DBD 12.31.2013 - 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, 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)
(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 x  No o
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, 2013, based upon the closing price on the New York Stock Exchange on June 28, 2013, was $2,143,286,411.

Number of shares of common stock outstanding as of February 28, 2014 was 64,289,504.

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 2014 Annual Meeting of Shareholders to be held on or about April 24, 2014, portions of which are incorporated by reference into Part III of this Form 10-K.





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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 services and software, financial self-service delivery and security systems to primarily the financial, commercial, retail and other markets. The Company today has approximately 16,000 employees with representation in more than 90 countries worldwide. The Company recently unveiled its multi-year turnaround strategy, Diebold 2.0, at the Investment Community Conference in November of 2013. The objective of Diebold 2.0 is to transform the Company into a world-class, services-led and software enabled provider of secure, convenient and efficient solutions for its customers. The turnaround strategy will follow a “Crawl, Walk, Run” approach, which requires the core business operations to be stabilized in the “Crawl” phase and build the foundation for future growth in the “Walk” and “Run” phases. Four core pillars provide the Company a clear path toward reaching this multi-year objective:
Reduce its cost structure and improve its near-term delivery and execution.
Generate increased free cash flow in order to fund the investments necessary to drive profitable growth, while preserving the ability to return value to shareholders in the form of reliable dividends and, as appropriate, share repurchases.
Attract and retain the talent necessary to drive innovation and the focused execution of the transformation strategy.
Return the Company to a sustainable, profitable growth trajectory.

The Company sees opportunities to leverage its capabilities in services, software and innovation to meet the needs of its rapidly evolving markets. 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. The Company has sharpened its focus on executing its core strategies in financial self-service (FSS) and electronic security. This includes making the appropriate investments to deliver growth within these areas. Finally, the Company remains committed to a disciplined risk assessment process, focused on proactively identifying and mitigating potential risks to the Company's continued success.

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 a self-service solution 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 automation, recycling and payment terminals and software. The Company also offers advanced functionality terminals capable of supporting two-way video technology to support bank branch transformation. 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.






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Self-Service Products
The Company offers a wide variety of self-service solutions. Self-service products include a full range of teller automation terminals as well as ATMs capable of cash dispensing and a number of more advanced functionalities, including check and cash deposit automation, recycling and two-way video.

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 electronic security offerings it provides today, the Company’s integrated security solutions utilize advanced products and an extensive services portfolio 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. The Company also provides internet banking, online payment and mobile banking security solutions aimed at preventing various types of fraud, such as phishing, pharming, and key logging.  All of 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, commercial, retail, and other markets.

Physical Security and Facility Products
The Company provides security solutions, 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 camera and video surveillance equipment, alarms, access control systems and biometric technologies.

Monitoring and Services
The Company provides security monitoring solutions, including remote monitoring and diagnostics, fire detection, intrusion protection, managed access control, energy management, remote video management and storage, logical security and web-based solutions like SecureStat®.

Outsourcing and Managed Service Solutions
The Company provides end-to-end outsourcing and managed service 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, services, software or a combination of these components. The Company provides value to its customers by offering a comprehensive array of hardware-agnostic outsourcing and managed 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 FSS implementation. The Company also provides design, installation, maintenance and monitoring of electronic security systems to financial, commercial, retail and other customers.

Election and Lottery Systems
The Company offers election and lottery systems product solutions and support to the government in Brazil. The Company provides elections and lottery 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.

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.



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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 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, 2013, the Company’s net investment in finance lease receivables was $105,491.

SEGMENTS AND FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
In the fourth quarter of 2013, the Company began management of its business on a regional geographic basis, changing from the previous model, which was a more condensed geographic basis. In order to align the Company's external reporting of its financial results with this change, the Company has modified its segment reporting. The Company now reports the following five segments: North America (NA), Asia Pacific (AP), Europe, the Middle East and Africa (EMEA), Latin America (LA) and Brazil.

The five geographic segments sell and service FSS and security systems around the globe, as well as election and lottery solutions in Brazil, through wholly-owned subsidiaries, majority-owned joint ventures and independent distributors in most major countries. Segment financial information 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.

Sales to customers outside the United States in relation to total consolidated net sales were $1,493,386 or 52.3 percent in 2013, $1,458,019 or 48.7 percent in 2012 and $1,494,681 or 52.7 percent in 2011.

Property, plant and equipment, at cost, located in the United States totaled $413,315, $468,575 and $455,814 as of December 31, 2013, 2012 and 2011, respectively, and property, plant and equipment, at cost, located outside the United States totaled $185,779, $193,335 and $186,442 as of December 31, 2013, 2012 and 2011, respectively.

Additional financial information regarding the Company’s international operations is included in note 19 to the consolidated financial statements, which is contained in Item 8 of this annual report on Form 10-K. 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.

PRODUCT BACKLOG
The Company's product backlog was approximately $728,811 and $529,716 as of December 31, 2013 and 2012, respectively. The backlog includes orders estimated or projected to be shipped or installed within 12 months. Although the Company believes the orders included in the backlog are firm, some orders may be canceled by customers without penalty, and the Company may elect to permit cancellation of orders without penalty where management believes it is in the Company's best interests to do so. Historically, the Company has not experienced significant cancellations within its product backlog. Additionally, over 50 percent of the Company's revenues are derived from its service business, for which backlog information is not measured. Therefore, the Company does not believe that its product backlog, as of any particular date, is necessarily indicative of revenues for any future period.

COMPETITION
The Company participates in many highly competitive businesses with some services and products in direct competition 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 services and software capabilities 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 FSS 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 including, but not limited to, GRG Banking Equipment Co., Ltd. and Nautilus Hyosung in AP and Itautec and Perto in LA. 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, commercial, retail 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


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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 Brazilian 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 $92,315, $85,881 and $78,108 in 2013, 2012 and 2011, respectively. In 2013, the Company introduced the first intelligent-powered ATM, the Diebold 429. Designed for urban and rural areas of India, this machine combines energy efficiency and environmental resistance with enhanced security and functionality. The Diebold 429 consumes approximately 40 percent less energy than previous cash dispensers available in these Indian markets and can switch between three possible power sources, ultimately lowering total cost of ownership and maximizing uptime while delivering unprecedented convenience to consumers.

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 2013 had no material effect upon the Company’s business, financial condition or results of operations.

EMPLOYEES
At December 31, 2013, the Company employed approximately 16,000 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 more than 90 countries worldwide.

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 stock information, news releases, investor 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.



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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 that 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 FSS, security, election and lottery 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.

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 customers' 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.



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In particular, continuing economic difficulties in 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, including new or increased regulatory burdens, 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 further 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 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.



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In international markets, we compete with local service providers that may have competitive advantages.
In a number of international markets, especially those in AP and LA, 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 52.3 percent in 2013, 48.7 percent in 2012 and 52.7 percent in 2011 of total revenue during these respective years.

Accordingly, international operations are subject to the risks of doing business abroad, including, among other things, 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 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, which 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


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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 implicated 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 AP operation that occurred over several prior years that also potentially implicated the FCPA. The Company continues to monitor its ongoing compliance with the FCPA.

The Company voluntarily self-reported its findings to the SEC and the U.S. Department of Justice (DOJ) and cooperated with these agencies in their review. The Company reached an agreement with the DOJ and the SEC to settle this matter for 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. The Company remitted the combined payments to the U.S. government in November 2013.

In addition, our business opportunities in select geographies have been or may be adversely affected by the settlement of this review.  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. We could also face third-party claims in connection with this matter or as a result of the outcome of the current or any future government reviews.  Our disclosure, internal review and any current or future governmental review of this matter 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 more than 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.

