DBD 6.30.2014 10Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
__________________________________________________
Form 10-Q
__________________________________________________ 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 31, 2014 was 64,608,372.




DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q

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




PART I – FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS
DIEBOLD, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
 
 
June 30,
2014

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

$
222,863


$
230,709

Short-term investments

152,970


242,988

Trade receivables, less allowances for doubtful accounts of $29,138 and $24,872, respectively
 
546,018

 
447,239

Inventories
 
481,314

 
376,462

Deferred income taxes
 
102,765

 
110,165

Prepaid expenses
 
25,335

 
22,031

Prepaid income taxes
 
17,579

 
21,245

Other current assets
 
169,153

 
104,511

Total current assets
 
1,717,997

 
1,555,350

Securities and other investments
 
82,675

 
82,591

Property, plant and equipment, at cost
 
599,495

 
599,094

Less accumulated depreciation and amortization
 
441,191

 
438,199

Property, plant and equipment, net
 
158,304

 
160,895

Goodwill
 
181,850

 
179,828

Deferred income taxes
 
65,352

 
39,461

Finance lease receivables
 
119,717

 
74,516

Other assets
 
89,013

 
90,850

Total assets
 
$
2,414,908

 
$
2,183,491

LIABILITIES AND EQUITY
 
 
 
 
Current liabilities
 
 
 
 
Notes payable
 
$
63,105

 
$
43,791

Accounts payable
 
296,724

 
210,399

Deferred revenue
 
277,246

 
234,607

Payroll and other benefits liabilities
 
93,461

 
93,845

Other current liabilities
 
331,556

 
311,094

Total current liabilities
 
1,062,092

 
893,736

Long-term debt
 
490,432

 
480,242

Pensions and other benefits
 
115,847

 
118,674

Post-retirement and other benefits
 
19,674

 
19,282

Deferred income taxes
 
9,423

 
9,150

Other long-term liabilities
 
48,697

 
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, 79,195,594 and 78,618,517 issued shares, 64,599,752 and 64,068,047 outstanding shares, respectively
 
98,994

 
98,273

Additional capital
 
409,213

 
385,321

Retained earnings
 
736,780

 
722,743

Treasury shares, at cost (14,595,842 and 14,550,470 shares, respectively)
 
(556,807
)
 
(555,252
)
Accumulated other comprehensive loss
 
(37,342
)
 
(54,321
)
Total Diebold, Incorporated shareholders' equity
 
650,838

 
596,764

Noncontrolling interests
 
17,905

 
24,051

Total equity
 
668,743

 
620,815

Total liabilities and equity
 
$
2,414,908

 
$
2,183,491

See accompanying notes to condensed consolidated financial statements.

3



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

 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2014
 
2013
 
2014
 
2013
Net sales
 
 
 
 
 
 
 
 
Services
 
$
409,819

 
$
413,216

 
$
793,198

 
$
795,434

Products
 
323,638

 
293,897

 
628,552

 
545,190

 
 
733,457

 
707,113

 
1,421,750


1,340,624

Cost of sales
 
 
 
 
 
 
 
 
Services
 
283,605

 
317,135

 
558,830

 
614,046

Products
 
263,057

 
232,562

 
511,992

 
439,148

 
 
546,662

 
549,697

 
1,070,822

 
1,053,194

Gross profit
 
186,795

 
157,416

 
350,928

 
287,430

Selling and administrative expense
 
121,006


157,205

 
241,298

 
282,718

Research, development and engineering expense
 
21,637


23,417

 
41,707

 
44,447

Impairment of assets
 


642

 

 
642

Gain on sale of assets, net
 
(13,050
)
 
(226
)
 
(12,558
)
 
(2,839
)
 
 
129,593

 
181,038

 
270,447

 
324,968

Operating profit (loss)
 
57,202

 
(23,622
)
 
80,481


(37,538
)
Other income (expense)
 
 
 
 
 
