant and equipment, net
 
169,012

 
184,345

Goodwill
 
257,296

 
272,951

Deferred income taxes
 
44,354

 
76,375

Other assets
 
166,500

 
167,358

Total assets
 
$
2,526,068

 
$
2,592,987

LIABILITIES AND EQUITY
 
 
 
 
Current liabilities
 
 
 
 
Notes payable
 
$
65,051

 
$
34,212

Accounts payable
 
243,569

 
224,973

Deferred revenue
 
231,828

 
222,343

Payroll and other benefits liabilities
 
77,042

 
69,814

Other current liabilities
 
346,361

 
306,002

Total current liabilities
 
963,851

 
857,344

Long-term debt
 
616,861

 
617,534

Pensions and other benefits
 
199,516

 
198,241

Post-retirement and other benefits
 
22,990

 
22,904

Deferred income taxes
 
31,842

 
34,250

Other long-term liabilities
 
37,921

 
35,892

Commitments and contingencies
 

 

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

 

Common shares, $1.25 par value, 125,000,000 authorized shares, 78,239,297 and 77,661,118 issued shares, 63,753,519 and 63,240,667 outstanding shares, respectively
 
97,799

 
97,076

Additional capital
 
377,870

 
358,281

Retained earnings
 
822,945

 
978,345

Treasury shares, at cost (14,485,778 and 14,420,451 shares, respectively)
 
(553,157
)
 
(551,189
)
Accumulated other comprehensive loss
 
(125,335
)
 
(91,039
)
Total Diebold, Incorporated shareholders' equity
 
620,122

 
791,474

Noncontrolling interests
 
32,965

 
35,348

Total equity
 
653,087

 
826,822

Total liabilities and equity
 
$
2,526,068

 
$
2,592,987

See accompanying notes to condensed consolidated financial statements.

3

Table of Contents

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

 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2013
 
2012
 
2013
 
2012
Net sales
 
 
 
 
 
 
 
 
Services
 
$
413,216

 
$
396,909

 
$
795,434

 
$
793,774

Products
 
293,897

 
346,279

 
545,190

 
647,905

 
 
707,113

 
743,188

 
1,340,624


1,441,679

Cost of sales
 
 
 
 
 
 
 
 
Services
 
317,135

 
294,092

 
614,046

 
579,488

Products
 
232,562

 
265,160

 
439,148

 
486,648

 
 
549,697

 
559,252

 
1,053,194

 
1,066,136

Gross profit
 
157,416

 
183,936

 
287,430

 
375,543

Selling and administrative expense
 
157,205


118,946

 
282,718

 
238,558

Research, development and engineering expense
 
23,417


20,172

 
44,447

 
38,973

Impairment of assets
 
642


6,701

 
642

 
6,701

(Gain) loss on sale of assets, net
 
(226
)
 
(143
)
 
(2,839
)
 
40

 
 
181,038

 
145,676

 
324,968

 
284,272

Operating (loss) profit
 
(23,622
)
 
38,260

 
(37,538
)

91,271

Other income (expense)
 
 
 
 
 
 
 
 
Investment income
 
6,814

 
8,039

 
14,365

 
19,994

Interest expense
 
(6,766
)
 
(7,461
)
 
(14,109
)
 
(15,069
)
Foreign exchange (loss) gain, net
 
(2,216
)
 
1,102

 
(4,430
)
 
1,647

Miscellaneous, net
 
309

 
431

 
(789
)
 
341

(Loss) income from continuing operations before taxes
 
(25,481
)
 
40,371

 
(42,501
)
 
98,184

Income tax expense
 
78,371

 
13,791

 
75,233

 
26,852

Net (loss) income
 
(103,852
)
 
26,580

 
(117,734
)
 
71,332

Net income attributable to noncontrolling interests
 
1,183

 
1,290

 
747

 
2,092

Net (loss) income attributable to Diebold, Incorporated
 
$
(105,035
)
 
$
25,290

 
$
(118,481
)
 
$
69,240

 
 
 
 
 
 
 
 
 
Basic weighted-average shares outstanding
 
63,700

 
63,064

 
63,509

 
62,899

Diluted weighted-average shares outstanding
 
63,700

 
64,035

 
63,509

 
63,795

 
 
 
 
 
 
 
 
 
Net (loss) income attributable to Diebold, Incorporated:
 
 
 
 
 
 
 
 
Basic (loss) earnings per share
 
$
(1.65
)
 
$
0.40

 
$
(1.87
)
 
$
1.10

Diluted (loss) earnings per share
 
$
(1.65
)
 
$
0.39

 
$
(1.87
)
 
$
1.09

See accompanying notes to condensed consolidated financial statements.


4

Table of Contents

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

 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2013
 
2012
 
2013
 
2012
Net (loss) income
 
$
(103,852
)
 
$
26,580

 
$
(117,734
)
 
$
71,332

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
 
Translation adjustment
 
(54,625
)
 
(67,929
)
 
(46,502
)
 
(40,338
)
Foreign currency hedges
 
2,482

 
1,896

 
2,668

 
(130
)
Interest rate hedges:
 


 


 
 
 
 
Net gain (loss) recognized in other comprehensive income
 
337

 
(101
)
 
542

 
69

Less: reclassification adjustment for net gains
 
51

 
76

 
111

 
170

 
 
286

 
(177
)
 
431

 
(101
)
Pension and other post-retirement benefits:
 
 
 
 
 
 
 
 
Net actuarial loss amortization
 
3,600

 
4,305

 
6,935

 
8,637

Net prior service benefit amortization
 
(67
)
 
(65
)
 
(130
)
 
(129
)
Curtailment loss
 

 

 
699

 

 
 
3,533

 
4,240

 
7,504

 
8,508

Unrealized gain (loss) on securities, net:
 
 
 
 
 
 
 
 
Net gain recognized in other comprehensive income
 
2,066

 
3,333

 
2,050

 
2,917

Less: reclassification adjustment for net gains
 
71

 
1,180

 
127

 
1,508

 
 
1,995

 
2,153

 
1,923

 
1,409

Other
 
7

 
5

 
14

 
10

Other comprehensive loss, net of tax
 
(46,322
)
 
(59,812
)
 
(33,962
)
 
(30,642
)
Comprehensive (loss) income
 
(150,174
)
 
(33,232
)
 
(151,696
)
 
40,690

Less: comprehensive income attributable to noncontrolling interests
 
1,429

 
1,068

 
1,081

 
1,862

Comprehensive (loss) income attributable to Diebold, Incorporated
 
$
(151,603
)
 
$
(34,300
)
 
$
(152,777
)
 
$
38,828

See accompanying notes to condensed consolidated financial statements.

