DBD 3.31.2014 10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
__________________________________________________
Form 10-Q
__________________________________________________ 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 1-4879 
_________________________________________________
Diebold, Incorporated
(Exact name of registrant as specified in its charter)
_________________________________________________ 
Ohio
 
34-0183970
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification Number)
 
 
 
5995 Mayfair Road, PO Box 3077, North Canton, Ohio
 
44720-8077
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (330) 490-4000
__________________________________________________ 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x     No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
(Do not check if a smaller reporting company)
o
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
Number of shares of common stock outstanding as of April 30, 2014 was 64,595,131.


Table of Contents

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q

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


Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS
DIEBOLD, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
 
 
March 31,
2014

December 31,
2013
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents

$
217,198


$
230,709

Short-term investments

209,017


242,988

Trade receivables, less allowances for doubtful accounts of $25,365 and $24,872, respectively
 
475,532

 
447,239

Inventories
 
417,689

 
376,462

Deferred income taxes
 
102,156

 
110,165

Prepaid expenses
 
25,314

 
22,031

Prepaid income taxes
 
20,587

 
21,245

Other current assets
 
150,130

 
104,511

Total current assets
 
1,617,623

 
1,555,350

Securities and other investments
 
81,584

 
82,591

Property, plant and equipment, at cost
 
598,064

 
599,094

Less accumulated depreciation and amortization
 
438,539

 
438,199

Property, plant and equipment, net
 
159,525

 
160,895

Goodwill
 
181,864

 
179,828

Deferred income taxes
 
64,836

 
39,461

Finance lease receivables
 
130,591

 
74,516

Other assets
 
96,477

 
90,850

Total assets
 
$
2,332,500

 
$
2,183,491

LIABILITIES AND EQUITY
 
 
 
 
Current liabilities
 
 
 
 
Notes payable
 
$
78,968

 
$
43,791

Accounts payable
 
278,499

 
210,399

Deferred revenue
 
298,507

 
234,607

Payroll and other benefits liabilities
 
79,495

 
92,364

Other current liabilities
 
314,554

 
312,575

Total current liabilities
 
1,050,023

 
893,736

Long-term debt
 
457,076

 
480,242

Pensions and other benefits
 
116,716

 
118,674

Post-retirement and other benefits
 
19,595

 
19,282

Deferred income taxes
 
9,214

 
9,150

Other long-term liabilities
 
52,589

 
41,592

Commitments and contingencies
 

 

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

 

Common shares, $1.25 par value, 125,000,000 authorized shares, 79,076,885 and 78,618,517 issued shares, 64,487,964 and 64,068,047 outstanding shares, respectively
 
98,846

 
98,273

Additional capital
 
400,443

 
385,321

Retained earnings
 
713,896

 
722,743

Treasury shares, at cost (14,588,921 and 14,550,470 shares, respectively)
 
(556,559
)
 
(555,252
)
Accumulated other comprehensive loss
 
(46,375
)
 
(54,321
)
Total Diebold, Incorporated shareholders' equity
 
610,251

 
596,764

Noncontrolling interests
 
17,036

 
24,051

Total equity
 
627,287

 
620,815

Total liabilities and equity
 
$
2,332,500

 
$
2,183,491

See accompanying notes to condensed consolidated financial statements.

3

Table of Contents

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

 
 
Three Months Ended
 
 
March 31,
 
 
2014
 
2013
Net sales
 
 
 
 
Services
 
$
383,379

 
$
382,218

Products
 
304,914

 
251,293

 
 
688,293


633,511

Cost of sales
 
 
 
 
Services
 
275,225

 
296,911

Products
 
248,935

 
206,586

 
 
524,160

 
503,497

Gross profit
 
164,133

 
130,014

Selling and administrative expense
 
120,292

 
125,513

Research, development and engineering expense
 
20,070

 
21,030

Loss (gain) on sale of assets, net
 
492

 
(2,613
)
 
 
140,854

 
143,930

Operating profit (loss)
 
23,279


(13,916
)
Other income (expense)
 
 
 
 
Investment income
 
8,711

 
7,551

Interest expense
 
(6,918
)
 
(7,343
)
Foreign exchange loss, net
 
(11,957
)
 
(2,214
)
Miscellaneous, net
 
(1,435
)
 
(1,098
)
Income (loss) before taxes
 
11,680

 
(17,020
)
Income tax expense (benefit)
 
6,804

 
(3,138
)
Net income (loss)
 
4,876

 
(13,882
)
Net loss attributable to noncontrolling interests
 
(4,930
)
 
(436
)
Net income (loss) attributable to Diebold, Incorporated
 
$
9,806

 
$
(13,446
)
 
 
 
 
 
Basic weighted-average shares outstanding
 
64,254

 
63,311

Diluted weighted-average shares outstanding
 
64,809

 
63,311

 
 
 
 
 
Net income (loss) attributable to Diebold, Incorporated:
 
 
 
 
Basic earnings (loss) per share
 
$
0.15

 
$
(0.21
)
Diluted earnings (loss) per share
 
$
0.15

 
$
(0.21
)
See accompanying notes to condensed consolidated financial statements.


4

Table of Contents

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

 
 
Three Months Ended
 
 
March 31,
 
 
2014
 
2013
Net income (loss)
 
$
4,876

 
$
(13,882
)
Other comprehensive income, net of tax:
 
 
 
 
Translation adjustment
 
9,453

 
8,123

Foreign currency hedges (net of tax of $(860) and $101, respectively)
 
(1,597
)
 
186

Interest rate hedges:
 


 


Net gain recognized in other comprehensive income (net of tax of $93 and $111, respectively)
 
174

 
205

Reclassification adjustment for amounts recognized in net income (net of tax of $(30) and $(33), respectively)
 
(57
)
 
(60
)
 
 
117

 
145

Pension and other post-retirement benefits:
 
 
 
 
Net actuarial loss amortization (net of tax of $282 and $2,192, respectively)
 
525

 
3,335

Net prior service benefit amortization (net of tax of $(33) and $(41), respectively)
 
(63
)
 
(63
)
Curtailment loss (net of tax of $0 and $460, respectively)
 

 
699

 
 
462

 
3,971

Unrealized gain (loss) on securities, net:
 
 
 
 
Net loss recognized in other comprehensive income (net of tax of $(567) and $(8), respectively)
 
(1,034
)
 
(16
)
Reclassification adjustment for amounts recognized in net income (net of tax of $(18) and $(30), respectively)
 
(32
)
 
(56
)
 
 
(1,066
)
 
(72
)
Other
 

 
7

Other comprehensive income, net of tax
 
7,369

 
12,360

Comprehensive income (loss)
 
12,245

 
(1,522
)
Less: comprehensive loss attributable to noncontrolling interests
 
(5,507
)
 
(348
)
Comprehensive income (loss) attributable to Diebold, Incorporated
 
$
17,752

 
$
(1,174
)
See accompanying notes to condensed consolidated financial statements.