 
 
 
Investment income
 
9,935

 
6,814

 
18,646

 
14,365

Interest expense
 
(7,840
)
 
(6,766
)
 
(14,758
)
 
(14,109
)
Foreign exchange gain (loss), net
 
596

 
(2,216
)
 
(11,361
)
 
(4,430
)
Miscellaneous, net
 
1,308

 
309

 
(127
)
 
(789
)
Income (loss) before taxes
 
61,201

 
(25,481
)
 
72,881

 
(42,501
)
Income tax expense
 
18,070

 
78,371

 
24,874

 
75,233

Net income (loss)
 
43,131

 
(103,852
)
 
48,007

 
(117,734
)
Net income (loss) attributable to noncontrolling interests
 
1,496

 
1,183

 
(3,434
)
 
747

Net income (loss) attributable to Diebold, Incorporated
 
$
41,635

 
$
(105,035
)
 
$
51,441

 
$
(118,481
)
 
 
 
 
 
 
 
 
 
Basic weighted-average shares outstanding
 
64,588

 
63,700

 
64,424

 
63,509

Diluted weighted-average shares outstanding
 
65,224

 
63,700

 
65,018

 
63,509

 
 
 
 
 
 
 
 
 
Net income (loss) attributable to Diebold, Incorporated:
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
 
$
0.64

 
$
(1.65
)
 
$
0.80

 
$
(1.87
)
Diluted earnings (loss) per share
 
$
0.64

 
$
(1.65
)
 
$
0.79

 
$
(1.87
)
See accompanying notes to condensed consolidated financial statements.


4



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

 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2014
 
2013
 
2014
 
2013
Net income (loss)
 
$
43,131

 
$
(103,852
)
 
$
48,007

 
$
(117,734
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Translation adjustment
 
11,353

 
(54,625
)
 
20,806

 
(46,502
)
Foreign currency hedges (net of tax $(1,063), $1,336, $(1,923) and $1,437, respectively)
 
(1,975
)
 
2,482

 
(3,572
)
 
2,668

Interest rate hedges:
 


 


 


 


Net gain recognized in other comprehensive income (net of tax $79, $181, $172 and $292, respectively)
 
145

 
337

 
319

 
542

Reclassification adjustment for amounts recognized in net income (net of tax $(28), $(27), $(58) and $(60), respectively)
 
(52
)
 
(51
)
 
(109
)
 
(111
)
 
 
93

 
286

 
210

 
431

Pension and other post-retirement benefits:
 
 
 
 
 
 
 
 
Net actuarial loss amortization (net of tax $282, $1,940, $564 and $4,132, respectively)
 
524

 
3,600

 
1,049

 
6,935

Net prior service benefit amortization (net of tax $(34), $(36), $(67) and $(77), respectively)
 
(61
)
 
(67
)
 
(124
)
 
(130
)
Curtailment loss (net of tax $0, $0, $0 and $460, respectively)
 

 

 

 
699

 
 
463

 
3,533

 
925

 
7,504

Unrealized (loss) gain on securities, net:
 
 
 
 
 
 
 
 
Net (loss) income recognized in other comprehensive income (net of tax $(216), $1,063, $(783) and $1,055, respectively)
 
(433
)
 
2,066

 
(1,467
)
 
2,050

Reclassification adjustment for amounts recognized in net income (net of tax $(237), $(35), $(255) and $(65), respectively)
 
(445
)
 
(71
)
 
(477
)
 
(127
)
 
 
(878
)
 
1,995

 
(1,944
)
 
1,923

Other
 

 
7

 

 
14

Other comprehensive income (loss), net of tax
 
9,056

 
(46,322
)
 
16,425

 
(33,962
)
Comprehensive income (loss)
 
52,187

 
(150,174
)
 
64,432

 
(151,696
)
Less: comprehensive income (loss) attributable to noncontrolling interests
 
1,519

 
1,429

 
(3,988
)
 
1,081

Comprehensive income (loss) attributable to Diebold, Incorporated
 
$
50,668

 
$
(151,603
)
 
$
68,420

 
$
(152,777
)
See accompanying notes to condensed consolidated financial statements.