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;


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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,which could affect 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.

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, 2013, we had $179,828 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, LA, AP, and 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.

During the third quarter of 2013, the Company performed an other-than-annual assessment for its Brazil reporting unit based on a two-step impairment test as a result of a reduced earnings outlook for the Brazil business unit. This was due to a deteriorating macro-economic outlook, structural changes to an auction-based purchasing environment and new competitors entering the market. The Company concluded that the goodwill within the Brazil reporting unit was partially impaired and recorded a $70,000 pre-tax, non-cash goodwill impairment charge. In the fourth quarter of 2013, the Brazil reporting unit was reviewed for impairment based on 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 addition, the remaining reporting units were reviewed based on a two-step test. These tests resulted in no additional impairment in any of the Company's reporting units. The Company concluded the AP reporting unit had excess fair


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value of approximately $23,000 or eight percent when compared to its carrying amount. Domestic and Canada and LA reporting units had excess fair value greater than 100 percent when compared to their carrying amounts.

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 and, in addition, could adversely impact our ability to maintain effective internal control over financial reporting. 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.

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


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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.

Any actions or other governmental investigations or proceedings related to or arising from the matters that resulted in the 2009 SEC settlement or the 2013 SEC and DOJ settlement 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 2009 with the staff of the SEC to settle civil charges stemming from the staff's enforcement inquiry and an agreement with the staff of the SEC and DOJ to settle the FCPA review in 2013.  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 these settlements. 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.






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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 2013 that constituted a material weakness. Management concluded that controls pertaining to the reconciliation process that could materially impact financial reporting in its Indian subsidiary were not operating effectively because of the lack of full adoption of revised processes necessitated by a newly implemented enterprise resource planning system.

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 2013, we began implementing control procedures pertaining to manufacturing and supply chain processes that impact indirect tax incentives in our Brazilian subsidiary. In addition, we began fulfillment of related roles and responsibilities in the indirect tax compliance organization structure. In 2012 and 2013, we have enhanced our internal control over financial reporting. However, as of December 31, 2013, 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.

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


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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 $4,567 to our pension plans in 2014. Changes in the current assumptions and estimates could result in contributions in years beyond 2014 that are greater than the projected 2014 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.

ITEM 1B: UNRESOLVED STAFF COMMENTS

None.

ITEM 2: PROPERTIES

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

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.



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ITEM 3: LEGAL PROCEEDINGS
(dollars in thousands)

At December 31, 2013, the Company was a party to several lawsuits that were incurred in the normal course of business, none of which individually or in the aggregate is considered material by management in relation to the Company's financial position or results of operations. In addition, the Company has indemnification obligations with certain former employees and costs associated with these indemnifications are expensed as incurred. In management's opinion, the 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 legal proceedings described below at
December 31, 2013:

Indirect Tax Contingencies
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. Additionally, in May 2013, the SEC requested that the Company retain certain documents and produce certain records relating to the assessment, and the Company is complying with that request.

In response to an order by the administrative court, the tax inspector provided further analysis with respect to the tax inspector’s initial assessment in December 2013 that, if accepted by the administrative court, could indicate a potential exposure that is significantly lower than the initial tax assessment received in August 2012.  However, this further analysis is not binding upon the administrative court and is subject to administrative court approval.  Additionally, any decision by the administrative court is subject to automatic appeal.  Accordingly, the Company cannot provide any assurance that its exposure pursuant to the initial assessment will be lowered significantly or at all.  The Company has filed additional administrative defenses in response to the tax inspector’s further analysis.  

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 sought 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 and an offsetting $12,755 pre-tax credit within selling and administrative expense related to the Company's insurance recovery. On November 14, 2013, the court entered an order preliminarily approving the parties’ stipulated settlement agreement; however, the settlement was subject to notice to the putative class and final approval by the court. In the fourth quarter of 2013, the Company and insurance companies paid their respective settlement amounts into an escrow fund in accordance with the terms of the settlement agreement.

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 implicated the FCPA, particularly its books and records provisions. 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 AP operation that occurred over the past several years that also potentially implicated the FCPA. The Company continues to monitor its ongoing global compliance with the FCPA.

The Company voluntarily self-reported its findings to the SEC and DOJ and cooperated with these agencies in their review. The Company was previously informed that the SEC's inquiry had been converted to a formal, non-public investigation. The Company reached an agreement with the DOJ and the SEC to the terms of a settlement of their inquiries, which terms were filed in federal


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court on October 22, 2013. These terms include combined payments to the U.S. government of $48,000 in disgorgement, penalties, and pre-judgment interest and the appointment of an independent compliance monitor for a minimum period of 18 months. The Company remitted the combined payments to the U.S. government in November 2013.

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:
 
2013
 
2012
 
2011
 
High
 
Low
 
High
 
Low
 
High
 
Low
1st Quarter
$
33.30

 
$
27.59

 
$
40.38

 
$
29.21

 
$
36.35

 
$
30.20

2nd Quarter
33.95

 
28.26

 
42.93

 
35.03

 
37.12

 
29.26

3rd Quarter
35.40

 
27.89

 
38.49

 
31.48

 
33.89

 
24.70

4th Quarter
34.44

 
28.88

 
34.33

 
27.66

 
33.59

 
25.83

Full Year
35.40

 
27.59

 
42.93

 
27.66

 
37.12

 
24.70


There were approximately 81,435 shareholders of the Company at December 31, 2013, 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 quarterly, the annualized dividends per share were $1.15, $1.14 and $1.12 in 2013, 2012 and 2011, respectively.

Information concerning the Company’s share repurchases made during the fourth quarter of 2013:
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
 

 
$

 

 
2,426,177

November
 
2,151

 
29.67

 

 
2,426,177

December
 
10,052

 
33.78

 

 
2,426,177

Total
 
12,203

 
$
33.06

 

 
 

(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, 2013. 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 provided to shareholders of the Company's common shares 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-four companies and twenty-five companies, whose individual companies are listed in footnotes 1 and 2 below, respectively. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common shares, in each index and in each of the peer groups on December 31, 2008 and its relative performance is tracked through December 31, 2013.


(1)
There are twenty-four companies included in the Company's old customized peer group which are: Actuant Corp., Benchmark Electronics Inc., Brady Corp., 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., Outerwall Inc. (f/k/a Coinstar Inc.), Pitney-Bowes 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-five companies included in the Company's new customized peer group are: Actuant Corp., Benchmark Electronics Inc., Brady Corp., Convergys Corp., DTS Inc., Fidelity National Information Services, Fiserv Inc., Flowserve Corp., Global Payments Inc., Harris Corp., International Game Technology, Intuit Inc., Lexmark International Inc., Logitech International SA, Mettler Toledo International Inc., NCR Corp., Outerwall Inc. (f/k/a Coinstar Inc.), Pitney-Bowes Inc., Sensata Technologies Holding NV, SPX Corp., The Brinks Company, The Timken Company, Unisys Corp., Western Union Company (The) and Woodward Inc.