5

Table of Contents

DIEBOLD, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
 
 
Three Months Ended
 
 
March 31,
 
 
2014
 
2013
Cash flow from operating activities:
 
 
 
 
Net income (loss)
 
$
4,876

 
$
(13,882
)
Adjustments to reconcile net income (loss) to cash flow used in operating activities:
 
 
 
 
Depreciation and amortization
 
17,680

 
19,831

Share-based compensation
 
5,080

 
7,186

Excess tax benefits from share-based compensation
 
(158
)
 
(166
)
Devaluation of Venezuelan balance sheet
 
12,101

 
1,584

Loss (gain) on sale of assets, net
 
492

 
(2,613
)
Cash flow from changes in certain assets and liabilities:
 
 
 
 
Trade receivables
 
(33,666
)
 
4,848

Inventories
 
(42,482
)
 
(18,785
)
Prepaid expenses
 
(3,204
)
 
730

Prepaid income taxes
 
659

 
(10,826
)
Other current assets
 
(24,221
)
 
(30,450
)
Accounts payable
 
69,213

 
(11,739
)
Deferred revenue
 
64,810

 
35,419

Deferred income tax
 
(17,930
)
 

Finance lease receivables
 
(82,471
)
 
(10,437
)
Certain other assets and liabilities
 
(2,335
)
 
(2,430
)
Net cash used in operating activities
 
(31,556
)
 
(31,730
)
Cash flow from investing activities:
 
 
 
 
Proceeds from maturities of investments
 
210,147

 
113,939

Proceeds from sale of investments
 
305

 
3,854

Payments for purchases of investments
 
(169,188
)
 
(108,887
)
Proceeds from sale of assets
 
330

 
3,112

Capital expenditures
 
(7,316
)
 
(9,328
)
Collections on purchased finance receivables
 

 
1,678

Increase in certain other assets
 
(6,183
)
 
(4,039
)
Net cash provided by investing activities
 
28,095

 
329

Cash flow from financing activities:
 
 
 
 
Dividends paid
 
(18,653
)
 
(18,418
)
Revolving debt borrowings, net
 
4,125

 
108,000

Other debt borrowings
 
50,523

 
6,915

Other debt repayments
 
(42,760
)
 
(85,091
)
Distributions to noncontrolling interest holders
 
(1,508
)
 
(3,464
)
Excess tax benefits from share-based compensation
 
158

 
166

Issuance of common shares
 
10,615

 
98

Repurchase of common shares
 
(1,307
)
 
(1,685
)
Net cash provided by financing activities
 
1,193

 
6,521

Effect of exchange rate changes on cash and cash equivalents
 
(11,243
)
 
(3,769
)
Decrease in cash and cash equivalents
 
(13,511
)
 
(28,649
)
Cash and cash equivalents at the beginning of the period
 
230,709

 
368,792

Cash and cash equivalents at the end of the period
 
$
217,198

 
$
340,143

See accompanying notes to condensed consolidated financial statements.

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Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of March 31, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)



NOTE 1: CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of Diebold, Incorporated and its subsidiaries (collectively, the Company) have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States (GAAP); however, such information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary for a fair statement of the results for the interim periods.
The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. In addition, some of the Company’s statements in this Quarterly Report on Form 10-Q may involve risks and uncertainties that could significantly impact expected future results. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of results to be expected for the full year.
The Company has reclassified the presentation of certain prior-year information to conform to the current presentation.
The Company's Venezuelan operations consist of a fifty-percent owned subsidiary, which is consolidated. Venezuela is measured using the U.S. dollar as its functional currency because its economy is considered highly inflationary. On March 24, 2014, the Venezuelan government announced a currency exchange mechanism, SICAD 2, which yielded an exchange rate significantly higher than the rates established through the other regulated exchange mechanisms. Management has determined that it is unlikely that the Company will be able to convert bolivars under a currency exchange other than SICAD 2. On March 31, 2014, the Company remeasured its Venezuelan balance sheet using the SICAD 2 rate of 50.86 compared to the previous official government rate of 6.3, resulting in a decrease of $6,051 to the Company’s cash balance and net losses of $12,101 that were recorded within foreign exchange loss, net in the condensed consolidated statements of operations. In addition, as a result of the currency devaluation, the Company recorded a $4,073 lower of cost or market adjustment related to its service inventory within service cost of sales in the condensed consolidated statements of operations in the first quarter of 2014. In the future, if the Company converts bolivares at a rate other than the SICAD 2 rate, the Company may realize additional gains or losses that would be recorded in the statement of operations. The Company does not expect its Venezuelan operations to be a significant component of its consolidated revenue or operating profit in the last nine months of 2014.

Recently Adopted Accounting Guidance
In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU 2013-11), which requires entities to present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss (NOL) or tax credit carryforward whenever the NOL or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed. This accounting standard update requires entities to assess whether to net the unrecognized tax benefit with a deferred tax asset as of the reporting date. The adoption of this update did not have a material impact on the financial statements of the Company.

Recently Issued Accounting Guidance
In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (ASU 2014-08), which includes amendments that change the requirements for reporting discontinued operations and require additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results. Additionally, ASU 2014-08 requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets,liabilities, income, and expenses of discontinued operations. The guidance is effective for fiscal and interim periods beginning after December 15, 2014. The adoption of this update is not expected to have a material impact on the financial statements of the Company.





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Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of March 31, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)



NOTE 2: EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is based on the weighted-average number of common shares outstanding. Diluted earnings (loss) per share includes the dilutive effect of potential common shares outstanding. Under the two-class method of computing earnings (loss) per share, non-vested share-based payment awards that contain rights to receive non-forfeitable dividends are considered participating securities. The Company’s participating securities include restricted stock units (RSUs), deferred shares and shares that were vested, but deferred by the employee. The Company calculated basic and diluted earnings (loss) per share under both the treasury stock method and the two-class method. For the three months ended March 31, 2014 and 2013, there was no impact in the per share amounts calculated under the two methods. Accordingly, the treasury stock method is disclosed below.

The following represents amounts used in computing earnings (loss) per share and the effect on the weighted-average number of shares of dilutive potential common shares for the three months ended March 31:
 
 
2014
 
2013
Numerator:
 
 
 
 
Income (loss) used in basic and diluted earnings per share:
 
 
 
 
Net income (loss) attributable to Diebold, Incorporated
 
$
9,806

 
$
(13,446
)
Denominator (in thousands):
 
 
 
 
Weighted-average number of common shares used in basic earnings per share
 
64,254

 
63,311

Effect of dilutive shares (1)
 
555

 

Weighted-average number of shares used in diluted earnings per share
 
64,809

 
63,311

Net income (loss) attributable to Diebold, Incorporated:
 
 
 
 
Basic earnings (loss) per share
 
$
0.15

 
$
(0.21
)
Diluted earnings (loss) per share
 
$
0.15

 
$
(0.21
)
Anti-dilutive shares (in thousands):
 
 
 
 
Anti-dilutive shares not used in calculating diluted weighted-average shares
 
1,657

 
2,784

 
(1) Incremental shares of 659 thousand were excluded from the computation of diluted earnings (loss) per share for the three months ended March 31, 2013 because their effect is anti-dilutive due to the net loss attributable to Diebold, Incorporated.

