5

Table of Contents

DIEBOLD, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
 
 
Six Months Ended
 
 
June 30,
 
 
2013
 
2012
Cash flow from operating activities:
 
 
 
 
Net (loss) income
 
$
(117,734
)
 
$
71,332

Adjustments to reconcile net (loss) income to cash flow used in operating activities:
 
 
 
 
Depreciation and amortization
 
42,194

 
38,795

Share-based compensation
 
10,470

 
5,704

Excess tax benefits from share-based compensation
 
(246
)
 
(1,591
)
Devaluation of Venezuelan balance sheet
 
1,584

 

(Gain) loss on sale of assets, net
 
(2,839
)
 
40

Impairment of assets
 
642

 
6,701

Equity in earnings of an investee
 

 
(592
)
Cash flow from changes in certain assets and liabilities:
 
 
 
 
Trade receivables
 
(44,757
)
 
(44,841
)
Inventories
 
(62,302
)
 
(54,882
)
Prepaid expenses
 
6,759

 
84

Prepaid income taxes
 
(30,257
)
 
(1,273
)
Other current assets
 
(51,948
)
 
(32,583
)
Accounts payable
 
23,089

 
10,406

Deferred revenue
 
12,410

 
1,908

Deferred income tax
 
86,198

 
3,020

Certain other assets and liabilities
 
63,312

 
(36,198
)
Net cash used in operating activities
 
(63,425
)
 
(33,970
)
Cash flow from investing activities:
 
 
 
 
Proceeds from maturities of investments
 
225,389

 
156,491

Proceeds from sale of investments
 
8,790

 
16,157

Payments for purchases of investments
 
(233,374
)
 
(176,404
)
Proceeds from sale of assets
 
3,828

 
283

Capital expenditures
 
(18,156
)
 
(20,669
)
Collections on purchased finance receivables
 
3,066

 
7,072

Increase in certain other assets
 
(6,981
)
 
(4,549
)
Net cash used in investing activities
 
(17,438
)
 
(21,619
)
Cash flow from financing activities:
 
 
 
 
Dividends paid
 
(36,919
)
 
(36,313
)
Revolving debt borrowings, net
 
111,000

 
106,000

Other debt borrowings
 
21,104

 
68,260

Other debt repayments
 
(101,076
)
 
(110,773
)
Distributions of affiliates earnings to noncontrolling interest holders
 
(3,464
)
 
(1,112
)
Excess tax benefits from share-based compensation
 
246

 
1,591

Issuance of common shares
 
9,841

 
16,003

Repurchase of common shares
 
(1,967
)
 
(2,896
)
Net cash (used in) provided by financing activities
 
(1,235
)
 
40,760

Effect of exchange rate changes on cash and cash equivalents
 
(4,125
)
 
1,450

Decrease in cash and cash equivalents
 
(86,223
)
 
(13,379
)
Cash and cash equivalents at the beginning of the period
 
368,792

 
333,920

Cash and cash equivalents at the end of the period
 
$
282,569

 
$
320,541

See accompanying notes to condensed consolidated financial statements.

6

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2013
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)



NOTE 1: CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of Diebold, Incorporated and its subsidiaries (collectively, the Company) have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with U.S. generally accepted accounting principles (GAAP); however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the results for the interim periods.
The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in the Company’s annual report on Form 10-K for the year ended December 31, 2012. In addition, some of the Company’s statements in this quarterly report on Form 10-Q may involve risks and uncertainties that could significantly impact expected future results. The results of operations for the three and six months ended June 30, 2013 are not necessarily indicative of results to be expected for the full year.
Error Correction and Reclassification The Company continues to work to remediate an internal control weakness pertaining to manufacturing and supply chain processes related to indirect tax incentives in one of its Brazilian subsidiaries. As part of remediation, during the second quarter of 2013, the Company identified an error related to prior year periods for Brazilian indirect tax incentives previously not appropriately recognized in product cost of goods sold. In accordance with Accounting Standards Codification 250-10, Accounting Changes and Error Corrections, prior year amounts of product cost of sales, income tax expense, other current liabilities and retained earnings have been adjusted as management determined that the correction for each respective year is not material to each prior year period. This correction was recorded within the Company's operations in Brazil, included in the Diebold International (DI) reporting segment. As a result of applying the correction retrospectively, previously reported product cost of sales for the three and six months ended June 30, 2013 increased by $1,633 and $3,266, respectively and previously reported net income and diluted earnings per share decreased by $1,212 and $0.02 and $2,425 and $0.03, respectively. The aggregated amount of the correction reflected in other current liabilities and retained earnings as of December 31, 2012 was $18,489. There was no impact of the correction on previously reported cash flows from operations for the prior period.
The Company has reclassified the presentation of certain prior-year information to conform to the current presentation, including the above correction.

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

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






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Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2013
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


NOTE 2: (LOSS) EARNINGS PER SHARE
Basic (loss) earnings per share is based on the weighted-average number of common shares outstanding. Diluted (loss) earnings per share includes the dilutive effect of potential common shares outstanding. Under the two-class method of computing (loss) earnings per share, non-vested share-based payment awards that contain rights to receive non-forfeitable dividends are considered participating securities. The Company’s participating securities include restricted stock units (RSUs), deferred shares and shares that were vested, but deferred by the employee. The Company calculated basic and diluted (loss) earnings per share under both the treasury stock method and the two-class method. For the three and six months ended June 30, 2013 and 2012, there was no impact in the per share amounts calculated under the two methods. Accordingly, the treasury stock method is disclosed below.

The following represents amounts used in computing (loss) earnings per share and the effect on the weighted-average number of shares of dilutive potential common shares:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2013
 
2012
 
2013
 
2012
Numerator:
 
 
 
 
 
 
 
 
(Loss) income used in basic and diluted earnings per share:
 
 
 
 
 
 
 
 
Net (loss) income attributable to Diebold, Incorporated
 
$
(105,035
)
 
$
25,290

 
$
(118,481
)
 
$
69,240

Denominator:
 
 
 
 
 
 
 
 
Weighted-average number of common shares used in basic earnings per share
 
63,700

 
63,064

 
63,509

 
62,899

Effect of dilutive shares (1)
 

 
971

 

 
896

Weighted-average number of shares used in diluted earnings per share
 
63,700

 
64,035

 
63,509

 
63,795

Net (loss) income attributable to Diebold, Incorporated:
 
 
 
 
 
 
 
 
Basic (loss) earnings per share
 
$
(1.65
)
 
$
0.40

 
$
(1.87
)
 
$
1.10

Diluted (loss) earnings per share
 
$
(1.65
)
 
$
0.39

 
$
(1.87
)
 
$
1.09

Anti-dilutive shares (in thousands):
 
 
 
 
 
 
 
 
Anti-dilutive shares not used in calculating diluted weighted-average shares
 
2,538

 
1,980

 
2,598

 
1,985

 
(1) Incremental shares of 447 thousand and 505 thousand were excluded from the computation of diluted (loss) earnings per share for the three and six months ended June 30, 2013 because their effect is anti-dilutive due to the net loss attributable to Diebold, Incorporated.






