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,
 
2013
 
2012
 
2011
 
2010
 
2009
 
(in millions, except per share data)
Results of operations
 
 
 
 
 
 
 
 
 
Net sales
$
2,857

 
$
2,992

 
$
2,836

 
$
2,824

 
$
2,718

Cost of sales
2,217

 
2,262

 
2,105

 
2,109

 
2,076

Gross profit
$
640

 
$
730

 
$
731

 
$
715

 
$
642

 
 
 
 
 
 
 
 
 
 
Amounts attributable to Diebold, Incorporated
 
 
 
 
 
 
 
 
 
(Loss) income from continuing operations, net of tax
$
(182
)
 
$
77

 
$
143

 
$
(25
)
 
$
65

(Loss) income from discontinued operations, net of tax

 
(3
)
 
1

 
1

 
(47
)
Net (loss) income attributable to Diebold, Incorporated
$
(182
)
 
$
74

 
$
144

 
$
(24
)
 
$
18

 
 
 
 
 
 
 
 
 
 
Basic earnings per common share:
 
 
 
 
 
 
 
 
 
(Loss) income from continuing operations, net of tax
$
(2.85
)
 
$
1.22

 
$
2.23

 
$
(0.37
)
 
$
0.99

(Loss) income from discontinued operations, net of tax

 
(0.05
)
 
0.01

 

 
(0.71
)
Net (loss) income attributable to Diebold, Incorporated
$
(2.85
)
 
$
1.17

 
$
2.24

 
$
(0.37
)
 
$
0.28

 
 
 
 
 
 
 
 
 
 
Diluted earnings per common share:
 
 
 
 
 
 
 
 
 
(Loss) income from continuing operations, net of tax
$
(2.85
)
 
$
1.20

 
$
2.21

 
$
(0.37
)
 
$
0.97

(Loss) income from discontinued operations, net of tax

 
(0.05
)
 
0.01

 

 
(0.70
)
Net (loss) income attributable to Diebold, Incorporated
$
(2.85
)
 
$
1.15

 
$
2.22

 
$
(0.37
)
 
$
0.27

 
 
 
 
 
 
 
 
 
 
Number of weighted-average shares outstanding
 
 
 
 
 
 
 
 
 
Basic shares
64

 
63

 
64

 
66

 
66

Diluted shares
64

 
64

 
65

 
66

 
67

 
 
 
 
 
 
 
 
 
 
Dividends
 
 
 
 
 
 
 
 
 
Common dividends paid
$
74

 
$
73

 
$
73

 
$
72

 
$
69

Common dividends paid per share
$
1.15

 
$
1.14

 
$
1.12

 
$
1.08

 
$
1.04

 
 
 
 
 
 
 
 
 
 
Consolidated balance sheet data (as of period end)
 
 
 
 
 
 
 
 
 
Current assets
$
1,555

 
$
1,815

 
$
1,732

 
$
1,714

 
$
1,588

Current liabilities
894

 
857

 
838

 
823

 
752

Net working capital
661

 
958

 
894

 
891

 
836

Property, plant and equipment, net
161

 
184

 
193

 
203

 
205

Total long-term liabilities
669

 
909

 
835

 
720

 
740

Total assets
2,183

 
2,593

 
2,517

 
2,520

 
2,555

Total equity
621

 
827

 
844

 
977

 
1,063




Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2013
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
The Company is a global leader in providing integrated services and software, financial self-service delivery and security systems to primarily the financial, commercial, retail and other markets. Founded in 1859, the Company today has approximately 16,000 employees with representation in more than 90 countries worldwide. The Company recently unveiled its multi-year turnaround strategy, Diebold 2.0, at the Investment Community Conference in November 2013. The objective of Diebold 2.0 is to transform the Company into a world-class, services-led and software enabled provider of secure, convenient and efficient solutions for its customers. The turnaround strategy will follow a “Crawl, Walk, Run” approach, which requires the core business operations to be stabilized in the “Crawl” phase and build the foundation for future growth in the “Walk” and “Run” phases. Four core pillars provide the Company a clear path toward reaching this multi-year objective:

Reduce its cost structure and improve its near-term delivery and execution.
Generate increased free cash flow in order to fund the investments necessary to drive profitable growth, while preserving the ability to return value to shareholders in the form of reliable dividends and, as appropriate, share repurchases.
Attract and retain the talent necessary to drive innovation and the focused execution of the transformation strategy.
Return the Company to a sustainable, profitable growth trajectory.

The Company sees opportunities to leverage its capabilities in services, software and innovation to meet the needs of its rapidly evolving markets. The Company has sharpened its focus on executing its core strategies in FSS and electronic security. This includes making the appropriate investments to deliver growth within these areas. In addition, the Company remains committed to a disciplined risk assessment process, focused on proactively identifying and mitigating potential risks to the Company's continued success.

(Loss) income from continuing operations attributable to Diebold, Incorporated, net of tax, for the year ended December 31, 2013 was $(181,605), or $(2.85) per share, a decrease of $258,333, or $4.05 per share from the year ended December 31, 2012. Total revenue for the year ended December 31, 2013 was $2,857,491, a decrease of $134,202 from the year ended December 31, 2012. The year ended December 31, 2013 included a $67,593 pre-tax non-cash pension charge related to the voluntary early retirement program, a $70,000 pre-tax goodwill impairment charge, $57,015 of pre-tax restructuring charges related to the Company's multi-year realignment plan, including $31,282 related to the voluntary early retirement program, $28,000 of additional pre-tax losses related to the settlement of the global FCPA investigation, a $17,245 pre-tax net charge related to settlement of the securities class action, and $9,300 of pre-tax executive severance. Additionally, a significant portion of the decline was associated with lower volume in NA resulting from the expiration of the Americans with Disabilities Act (ADA) compliance deadline in 2012. Internationally, improvement was driven by higher FSS sales in AP and EMEA combined with security sales growth in Brazil, mainly due to the GAS Tecnologia (GAS) acquisition in Brazil. These increases were partially offset by a reduction in election systems and lottery sales in Brazil as well as a decline in FSS volume for LA. Additionally, the 2013 results were significantly impacted by a higher tax rate, which is a result of tax expense related to the repatriation of previously undistributed earnings and the establishment of a valuation allowance on certain Brazil deferred tax assets.

Diebold 2.0 - Turnaround Strategy
The Company’s turnaround strategy, Diebold 2.0, is built on four core pillars: cost, cash, talent and growth. Underpinned by the four core pillars, the turnaround strategy encompasses eight specific actions to achieve top-tier performance and generate sustainable, profitable growth.









21

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2013
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)




Eight-Point Program:
1.
Establish a Competitive Cost Structure
Reducing the Company’s fixed cost envelope and driving operational rigor is fundamental. The $150,000 multi-year realignment plan launched in 2013 will drive efficiency while reducing general and administrative costs and the cost of goods sold.

2.
Drive Sustainable Improvement in Cash Flow
The Company is committed to improving cash generation in order to increase shareholder value and fuel the investments necessary to grow the business. An emphasis on working capital improvements and cash generation now extends far beyond the finance organization - it is a main-stage requirement in every operation in every region.

3.
Improve Sales Effectiveness
The Company’s sales teams must enhance skills, tools and coverage to reach more prospects more effectively. For example, the global deployment of Salesforce.com will enhance the ability to plan, forecast and allocate resources more productively.

4.
Increase Speed and Agility
Streamlining the management structure will drive greater accountability, accelerate decision-making and facilitate the transition to a truly global business. Change is being viewed as an enabler of progress and not as a disrupter.

5.
Instill a Winning Culture Grounded in Execution
The message being driven to every member of the organization: The Company is not merely to participate in a market, but to succeed, and win through a culture built upon accountability and execution. As an example, the Company is taking steps to better align employee compensation with Company performance.

6.
Collaborate With Customers and Partners to Drive Innovative Solutions
The Company must accelerate new ideas through teamwork with capable partners and collaboration with customers. For example, the India-originated Diebold 429 ATM solution reduced development time and costs while at the same time meeting defined market needs.

7.
Further Leverage Services and Software
The Company expects the commoditization of hardware to continue, the size and importance of the software stack to increase, and our expertise in services and system integration to be a key differentiator. The objective is to further expand the percentage of sales derived from services and software, which is expected to exceed 60 percent during the transformation.