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Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of March 31, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


NOTE 3: EQUITY

The following table presents changes in shareholders' equity attributable to Diebold, Incorporated and the noncontrolling interests for the three months ended March 31:
 
 
2014
 
2013
Diebold, Incorporated shareholders' equity
 
 
 
 
Balance at beginning of period
 
$
596,764

 
$
809,963

Comprehensive income (loss) attributable to Diebold, Incorporated
 
17,752

 
(1,174
)
Common shares
 
573

 
545

Additional capital
 
15,122

 
13,628

Treasury shares
 
(1,307
)
 
(1,685
)
Dividends paid
 
(18,653
)
 
(18,418
)
Balance at end of period
 
$
610,251

 
$
802,859

 
 
 
 
 
Noncontrolling interests
 
 
 
 
Balance at beginning of period
 
$
24,051

 
$
35,348

Comprehensive loss attributable to noncontrolling interests
 
(5,507
)
 
(348
)
Distributions to noncontrolling interest holders
 
(1,508
)
 
(3,464
)
Balance at end of period
 
$
17,036

 
$
31,536


NOTE 4: ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table summarizes the changes in the Company’s accumulated other comprehensive loss (AOCI), net of tax, by component for the three months ended March 31, 2014:
 
 
Translation
 
Foreign Currency Hedges
 
Interest Rate Hedges
 
Pension and Other Post-retirement Benefits
 
Unrealized Gain on Securities, Net
 
Other
 
Accumulated Other Comprehensive Income
Balance at January 1, 2014
 
$
(2,409
)
 
$
(1,884
)
 
$
(960
)
 
$
(52,027
)
 
$
2,679

 
$
280

 
$
(54,321
)
Other comprehensive income before reclassifications (1)
 
10,030

 
(1,597
)
 
174

 

 
(1,034
)
 

 
7,573

Amounts reclassified from AOCI
 

 

 
(57
)
 
462

 
(32
)
 

 
373

Net current-period other comprehensive income (loss)
 
10,030

 
(1,597
)
 
117

 
462

 
(1,066
)
 

 
7,946

Balance at March 31, 2014
 
$
7,621

 
$
(3,481
)
 
$
(843
)
 
$
(51,565
)
 
$
1,613

 
$
280

 
$
(46,375
)
1) Other comprehensive income before reclassifications within the translation component excludes $(577) of translation attributable to noncontrolling interests.
 













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Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of March 31, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


The following table summarizes the details about amounts reclassified from AOCI for the three months ended March 31, 2014:
 
 
Amount Reclassified from AOCI
 
Affected Line Item in the Statement of Operations
Interest rate hedges (net of tax of $(30))
 
$
(57
)
 
Interest expense
Pension and post-retirement benefits:
 
 
 
 
Net actuarial loss amortization (net of tax of $282)
 
525

 
(1)
Net prior service benefit amortization (net of tax of $(33))
 
(63
)
 
(1)
 
 
462

 
 
Unrealized gain on securities, net (net of tax of $(18))
 
(32
)
 
Investment income
Total reclassifications for the period
 
$
373

 
 
1) Pension and other post-retirement benefits AOCI components are included in the computation of net periodic benefit cost (refer to note 12 to the condensed consolidated financial statements).

NOTE 5: SHARE-BASED COMPENSATION
The Company’s share-based compensation payments to employees are recognized based on their grant-date fair values during the period in which the employee is required to provide services in exchange for the award. Share-based compensation is recognized as a component of selling and administrative expense. Total share-based compensation expense was $5,080 and $7,186 for the three months ended March 31, 2014 and 2013, respectively. Share-based compensation expense for the three months ended March 31, 2013 included accelerated expense of $2,982 related to executive severance.

Options outstanding and exercisable as of March 31, 2014 under the Company’s 1991 Equity and Performance Incentive Plan (as Amended and Restated as of April 13, 2009) and changes during the three months ended March 31, 2014, were as follows:
    
 
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value (1)
 
 
(in thousands)
 
(per share)
 
(in years)
 
 
Outstanding at January 1, 2014
 
1,954

 
$
39.63

 
 
 
 
Expired or forfeited
 
(283
)
 
52.35

 
 
 
 
Exercised
 
(327
)
 
32.50

 

 
 
Granted
 
446

 
34.13

 
 
 
 
Outstanding at March 31, 2014
 
1,790

 
37.34

 
6
 
$
8,889

Options exercisable at March 31, 2014
 
1,018

 
40.30

 
4
 
3,902

Options vested and expected to vest at March 31, 2014 (2)
 
1,762

 
37.41

 
6
 
8,693

(1) The aggregate intrinsic value (the difference between the closing price of the Company’s common shares on the last trading day of the first quarter of 2014 and the exercise price, multiplied by the number of “in-the-money” options) that would have been received by the option holders had all option holders exercised their options on March 31, 2014. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s common shares.
(2) The options expected to vest are the result of applying the pre-vesting forfeiture rate assumption to total outstanding non-vested options.

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Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of March 31, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


The following table summarizes information on non-vested RSUs, performance shares and deferred shares for the three months ended March 31, 2014:
 
 
Number of
Shares
 
Weighted-Average
Grant-Date Fair
Value
 
 
(in thousands)
 
 
RSUs:
 
 
 
 
Non-Vested at January 1, 2014
 
499

 
$
32.28

Forfeited
 
(21
)
 
32.63

Vested
 
(128
)
 
32.74

Granted
 
257

 
34.19

Non-Vested at March 31, 2014
 
607

 
32.98

Performance Shares (1):
 
 
 
 
Non-Vested at January 1, 2014
 
542

 
$
37.10

Forfeited
 
(159
)
 
39.77

Granted
 
723

 
36.76

Non-Vested at March 31, 2014
 
1,106

 
36.50

Director Deferred Shares:
 
 
 
 
Non-Vested at March 31, 2014
 
30

 
$
29.73

Vested at March 31, 2014
 
116

 
34.88

Outstanding at March 31, 2014
 
146

 
33.81

(1)
Non-vested performance shares are based on a maximum potential payout. Actual shares granted at the end of the performance period may be less than the maximum potential payout level depending on achievement of performance share objectives. During the first quarter of 2014, the Company granted maximum performance shares of 432 thousand based on certain annual management objectives, as determined by the Board of Directors. These performance shares vest proportionately over a three-year period and have a grant-date fair value of $32.97.

NOTE 6: INCOME TAXES

The effective tax rate on the income (loss) before taxes was 58.3 percent and 18.4 percent for the three months ended March 31, 2014 and 2013, respectively. The increase is mainly due to the mix of income, discrete tax expense on prior year cash repatriation
and the 2013 rate benefit of 2012 and 2013 tax credits recorded in the first quarter of 2013 due to the retroactive reinstatement of the Federal Research and Development Tax Credit and the Look-Thru Rule for Related Controlled Foreign Corporations of Section 954(c)(6) of the Internal Revenue Code of 1986, as amended. Due to the expiration of these and other tax provisions at December 31, 2013, the tax benefits are not available for 2014, further impacting the effective tax rate.

NOTE 7: INVESTMENTS
The Company’s investments, primarily in Brazil, consist of certificates of deposit and U.S. dollar indexed bond funds, which are classified as available-for-sale and stated at fair value based upon quoted market prices and net asset values, respectively. Unrealized gains and losses are recorded in AOCI. Realized gains and losses are recognized in investment income and are determined using the specific identification method. Realized gain from the sale of securities were $50 and $86 for the three months ended March 31, 2014 and 2013, respectively. Proceeds from the sale of available-for-sale securities were $305 and $3,854 during the three months ended March 31, 2014 and 2013, respectively.