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Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2013
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


NOTE 3: EQUITY

The following table presents changes in shareholders' equity attributable to Diebold, Incorporated and the noncontrolling interests:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2013
 
2012
 
2013
 
2012
Diebold, Incorporated shareholders' equity
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
784,370

 
$
879,196

 
$
791,474

 
$
813,348

Comprehensive (loss) income attributable to Diebold, Incorporated
 
(151,603
)
 
(34,300
)
 
(152,777
)
 
38,828

Common shares
 
178

 
252

 
723

 
938

Additional capital
 
5,961

 
7,756

 
19,589

 
20,769

Treasury shares
 
(283
)
 
(11
)
 
(1,968
)
 
(2,896
)
Dividends declared and paid
 
(18,501
)
 
(18,219
)
 
(36,919
)
 
(36,313
)
Balance at end of period
 
$
620,122

 
$
834,674

 
$
620,122

 
$
834,674

 
 
 
 
 
 
 
 
 
Noncontrolling interests
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
31,536

 
$
30,956

 
$
35,348

 
$
31,274

Comprehensive income attributable to noncontrolling interests
 
1,429

 
1,068

 
1,081

 
1,862

Distributions to noncontrolling interest holders
 

 

 
(3,464
)
 
(1,112
)
Balance at end of period
 
$
32,965

 
$
32,024

 
$
32,965

 
$
32,024


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

NOTE 4: SHARE-BASED COMPENSATION
The Company’s share-based compensation payments to employees are recognized based on their grant-date fair values during the period in which the employee is required to provide services in exchange for the award. Share-based compensation is recognized as a component of selling and administrative expense. Total share-based compensation expense was $3,284 and $1,907 for the three months ended June 30, 2013 and 2012, respectively, and $10,470 and $5,704 for the six months ended June 30, 2013 and 2012, respectively. Share-based compensation expense for the six months ended June 30, 2013 included accelerated expense of $2,982 related to executive severance.


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Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2013
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


Options outstanding and exercisable as of June 30, 2013 under the Company’s 1991 Equity and Performance Incentive Plan (as Amended and Restated as of April 13, 2009) and changes during the six months ended June 30, 2013, were as follows:
 
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value (1)
 
 
(in thousands)
 
(per share)
 
(in years)
 
 
Outstanding at January 1, 2013
 
2,668

 
$
37.56

 
 
 
 
Expired or forfeited
 
(277
)
 
36.47

 
 
 
 
Exercised
 
(372
)
 
26.45

 

 
 
Granted
 
338

 
30.46

 
 
 
 
Outstanding at June 30, 2013
 
2,357

 
$
38.42

 
5
 
$
3,145

Options exercisable at June 30, 2013
 
1,675

 
$
40.97

 
4
 
$
1,775

Options vested and expected to vest at June 30, 2013
 
2,327

 
$
38.50

 
5
 
$
3,075

(1)
The aggregate intrinsic value (the difference between the closing price of the Company’s common shares on the last trading day of the second quarter of 2013 and the exercise price, multiplied by the number of “in-the-money” options) that would have been received by the option holders had all option holders exercised their options on June 30, 2013. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s common shares.
(2)
The options expected to vest are the result of applying the pre-vesting forfeiture rate assumption to total outstanding non-vested options.

The following table summarizes information on non-vested RSUs, performance shares and deferred shares for the six months ended June 30, 2013:
 
 
Number of
Shares
 
Weighted-Average
Grant-Date Fair
Value
 
 
(in thousands)
 
 
RSUs:
 
 
 
 
Non-Vested at January 1, 2013
 
732

 
$
33.33

Forfeited
 
(94
)
 
33.94

Vested
 
(248
)
 
32.74

Granted
 
226

 
30.04

Non-Vested at June 30, 2013
 
616

 
$
32.30

Performance Shares (1):
 
 
 
 
Non-Vested at January 1, 2013
 
729

 
$
40.41

Forfeited
 
(328
)
 
38.00

Vested
 
(31
)
 
35.49

Granted
 
277

 
29.15

Non-Vested at June 30, 2013
 
647

 
$
37.04

Director Deferred Shares:
 
 
 
 
Non-Vested at January 1, 2013
 
20

 
$
40.54

Forfeited
 
(3
)
 
40.54

Vested
 
(17
)
 
40.54

Granted
 
31

 
29.73

Non-Vested at June 30, 2013
 
31

 
$
29.73

Vested at June 30, 2013
 
103

 
$
35.54

Outstanding at June 30, 2013
 
134

 
$
34.20

(1)
Non-vested performance shares are based on a maximum potential payout. Actual shares granted at the end of the performance period may be less than the maximum potential payout level depending on achievement of performance share objectives.


10

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2013
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


NOTE 5: INCOME TAXES

During the second quarter of 2013, the Company changed its assertion regarding the indefinite reinvestment of certain foreign subsidiary earnings due primarily to forecasted cash needs within the U.S. and strategic decisions related to the Company's capital structure. The largest jurisdictions impacted were China, Switzerland and Thailand where the majority of undistributed earnings will no longer be considered permanently reinvested. As a result, the Company recorded a deferred tax liability (net of related foreign tax credits) of approximately $47,000.
The effective tax rate was (307.6) and 34.2 percent for the three months ended June 30, 2013 and 2012, respectively, and (177.0) and 27.3 percent for the six months ended June 30, 2013 and 2012, respectively. The negative tax rate for 2013 is a result of deferred tax expense related to the repatriation of previously undistributed earnings and the establishment of a valuation allowance of approximately $39,200 on deferred tax assets in the Company's Brazilian manufacturing facility. A change in circumstances occurring in the second quarter of 2013, including but not limited to lower profitability in core operations, lower anticipated taxable income and an unfavorable business outlook in the Brazil manufacturing subsidiary triggered the Company's determination that it is more likely than not that deferred tax assets in this subsidiary will not be realized. In addition, the effective income tax rate was impacted by increased operating losses in certain jurisdictions for which no tax benefit can be recognized.