5



DIEBOLD, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
 
 
Six Months Ended
 
 
June 30,
 
 
2014
 
2013
Cash flow from operating activities:
 
 
 
 
Net income (loss)
 
$
48,007

 
$
(117,734
)
Adjustments to reconcile net income (loss) to cash flow used in operating activities:
 
 
 
 
Depreciation and amortization
 
36,719

 
42,194

Share-based compensation
 
10,379

 
10,470

Excess tax benefits from share-based compensation
 
(255
)
 
(246
)
Devaluation of Venezuelan balance sheet
 
12,101

 
1,584

Gain on sale of assets, net
 
(12,558
)
 
(2,839
)
Impairment of assets
 

 
642

Cash flow from changes in certain assets and liabilities:
 
 
 
 
Trade receivables
 
(100,600
)
 
(44,757
)
Inventories
 
(101,246
)
 
(62,302
)
Prepaid expenses
 
(4,464
)
 
6,759

Prepaid income taxes
 
3,667

 
(30,257
)
Other current assets
 
(35,092
)
 
(51,948
)
Accounts payable
 
87,049

 
23,089

Deferred revenue
 
42,776

 
12,410

Deferred income tax
 
(18,462
)
 
86,198

Finance lease receivables
 
(71,884
)
 
(15,764
)
Certain other assets and liabilities
 
12,088

 
79,076

Net cash used in operating activities
 
(91,775
)
 
(63,425
)
Cash flow from investing activities:
 
 
 
 
Proceeds from maturities of investments
 
300,464

 
225,389

Proceeds from sale of investments
 
31,047

 
8,790

Payments for purchases of investments
 
(230,454
)
 
(233,374
)
Proceeds from sale of assets
 
17,555

 
3,828

Capital expenditures
 
(18,350
)
 
(18,156
)
Collections on purchased finance receivables
 

 
3,066

Increase in certain other assets
 
(8,003
)
 
(6,981
)
Net cash provided by (used in) investing activities
 
92,259

 
(17,438
)
Cash flow from financing activities:
 
 
 
 
Dividends paid
 
(37,404
)
 
(36,919
)
Revolving debt borrowings, net
 
20,040

 
111,000

Other debt borrowings
 
95,445

 
21,104

Other debt repayments
 
(86,071
)
 
(101,076
)
Distributions to noncontrolling interest holders
 
(2,158
)
 
(3,464
)
Excess tax benefits from share-based compensation
 
255

 
246

Issuance of common shares
 
14,234

 
9,841

Repurchase of common shares
 
(1,555
)
 
(1,967
)
Net cash provided by (used in) financing activities
 
2,786

 
(1,235
)
Effect of exchange rate changes on cash and cash equivalents
 
(11,116
)
 
(4,125
)
Decrease in cash and cash equivalents
 
(7,846
)
 
(86,223
)
Cash and cash equivalents at the beginning of the period
 
230,709

 
368,792

Cash and cash equivalents at the end of the period
 
$
222,863

 
$
282,569

See accompanying notes to condensed consolidated financial statements.

6

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 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 and six months ended June 30, 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 gain (loss), net in the condensed consolidated statements of operations in the first quarter of 2014. 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 bolivars 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's Venezuelan operations represented less than one percent of the Company's total assets as of June 30, 2014 and less than one percent of net sales for both the three and six months ended June 30, 2014. The Company does not expect its Venezuelan operations to be a significant component of its consolidated revenue or operating profit for the remainder of 2014.