11

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of March 31, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


The Company’s investments, excluding cash surrender value of insurance contracts of $71,423 and $72,214 as of March 31, 2014 and December 31, 2013, respectively, consisted of the following:
 
 
Cost Basis
 
Unrealized Gain
 
Fair Value
As of March 31, 2014
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
Certificates of deposit
 
$
169,652

 
$

 
$
169,652

U.S. dollar indexed bond funds
 
38,301

 
1,064

 
39,365

 
 
$
207,953

 
$
1,064

 
$
209,017

Long-term investments:
 
 
 
 
 
 
Assets held in a rabbi trust
 
$
9,738

 
$
423

 
$
10,161

 
 
 
 
 
 
 
As of December 31, 2013
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
Certificates of deposit
 
$
215,010

 
$

 
$
215,010

U.S. dollar indexed bond funds
 
25,263

 
2,715

 
27,978

 
 
$
240,273

 
$
2,715

 
$
242,988

Long-term investments:
 
 
 
 
 
 
Assets held in a rabbi trust
 
$
10,085

 
$
292

 
$
10,377


NOTE 8: ALLOWANCE FOR CREDIT LOSSES
Trade Receivables The Company evaluates the collectability of trade receivables based on a percentage of sales related to historical loss experience. The Company will also record periodic adjustments for known events such as specific customer circumstances and changes in the aging of accounts receivable balances. After all efforts at collection have been unsuccessful, the account is deemed uncollectible and is written off.
Financing Receivables The Company evaluates the collectability of notes and finance lease receivables (collectively, financing receivables) on a customer-by-customer basis and evaluates specific customer circumstances, aging of invoices, credit risk changes, payment patterns and historical loss experience. When the collectability is determined to be at risk based on the above criteria, the Company records the allowance for credit losses, which represents the Company’s current exposure less estimated reimbursement from insurance claims. After all efforts at collection have been unsuccessful, the account is deemed uncollectible and is written off.
The following table summarizes the Company’s allowance for credit losses for the three months ended March 31, 2014 and 2013:

 
 
Finance
Leases
 
Notes
Receivable
 
Total
Allowance for credit losses
 
 
 
 
 
 
Balance at January 1, 2014
 
$
439

 
$
4,134

 
$
4,573

Provision for credit losses
 
8

 

 
8

Balance at March 31, 2014
 
$
447

 
$
4,134

 
$
4,581

 
 
 
 
 
 
 
Balance at January 1, 2013

$
525


$
2,047


$
2,572

Provision for credit losses

7




7

Recoveries

3




3

Write-offs

(75
)

(426
)

(501
)
Balance at March 31, 2013

$
460


$
1,621


$
2,081





12

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of March 31, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


The Company's allowance of $4,581 and $2,081 at March 31, 2014 and 2013, respectively, all resulted from individual impairment evaluation. As of March 31, 2014, finance leases and notes receivable individually evaluated for impairment were $202,559 and $14,128, respectively. As of March 31, 2013, balances of finance leases and notes receivable individually evaluated for impairment were $89,845 and $15,790, respectively. As of March 31, 2014 and December 31, 2013, the Company’s finance lease receivables in Brazil were $117,310 and $33,283, respectively. The increase related to customer financing arrangements within the education ministry.
The Company records interest income and any fees or costs related to financing receivables using the effective interest method over the term of the lease or loan. The Company reviews the aging of its financing receivables to determine past due and delinquent accounts. Credit quality is reviewed at inception and is re-evaluated as needed based on customer-specific circumstances. Receivable balances 60 days to 89 days past due are reviewed and may be placed on nonaccrual status based on customer-specific circumstances. Receivable balances are placed on nonaccrual status upon reaching greater than 89 days past due. Upon receipt of payment on nonaccrual financing receivables, interest income is recognized and accrual of interest is resumed once the account has been made current or the specific circumstances have been resolved.
As of March 31, 2014 and December 31, 2013, the recorded investment in past-due financing receivables on nonaccrual status was $2,924 and $1,670, respectively, and there were no recorded investments in finance receivables past due 90 days or more and still accruing interest. The recorded investment in impaired notes receivable was $4,134 as of March 31, 2014 and December 31, 2013, respectively, and was fully reserved. The following table summarizes the Company’s aging of past-due notes receivable balances:
 
 
March 31, 2014
 
December 31, 2013
30-59 days past due
 
$

 
$
85

60-89 days past due
 

 

> 89 days past due (1)
 
759

 

Total past due
 
$
759

 
$
85

(1) past-due notes receivable balances greater than 89 days as of March 31, 2014 are fully reserved.

NOTE 9: INVENTORIES
Major classes of inventories are summarized as follows:
 
 
March 31, 2014
 
December 31, 2013
Finished goods
 
$
206,711

 
$
167,577

Service parts
 
126,291

 
132,508

Raw materials and work in process
 
84,687

 
76,377

Total inventories
 
$
417,689

 
$
376,462

 
NOTE 10: GOODWILL AND OTHER ASSETS
Goodwill In 2013, goodwill was reviewed for impairment based on a two-step test. As a result of the 2013 Step I goodwill impairment test, the Company concluded the Asia Pacific (AP) reporting unit had excess fair value of approximately $23,000 or eight percent when compared to its carrying amount. The amount of goodwill in the Company’s AP reporting unit was $42,433 and $41,307 as of March 31, 2014 and December 31, 2013, respectively. As of December 31, 2013, the Domestic and Canada and LA reporting units had excess fair value significantly greater than their carrying amounts. There have been no impairment indicators identified during the three months ended March 31, 2014.

Other Assets Included in other assets are net capitalized software development costs of $39,303 and $40,235 as of March 31, 2014 and December 31, 2013, respectively. Amortization expense on capitalized software of $4,589 and $4,849 was included in product cost of sales for the three months ended March 31, 2014 and 2013, respectively. Other long-term assets also consist of patents, trademarks and other intangible assets. Where applicable, other assets are stated at cost and, if applicable, are amortized ratably over the relevant contract period or the estimated life of the assets. Fees to renew or extend the term of the Company’s intangible assets are expensed when incurred.


13

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of March 31, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


Impairment of long-lived assets is recognized when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the expected future undiscounted cash flows are less than the carrying amount of the asset group, an impairment loss may be recognized at that time to reduce the asset to the lower of its fair value or its net book value. There were no other asset impairments recorded by the Company in the three months ended March 31, 2014 and 2013.

NOTE 11: DEBT
Outstanding debt balances were as follows:
 
 
March 31, 2014
 
December 31, 2013
Notes payable:
 
 
 
 
Uncommitted lines of credit
 
$
78,255

 
$
43,062

Other
 
713

 
729

 
 
$
78,968

 
$
43,791

Long-term debt:
 
 
 
 
Credit facility
 
$
216,125

 
$
239,000

Senior notes
 
225,000

 
225,000

Industrial development revenue bonds
 
11,900

 
11,900

Other
 
4,051

 
4,342

 
 
$
457,076

 
$
480,242

As of March 31, 2014, the Company had various international short-term uncommitted lines of credit with borrowing limits of $111,543. The weighted-average interest rate on outstanding borrowings on the short-term uncommitted lines of credit as of March 31, 2014 and December 31, 2013 was 2.90 percent and 3.24 percent, respectively. The decrease in the weighted-average interest rate is attributable to the change in mix of borrowings in foreign entities. Short-term uncommitted lines mature in less than one year. The amount available under the short-term uncommitted lines at March 31, 2014 was $33,288.
As of March 31, 2014, the Company had borrowing limits under its credit facility totaling $500,000, which expires in June 2016. Under the terms of the credit facility, the Company has the ability, subject to various approvals, to increase the borrowing limits by $250,000. Up to $50,000 of the revolving credit facility is available under a swing line sub-facility. The weighted-average interest rate on outstanding credit facility borrowings as of March 31, 2014 and December 31, 2013 was 1.36 percent, which is variable based on the London Interbank Offered Rate (LIBOR). The amount available under the credit facility as of March 31, 2014 was $283,875.

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.
In 1997, industrial development revenue bonds were issued on behalf of the Company. The proceeds from the bond issuances were used to construct new manufacturing facilities in the United States. The Company guaranteed the payments of principal and interest on the bonds by obtaining letters of credit. The bonds were issued with a 20-year original term and are scheduled to mature in 2017. Each industrial development revenue bond carries a variable interest rate, which is reset weekly by the remarketing agents. The weighted-average interest rate on the bonds was 0.32 percent and 0.36 percent as of March 31, 2014 and December 31, 2013, respectively.
The Company’s financing agreements contain various restrictive financial covenants, including net debt to capitalization and net interest coverage ratios. As of March 31, 2014, the Company was in compliance with the financial and other covenants in its debt agreements.