NOTE 6: INVESTMENTS
The Company’s investments, primarily in Brazil, consist of certificates of deposit and U.S. dollar indexed bond funds, which are classified as available-for-sale and stated at fair value based upon quoted market prices and net asset values, respectively. Unrealized gains and losses are recorded in AOCI. Realized gains and losses are recognized in investment income and are determined using the specific identification method. Realized gains, net from the sale of securities were $106 and $1,180 for the three months ended in June 30, 2013 and 2012, respectively, and $192 and $1,508 for the six months ended June 30, 2013 and 2012, respectively. Proceeds from the sale of available-for-sale securities were $8,790 and $16,157 during the six months ended June 30, 2013 and 2012, respectively.

The Company’s investments, excluding cash surrender value of insurance contracts of $70,632 and $70,318 as of June 30, 2013 and December 31, 2012, respectively, consist of the following:
 
 
Cost Basis
 
Unrealized Gain
 
Fair Value
As of June 30, 2013
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
Certificates of deposit
 
$
211,496

 
$

 
$
211,496

U.S. dollar indexed bond funds
 
28,911

 
3,032

 
31,943

 
 
$
240,407

 
$
3,032

....
$
243,439

Long-term investments:
 
 
 
 
 
 
Assets held in a rabbi trust
 
$
6,136

 
$
1,031

 
$
7,167

 
 
 
 
 
 
 
As of December 31, 2012
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
Certificates of deposit
 
$
258,518

 
$

 
$
258,518

U.S. dollar indexed bond funds
 
3,249

 
119

 
3,368

 
 
$
261,767

 
$
119

 
$
261,886

Long-term investments:
 
 
 
 
 
 
Assets held in a rabbi trust
 
$
6,266

 
$
517

 
$
6,783








11

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2013
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


NOTE 7: ALLOWANCE FOR CREDIT LOSSES
Trade Receivables The Company evaluates the collectability of trade receivables based on (1) a percentage of sales related to historical loss experience and current trends and (2) periodic adjustments for known events such as specific customer circumstances and changes in the aging of accounts receivable balances. After all efforts at collection have been unsuccessful, the account is deemed uncollectible and is written off.
Financing Receivables The Company evaluates the collectability of notes and finance lease receivables (collectively, financing receivables) on a customer-by-customer basis and evaluates specific customer circumstances, aging of invoices, credit risk changes and payment patterns and historical loss experience. When the collectability is determined to be at risk based on the above criteria, the Company records the allowance for credit losses, which represents the Company’s current exposure less estimated reimbursement from insurance claims. After all efforts at collection have been unsuccessful, the account is deemed uncollectible and is written off. The following table summarizes the Company’s allowance for credit losses for the six months ended June 30, 2013 and 2012:
 
 
Finance
Leases
 
Notes
Receivable
 
Total
Allowance for credit losses
 
 
 
 
 
 
Balance at January 1, 2013
 
$
525

 
$
2,047

 
$
2,572

Provision for credit losses
 
7

 

 
7

Recoveries
 
3

 

 
3

Write-offs
 
(90
)
 
(2,047
)
 
(2,137
)
Balance at June 30, 2013
 
$
445

 
$

 
$
445

 
 
 
 
 
 
 
Balance at January 1, 2012

$
210


$
2,047


$
2,257

Provision for credit losses

247




247

Recoveries

41




41

Write-offs






Balance at June 30, 2012

$
498


$
2,047


$
2,545


The Company's allowance of $445 and $2,545 at June 30, 2013 and 2012, respectively, all resulted from individual impairment evaluation. As of June 30, 2013, finance leases and notes receivables individually evaluated for impairment were $90,490 and $10,808, respectively. As of June 30, 2012, finance leases and notes receivables individually evaluated for impairment were $95,753 and $13,829, respectively.
The Company records interest income and any fees or costs related to financing receivables using the effective interest method over the term of the lease or loan. The Company reviews the aging of its financing receivables to determine past due and delinquent accounts. Credit quality is reviewed at inception and is re-evaluated as needed based on customer-specific circumstances. Receivable balances 60 days to 89 days past due are reviewed and may be placed on nonaccrual status based on customer-specific circumstances. Receivable balances are placed on nonaccrual status upon reaching greater than 89 days past due. Upon receipt of payment on nonaccrual financing receivables, interest income is recognized and accrual of interest is resumed once the account has been made current or the specific circumstances have been resolved.







12

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2013
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


As of June 30, 2013 and December 31, 2012, the recorded investment in past-due financing receivables on nonaccrual status was $2,191 and $2,060, respectively, and there were no recorded investments in finance receivables past due 90 days or more and still accruing interest. The recorded investment in impaired notes receivable was $0 as of June 30, 2013 and was $2,407 as of December 31, 2012 which was fully reserved. The following table summarizes the Company’s aging of past-due notes receivable balances:
 
 
June 30, 2013
 
December 31, 2012
30-59 days past due
 
$

 
$

60-89 days past due
 

 

> 89 days past due
 

 
1,840

Total past due
 
$

 
$
1,840


NOTE 8: INVENTORIES
Major classes of inventories are summarized as follows:
 
 
June 30, 2013
 
December 31, 2012
Finished goods
 
$
215,580

 
$
183,286

Service parts
 
146,786

 
151,189

Raw materials and work in process
 
98,777

 
78,521

Total inventories
 
$
461,143

 
$
412,996

 
NOTE 9: GOODWILL AND OTHER ASSETS
Goodwill In 2012, goodwill was reviewed for impairment based on a two-step test, which resulted in no impairment in any of the Company's reporting units. As a result of the 2012 goodwill 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 $110,686 and $120,571 as of June 30, 2013 and December 31, 2012, respectively. All other reporting units had excess fair value greater than 25.0 percent when compared to their carrying amounts.
Other Assets Included in other assets are net capitalized software development costs of $44,318 and $49,513 as of June 30, 2013 and December 31, 2012, respectively. Amortization expense on capitalized software of $6,402 and $4,231 was included in product cost of sales for the three months ended June 30, 2013 and 2012, respectively, and $11,251 and $8,601 was included in product cost of sales for the six months ended June 30, 2013 and 2012, respectively. Other long-term assets also consist of patents, trademarks, other intangible assets, and financing receivables. Where applicable, other assets are stated at cost and, if applicable, are amortized ratably over the relevant contract period or the estimated life of the assets. Fees to renew or extend the term of the Company’s intangible assets are expensed when incurred.
In August 2012, the Company acquired GAS Tecnologia (GAS), a Brazilian Internet banking, online payment and mobile banking security company. At June 30, 2013, the Company had finalized the purchase accounting with respect to opening balance sheet valuations. Amortizable intangible assets and goodwill resulting from the acquisition were $16,000 and $26,000, respectively.
Impairment of long-lived assets is recognized when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the expected future undiscounted cash flows are less than the carrying amount of the asset group, an impairment loss may be recognized at that time to reduce the asset to the lower of its fair value or its net book value.