In the second quarter of 2014, the Company divested its Diebold Eras, Incorporated (Eras) subsidiary for a sale price of $20,000, including installment payments of $1,000 on the first and second year anniversary dates of the closing. This sale resulted in a gain of $13,709 recognized within gain on sale of assets, net in the condensed consolidated statement of operations. Revenue and operating profit in the six months ended June 30, 2014 related to this divested subsidiary were $6,011 and $2,970, respectively, and are included within the North America (NA) segment. Net income before taxes related to this divested subsidiary are included in continuing operations and were $2,050 and $1,036 for the three months ended June 30, 2014 and 2013, respectively, and $2,978 and $2,084 for the six months ended June 30, 2014 and 2013, respectively.

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.

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

7

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


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. In the second quarter of 2014, the Company elected to early adopt ASU 2014-08. The adoption of this update did not have a material impact on the financial statements of the Company.

Recently Issued Accounting Guidance
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

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 and six months ended June 30, 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:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2014
 
2013
 
2014
 
2013
Numerator:
 
 
 
 
 
 
 
 
Income (loss) used in basic and diluted earnings per share:
 
 
 
 
 
 
 
 
Net income (loss) attributable to Diebold, Incorporated
 
$
41,635

 
$
(105,035
)
 
$
51,441

 
$
(118,481
)
Denominator (in thousands):
 
 
 
 
 
 
 
 
Weighted-average number of common shares used in basic earnings per share
 
64,588

 
63,700

 
64,424

 
63,509

Effect of dilutive shares (1)
 
636

 

 
594

 

Weighted-average number of shares used in diluted earnings per share
 
65,224

 
63,700

 
65,018

 
63,509

Net income (loss) attributable to Diebold, Incorporated:
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
 
$
0.64

 
$
(1.65
)
 
$
0.80

 
$
(1.87
)
Diluted earnings (loss) per share
 
$
0.64

 
$
(1.65
)
 
$
0.79

 
$
(1.87
)
Anti-dilutive shares (in thousands):
 
 
 
 
 
 
 
 
Anti-dilutive shares not used in calculating diluted weighted-average shares
 
1,022

 
2,538

 
1,214

 
2,598

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






8

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 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:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2014
 
2013
 
2014
 
2013
Diebold, Incorporated shareholders' equity
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
610,251

 
$
802,859

 
$
596,764

 
$
809,963

Comprehensive income (loss) attributable to Diebold, Incorporated
 
50,668

 
(151,603
)
 
68,420

 
(152,777
)
Common shares
 
148

 
178

 
721

 
723

Additional capital
 
8,770

 
5,961

 
23,892

 
19,589

Treasury shares
 
(248
)
 
(283
)
 
(1,555
)
 
(1,968
)
Dividends paid
 
(18,751
)
 
(18,501
)
 
(37,404
)
 
(36,919
)
Balance at end of period
 
$
650,838

 
$
638,611

 
$
650,838

 
$
638,611

 
 
 
 
 
 
 
 
 
Noncontrolling interests
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
17,036

 
$
31,536

 
$
24,051

 
$
35,348

Comprehensive income (loss) attributable to noncontrolling interests
 
1,519

 
1,429

 
(3,988
)
 
1,081

Distributions to noncontrolling interest holders
 
(650
)
 

 
(2,158
)
 
(3,464
)
Balance at end of period
 
$
17,905

 
$
32,965

 
$
17,905

 
$
32,965


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 June 30, 2014:
 
 
Translation
 
Foreign Currency Hedges
 
Interest Rate Hedges
 
Pension and Other Post-retirement Benefits
 
Unrealized Gain (Loss) on Securities, Net
 
Other
 
Accumulated Other Comprehensive Loss
Balance at March 31, 2014
 
$
7,621

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

 
$
280

 
$
(46,375
)
Other comprehensive income (loss) before reclassifications (1)
 
11,330

 
(1,975
)
 
145

 

 
(433
)
 

 
9,067

Amounts reclassified from AOCI
 

 

 
(52
)
 
463

 
(445
)
 

 
(34
)
Net current-period other comprehensive income (loss)
 
11,330

 
(1,975
)
 
93

 
463

 
(878
)
 

 
9,033

Balance at June 30, 2014
 
$
18,951

 
$
(5,456
)
 
$
(750
)
 
$
(51,102
)
 
$
735

 
$
280

 
$
(37,342
)
(1) Other comprehensive income (loss) before reclassifications within the translation component excludes $23 of translation attributable to noncontrolling interests.
 