14

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of March 31, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


NOTE 12: BENEFIT PLANS
The Company has qualified pension plans covering certain U.S. employees that have been closed to new participants since 2003. Plans that cover salaried employees provide pension benefits based on the employee’s compensation during the ten years before retirement. The Company’s funding policy for salaried plans is to contribute annually based on actuarial projections and applicable regulations. Plans covering hourly employees and union members generally provide benefits of stated amounts for each year of service. The Company’s funding policy for hourly plans is to make at least the minimum annual contributions required by applicable regulations. Employees of the Company’s operations in countries outside of the United States participate to varying degrees in local pension plans, which in the aggregate are not significant.
The Company has non-qualified pension plans to provide supplemental retirement benefits to certain officers. Benefits are payable at retirement based upon a percentage of the participant’s compensation, as defined. During the first quarter of 2013, the Company recognized a curtailment loss of $1,159 within selling and administrative expense as a result of the departure of certain executives officers.

In July 2013, the Company's board of directors approved the freezing of certain pension and supplemental executive retirement plan benefits effective as of December 31, 2013 for U.S.-based salaried employees.

In addition to providing pension benefits, the Company provides post-retirement healthcare and life insurance benefits (referred to as other benefits) for certain retired employees. Eligible employees may be entitled to these benefits based upon years of service with the Company, age at retirement and collective bargaining agreements. Currently, the Company has made no commitments to increase these benefits for existing retirees or for employees who may become eligible for these benefits in the future. Currently there are no plan assets and the Company funds the benefits as the claims are paid.
The following table sets forth the net periodic benefit cost for the Company’s defined benefit pension plans and other benefits for the three months ended March 31:
 
 
Pension Benefits
 
Other Benefits
 
 
2014
 
2013
 
2014
 
2013
Components of net periodic benefit cost
 
 
 
 
 
 
 
 
Service cost
 
$
732

 
$
3,331

 
$

 
$

Interest cost
 
5,750

 
6,957

 
157

 
157

Expected return on plan assets
 
(6,449
)
 
(8,803
)
 

 

Amortization of prior service (benefit) cost
 
(39
)
 
18

 
(57
)
 
(122
)
Recognized net actuarial loss
 
756

 
5,421

 
51

 
106

Curtailment loss
 

 
1,159

 

 

Net periodic pension benefit cost
 
$
750

 
$
8,083

 
$
151

 
$
141

Contributions
There have been no changes to the expected 2014 plan year contribution amounts previously disclosed. For the three months ended March 31, 2014 and 2013, contributions of $1,924 and $761, respectively, were made to the qualified and non-qualified pension plans.

NOTE 13: GUARANTEES AND PRODUCT WARRANTIES
In 1997, industrial development revenue bonds were issued on behalf of the Company. The Company guaranteed the payments of principal and interest on the bonds (refer to note 11) by obtaining letters of credit. The carrying value of the bonds was $11,900 as of March 31, 2014 and December 31, 2013, respectively.
The Company provides its global operations guarantees and standby letters of credit through various financial institutions to suppliers, customers, regulatory agencies and insurance providers. If the Company is not able to make payment or fulfill contractual obligations, the suppliers, customers, regulatory agencies and insurance providers may draw on the pertinent bank. At March 31, 2014, the maximum future payment obligations related to these various guarantees totaled $89,073, of which $26,035 represented standby letters of credit to insurance providers, and no associated liability was recorded. At December 31, 2013, the maximum

15

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of March 31, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


future payment obligations relative to these various guarantees totaled $87,104, of which $26,035 represented standby letters of credit to insurance providers, and no associated liability was recorded.
The Company provides its customers a manufacturer’s warranty and records, at the time of the sale, a corresponding estimated liability for potential warranty costs. Estimated future obligations due to warranty claims are based upon historical factors such as labor rates, average repair time, travel time, number of service calls per machine and cost of replacement parts.
Changes in the Company’s warranty liability balance are illustrated in the following table:
 
 
2014
 
2013
Balance at January 1
 
$
83,199

 
$
81,751

Current period accruals (1)
 
11,836

 
12,936

Current period settlements
 
(12,278
)
 
(13,011
)
Balance at March 31
 
$
82,757

 
$
81,676

(1)
Includes the impact of foreign exchange rate fluctuations.

NOTE 14: COMMITMENTS AND CONTINGENCIES

Contractual Obligations
At March 31, 2014, the Company had purchase commitments due within one year of $13,738 for materials through contract manufacturing agreements at negotiated prices.

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

At March 31, 2014, the Company was a party to several indirect tax claims from various taxing authorities globally that were incurred in the normal course of business, none of which individually or in the aggregate is considered material by management in relation to the Company’s financial position or results of operations. In management’s opinion, the condensed consolidated financial statements would not be materially affected by the outcome of these indirect tax claims and/or proceedings or asserted claims.

In addition to these routine indirect tax matters, the Company was a party to the proceeding described below:

In August 2012, one of the Company's Brazilian subsidiaries was notified of a tax assessment of approximately R$270,000, including penalties and interest, regarding certain Brazilian federal indirect taxes (Industrialized Products Tax, Import Tax, Programa de Integração Social and Contribution to Social Security Financing) for 2008 and 2009. The assessment alleges improper importation of certain components into Brazil's free trade zone that would nullify certain indirect tax incentives. On September 10, 2012, the Company filed its administrative defenses with the tax authorities. This proceeding is currently pending an administrative level decision, which could negatively impact Brazilian federal indirect taxes in other years that remain open under statute. It is reasonably possible that the Company could be required to pay taxes, penalties and interest related to this matter, which could be material to the Company's condensed consolidated financial statements. Additionally, in May 2013, the U.S. Securities and Exchange Commission (SEC) requested that the Company retain certain documents and produce certain records relating to the assessment, and the Company is complying with that request.

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

16

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of March 31, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


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.

At March 31, 2014 and December 31, 2013, the Company had an accrual of approximately $26,000 for certain indirect tax positions in both periods. A loss contingency is reasonably possible if it has a more than remote but less than probable chance of occurring. Although management believes the Company has valid defenses with respect to its indirect tax positions, it is reasonably possible that a loss could occur in excess of the estimated accrual, for which the Company estimated the aggregate risk at March 31, 2014 to be up to approximately $395,000 for its material indirect tax matters, which amounts includes the tax assessment discussed above. The aggregate risk related to indirect taxes will decrease on an annual basis as the applicable statutes of limitations expire.

Legal Contingencies
At March 31, 2014, 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 condensed consolidated financial statements would not be materially affected by the outcome of these legal proceedings, commitments or asserted claims.