8.
Generate Long-Term, Profitable Growth
The seven actions defined above are designed to put the Company on a sustainable, profitable growth trajectory. A commitment to operational rigor, improved analytics and data-driven decision-making is expected to position the Company to benefit from secular trends in outsourcing and mobility, expand its electronic security business and drive both organic and inorganic growth.

Solutions
The Company leverages its strong base of maintenance and advanced services to deliver comprehensive outsourcing and managed services. Banks are continuously being challenged to reduce costs while increasing operational efficiencies. Through outsourced services, banks entrust the management of their ATM and security operations to the Company, allowing their staffs to focus on core competencies. Furthermore, the Company's outsourcing and managed services offering provides banks and credit unions with the leading-edge technology they need to stay competitive in the marketplace. As a leader in outsourcing services, the Company is poised to capitalize on the secular outsourcing trends in the marketplace. Several years ago, the Company launched its outsourcing and managed services business in North America and has grown this business from $5,000 to over $200,000 in annual revenue with over 22,500 units under contract.



22

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2013
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)




Another demand driver in the global ATM marketplace is branch transformation. The concept of branch transformation is to help financial institutions reduce their costs by migrating routine transactions, typically done inside the branch, to lower-cost automated channels, including the ATM. One area of branch transformation that continues to gain traction is 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.
Another solution the Company offers as part of its branch transformation efforts is Concierge Video Services™, most recently launched in North America. The solution provides consumers with on-demand access to bank call center representatives right at the ATM 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 by maximizing operational efficiencies, improving the consumer experience and enhancing the overall consumer relationship.
Mobile integration is another emerging trend in the FSS space, as consumers look for multiple ways to interact with their financial institutions. In July 2013, Diebold introduced its cardless Mobile Cash Access solution, which allows consumers to stage a transaction with their mobile device and complete it at the ATM without the need for a card. This capability provides consumers with a more convenient and secure option, while giving financial institutions the opportunity to offer their own branded mobile wallet solution.
In its security business, the Company has another opportunity for a successful outsourcing and managed services approach. Security challenges and the systems to address them have grown increasingly complex. That has created a strong business case among financial institutions and commercial customers for outsourcing and managed service solutions, particularly in the areas of monitoring, services and software management. 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 high levels of logical and enterprise security expertise that are required in this business. The Company is also leveraging best practices and some of the best talent to continue building upon its security outsourcing and manged services business.
As it relates to security, the Company recently introduced a new online security management tool in in North America, called SecureStat®, that streamlines how customers manage their security operations. At the core of the solution is a personalized dashboard that utilizes customizable, distinct widgets to provide a snapshot of a user's entire security platform, including locations, security systems and devices. In addition, SecureStat® can unify security services and disparate systems, while providing a single interface for real-time administration of security operations across an enterprise. SecureStat® is a great example of the software-driven platforms the Company is investing in to strengthen its services offering and differentiate itself in the marketplace.

Moving forward, the Company intends to create shareholder value by leveraging the opportunities it sees within the area of branch transformation, growing its services, outsourcing and software capabilities, further building out its electronic security business and taking advantage of key secular trends around the world. Many opportunities lie ahead, and the Company will continue to invest in developing new services, software and security solutions that align with the needs of its core markets.

Multi-Year Realignment Plan
The Company is committed to its previously announced multi-year realignment plan aimed at establishing a competitive cost structure throughout the organization. The Company has currently identified targeted savings of $150,000 that are expected to be fully realized by the end of 2015 and is working to accelerate the cost savings efforts beyond this target longer-term. The Company expects to reinvest a portion of the savings to drive long-term growth. Areas of reinvestment include: research and development of innovative new customer solutions; improving and updating the Company's information technology systems and infrastructure; transforming the general and administrative back-office functions; and strengthening sales coverage, processes and tools. In addition, some of the savings should offset price erosion, wage inflation in emerging markets and volatile commodity prices in the Company’s core business. Given these factors, the Company anticipates that approximately 50 percent of the savings will positively impact operating profit. In addition to the cost savings impact, the plan will enhance its competitive position by focusing on globalizing the Company's service organization, creating a unified center-led global organization for research and development as well as transform the Company's general and administrative cost structure. Restructuring charges associated with the multi-year realignment plan were $57,015 and $15,241 for 2013 and 2012, respectively.




23

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2013
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)




Segment Reporting
In the fourth quarter of 2013, the Company began managing its business on a regional geographic basis, changing from the previous model, which was a more condensed geographic basis. In order to align the Company's external reporting of its financial results with this change, the Company has modified its segment reporting. The Company now reports the following five segments: NA, AP, EMEA, LA and Brazil.

Business Drivers
The business drivers of the Company's future performance include, but are not limited to:
• timing of self-service equipment upgrades and/or replacement cycles, including deposit automation in mature markets such as the United States;
• demand for products and solutions related to bank branch transformation opportunities;
• demand for services, including outsourcing and managed services;
• demand for security products and services for the financial and commercial sectors; and
• high levels of deployment growth for new self-service products in emerging markets, such as AP.


24

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2013
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, 2013, 2012 and 2011. 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,
 
 
2013
 
2012
 
2011
 
 
 
 
% of Net Sales
 
% Change
 
 
 
 % of Net Sales
 
% Change
 
 
 
 % of Net Sales
Net sales
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Services
 
$
1,637,056

 
57.3
 
0.6
 
$
1,626,521

 
54.4
 
4.8
 
$
1,552,358

 
54.7
Products
 
1,220,435

 
42.7
 
(10.6)
 
1,365,172

 
45.6
 
6.4
 
1,283,490

 
45.3
 
 
2,857,491

 
100.0
 
(4.5)
 
2,991,693

 
100.0
 
5.5
 
2,835,848

 
100.0
Cost of sales
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Services
 
1,222,675

 
42.8
 
0.6
 
1,215,673

 
40.6
 
6.8
 
1,138,213

 
40.1
Products
 
994,460

 
34.8
 
(5.0)
 
1,046,400

 
35.0
 
8.2
 
967,161

 
34.1
 
 
2,217,135

 
77.6
 
(2.0)
 
2,262,073

 
75.6
 
7.4
 
2,105,374

 
74.2
Gross profit
 
640,356

 
22.4
 
(12.2)
 
729,620

 
24.4
 
(0.1)
 
730,474

 
25.8
Selling and administrative expense
 
596,694

 
20.9
 
13.1
 
527,729

 
17.6
 
4.6
 
504,436

 
17.8
Research, development and
     engineering expense
 
92,315

 
3.2
 
7.5
 
85,881

 
2.9
 
10.0
 
78,108

 
2.8
Impairment of assets
 
72,017

 
2.5
 
356.3
 
15,783

 
0.5
 
432.8
 
2,962

 
0.1
Gain on sale of assets, net
 
(2,410
)
 
(0.1)
 
100.5
 
(1,202
)
 
 
(37.4)
 
(1,921
)
 
(0.1)
 
 
758,616

 
26.5
 
20.8
 
628,191

 
21.0
 
7.6
 
583,585

 
20.6
Operating (loss) profit
 
(118,260
)
 
(4.1)
 
(216.6)
 
101,429

 
3.4
 
(30.9)
 
146,889

 
5.2
Other (expense) income, net
 
(1,547
)
 
(0.1)
 
(116.3)
 
9,466

 
0.3
 
(21.4)
 
12,048

 
0.4
(Loss) income from continuing
     operations before taxes
 
(119,807
)
 
(4.2)
 
(208.0)
 
110,895

 
3.7
 
(30.2)
 
158,937

 
5.6
Income tax expense
 
56,715

 
2.0
 
100.9
 
28,225

 
0.9
 
251.6
 
8,028

 
0.3
(Loss) income from continuing
      operations
 
(176,522
)
 