9

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


The following table summarizes the changes in the Company’s AOCI, net of tax, by component for the six months ended June 30, 2014:
 
 
Translation
 
Foreign Currency Hedges
 
Interest Rate Hedges
 
Pension and Other Post-retirement Benefits
 
Unrealized Gain (Loss) on Securities, Net
 
Other
 
Accumulated Other Comprehensive Loss
Balance at January 1, 2014
 
$
(2,409
)
 
$
(1,884
)
 
$
(960
)
 
$
(52,027
)
 
$
2,679

 
$
280

 
$
(54,321
)
Other comprehensive income (loss) before reclassifications (1)
 
21,360

 
(3,572
)
 
319

 

 
(1,467
)
 

 
16,640

Amounts reclassified from AOCI
 

 

 
(109
)
 
925

 
(477
)
 

 
339

Net current-period other comprehensive income (loss)
 
21,360

 
(3,572
)
 
210

 
925

 
(1,944
)
 

 
16,979

Balance at June 30, 2014
 
$
18,951

 
$
(5,456
)
 
$
(750
)
 
$
(51,102
)
 
$
735

 
$
280

 
$
(37,342
)
(1) Other comprehensive income (loss) before reclassifications within the translation component excludes $(554) of translation attributable to noncontrolling interests.
 
The following table summarizes the details about amounts reclassified from AOCI:
 
 
Three Months Ended
 
Six Months Ended
 
 
 
 
June 30, 2014
 
June 30, 2014
 
 
 
 
Amount Reclassified from AOCI
 
Amount Reclassified from AOCI
 
Affected Line Item in the Statement of Operations
Interest rate hedges (net of tax of $(28) and $(58), respectively)
 
(52
)
 
(109
)
 
Interest expense
Pension and post-retirement benefits:
 
 
 
 
 
 
Net actuarial loss amortization (net of tax of $282 and $564, respectively)
 
524

 
1,049

 
(1)
Net prior service benefit amortization (net of tax of $(34) and $(67), respectively)
 
(61
)
 
(124
)
 
(1)
 
 
463

 
925

 
 
Unrealized gain on securities, net (net of tax of $(237) and $(255), respectively)
 
(445
)
 
(477
)
 
Investment income
Total reclassifications for the period
 
$
(34
)
 
$
339

 
 
(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 $5,299 and $3,284 for the three months ended June 30, 2014 and 2013, respectively, and $10,379 and $10,470 for the six months ended June 30, 2014 and 2013, respectively. Share-based compensation expense for the six months ended June 30, 2013 included accelerated expense of $2,982 related to executive severance.









10

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


Options outstanding and exercisable as of June 30, 2014 under the Company’s 1991 Equity and Performance Incentive Plan (as Amended and Restated as of April 13, 2009) (the 1991 Plan) and changes during the six months ended June 30, 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
 
(329
)
 
51.83

 
 
 
 
Exercised
 
(431
)
 
33.05

 

 
 
Granted
 
446

 
34.13

 
 
 
 
Outstanding at June 30, 2014
 
1,640

 
37.19

 
6
 
$
8,703

Options exercisable at June 30, 2014
 
909

 
40.18

 
4
 
3,798

Options vested and expected to vest at June 30, 2014 (2)
 
1,613

 
37.26

 
6
 
8,505

(1)
The aggregate intrinsic value (the difference between the closing price of the Company’s common shares on the last trading day of the second quarter of 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 June 30, 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.