NOTE 15: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company uses derivatives to mitigate the economic consequences associated with fluctuations in currencies and interest rates.
FOREIGN EXCHANGE
Net Investment Hedges The Company has international subsidiaries with net balance sheet positions that generate cumulative translation adjustments within AOCI. The Company uses derivatives to manage potential changes in value of its net investments in Brazil. The Company uses the forward-to-forward method for its quarterly retrospective and prospective assessments of hedge effectiveness. No ineffectiveness results if the notional amount of the derivative matches the portion of the net investment designated as being hedged because the Company uses derivative instruments with underlying exchange rates consistent with its functional currency and the functional currency of the hedged net investment. Changes in value that are deemed effective are accumulated in AOCI where they will remain until they are reclassified to income together with the gain or loss on the entire investment upon substantial liquidation of the subsidiary. The fair value of the Company’s net investment hedge contracts was $(2,429) and $313 as of March 31, 2014 and December 31, 2013, respectively. The net (loss) gain recognized in AOCI on net investment hedge derivative instruments was $(2,457) and $287 in the three months ended March 31, 2014 and 2013, respectively.
Non-Designated Hedges A substantial portion of the Company’s operations and revenues are international. As a result, changes in foreign exchange rates can create substantial foreign exchange gains and losses from the revaluation of non-functional currency monetary assets and liabilities. The Company’s policy allows the use of foreign exchange forward contracts with maturities of up to 24 months to mitigate the impact of currency fluctuations on those foreign currency asset and liability balances. The Company elected not to apply hedge accounting to its foreign exchange forward contracts. Thus, spot-based gains/losses offset revaluation gains/losses within foreign exchange loss, net and forward-based gains/losses represent interest expense. The fair value of the Company’s non-designated foreign exchange forward contracts was $(303) and $705 as of March 31, 2014 and December 31, 2013, respectively.







17

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of March 31, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


The following table summarizes the (loss) gain recognized on non-designated foreign-exchange derivative instruments for the three months ended March 31:

 
2014
 
2013
Interest expense
 
$
(1,430
)
 
$
(815
)
Foreign exchange loss, net
 
1,231

 
1,402

 
 
$
(199
)
 
$
587

INTEREST RATE
Cash Flow Hedges The Company has variable rate debt and is subject to fluctuations in interest related cash flows due to changes in market interest rates. The Company’s policy allows derivative instruments designated as cash flow hedges that fix a portion of future variable-rate interest expense. As of March 31, 2014, the Company had two pay-fixed receive-variable interest rate swaps, with a total notional amount of $50,000, to hedge against changes in the LIBOR benchmark interest rate on a portion of the Company’s LIBOR-based borrowings. Changes in value that are deemed effective are accumulated in AOCI and reclassified to interest expense when the hedged interest is accrued. To the extent that it becomes probable that the Company’s variable rate borrowings will not occur, the gains or losses on the related cash flow hedges will be reclassified from AOCI to interest expense. The fair value of the Company’s interest rate contracts was $(2,074) and $(2,351) as of March 31, 2014 and December 31, 2013, respectively.
In December 2005 and January 2006, the Company executed cash flow hedges by entering into receive-variable and pay-fixed interest rate swaps, with a total notional amount of $200,000, related to the senior notes issuance in March 2006. Amounts previously recorded in AOCI related to the pre-issuance cash flow hedges will continue to be reclassified on a straight-line basis through February 2016.

The gain recognized on designated cash flow hedge derivative instruments was $267 and $316 for the three months ended March 31, 2014 and 2013, respectively. Gains and losses related to interest rate contracts that are reclassified from AOCI are recorded in interest expense on the statements of operations. The Company anticipates reclassifying $970 from AOCI to interest expense within the next 12 months.

NOTE 16: RESTRUCTURING AND OTHER CHARGES
Restructuring Charges
The following table summarizes the impact of the Company’s restructuring charges (accrual adjustments) on the condensed consolidated statements of operations for the three months ended March 31:
 
 
2014
 
2013
Cost of sales – services
 
$
700

 
$
2,624

Cost of sales – products
 
14

 
139

Selling and administrative expense
 
4,465

 
5,887

Research, development and engineering expense
 
(42
)
 
853

Total
 
$
5,137

 
$
9,503














18

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of March 31, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


The following table summarizes the Company’s restructuring charges (accrual adjustments) by reporting segment for the three months ended March 31:
 
 
2014
 
2013
Severance
 
 
 
 
North America (NA)
 
$
2,138

 
$
9,528

Asia Pacific (AP)
 
255

 

Europe, Middle East and Africa (EMEA)
 
597

 
(98
)
Latin America (LA)
 
1,242

 

Brazil
 
905

 
12

Total Severance
 
5,137

 
9,442

 
 
 
 
 
Other
 
 
 
 
EMEA
 

 
61

Total Other
 

 
61

Total
 
$
5,137

 
$
9,503


During the first quarter of 2013, the Company announced a multi-year realignment plan. Certain aspects of this plan were previously disclosed under the Company's global realignment plan and global shared services plan. This multi-year realignment focuses on globalizing the Company's service organization and creating a unified center-led global organization for research and development, as well as transforming the Company's general and administrative cost structure. Restructuring charges of $5,137 and $9,503 for the three months ended March 31, 2014 and 2013, respectively, related to the Company's multi-year realignment plan. Restructuring charges for the three months ended March 31, 2014 primarily related to a business process outsourcing initiative. As of March 31, 2014, the Company anticipates additional restructuring costs of $9,000 to $12,000 to be incurred through the end of 2014, primarily within NA and EMEA. As management finalizes certain aspects of the realignment plan, the anticipated future costs related to this plan are subject to change. As of March 31, 2014, cumulative total restructuring costs for the multi-year realignment plan were $62,470, $2,814, $5,481, $1,694 and $8,603 in NA, AP, EMEA, LA and Brazil, respectively.

The following table summarizes the Company’s restructuring accrual balances and related activity:
 
 
2014
 
2013
Balance at January 1
 
$
35,289

 
$
11,844

Liabilities incurred
 
5,137

 
9,503

Liabilities paid/settled
 
(23,425
)
 
(5,994
)
Balance at March 31
 
$
17,001

 
$
15,353


Other Charges
Other charges consist of items that the Company has determined are non-routine in nature and are not expected to recur in future operations. Net non-routine expenses of $1,074 and $8,194 impacted the three months ended March 31, 2014 and 2013, respectively. Net non-routine expenses for 2013 consisted primarily of executive severance costs, including accelerated share-based compensation expense of $2,982 and non-routine income related to a gain on assets of $2,191 from the sale of certain U.S. manufacturing operations to a long-time supplier.










19

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of March 31, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


NOTE 17: FAIR VALUE OF ASSETS AND LIABILITIES
The Company measures its financial assets and liabilities using one or more of the following three valuation techniques:
Market approach – Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
Cost approach – Amount that would be required to replace the service capacity of an asset (replacement cost).
Income approach – Techniques to convert future amounts to a single present amount based upon market expectations.
The hierarchy that prioritizes the inputs to valuation techniques used to measure fair value is divided into three levels:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 – Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active or inputs, other than quoted prices in active markets, that are observable either directly or indirectly.
Level 3 – Unobservable inputs for which there is little or no market data.
 