13

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2013
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


NOTE 10: DEBT
Outstanding debt balances were as follows:
 
 
June 30, 2013
 
December 31, 2012
Notes payable:
 
 
 
 
Uncommitted lines of credit
 
$
64,412

 
$
33,916

Other
 
639

 
296

 
 
$
65,051

 
$
34,212

Long-term debt:
 
 
 
 
Credit facility
 
$
375,000

 
$
300,000

Senior notes
 
225,000

 
300,000

Industrial development revenue bonds
 
11,900

 
11,900

Other
 
4,961

 
5,634

 
 
$
616,861

 
$
617,534

As of June 30, 2013, the Company had various international short-term uncommitted lines of credit with borrowing limits of $109,613. The weighted-average interest rate on outstanding borrowings on the short-term uncommitted lines of credit as of June 30, 2013 and December 31, 2012 was 1.84 percent and 2.81 percent, respectively. The decrease in the weighted-average interest rate is attributable to the change in mix of borrowings in foreign entities. Short-term uncommitted lines mature in less than one year. The amount available under the short-term uncommitted lines at June 30, 2013 was $45,201.
As of June 30, 2013, the Company had borrowing limits under its five-year credit facility totaling $500,000, which expires in June 2016. Under the terms of the credit facility agreement, the Company has the ability, subject to various approvals, to increase the borrowing limits by $250,000. Up to $50,000 of the revolving credit facility is available under a swing line sub-facility. The weighted-average interest rate on outstanding credit facility borrowings as of June 30, 2013 and December 31, 2012 was 1.31 percent and 1.33 percent, respectively, which is variable based on the London Interbank Offered Rate (LIBOR). The amount available under the credit facility as of June 30, 2013 was $125,000.

In March 2006, the Company issued senior notes in an aggregate principal amount of $300,000 with a weighted-average fixed interest rate of 5.50 percent. Additionally, the Company entered into a derivative transaction to hedge interest rate risk on $200,000 of the senior notes, which was treated as a cash flow hedge. This reduced the effective interest rate from 5.50 percent to 5.36 percent. The Company funded the repayment of $75,000 of the senior notes at maturity in March 2013 using its revolving credit facility. The maturity dates of the remaining senior notes are staggered, with $175,000 and $50,000 due in 2016 and 2018, respectively.
In 1997, industrial development revenue bonds were issued on behalf of the Company. The proceeds from the bond issuances were used to construct new manufacturing facilities in the United States. The Company guaranteed the payments of principal and interest on the bonds by obtaining letters of credit. The bonds were issued with a 20-year original term and are scheduled to mature in 2017. Each industrial development revenue bond carries a variable interest rate, which is reset weekly by the remarketing agents. The weighted-average interest rate on the bonds was 0.43 percent and 0.49 percent as of June 30, 2013 and December 31, 2012, respectively.
The Company’s debt agreements contain various restrictive financial covenants, including net debt to capitalization and net interest coverage ratios. As of June 30, 2013, the Company was in compliance with the financial and other covenants in its debt agreements.











14

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2013
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


NOTE 11: BENEFIT PLANS
The Company has pension plans covering certain U.S. employees that have been closed to new participants since July 1, 2003. Plans that cover certain salaried employees provide pension benefits based on the employee’s compensation during the ten years before retirement. The Company’s funding policy for salaried plans is to contribute annually based on actuarial projections and applicable regulations. Plans covering certain hourly employees and union members generally provide benefits of stated amounts for each year of service. The Company’s funding policy for hourly plans is to make at least the minimum annual contributions required by applicable regulations. Employees of the Company’s operations in countries outside of the U.S. participate to varying degrees in local pension plans, which in the aggregate are not significant.
In addition to providing pension benefits, the Company provides healthcare and life insurance benefits (referred to as other benefits) for certain retired employees. Eligible employees may be entitled to these benefits based upon years of service with the Company, age at retirement and collective bargaining agreements. Currently, the Company has made no commitments to increase these benefits for existing retirees or for employees who may become eligible for these benefits in the future. There are no plan assets and the Company funds the benefits as the claims are paid.
The following table sets forth the net periodic benefit cost for the Company’s defined benefit pension plans and other benefits for the three months ended June 30:
 
 
Pension Benefits
 
Other Benefits
 
 
2013
 
2012
 
2013
 
2012
Components of net periodic benefit cost
 
 
 
 
 
 
 
 
Service cost
 
$
3,330

 
$
2,861

 
$

 
$

Interest cost
 
6,956

 
7,958

 
157

 
203

Expected return on plan assets
 
(8,802
)
 
(10,206
)
 

 

Amortization of prior service cost (benefit)
 
19

 
64

 
(122
)
 
(129
)
Recognized net actuarial loss
 
5,435

 
4,183

 
105

 
122

Net periodic pension benefit cost
 
$
6,938

 
$
4,860

 
$
140

 
$
196

The following table sets forth the net periodic benefit cost for the Company’s defined benefit pension plans and other benefits for the six months ended June 30:
 
 
Pension Benefits
 
Other Benefits
 
 
2013
 
2012
 
2013
 
2012
Components of net periodic benefit cost
 
 
 
 
 
 
 
 
Service cost
 
$
6,661

 
$
5,723

 
$

 
$

Interest cost
 
13,913

 
15,916

 
314

 
407

Expected return on plan assets
 
(17,605
)
 
(20,411
)
 

 

Amortization of prior service cost (benefit)
 
37

 
129

 
(244
)
 
(258
)
Recognized net actuarial loss
 
10,856

 
8,394

 
211

 
243

Curtailment loss (1)
 
1,159

 

 

 

Net periodic pension benefit cost
 
$
15,021

 
$
9,751

 
$
281

 
$
392

(1) The curtailment loss during the six months ended June 30, 2013 resulted from the departure of certain executive officers and was recorded within selling and administrative expense.
Contributions
There have been changes to the 2013 plan year contribution amounts previously disclosed. The Company is freezing its defined-benefit pension plan for U.S.-based employees (refer to note 18). The freeze, coupled with higher discount rates, is expected to reduce the underfunded status of the plan and thus, the Company has no plans to make voluntary contributions to the pension plan for the foreseeable future. For the six months ended June 30, 2013 and 2012, contributions of $1,597 and $13,780, respectively, were made to the qualified and non-qualified pension plans.