The following table summarizes information on non-vested RSUs and performance shares for the six months ended June 30, 2014:
 
 
Number of
Shares
 
Weighted-Average
Grant-Date Fair
Value
 
 
(in thousands)
 
 
RSUs:
 
 
 
 
Non-Vested at January 1, 2014
 
499

 
$
32.28

Forfeited
 
(40
)
 
32.99

Vested
 
(131
)
 
32.77

Granted (1)
 
299

 
34.98

Non-Vested at June 30, 2014
 
627

 
33.42

Performance Shares (2):
 
 
 
 
Non-Vested at January 1, 2014
 
542

 
$
37.10

Forfeited
 
(171
)
 
39.67

Granted (3)
 
746

 
38.09

Non-Vested at June 30, 2014
 
1,117

 
37.38

(1)
The RSUs granted during the six months ended June 30, 2014 include 35 thousand one-year RSUs to non-employee directors under the 1991 Plan. These RSUs have a weighted-average grant-date fair value of $39.35.
(2)
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. Performance shares are based on certain annual management objectives, as determined by the Board of Directors.
(3)
The maximum performance shares granted during the six months ended June 30, 2014 include 455 thousand which vest proportionately over a three-year period and have a weighted-average grant-date fair value of $35.35.

As of June 30, 2014, there were 143 thousand director deferred shares vested and outstanding.








11

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


NOTE 6: INCOME TAXES
The effective tax rate on income was 29.5 percent for the three months ended June 30, 2014 and the effective tax rate on the loss was (307.6) percent for the three months ended June 30, 2013. The second quarter 2014 tax rate benefited from a $2,439 release of a valuation allowance against excess capital losses utilized against capital gains from the sale of Eras. The negative tax rate for 2013 is a result of tax expense of approximately $47,000 related to the repatriation of previously undistributed earnings and the establishment of a valuation allowance of approximately $39,200 on deferred tax assets in the Company’s Brazilian manufacturing facility, both of which occurred in the second quarter of 2013.
The effective tax rate on income was 34.1 percent for the six months ended June 30, 2014 and the effective tax rate on the loss was (177.0) percent for the six months ended June 30, 2013. The tax rate for the six months ended June 30, 2014 reflects tax on foreign entities not permanently reinvested and the negative impact from the December 31, 2013 expiration of the Federal Research and Development Tax Credit and the Look-Thru Rule for Related Controlled Foreign Corporations under Section 954(c)(6) of the Internal Revenue Code of 1986, as amended.
The Internal Revenue Service (IRS) completed its examination of the Company’s U.S. federal income tax returns for the years 2008-2010 and has issued a Revenue Agent’s Report (RAR) that includes various proposed adjustments, including adjustments related to transfer pricing. The net tax deficiency, excluding interest, associated with the RAR is $6,300 after net operating loss utilization. In May 2014, the Company filed a protest challenging proposed adjustments contained in the RAR and will pursue resolution of these issues with the Appeals Division of the IRS. The time frame for the appeals process has not yet been established. The Company believes it has adequately provided for any related uncertain tax positions.

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 gains from the sale of securities were $682 and $106 for the three months ended June 30, 2014 and 2013, respectively, and $732 and $192 for the six months ended June 30, 2014 and 2013, respectively. Proceeds from the sale of available-for-sale securities were $31,047 and $8,790 during the six months ended June 30, 2014 and 2013, respectively.