(6.2)
 
(313.5)
 
82,670

 
2.8
 
(45.2)
 
150,909

 
5.3
(Loss) income from discontinued
     operations, net of tax
 

 
 
(100.0)
 
(3,125
)
 
(0.1)
 
N/M
 
523

 
Net (loss) income
 
(176,522
)
 
(6.2)
 
(321.9)
 
79,545

 
2.7
 
(47.5)
 
151,432

 
5.3
Net income attributable to
     noncontrolling interests
 
5,083

 
0.2
 
(14.5)
 
5,942

 
0.2
 
(18.4)
 
7,285

 
0.3
Net (loss) income attributable to
     Diebold, Incorporated
 
$
(181,605
)
 
(6.4)
 
(346.7)
 
$
73,603

 
2.5
 
(48.9)
 
$
144,147

 
5.1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amounts attributable to Diebold, Incorporated
 
 
 
 
 
 
 
 
 
 
 
 
(Loss) income from continuing
     operations, net of tax
 
$
(181,605
)
 
(6.4)
 
 
 
$
76,728

 
2.6
 
 
 
$
143,624

 
5.1
(Loss) income from discontinued
     operations, net of tax
 

 
 
 
 
(3,125
)
 
(0.1)
 
 
 
523

 
Net (loss) income attributable to
     Diebold, Incorporated
 
$
(181,605
)
 
(6.4)
 
 
 
$
73,603

 
2.5
 
 
 
$
144,147

 
5.1


25

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2013
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)




RESULTS OF OPERATIONS
2013 comparison with 2012
Net Sales
The following table represents information regarding our net sales for the years ended December 31:
 
2013
 
2012
 
$ Change
 
% Change
Total financial self-service
2,216,968

 
2,311,901

 
(94,933
)
 
(4.1)
Total security
618,889

 
623,637

 
(4,748
)
 
(0.8)
Election and lottery systems
21,634

 
56,155

 
(34,521
)
 
(61.5)
Total net sales
$
2,857,491

 
$
2,991,693

 
$
(134,202
)
 
(4.5)
The decrease in FSS sales included a net unfavorable currency impact of $40,920 or 1.7 percent, of which approximately 76 percent related to the Brazilian real. The following segment highlights include the impact of foreign currency. NA FSS sales decreased $167,104 or 15.9 percent due primarily to lower volume within the U.S. regional bank business partially offset by growth in the national bank sector. A significant portion of the decline was associated with the expiration of the ADA compliance deadline in 2012. The product volume decrease in regional bank business caused a corresponding reduction in the service business specific to installation and professional services sales. AP increased $56,544 or 14.1 percent due to higher volume in India and China. EMEA increased $36,125 or 11.1 percent mainly from higher volume in Western Europe and the Middle East primarily in the emerging market of Turkey due in part to the Altus acquisition partially offset by a net decrease in the remainder of the region. Brazil decreased $13,058 or 3.9 percent, including $31,020 in unfavorable currency impact. LA declined $7,440 or 3.7 percent mainly due to volume deterioration in Mexico, partially offset by an increase in Colombia.
Security sales decreased from declines in the LA, NA and AP regions. LA decreased $8,869 or 15.2 percent largely due declines in Chile. NA experienced a reduction of $8,378 or 1.6 percent. AP decreased $4,960 or 19.7 percent as the company executed on its decision in 2013 to exit the security business in Australia. These reductions were partially offset by Brazil increasing from the prior year due to the GAS acquisition.
The decrease in the Brazilian-based election and lottery systems was driven by cyclical purchasing decisions within the country.

Gross Profit
The following table represents information regarding our gross profit for the years ended December 31:
 
2013
 
2012
 
$ Change
 
% Change
Gross profit - services
$
414,381

 
$
410,848

 
$
3,533

 
0.9
Gross profit - products
225,975

 
318,772

 
(92,797
)
 
(29.1)
Total gross profit
$
640,356

 
$
729,620

 
$
(89,264
)
 
(12.2)
 
 
 
 
 
 
 
 
Gross margin - services
25.3
%
 
25.3
%
 

 
 
Gross margin - products
18.5
%
 
23.4
%
 


 
 
Total gross margin
22.4
%
 
24.4
%
 


 
 

Total service gross margin remained at 25.3 percent in 2013. NA service gross margin increased due to improvements resulting from lower employee related expense associated with restructuring initiatives and a decrease in insurance and vehicle related expense in the U.S. maintenance business. In addition, NA benefited from stronger performance in the enterprise security business. These benefits were partially offset by lower FSS product volume within the U.S. regional business related to the expiration of the ADA compliance deadline in 2012, which negatively impacted services utilization specific to professional service and installation. Total service gross margin also benefited from higher volume and improved margins in EMEA and AP, partially offset by a margin decrease in Brazil. Total service gross profit in 2013 and 2012 included restructuring charges of $27,107 and $6,226, respectively.



26

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2013
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)




The decrease in total product gross margin was driven by NA, which had significantly lower volume, particularly in the U.S. regional bank business, due to the expiration of the ADA compliance deadline in 2012. In addition, the decline in U.S regional bank business coupled with an increase in U.S. national bank sales created a customer mix shift that contributed to the product margin deterioration. Total product gross margin was also negatively influenced by unfavorable customer mix and continued pricing pressure in AP while there was a partially offsetting improvement in EMEA mainly due to favorable manufacturing performance resulting primarily from beneficial currency impact on material purchase prices. Total product gross profit included restructuring charges of $1,256 in 2013 compared to a net restructuring accrual benefit of $1,849 in 2012.

Operating Expenses
The following table represents information regarding our operating expenses for the years ended December 31:
 
2013
 
2012
 
$ Change
 
% Change
Selling and administrative expense
$
596,694

 
$
527,729

 
$
68,965

 
13.1
Research, development and engineering expense
92,315

 
85,881

 
6,434

 
7.5
Impairment of assets
72,017

 
15,783

 
56,234

 
356.3
Gain on sale of assets, net
(2,410
)
 
(1,202
)
 
1,208

 
100.5
Total operating expenses
$
758,616

 
$
628,191

 
130,425

 
20.8

The increase in selling and administrative expense resulted from higher non-routine expense and restructuring charges, partially offset by lower compensation and commission related expense, savings realized from the Company's continued focus on cost structure and favorable currency impact of $6,240. Non-routine expenses of $128,739 and $41,542 were included in 2013 and 2012, respectively. The primary components of the 2013 non-routine expense were a $67,593 non-cash pension charge, additional losses of $28,000 related to the settlement of the FCPA investigation, $17,245 related to the settlement of the securities class action and executive severance costs of $9,300. The majority of the 2012 non-routine expense pertained to $21,907 in early pension buy-out payments made to certain deferred terminated vested participants and estimated losses of $16,750 related to the FCPA investigation. Selling and administrative expense also included $22,561 and $9,037 of restructuring charges in 2013 and 2012, respectively. Restructuring charges in 2013 related to the Company's multi-year realignment plan, including $31,282 related to the voluntary early retirement program. The 2012 restructuring charges related to the Company's global realignment and global shared services plans.

Research, development and engineering expense as a percent of net sales in 2013 and 2012 were 3.2 percent and 2.9 percent, respectively. The spend increase between years resulted from higher restructuring charges and higher expense related to software development in 2013. Research, development and engineering expense included restructuring charges of $6,091 and $1,827 in 2013 and 2012, respectively.