15

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2013
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


NOTE 12: GUARANTEES AND PRODUCT WARRANTIES
In 1997, industrial development revenue bonds were issued on behalf of the Company. The Company guaranteed the payments of principal and interest on the bonds (refer to note 10) by obtaining letters of credit. The carrying value of the bonds was $11,900 as of June 30, 2013 and December 31, 2012.
The Company provides its global operations guarantees and standby letters of credit through various financial institutions to suppliers, customers, regulatory agencies and insurance providers. If the Company is not able to make payment or fulfill contractual obligations, the suppliers, customers, regulatory agencies and insurance providers may draw on the pertinent bank. At June 30, 2013, the maximum future payment obligations related to these various guarantees totaled $83,592, of which $26,035 represented standby letters of credit to insurance providers, and no associated liability was recorded. At December 31, 2012, the maximum future payment obligations relative to these various guarantees totaled $80,662, of which $23,435 represented standby letters of credit to insurance providers, and no associated liability was recorded.
The Company provides its customers a manufacturer’s warranty and records, at the time of the sale, a corresponding estimated liability for potential warranty costs. Estimated future obligations due to warranty claims are based upon historical factors such as labor rates, average repair time, travel time, number of service calls per machine and cost of replacement parts.
Changes in the Company’s warranty liability balance are illustrated in the following table:
 
 
2013
 
2012
Balance at January 1
 
$
81,751

 
$
63,355

Current period accruals (a)
 
16,105

 
29,867

Current period settlements
 
(24,429
)
 
(26,371
)
Balance at June 30
 
$
73,427

 
$
66,851

(a)
includes the impact of foreign exchange rate fluctuations

NOTE 13: COMMITMENTS AND CONTINGENCIES
At June 30, 2013, the Company had purchase commitments due within one year of $16,728 for materials through contract manufacturing agreements at negotiated prices.

The Company accrues non income-tax liabilities for indirect tax matters when management believes that a loss is probable and the amounts can be reasonably estimated, while contingent gains are recognized only when realized. In the event any losses are sustained in excess of accruals, they are charged against income. In evaluating indirect tax matters, management takes into consideration factors such as historical experience with matters of similar nature, specific facts and circumstances, and the likelihood of prevailing. Management evaluates and updates accruals as matters progress over time. It is reasonably possible that some of the matters for which accruals have not been established could be decided unfavorably to the Company and could require recognizing future expenditures. Also, statutes of limitations could expire without the Company paying the taxes for matters for which accruals have been established which could result in the recognition of future gains upon reversal of these accruals at that time. At June 30, 2013 and December 31, 2012, the Company had accrued approximately $26,000 for certain indirect tax positions in both periods. A loss contingency is reasonably possible if it has a more than remote but less than probable chance of occurring. Although management believes the Company has valid defenses with respect to its indirect tax positions, it is reasonably possible that a loss could occur in excess of the estimated accrual, for which the Company estimated the aggregate risk at June 30, 2013 to be a range of up to approximately $381,000 for its material indirect tax matters.

At June 30, 2013, the Company was a party to several lawsuits that were incurred in the normal course of business, none of which individually or in the aggregate are considered material by management in relation to the Company’s financial position or results of operations. In addition, the Company has indemnification obligations with certain former employees and costs associated with these indemnifications are expensed as incurred. In management’s opinion, the condensed consolidated financial statements would not be materially affected by the outcome of these legal proceedings, commitments or asserted claims. In addition to these routine legal proceedings, the Company was a party to the legal proceedings described below:




16

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2013
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


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 Brazil's free trade zone that would nullify certain indirect tax incentives. On September 10, 2012, the Company filed its administrative defenses with the tax authorities. This proceeding is currently pending an administrative level decision, which could negatively impact Brazilian federal indirect taxes in other years that remain open under statute. It is reasonably possible that the Company could be required to pay taxes, penalties and interest related to this matter, which could be material to the Company's consolidated financial statements. Management believes that the possible range of loss associated with the Brazilian federal indirect tax assessment is $0 to $236,000. Additionally, in May 2013, the U.S. Securities and Exchange Commission (SEC) requested that the Company retain certain documents and produce certain records relating to the assessment, and the Company is complying with that request.

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. In the second quarter 2013, the Company recorded a $30,000 pre-tax charge within selling and administrative expense related to an agreement in principle to settle this matter, which is included in other current liabilities. Additionally, the Company recorded an offsetting $12,500 pre-tax credit within selling and administrative expense related to the Company's estimate of anticipated insurance recovery, which is included in other current assets .

Global Foreign Corrupt Practices Act (FCPA) Review
During the second quarter of 2010, while conducting due diligence in connection with a potential acquisition in Russia, the Company identified certain transactions and payments by its subsidiary in Russia (primarily during 2005 to 2008) that potentially implicate the FCPA, particularly the books and records provisions of the FCPA. As a result, the Company conducted a global internal review and collected information related to its global FCPA compliance. In the fourth quarter of 2010, the Company identified certain transactions within its Asia Pacific operation that occurred over the past several years that may also potentially implicate the FCPA. The Company continues to monitor its ongoing 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.

Though the DOJ and SEC's investigations are not yet closed and final, the Company has agreed in principle with the DOJ and the SEC to the terms of a proposed potential settlement of their inquiries, which terms remain subject to final approval by all parties. These proposed settlement terms include combined payments to the U.S. government of $48,000 in disgorgement, penalties, and pre-judgment interest and the appointment of an independent compliance monitor for a minimum period of 18 months. As a result, in the second quarter of 2013, the Company recorded a $28,000 pre-tax charge within selling and administrative expense for additional estimated losses related to this matter. As of June 30, 2013 and December 31, 2012, the total accrual for estimated losses was $48,000 and $20,000, respectively.