The Company’s investments, excluding cash surrender value of insurance contracts of $72,660 and $72,214 as of June 30, 2014 and December 31, 2013, respectively, consisted of the following:
 
 
Cost Basis
 
Unrealized (Loss) Gain
 
Fair Value
As of June 30, 2014
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
Certificates of deposit
 
$
144,273

 
$

 
$
144,273

U.S. dollar indexed bond funds
 
8,963

 
(266
)
 
8,697

 
 
$
153,236

 
$
(266
)
 
$
152,970

Long-term investments:
 
 
 
 
 
 
Assets held in a rabbi trust
 
$
9,285

 
$
730

 
$
10,015

 
 
 
 
 
 
 
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




12

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


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 six months ended June 30, 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
 
114

 

 
114

Write-offs
 
(227
)
 

 
(227
)
Balance at June 30, 2014
 
$
326

 
$
4,134

 
$
4,460

 
 
 
 
 
 
 
Balance at January 1, 2013

$
525


$
2,047


$
2,572

Provision for credit losses

7




7

Recoveries

3




3

Write-offs

(90
)

(2,047
)

(2,137
)
Balance at June 30, 2013

$
445


$


$
445


The Company's allowance of $4,460 and $445 at June 30, 2014 and 2013, respectively, all resulted from individual impairment evaluation. As of June 30, 2014, finance leases and notes receivable individually evaluated for impairment were $194,791 and $18,923, respectively. As of June 30, 2013, finance leases and notes receivable individually evaluated for impairment were $90,490 and $14,428, respectively. As of June 30, 2014 and December 31, 2013, the Company’s finance lease receivables in Brazil were $123,162 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 June 30, 2014 and December 31, 2013, the recorded investment in past-due financing receivables on nonaccrual status was $1,287 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 June 30, 2014 and December 31, 2013 and was fully reserved.




13

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


The following table summarizes the Company’s aging of past-due notes receivable balances:
 
 
June 30, 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 June 30, 2014 are fully reserved.

NOTE 9: INVENTORIES
Major classes of inventories are summarized as follows:
 
 
June 30, 2014
 
December 31, 2013
Finished goods
 
$
238,493

 
$
167,577

Service parts
 
133,748

 
132,508

Raw materials and work in process
 
109,073

 
76,377

Total inventories
 
$
481,314

 
$
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 $43,005 and $41,307 as of June 30, 2014 and December 31, 2013, respectively. As of December 31, 2013, the Domestic and Canada and Latin America (LA) reporting units had excess fair value significantly greater than their carrying amounts. There have been no impairment indicators identified during the six months ended June 30, 2014.

Other Assets Included in other assets are net capitalized software development costs of $37,018 and $40,235 as of June 30, 2014 and December 31, 2013, respectively. Amortization expense on capitalized software included in product cost of sales was $4,335 and $6,402 for the three months ended June 30, 2014 and 2013, respectively, and $8,924 and $11,251 for the six months ended June 30, 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.

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.


14

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


NOTE 11: DEBT
Outstanding debt balances were as follows:
 
 
June 30, 2014
 
December 31, 2013
Notes payable:
 
 
 
 
Uncommitted lines of credit
 
$
62,281

 
$
43,062

Other
 
824

 
729

 
 
$
63,105

 
$
43,791

Long-term debt:
 
 
 
 
Credit facility
 
$
251,040

 
$
239,000

Senior notes
 
225,000

 
225,000

Industrial development revenue bonds
 
11,900

 
11,900

Other
 
2,492

 
4,342

 
 
$
490,432

 
$
480,242

As of June 30, 2014, the Company had various international short-term uncommitted lines of credit with borrowing limits of $124,595. The weighted-average interest rate on outstanding borrowings on the short-term uncommitted lines of credit as of June 30, 2014 and December 31, 2013 was 4.64 percent and 3.24 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 June 30, 2014 was $62,314.
As of June 30, 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 June 30, 2014 and December 31, 2013 was 1.37 percent and 1.36 percent, respectively, which is variable based on the London Interbank Offered Rate (LIBOR). The amount available under the credit facility as of June 30, 2014 was $248,960.

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 0.35 percent and 0.36 percent as of June 30, 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 June 30, 2014, the Company was in compliance with the financial and other covenants in its debt agreements.