During the third quarter of 2013, the Company performed an other-than-annual assessment for its Brazil reporting unit based on a two-step impairment test as a result of a reduced earnings outlook for the Brazil business unit due to deteriorating macro-economic outlook, structural changes to an auction-based purchasing environment and new competitors entering the market. The Company concluded that the goodwill within the Brazil reporting unit was partially impaired and recorded a $70,000 pre-tax, non-cash goodwill impairment charge. 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 enterprise resource planning (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.



27

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2013
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:
 
2013
 
2012
 
$ Change
 
% Change
Operating (loss) profit
$
(118,260
)
 
$
101,429

 
$
(219,689
)
 
(216.6)
Operating (loss) profit margin
(4.1
)%
 
3.4
%
 

 
 

The decline in operating (loss) profit was influenced primarily by lower volume and a shift in customer mix within NA and significant increases in impairment, non-routine expenses and restructuring charges, partially offset by lower operational spend in NA and an overall improvement in service margin.

Other Income (Expense)
The following table represents information regarding our other income (expense) for the years ended December 31:
 
2013
 
2012
 
$ Change
 
% Change
Investment income
$
27,603

 
$
37,593

 
$
(9,990
)
 
(26.6)
Interest expense
(29,234
)
 
(30,330
)
 
(1,096
)
 
(3.6)
Foreign exchange gain, net
172

 
2,654

 
(2,482
)
 
(93.5)
Miscellaneous, net
(88
)
 
(451
)
 
(363
)
 
(80.5)
Other income (expense)
$
(1,547
)
 
$
9,466

 
(11,013
)
 
(116.3)

The decline in investment income was primarily driven by Brazil due to a decrease in total investments, lower interest rates and unfavorable currency impact. Foreign exchange gain, net, in 2013 included a $1,584 devaluation of the Venezuelan balance sheet.

(Loss) Income from Continuing Operations
The following table represents information regarding our (loss) income from continuing operations, net of tax for the years ended December 31:
 
2013
 
2012
 
$ Change
 
% Change
(Loss) income from continuing operations, net of tax
$
(176,522
)
 
$
82,670

 
$
(259,192
)
 
(313.5)
Percent of net sales
(6.2
)%
 
2.8
%
 

 
 
Effective tax rate
(47.3
)%
 
25.5
%
 


 
 

The decrease in (loss) income from continuing operations, net of tax was driven by reduced operating profit mostly related to the decrease in sales volume and the significant increases in impairment, non-routine expenses and restructuring charges, unfavorable movement in other (expense) income and higher taxes. These decreases were partially offset by lower operational spend and an improvement in service margin.

The negative tax rate for 2013 is a result of tax expense of approximately $55,000 related to the repatriation of previously undistributed earnings and the establishment of a valuation allowance of approximately $39,200 on deferred tax assets in the Company's Brazilian manufacturing facility. The 2013 tax rate was also negatively impacted by the partially non-deductible Brazil goodwill impairment and the FCPA penalty charge.



28

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2013
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)




Segment Revenue and Operating Profit Summary
The following tables represent information regarding our revenue and operating profit by reporting segment for the years ended December 31:
North America:
 
2013
 
2012
 
$ Change
 
% Change
Revenue
 
$
1,415,050

 
$
1,590,532

 
$
(175,482
)
 
(11.0)
Segment operating profit
 
252,737

 
294,996

 
(42,259
)
 
(14.3)
Segment operating profit margin
 
17.9
%
 
18.5
%
 
 
 
 
The decrease in revenue and operating profit was driven by lower FSS product volume in the U.S. regional bank business associated with the expiration of the ADA compliance deadline in 2012. The product volume decrease in regional bank business caused a corresponding reduction in the service business specific to installation and professional services. These detriments were partially offset by lower compensation and commission related expense, savings realized from the Company's continued focus on cost structure, and margin improvement in the U.S. maintenance business resulting from restructuring initiatives and growth in the national bank business.
Asia Pacific:
 
2013
 
2012
 
$ Change
 
% Change
Revenue
 
$
479,129

 
$
427,542

 
$
51,587

 
12.1
Segment operating profit
 
62,760

 
62,414

 
346

 
0.6
Segment operating profit margin
 
13.1
%
 
14.6
%
 
 
 
 
Revenue growth resulted from higher product and service sales primarily within India and China. Operating profit remained neutral to prior year as higher service gross profit resulting from the increased sales and improved service margin performance was offset by a reduction in product gross profit and higher operating expense. Total product gross profit was negatively impacted by unfavorable customer mix and continued pricing pressure in the region.
Europe, Middle East and Africa:
 
2013
 
2012
 
$ Change
 
% Change
Revenue
 
$
362,167

 
$
325,489

 
$
36,678

 
11.3
Segment operating profit
 
44,507

 
28,659

 
15,848

 
55.3
Segment operating profit margin
 
12.3
%
 
8.8
%
 
 
 
 
Revenue increased from growth in Western Europe and the Middle East due in part to the Altus acquisition in Turkey, partially offset by a net decline in the rest of EMEA. The increase in operating profit resulted from higher product and service sales complemented by improved margins especially on the product side mainly due to favorable manufacturing performance resulting primarily from beneficial currency impact on material purchase prices. These favorable influences on operating profit were partially offset by higher selling and administrative expense.
Latin America:
 
2013
 
2012
 
$ Change
 
% Change
Revenue
 
$
241,770

 
$
258,079

 
$
(16,309
)
 
(6.3)
Segment operating profit
 
35,218

 
44,472

 
(9,254
)
 
(20.8)
Segment operating profit margin
 
14.6
%
 
17.2
%
 
 
 
 
Revenue declined as lower product sales, primarily due to decreased volume in Mexico and Venezuela, was partially offset by higher sales in the service business. Operating profit was negatively impacted by the net revenue decrease coupled with an overall gross margin decline and higher operating expense.
Brazil:
 
2013
 
2012
 
$ Change
 
% Change
Revenue
 
$
359,375

 
$
390,051

 
$
(30,676
)
 
(7.9)
Segment operating profit
 
6,321

 
3,304

 
3,017

 
91.3
Segment operating profit margin
 
1.8
%
 
0.8
%
 
 
 
 
The decrease in revenue included a net unfavorable currency impact of $36,722. Excluding the negative currency impact, revenue increased from higher FSS sales and growth in security revenue due to the GAS acquisition, partially offset by lower lottery and


29

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2013
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)




election systems sales. Operating profit increased as the benefit of lower operating expense outweighed the unfavorable impact of the total revenue decline between years.
Refer to note 19 to the consolidated financial statements, which is contained in Item 8 of this annual report on Form 10-K, for further details of segment revenue and operating profit.

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
Total financial self-service
2,311,901

 
2,137,545

 
174,356

 
8.2
Total security
623,637

 
605,502

 
18,135

 
3.0
Election and lottery systems
56,155

 
92,801

 
(36,646
)
 
(39.5)
Total customer revenues
$
2,991,693

 
$
2,835,848

 
$
155,845

 
5.5
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 segment highlights include the impact of foreign currency. NA 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 ADA compliance and a focus on deposit automation technology. With the expiration of the ADA compliance deadline, the rate of growth in regional sales has slowed and led to a higher concentration of national bank sales. EMEA decreased $20,085 or 5.8 percent driven by an unfavorable currency impact, particularly the euro and South African rand, partially offset with growth in South Africa compared to the prior year. Brazil FSS sales declined $13,540 or 3.9 percent due to unfavorable currency impact of $47,522, partially offset by higher volume. LA increased $22,769 or 12.9 percent due to higher volume across most of the geographies. AP increased $3,637 or 0.9 percent driven by higher volume in Thailand, partially offset by an unfavorable currency impact associated mostly with the Indian rupee.
The security sales increase resulted mainly from growth in LA of $12,742 or 27.9 percent associated with higher volume in Colombia and Chile. NA security sales increased $3,938 or 0.7 percent compared to the prior year. The improvement in NA security sales 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 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 by 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
318,772

 
316,329

 
2,443

 
0.8
Total gross profit
$
729,620

 
$
730,474

 
$
(854
)
 
(0.1)
 
 
 
 
 
 
 
 
Gross margin - services
25.3
%
 
26.7
%
 

 
 
Gross margin - products
23.4
%
 
24.6
%
 

 
 
Total gross margin
24.4
%
 
25.8
%
 

 
 

The decrease in total service gross margin for 2012 compared to 2011 was driven by margin decreases in each region with the exception of EMEA, which improved due to fewer net restructuring charges in 2012 paired with a favorable customer mix. NA was the primary driver of the margin decrease due to an increased competitive environment and associated pricing impact coupled with higher compensation and benefits, scrap and insurance charges. Brazil was also down from an increase in warranty expense


30

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2013
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)




combined with higher restructuring charges in 2012. Total service gross profit for 2012 included $6,226 of net restructuring charges compared to $10,678 of net restructuring charges in 2011.
  