17

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2013
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


NOTE 14: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company uses derivatives to mitigate the economic consequences associated with fluctuations in currencies and interest rates.
FOREIGN EXCHANGE
Net Investment Hedges The Company has international subsidiaries with net balance sheet positions that generate cumulative translation adjustments within AOCI. The Company uses derivatives to manage potential changes in value of its net investments in Brazil. The Company uses the forward-to-forward method for its quarterly retrospective and prospective assessments of hedge effectiveness. No ineffectiveness results if the notional amount of the derivative matches the portion of the net investment designated as being hedged because the Company uses derivative instruments with underlying exchange rates consistent with its functional currency and the functional currency of the hedged net investment. Changes in value that are deemed effective are accumulated in AOCI where they will remain until they are reclassified to income together with the gain or loss on the entire investment upon substantial liquidation of the subsidiary. The fair value of the Company’s net investment hedge contracts was $2,628 and $0 as of June 30, 2013 and December 31, 2012, respectively. The net gain recognized in AOCI on net investment hedge derivative instruments was $3,700 and $4,295 in the three months ended June 30, 2013 and 2012, respectively, and $3,987 and $2,269 in the six months ended June 30, 2013 and 2012, respectively.
Non-Designated Hedges A substantial portion of the Company’s operations and revenues are international. As a result, changes in foreign exchange rates can create substantial foreign exchange gains and losses from the revaluation of non-functional currency monetary assets and liabilities. The Company’s policy allows the use of foreign exchange forward contracts with maturities of up to 24 months to mitigate the impact of currency fluctuations on those foreign currency asset and liability balances. The Company elected not to apply hedge accounting to its foreign exchange forward contracts. Thus, spot-based gains/losses offset revaluation gains/losses within foreign exchange loss, net and forward-based gains/losses represent interest expense. The fair value of the Company’s non-designated foreign exchange forward contracts was $490 and $47 as of June 30, 2013 and December 31, 2012, respectively.
The following table summarizes the (loss) gain recognized on non-designated foreign-exchange derivative instruments:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,

 
2013
 
2012
 
2013
 
2012
Interest expense
 
$
(1,812
)
 
$
(1,275
)
 
$
(2,627
)
 
$
(2,666
)
Foreign exchange (loss) gain, net
 
9,553

 
3,033

 
10,955

 
599

 
 
$
7,741

 
$
1,758

 
$
8,328

 
$
(2,067
)
INTEREST RATE
Cash Flow Hedges The Company has variable rate debt and is subject to fluctuations in interest related cash flows due to changes in market interest rates. The Company’s policy allows derivative instruments designated as cash flow hedges that fix a portion of future variable-rate interest expense. As of June 30, 2013, the Company had two pay-fixed receive-variable interest rate swaps, with a total notional amount of $50,000, to hedge against changes in the LIBOR benchmark interest rate on a portion of the Company’s LIBOR-based borrowings. Changes in value that are deemed effective are accumulated in AOCI and reclassified to interest expense when the hedged interest is accrued. To the extent that it becomes probable that the Company’s variable rate borrowings will not occur, the gains or losses on the related cash flow hedges will be reclassified from AOCI to interest expense. The fair value of the Company’s interest rate contracts was $(2,715) and $(3,558) as of June 30, 2013 and December 31, 2012, respectively.
In December 2005 and January 2006, the Company executed cash flow hedges by entering into receive-variable and pay-fixed interest rate swaps, with a total notional amount of $200,000, related to the senior notes issuance in March 2006. Amounts previously recorded in AOCI related to the pre-issuance cash flow hedges will continue to be reclassified on a straight-line basis through February 2016.

The gain or loss on designated cash flow hedge derivative instruments for the three and six months ended June 30, 2013 and 2012 were not material. Gains and losses related to interest rate contracts that are reclassified from AOCI are recorded in interest expense on the statements of operations. The Company anticipates reclassifying $924 from AOCI to interest expense within the next 12 months.


18

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2013
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


NOTE 15: RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES
Restructuring Charges
The following table summarizes the impact of the Company’s restructuring charges (accrual adjustments) on the condensed consolidated statements of operations:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2013
 
2012
 
2013
 
2012
Cost of sales – services
 
$
4,235

 
$
(196
)
 
$
6,859

 
$
(865
)
Cost of sales – products
 
78

 
100

 
217

 
105

Selling and administrative expense
 
1,629

 
813

 
7,516

 
3,200

Research, development and engineering expense
 
1,613

 

 
2,466

 

Total
 
$
7,555

 
$
717

 
$
17,058

 
$
2,440


The following table summarizes the Company’s net restructuring charges for its Diebold North America (DNA) and Diebold International (DI) reporting segments:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2013
 
2012
 
2013
 
2012
DNA
 
 
 
 
 
 
 
 
Severance
 
$
3,883

 
$
450

 
$
13,411

 
$
1,557

DI
 
 
 
 
 
 
 
 
Severance
 
3,593

 
164

 
3,507

 
292

Other
 
79

 
103

 
140

 
591

Total
 
$
7,555

 
$
717

 
$
17,058

 
$
2,440


During the first quarter 2013, the Company announced a multi-year realignment plan. Certain aspects of this plan were previously disclosed under the Company's global realignment plan and global shared services plan. This multi-year realignment will focus on globalizing the Company's service organization, create a unified center-led global organization for research and development as well as transform the Company's general and administrative cost structure. Restructuring charges were $7,555 and $717 for the three months ended June 30, 2013 and 2012, respectively, and $17,058 and $2,440 for the six months ended June 30, 2013 and 2012, respectively, related to the Company's realignment plan. As of June 30, 2013, the Company anticipates additional restructuring costs of in the range of $10,000 to $20,000. As management concludes on certain aspects of the realignment plan, the anticipated future costs related to this plan are subject to change. As of June 30, 2013, cumulative total restructuring costs for the realignment plan were $24,993 and $10,795 in DNA and DI, respectively.

The following table summarizes the Company’s restructuring accrual balances:
 
 
2013
 
2012
Balance at January 1
 
$
11,844

 
$
10,136

Liabilities incurred
 
17,058

 
2,440

Liabilities paid
 
(17,788
)
 
(3,587
)
Balance at June 30
 
$
11,114

 
$
8,989









19

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2013
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


Impairment and Other Charges
In the second quarter of 2012, the Company recorded an impairment charge within DNA of $6,701 related to a portion of its global enterprise resource planning (ERP) system. Previously capitalized software and software-related costs were impaired due to changes in the ERP implementation plan related to configuration and design.

Other charges consist of items that the Company determines are non-routine in nature. Net non-routine expenses of $53,017 and $1,267 impacted the six months ended June 30, 2013 and 2012, respectively. Non-routine expenses within selling and administrative expense for the first six months of 2013 included $28,000 of estimated pre-tax losses related to the potential outcome of the FCPA investigation, $17,500 pre-tax charge related to settlement of the securities legal action (refer to note 13), and executive severance costs, including accelerated share-based compensation expense of $2,982 (pre-tax). Non-routine income for 2013 related to a pre-tax gain of $2,191 from the sale of certain U.S. manufacturing operations to a long-time supplier. Net non-routine expenses for 2012 consisted primarily of legal and compliance costs related to the FCPA investigation.