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

Assets and Liabilities Recorded at Fair Value
Assets and liabilities subject to fair value measurement are as follows:
 
 
March 31, 2014
 
December 31, 2013
 
 
 
 
Fair Value Measurements Using
 
 
 
Fair Value Measurements Using
 
 
Fair Value
 
Level 1
 
Level 2
 
Fair Value
 
Level 1
 
Level 2
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
 
$
169,652

 
$
169,652

 
$

 
$
215,010

 
$
215,010

 
$

U.S. dollar indexed bond funds
 
39,365

 

 
39,365

 
27,978

 

 
27,978

Assets held in rabbi trusts
 
10,161

 
10,161

 

 
10,377

 
10,377

 

Foreign exchange forward contracts
 
96

 

 
96

 
1,382

 

 
1,382

Total
 
$
219,274

 
$
179,813

 
$
39,461

 
$
254,747

 
$
225,387


$
29,360

Liabilities
 

 
 
 
 
 
 
 
 
 
 
Deferred compensation
 
$
10,161

 
$
10,161

 
$

 
$
10,377

 
$
10,377

 
$

Foreign exchange forward contracts
 
2,828

 

 
2,828

 
364

 

 
364

Interest rate swaps
 
2,074

 

 
2,074

 
2,351

 

 
2,351

Total
 
$
15,063

 
$
10,161

 
$
4,902

 
$
13,092

 
$
10,377

 
$
2,715


The Company uses the end of period when determining the timing of transfers between levels. During the three months ended March 31, 2014, there were no transfers between levels.
Short-Term Investments The Company has investments in certificates of deposit that are recorded at cost, which approximates fair value. Additionally, the Company has investments in U.S. dollar indexed bond funds that are classified as available-for-sale and stated at fair value. U.S. dollar indexed bond funds are reported at net asset value, which is the practical expedient for fair value as determined by banks where funds are held.
Assets Held in Rabbi Trusts / Deferred Compensation The fair value of the assets held in rabbi trusts (refer to note 7) are derived from investments in a mix of money market, fixed income and equity funds managed by Bank of America/Merill Lynch. The related deferred compensation liability is recorded at fair value.



20

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of March 31, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


Foreign Exchange Forward Contracts A substantial portion of the Company’s operations and revenues are international. As a result, changes in foreign exchange rates can create substantial foreign exchange gains and losses from the revaluation of non-functional currency monetary assets and liabilities. The foreign exchange contracts are valued using the market approach based on observable market transactions of forward rates.
Interest Rate Swaps The Company has variable rate debt and is subject to fluctuations in interest-related cash flows due to changes in market interest rates. The Company’s policy allows it to periodically enter into derivative instruments designated as cash flow hedges to fix some portion of future variable rate-based interest expense. The Company executed two pay-fixed receive-variable interest rate swap to hedge against changes in the LIBOR benchmark interest rate on a portion of the Company’s LIBOR-based borrowings. The fair value of the swap is determined using the income approach and is calculated based on LIBOR rates at the reporting date.
Assets and Liabilities Not Measured at Fair Value on a Recurring Basis
In addition to assets and liabilities that are measured at fair value on a recurring basis, the Company also measures certain assets and liabilities at fair value on a nonrecurring basis. Our non-financial assets, including goodwill, intangible assets and property, plant and equipment, are measured at fair value when there is an indication of impairment. These assets are recorded at fair value, determined using level 3 inputs, only when an impairment charge is recognized.
Assets and Liabilities Recorded at Carrying Value
The fair value of the Company’s cash and cash equivalents, trade receivables and accounts payable, approximates the carrying value due to the relative short maturity of these instruments.
The fair value and carrying value of the Company’s debt instruments are summarized as follows:
 
 
March 31, 2014
 
December 31, 2013
 
 
Fair Value
 
Carrying
Value
 
Fair Value
 
Carrying
Value
Notes payable
 
$
78,968

 
$
78,968

 
$
43,791

 
$
43,791

Long-term debt
 
466,182

 
457,076

 
489,499

 
480,242

Total debt instruments
 
$
545,150

 
$
536,044

 
$
533,290

 
$
524,033

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


















21

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of March 31, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


NOTE 18: SEGMENT INFORMATION
The Company’s segments are comprised of five geographic segments: NA, AP, EMEA, LA and Brazil. The five geographic segments sell and service financial self-service and security systems around the globe, as well as elections, lottery and information technology solutions in Brazil, through wholly-owned subsidiaries, majority-owned joint ventures and independent distributors in most major countries.

Certain information not routinely used in the management of the segments, information not allocated back to the segments or information that is impractical to report is not shown. Total assets are not allocated to segments and are not included in the assessment of segment performance and therefore are excluded from the segment information disclosed below. The following tables represent information regarding the Company’s segment information and provides a reconciliation between segment operating profit and the condensed consolidated financial statements for the three months ended March 31:
 
 
2014
 
2013
Revenue summary by segment
 
 
 
 
NA
 
$
317,495

 
$
330,855

AP
 
107,136

 
112,183

EMEA
 
84,114

 
66,068

LA
 
48,950

 
45,692

Brazil
 
130,598

 
78,713

Total customer revenues
 
$
688,293

 
$
633,511

 
 
 
 
 
Intersegment revenues
 
 
 
 
NA
 
$
15,382

 
$
18,798

AP
 
23,845

 
16,136

EMEA
 
7,044

 
15,893

LA
 
124

 

Total intersegment revenues
 
$
46,395

 
$
50,827

 
 
 
 
 
Segment operating profit (loss)
 
 
 
 
NA
 
$
58,230

 
$
46,077

AP
 
16,779

 
13,707

EMEA
 
11,336

 
4,292

LA
 
1,536

 
5,270

Brazil
 
9,992

 
(1,152
)
Total segment operating profit
 
$
97,873

 
$
68,194

Corporate charges not allocated to segments (1)
 
(68,383
)
 
(64,413
)
Restructuring charges
 
(5,137
)
 
(9,503
)
Net non-routine expenses
 
(1,074
)
 
(8,194
)
 
 
(74,594
)
 
(82,110
)
Operating profit (loss)
 
$
23,279

 
$
(13,916
)

(1) Corporate charges not allocated to segments include headquarter based costs associated with manufacturing administration, procurement, human resources, finance and accounting, global development/engineering, global strategy/mergers and acquisitions, global information technology, tax, treasury and legal.


22

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of March 31, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


 
 
2014
 
2013
Segment property, plant and equipment, at cost
 
 
 
 
NA
 
$
134,880

 
$
155,599

AP
 
47,052

 
48,754

EMEA
 
40,761

 
38,731

LA
 
24,491

 
24,779

Brazil
 
60,974

 
73,753

Total segment property, plant and equipment, at cost
 
308,158

 
341,616

Corporate property plant and equipment, at cost, not allocated to segments
 
289,906

 
305,867

Total property, plant and equipment,at cost
 
$
598,064

 
$
647,483

 
 
 
 
 
Segment depreciation and amortization expense
 
 
 
 
NA
 
$
2,439

 
$
3,037

AP
 
1,858

 
1,882

EMEA
 
1,235

 
991

LA
 
761

 
847

Brazil
 
1,154

 
2,175

Total segment depreciation and amortization expense
 
7,447

 
8,932

Corporate depreciation and amortization expense
 
10,233

 
10,899

Total depreciation and amortization expense
 
$
17,680

 
$
19,831


The following table presents information regarding the Company’s revenue by service and product solution for the three months ended March 31:
Revenue summary by service and product solution
 
2014
 
2013
Financial self-service:
 
 
 
 
Services
 
$
284,955

 
$
280,283

Products
 
181,577

 
206,118

Total financial self-service
 
466,532

 
486,401

Security:
 
 
 
 
Services
 
98,424

 
101,935

Products
 
43,951

 
35,317

Total security
 
142,375

 
137,252

Total financial self-service & security
 
608,907

 
623,653

Brazil other
 
79,386

 
9,858



$
688,293


$
633,511



23

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of March 31, 2014
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and accompanying notes that appear elsewhere in this Quarterly Report on Form10-Q.
Introduction
Diebold, Incorporated and its subsidiaries (collectively, the Company) is a global leader in providing integrated services and software, financial self-service (FSS) delivery and security systems to primarily the financial, commercial, retail and other markets. Founded in 1859, the Company currently has approximately 16,000 employees with representation in more than 90 countries worldwide. The Company 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.

Diebold 2.0 - 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.

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.

24

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of March 31, 2014
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)

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 has taken 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 Automated Teller Machine (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.