The decrease in total product gross margin was driven by product and customer mix differences in Brazil, as well as continued pricing pressure in AP. Partially offsetting these decreases, NA product revenue was significantly higher in 2012 compared to 2011, which caused a favorable shift in revenue mix among the regions, improving product gross margin. Total product gross profit 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
$
527,729

 
$
504,436

 
$
23,293

 
4.6
Research, development and engineering expense
85,881

 
78,108

 
7,773

 
10.0
Impairment of assets
15,783

 
2,962

 
12,821

 
432.8
Gain on sale of assets, net
(1,202
)
 
(1,921
)
 
(719
)
 
(37.4)
Total operating expenses
$
628,191

 
$
583,585

 
44,606

 
7.6

The increase in selling and administrative expense 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 $41,542 and $16,480, respectively. Non-routine expenses in 2012 included $21,907 related to early pension buy-out payments made to certain deferred terminated vested participants and estimated losses of $16,750 related to the FCPA investigation. The non-routine expenses in 2011 pertained to legal, consultative and audit costs related to the global FCPA investigation as well as estimated losses of $3,250 related to this matter. 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. 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. 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
$
101,429

 
$
146,889

 
$
(45,460
)
 
(30.9)
Operating profit margin
3.4
%
 
5.2
%
 

 
 

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 partially offset by the benefit of higher volume. All of these items combined to produce a 1.8 percentage point decrease in operating profit margin in 2012 compared to 2011.


31

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2013
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, net
2,654

 
3,095

 
(441
)
 
(14.2)
Miscellaneous, net
(451
)
 
1,746

 
(2,197
)
 
(125.8)
Other income (expense)
$
9,466

 
$
12,048

 
(2,582
)
 
(21.4)

Investment income declined in 2012 from the influence of a net unfavorable currency impact. Interest expense in 2012 decreased compared to 2011 due to lower interest rates and favorable foreign exchange hedge activity.
 
Income from Continuing Operations
The following table represents information regarding our income from continuing operations, net of tax for the years ended December 31:
 
2012
 
2011
 
$ Change
 
% Change
Income from continuing operations, net of tax
$
82,670

 
$
150,909

 
$
(68,239
)
 
(45.2)
Percent of net sales
2.8
%
 
5.3
%
 

 
 
Effective tax rate
25.5
%
 
5.1
%
 

 
 

The decrease in income from continuing operations, net of tax 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 20.4 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 tables represent information regarding our revenue and operating profit by reporting segment for the years ended December 31:
North America:
 
2012
 
2011
 
$ Change
 
% Change
Revenue
 
$
1,590,532

 
$
1,405,018

 
$
185,514

 
13.2
Segment operating profit
 
294,996

 
276,546

 
18,450

 
6.7
Segment operating profit margin
 
18.5
%
 
19.7
%
 
 
 
 
The increase in revenue was primarily 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 revenue increases was a reduction in security product volume in the U.S. national bank business. Operating profit benefited from the higher net sales volume while being negatively impacted by an increase in operating expense and a decrease in total gross margin due in part to lower margin in traditional maintenance services related to competitive pricing and higher compensation and benefits, scrap, and insurance charges.


32

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2013
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)




Asia Pacific:
 
2012
 
2011
 
$ Change
 
% Change
Revenue
 
$
427,542

 
$
422,491

 
$
5,051

 
1.2
Segment operating profit
 
62,414

 
74,790

 
(12,376
)
 
(16.5)
Segment operating profit margin
 
14.6
%
 
17.7
%
 
 
 
 
Revenue increased due to a mix of revenue shifts among the AP countries with the most significant growth in Thailand. Operating profit decreased despite the revenue growth due to higher operating expense as well as service and product gross margin deterioration of which product declined principally due to continued pricing pressure.
Europe, Middle East and Africa:
 
2012
 
2011
 
$ Change
 
% Change
Revenue
 
$
325,489

 
$
345,534

 
$
(20,045
)
 
(5.8)
Segment operating profit
 
28,659

 
15,978

 
12,681

 
79.4
Segment operating profit margin
 
8.8
%
 
4.6
%
 
 
 
 
The revenue decrease, inclusive of a net unfavorable currency impact of $25,425, occurred among a majority of the countries within both the product and service businesses. The unfavorable impact of lower revenue on operating profit was more than offset by a significant decrease in operating expense and improved gross margins particularly in service.
Latin America:
 
2012
 
2011
 
$ Change
 
% Change
Revenue
 
$
258,079

 
$
222,568

 
$
35,511

 
16.0
Segment operating profit
 
44,472

 
40,425

 
4,047

 
10.0
Segment operating profit margin
 
17.2
%
 
18.2
%
 
 
 
 
The increase in revenue was due to higher FSS and security sales across most of the countries in the region. The volume gain paired with improved gross margin performance in the security business increased operating profit. These benefits to operating profit were partially offset by lower gross margin in the FSS business and higher selling and administrative expense.
Brazil:
 
2012
 
2011
 
$ Change
 
% Change
Revenue
 
$
390,051

 
$
440,237

 
$
(50,186
)
 
(11.4)
Segment operating profit
 
3,304

 
36,119

 
(32,815
)
 
(90.9)
Segment operating profit margin
 
0.8
%
 
8.2
%
 
 
 
 
Revenue was negatively impacted by net unfavorable currency impacts of $61,133. From an operational perspective, revenue increased $10,947 or 2.9 percent as higher FSS volume and lottery unit sales outweighed a decline in the election systems business. The decrease in operating profit resulted from customer and product mix differences, fewer election system sales compared to the prior year, higher warranty expense and unfavorable currency impact offset in part by the benefit of the GAS acquisition.
Refer to note 19 to the consolidated financial statements, which is contained in Item 8 of this annual report on Form 10-K, 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 any repurchases of the Company’s common shares for at least the next 12 months. At December 31, 2013, $468,109 or 98.8 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 payments for foreign and domestic taxes, excluding $15,986 that is available for repatriation with no additional tax expense because the Company has already provided for such 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,


33

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2013
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)




cash provided from operations, borrowings under available credit facilities, proceeds from debt or equity offerings and/or the issuance of common shares.