NOTE 16: FAIR VALUE OF ASSETS AND LIABILITIES
The Company measures its financial assets and liabilities using one or more of the following three valuation techniques:
Market approach – Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
Cost approach – Amount that would be required to replace the service capacity of an asset (replacement cost).
Income approach – Techniques to convert future amounts to a single present amount based upon market expectations.
The hierarchy that prioritizes the inputs to valuation techniques used to measure fair value is divided into three levels:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 – Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active or inputs, other than quoted prices in active markets, that are observable either directly or indirectly.
Level 3 – Unobservable inputs for which there is little or no market data.
 
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

Assets and Liabilities Recorded at Fair Value
Assets and liabilities subject to fair value measurement are as follows:
 
 
June 30, 2013
 
December 31, 2012
 
 
 
 
Fair Value Measurements Using
 
 
 
Fair Value Measurements Using
 
 
Fair Value
 
Level 1
 
Level 2
 
Fair Value
 
Level 1
 
Level 2
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
 
$
211,496

 
$
211,496

 
$

 
$
258,518

 
$
258,518

 
$

U.S. dollar indexed bond funds
 
31,943

 

 
31,943

 
3,368

 

 
3,368

Assets held in a rabbi trust
 
7,167

 
7,167

 

 
6,783

 
6,783

 

Foreign exchange forward contracts
 
3,529

 

 
3,529

 
960

 

 
960

Total
 
$
254,135

 
$
218,663

 
$
35,472

 
$
269,629

 
$
265,301


$
4,328

Liabilities
 

 
 
 
 
 
 
 
 
 
 
Deferred compensation
 
$
7,167

 
$
7,167

 
$

 
$
6,783

 
$
6,783

 
$

Foreign exchange forward contracts
 
411

 

 
411

 
913

 

 
913

Interest rate swaps
 
2,715

 

 
2,715

 
3,558

 

 
3,558

Total
 
$
10,293

 
$
7,167

 
$
3,126

 
$
11,254

 
$
6,783

 
$
4,471



20

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2013
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


The Company uses the end of period when determining the timing of transfers between levels. During the three and six months ended June 30, 2013 and 2012, there were no transfers between levels.
Short-Term Investments The Company has investments in certificates of deposit that are recorded at cost, which approximates fair value. Additionally, the Company has investments in U.S. dollar indexed bond funds that are classified as available-for-sale and stated at fair value. U.S. dollar indexed bond funds are reported at net asset value, which is the practical expedient for fair value as determined by banks where funds are held.
Assets Held in a Rabbi Trust / Deferred Compensation The fair value of the assets held in a rabbi trust is derived from investments in a mix of money market, fixed income and equity funds managed by Vanguard. The related deferred compensation liability is recorded at fair value.
Foreign Exchange Forward Contracts A substantial portion of the Company’s operations and revenues are international. As a result, changes in foreign exchange rates can create substantial foreign exchange gains and losses from the revaluation of non-functional currency monetary assets and liabilities. The foreign exchange contracts are valued using the market approach based on observable market transactions of forward rates.
Interest Rate Swaps The Company has variable rate debt and is subject to fluctuations in interest-related cash flows due to changes in market interest rates. The Company’s policy is to periodically enter into derivative instruments designated as cash flow hedges to fix some portion of future variable rate-based interest expense. The Company has a pay-fixed receive-variable interest rate swap to hedge against changes in the LIBOR benchmark interest rate on a portion of the Company’s LIBOR-based borrowings. The fair value of the swap is determined using the income approach and is calculated based on LIBOR rates at the reporting date.
Assets and Liabilities Recorded at Carrying Value
The fair value of the Company’s cash and cash equivalents, trade receivables and accounts payable, approximates the carrying value due to the relative short maturity of these instruments. The fair value and carrying value of the Company’s debt instruments are summarized as follows:
 
 
June 30, 2013
 
December 31, 2012
 
 
Fair Value
 
Carrying
Value
 
Fair Value
 
Carrying
Value
Notes payable
 
$
65,051

 
$
65,051

 
$
34,212

 
$
34,212

Long-term debt
 
625,813

 
616,861

 
630,450

 
617,534

Total debt instruments
 
$
690,864

 
$
681,912

 
$
664,662

 
$
651,746

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

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



21

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2013
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


The following table presents information regarding the Company’s segments:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2013
 
2012
 
2013
 
2012
DNA
 
 
 
 
 
 
 
 
Customer revenues
 
$
368,386

 
$
398,897

 
$
699,241

 
$
798,817

Intersegment revenues
 
19,841

 
13,294

 
38,892

 
26,901

Operating profit
 
13,434

 
35,665

 
7,536


90,596

Capital expenditures
 
5,559

 
7,315

 
11,199

 
12,600

Depreciation and amortization
 
16,394

 
14,908

 
30,330

 
27,115

Property, plant and equipment, at cost
 
419,200

 
457,904

 
419,200

 
457,904

Total assets
 
1,011,864

 
1,072,470

 
1,011,864

 
1,072,470

DI
 
 
 
 
 
 
 
 
Customer revenues
 
338,727

 
344,291

 
641,383

 
642,862

Intersegment revenues
 
6,287

 
15,704

 
15,701

 
34,479

Operating (loss) profit
 
(37,056
)
 
2,595

 
(45,074
)

675

Capital expenditures
 
3,269

 
1,057

 
6,957

 
8,069

Depreciation and amortization
 
5,969

 
4,176

 
11,864

 
11,680

Property, plant and equipment, at cost
 
183,576

 
177,518

 
183,576

 
177,518

Total assets
 
1,514,204

 
1,496,859

 
1,514,204

 
1,496,859

TOTAL
 
 
 
 
 
 
 
 
Customer revenues
 
707,113

 
743,188

 
1,340,624

 
1,441,679

Intersegment revenues
 
26,128

 
28,998

 
54,593

 
61,380

Operating (loss) profit
 
(23,622
)
 
38,260

 
(37,538
)
 
91,271

Capital expenditures
 
8,828

 
8,372

 
18,156

 
20,669

Depreciation and amortization
 
22,363

 
19,084

 
42,194

 
38,795

Property, plant and equipment, at cost
 
602,776

 
635,422

 
602,776

 
635,422

Total assets
 
2,526,068

 
2,569,329

 
2,526,068

 
2,569,329


The following tables present information regarding the Company’s revenue by geography:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
Revenue summary by geography
 
2013
 
2012
 
2013
 
2012
DNA
 
$
368,386

 
$
398,897

 
$
699,241


$
798,817

DI
 
 
 
 
 
 
 
 
Latin America including Brazil
 
135,803

 
163,329

 
260,208

 
300,997

Asia Pacific
 
118,375

 
96,149

 
230,558

 
192,349

Europe, Middle East and Africa
 
84,549

 
84,813

 
150,617