As part of the transformation, the Company announced it is engaging Accenture to provide finance and accounting, human resources and procurement business process outsourcing services. The Company has signed this multi-year outsourcing agreement in an effort to create one global delivery model that enhances the quality, controls and efficiency of the Company’s integrated global business processes. The Company plans to utilize Accenture’s industry leading practices, technologies and global delivery network to establish more synchronized operational controls, improve operational transparency, lower spending and reduce costs.
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.

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 as well as adding convenience and additional security for the banks' customers. 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

25

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of March 31, 2014
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)

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. This 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 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 commercial 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 and marketing, 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 Company expects that 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 transforming the Company's general and administrative cost structure. Restructuring charges associated with the multi-year realignment plan were $5,137 and $9,503 for the three months ended March 31, 2014 and 2013, respectively. Restructuring charges for the three months ended March 31, 2014 primarily related to a business process outsourcing initiative.

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 Asia Pacific.



26

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of March 31, 2014
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)

RESULTS OF OPERATIONS

Net income (loss) attributable to Diebold, Incorporated for the three months ended March 31, 2014 was $9,806 or $0.15 per share, an increase of $23,252 and $0.36 per share, respectively, from the same period in 2013. Total revenue for the three months ended March 31, 2014 was $688,293, an increase of $54,782 compared to the same period in 2013.
The Company's Venezuelan operations consist of a fifty-percent owned subsidiary, which is consolidated. Venezuela is measured using the U.S. dollar as its functional currency because its economy is considered highly inflationary. On March 24, 2014, the Venezuelan government announced a currency exchange mechanism, SICAD 2, which yielded an exchange rate significantly higher than the rates established through the other regulated exchange mechanisms. Management has determined that it is unlikely that the Company will be able to convert bolivars under a currency exchange other than SICAD 2. On March 31, 2014, the Company remeasured its Venezuelan balance sheet using the SICAD 2 rate of 50.86 compared to the previous official government rate of 6.3, resulting in a decrease of $6,051 to the Company’s cash balance and net losses of $12,101 that were recorded within foreign exchange loss, net in the condensed consolidated statements of operations. In addition, as a result of the currency devaluation, the Company recorded a $4,073 lower of cost or market adjustment related to its service inventory within service cost of sales in the condensed consolidated statements of operations in the first quarter of 2014. In the future, if the Company converts bolivares at a rate other than the SICAD 2 rate, the Company may realize additional gains or losses that would be recorded in the statement of operations. The Company does not expect its Venezuelan operations to be a significant component of its consolidated revenue or operating profit in the last nine months of 2014.
The following discussion of the Company’s financial condition and results of operations provides information that will assist in understanding the financial statements and the changes in certain key items in those financial statements. The following discussion should be read in conjunction with the condensed consolidated financial statements and the accompanying notes that appear elsewhere in this Quarterly Report.
  
 
Three Months Ended
 
 
March 31,
  
 
2014
 
2013
 
 
Dollars
 
% of
Net sales
 
Dollars
 
% of
Net sales
Net sales
 
$
688,293

 
100.0

 
$
633,511

 
100.0

Gross profit
 
164,133

 
23.8

 
130,014

 
20.5

Operating expenses
 
140,854

 
20.5

 
143,930

 
22.7

Operating profit (loss)
 
23,279

 
3.4

 
(13,916
)
 
(2.2
)
Net income (loss)
 
4,876

 
0.7

 
(13,882
)
 
(2.2
)
Net loss attributable to noncontrolling interests
 
(4,930
)
 
(0.7
)
 
(436
)
 
(0.1
)
Net income (loss) attributable to Diebold, Incorporated
 
9,806

 
1.4

 
(13,446
)
 
(2.1
)

First Quarter 2014 Comparisons to First Quarter 2013

Net Sales
The following table represents information regarding our net sales three months ended March 31:
 
 
2014
 
2013
 
$ Change
 
% Change
Total financial self-service
 
466,532

 
486,401

 
(19,869
)
 
(4.1
)
Total security
 
142,375

 
137,252

 
5,123

 
3.7

Brazil other
 
79,386

 
9,858

 
69,528

 
705.3

Total customer revenue
 
$
688,293

 
$
633,511

 
$
54,782

 
8.6


FSS sales in the first quarter of 2014 decreased compared to the same period of 2013, including net unfavorable currency impact of $17,193 or 3.5 percent related mainly to the Brazilian real and Indian rupee. The following commentary concerning segment variances include the impact of foreign currency. North America (NA) decreased $22,783 or 10.7 percent due primarily to lower volume within the U.S. national bank business due in part to a large non-recurring project that favorably impacted the first quarter of 2013. Asia Pacific (AP) decreased $3,365 or 3.1 percent principally due to lower sales in China. Europe, Middle East and Africa

27

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of March 31, 2014
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)
(dollars in thousands, except per share amounts)

(EMEA) increased $18,053 or 27.3 percent from growth in multiple countries within Western Europe. Latin America (LA) increased $7,117 or 20.9 percent driven by higher volume in Mexico. Brazil decreased $18,891 or 28.8 percent, including $10,272 in unfavorable currency impact, due to declines in volume.
 
Security sales increased compared to the same period of 2013, as growth in the electronic security business more than offset a decline in physical security sales. From a regional perspective, total security sales increased due to growth in NA of $9,423 or 8.0 percent combined with improvement in Brazil driven by GAS. LA decreased $3,859 or 33.3 percent mainly from lower volume in Chile and Peru while AP declined due to the Company exiting the security market in Australia.

Brazil other increased $69,528 primarily related to deliveries of information technology (IT) equipment to the education ministry.

Gross Profit
The following table represents information regarding our gross profit for the three months ended March 31:

 
 
2014
 
2013
 
$ Change
 
% Change
Gross profit - services
 
$
108,154

 
$
85,307

 
$
22,847

 
26.8
Gross profit - products
 
55,979

 
44,707

 
11,272

 
25.2
Total gross profit
 
$
164,133

 
$
130,014

 
$
34,119

 
26.2
 
 
 
 
 
 
 
 
 
Gross margin – services
 
28.2
%
 
22.3
%
 
 
 
 
Gross margin – products
 
18.4
%
 
17.8
%
 
 
 
 
Total gross margin
 
23.8
%
 
20.5
%
 
 
 
 

Total service gross margin improved 5.9 percentage points to 28.2 percent compared with the first quarter of 2013. This increase was primarily driven by NA which benefited from lower employee related expense associated with restructuring initiatives implemented as part of the Company’s service transformation efforts, including the ongoing benefit from its pension freeze and voluntary early retirement program. Total service gross margin was also favorably impacted by margin improvements across each of the international regions except LA, which was adversely affected by a $4,073 lower of cost or market adjustment related to its service inventory as a result the Venezuelan currency devaluation. Total service gross profit in 2014 and 2013 included restructuring charges of $700 and $2,624, respectively.

The increase in total product gross margin resulted from additional volume and favorable product mix in Brazil coupled with higher sales in EMEA. Total product gross margin was negatively impacted by lower volume and margin deterioration in NA.

Operating Expenses
The following table represents information regarding our operating expenses for the three months ended March 31:
 
 
2014
 
2013
 
$ Change
 
% Change
Selling and administrative expense
 
$
120,292

 
$
125,513

 
$
(5,221
)
 
(4.2
)
Research, development and engineering expense
 
20,070

 
21,030

 
(960
)
 
(4.6
)
Loss (gain) on sale of assets, net
 
492

 
(2,613
)
 
3,105

 
118.8

Total operating expenses