The Company's global liquidity as of December 31, 2013 and 2012 was as follows:
 
2013
 
2012
Cash and cash equivalents
$
230,709

 
$
368,792

Additional cash availability from:
 
 
 
Short-term uncommitted lines of credit
63,747

 
77,421

Five-year credit facility
261,000

 
200,000

Short-term investments
242,988

 
261,886

  Total global liquidity
$
798,444

 
$
908,099


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):
2013
 
2012
 
2011
Operating activities
$
124,224

 
$
135,508

 
$
215,397

Investing activities
(52,719
)
 
(72,831
)
 
(90,706
)
Financing activities
(204,449
)
 
(36,227
)
 
(123,535
)
Effect of exchange rate changes on cash and cash equivalents
(5,139
)
 
8,422

 
4,106

Net (decrease) increase in cash and cash equivalents
$
(138,083
)
 
$
34,872

 
$
5,262


During 2013, the Company generated $124,224 in cash from operating activities, a decrease of $11,284 from 2012. 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, 2013 compared to the year ended December 31, 2012 were negatively impacted by a $256,067 unfavorable change in net (loss) income, as well as unfavorable changes in prepaid income taxes, accounts payable, deferred income taxes and certain other assets and liabilities. These changes were partially offset by favorable changes in trade receivables, prepaid expenses, other current assets, deferred revenue and pension and post-retirement benefits.
Net cash used in investing activities was $52,719 in 2013, an improvement of $20,112 from 2012. The improvement was primarily due to a $14,295 reduction in capital expenditures, $28,292 paid for acquisitions in 2012 and a $4,179 increase in proceeds from sale of assets. These activities were partially offset by a $16,128 change in net investment security activity and a $9,856 reduction in collections on purchased finance receivables.
Net cash used in financing activities was $204,449 in 2013, an increase of $168,222 from 2012. The increase was primarily due to $126,670 of net debt repayments in 2013 compared to $23,625 of net debt borrowings in the prior year and an increase of $14,821 in distributions to noncontrolling interest holders.
Benefit Plans The Company expects to contribute $4,567 to its pension plans during the year ending December 31, 2014. Beyond 2014, minimum statutory funding requirements for the Company's U.S. pension plans may become significant. 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 post-retirement benefit plans are not required to be funded in advance. Payments are made as medical costs are incurred by covered retirees, and are principally dependent upon the future cost of retiree medical benefits under these plans. The Company expects the other post-retirement benefit plan payments to approximate $1,695 in 2014. Refer to note 12 to the consolidated financial statements, which is contained in Item 8 of this annual report on Form 10-K, for further discussion of the Company's pension and other post-retirement benefit plans.


34

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2013
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)




Dividends The Company paid dividends of $73,997, $72,830 and $72,901 in the years ended December 31, 2013, 2012 and 2011, respectively. Annualized dividends per share were $1.15, $1.14 and $1.12 for the years ended December 31, 2013, 2012 and 2011, respectively. The quarterly 2014 cash dividend represents $1.15 per share on an annualized basis.
Contractual Obligations The following table summarizes the Company’s approximate obligations and commitments to make future payments under contractual obligations as of December 31, 2013:
 
 
 
Payment due by period
 
Total
 
Less than 1 year
 
1-3 years
 
3-5 years
 
More than 5 years
Minimum operating lease obligations
$
112,586

 
$
36,216

 
$
43,550

 
$
16,676

 
$
16,144

Debt
524,033

 
43,791

 
416,666

 
63,576

 

Interest on debt (1)
45,212

 
16,232

 
24,700

 
4,280

 

Purchase commitments
17,355

 
17,355

 

 

 

Total
$
699,186

 
$
113,594

 
$
484,916

 
$
84,532

 
$
16,144

(1)
Amounts represent estimated contractual interest payments on outstanding long-term debt and notes payable. Rates in effect as of December 31, 2013 are used for variable rate debt.

At December 31, 2013, the Company also maintained uncertain tax positions of $16,545, 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, which is contained in Item 8 of this annual report on Form 10-K).

As of December 31, 2013, the Company had various short-term uncommitted lines of credit with borrowing limits of $106,809. The weighted-average interest rate on outstanding borrowings on the short-term uncommitted lines of credit as of December 31, 2013 and 2012 was 3.24 percent and 2.81 percent, respectively. The increase in the weighted-average interest rate is attributable to the change in mix of borrowings in foreign entities. Short-term uncommitted lines mature in less than one year. The amount available under the short-term uncommitted lines at December 31, 2013 was $63,747.

As of December 31, 2013, the Company had borrowing limits under its 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 subfacility. The weighted-average interest rate on outstanding credit facility borrowings as of December 31, 2013 and 2012 was 1.36 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 December 31, 2013 was $261,000. 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 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 borrowings under 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.

The Company’s financing agreements contain various restrictive financial covenants, including net debt to capitalization and net interest coverage ratios. As of December 31, 2013, 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, operating leases (refer to note 13 to the consolidated financial statements, which is contained in Item 8 of this annual report on Form 10-K) 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


35

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2013
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)




statements, which is contained in Item 8 of this annual report on Form 10-K, 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, which is contained in Item 8 of this annual report on Form 10-K, 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 post-retirement 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, which is contained in Item 8 of this annual report on Form 10-K. 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 post-retirement 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 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 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. This information is gathered from experience in customer negotiations, recent technological trends and the 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, excluding 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 cannot be 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.


36

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2013
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)




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, which is contained in Item 8 of this annual report on Form 10-K). 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 five reporting units are defined as Domestic and Canada, Brazil, LA, AP and 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 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 the 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, which is contained in Item 8 of this annual report on Form 10-K), 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


37

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2013
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)




unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market conditions.

During the third quarter of 2013, the Company performed an other-than-annual assessment for its Brazil reporting unit based on a two-step impairment test as a result of a reduced earnings outlook for the Brazil business unit. This was due to a deteriorating macro-economic outlook, structural changes to an auction-based purchasing environment and new competitors entering the market. The Company concluded that the goodwill within the Brazil reporting unit was partially impaired and recorded a $70,000 pre-tax, non-cash goodwill impairment charge. In the fourth quarter of 2013, the Brazil reporting unit was reviewed for impairment based on 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 addition, the remaining reporting units were reviewed based on a two-step test. These tests resulted in no additional impairment in any of the Company's reporting units. The Company concluded the AP reporting unit had excess fair value of approximately $23,000 or eight percent when compared to its carrying amount. The Domestic and Canada and LA reporting units had excess fair value greater than 100 percent when compared to their carrying amounts.

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. 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.

Long-Lived Assets 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, an impairment loss is recognized at that time to reduce the asset to the lower of its fair value or its net book value.

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 and undistributed earnings in certain jurisdictions. Deferred tax assets are reduced by a valuation allowance when, based upon the available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Determination of a valuation allowance involves estimates regarding the timing and amount of the reversal of taxable temporary differences, expected future taxable income and the impact of tax planning strategies. 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 acquisitions and 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 assesses its position with regard to tax exposures and records liabilities for these uncertain tax positions and any related interest and penalties, 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 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.





38

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of December 31, 2013
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)




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 Post-retirement 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 post-retirement benefits are not funded and the Company’s policy is to pay these benefits as they become due.

The following table represents assumed healthcare cost trend rates at December 31:
 
2013
 
2012
Healthcare cost trend rate assumed for next year
7.5
%
 
8.0
%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
5.0
%
 
4.2
%
Year that rate reaches ultimate trend rate
2019

 
2099


The healthcare trend rates are reviewed based upon the results of actual claims experience. The Company used healthcare cost trends of 7.5 percent and 8.0 percent in 2014 and 2013, respectively, decreasing to an ultimate trend of 5.0 percent in 2019 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
$
38

 
$
(35
)
Effect on other post-retirement benefit obligation
$
678

 
$
(624
)

RECENTLY ISSUED ACCOUNTING GUIDANCE
Refer to note 1 to the consolidated financial statements, which is contained in Item 8 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, 2013
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 further repatriate cash and cash equivalents and short-term investments residing in international t