15

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 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 executive 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 June 30:
 
 
Pension Benefits
 
Other Benefits
 
 
2014
 
2013
 
2014
 
2013
Components of net periodic benefit cost
 
 
 
 
 
 
 
 
Service cost
 
$
732

 
$
3,330

 
$

 
$

Interest cost
 
5,750

 
6,956

 
157

 
157

Expected return on plan assets
 
(6,449
)
 
(8,802
)
 

 

Amortization of prior service (benefit) cost
 
(39
)
 
19

 
(56
)
 
(122
)
Recognized net actuarial loss
 
756

 
5,435

 
50

 
105

Net periodic pension benefit cost
 
$
750

 
$
6,938

 
$
151

 
$
140

The following table sets forth the net periodic benefit cost for the Company’s defined benefit pension plans and other benefits for the six months ended June 30:
 
 
Pension Benefits
 
Other Benefits
 
 
2014
 
2013
 
2014
 
2013
Components of net periodic benefit cost
 
 
 
 
 
 
 
 
Service cost
 
$
1,464

 
$
6,661

 
$

 
$

Interest cost
 
11,500

 
13,913

 
314

 
314

Expected return on plan assets
 
(12,898
)
 
(17,605
)
 

 

Amortization of prior service (benefit) cost
 
(78
)
 
37

 
(113
)
 
(244
)
Recognized net actuarial loss
 
1,512

 
10,856

 
101

 
211

Curtailment loss (1)
 

 
1,159

 

 

Net periodic pension benefit cost
 
$
1,500

 
$
15,021

 
$
302

 
$
281

(1) Curtailment loss during the six months ended June 30, 2013 resulted from the departure of certain executive officers and was recorded within selling and administrative expense in the condensed consolidated statement of operations.


16

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


Contributions
The Company is considering making voluntary contributions to its qualified pension plans of approximately $5,000 to $7,500 by the end of 2015. For the six months ended June 30, 2014 and 2013, contributions of $2,813 and $1,597, 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 June 30, 2014 and December 31, 2013.
The Company provides its global operations guarantees and standby letters of credit through various financial institutions for suppliers, customers, regulatory agencies and insurance providers. If the Company is not able to make payment or fulfill contractual obligations, the suppliers, customers, regulatory agencies and insurance providers may draw on the pertinent bank. At June 30, 2014, the maximum future payment obligations related to these various guarantees totaled $93,042, of which $27,985 represented standby letters of credit to insurance providers, and no associated liability was recorded. At December 31, 2013, the maximum 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)
 
35,983

 
16,105

Current period settlements
 
(25,184
)
 
(24,429
)
Balance at June 30
 
$
93,998

 
$
73,427

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

NOTE 14: COMMITMENTS AND CONTINGENCIES
Contractual Obligations
At June 30, 2014, the Company had purchase commitments due within one year of $9,622 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 June 30, 2014, the Company was a party to several routine 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.


17

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


In addition to these routine indirect tax matters, the Company was a party to the proceedings 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 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.

In addition, the Company is challenging a customs ruling in Thailand seeking to retroactively collect customs duties on previous imports of ATMs. Management believes that the customs authority’s attempt to retroactively assess customs duties is in contravention of World Trade Organization agreements and, accordingly, is challenging the ruling. In July 2014, the Central Tax Court in Thailand dismissed the Company’s complaint; however, the Company will be appealing this decision, and management continues to believe that the Company has a strong position for supporting its challenge. Accordingly, the Company has not accrued any amount for this contingency; however, the Company cannot provide any assurance that it will not ultimately be subject to a retroactive assessment.

At June 30, 2014 and December 31, 2013, the Company had an accrual of approximately $26,000 related to the Brazilian indirect tax matter disclosed above.

A loss contingency is reasonably possible if it has a more than remote but less than probable chance of occurring. Although management believes the Company has valid defenses with respect to its indirect tax positions, it is reasonably possible that a loss could occur in excess of the estimated accrual, for which the Company estimated the aggregate risk at June 30, 2014 to be up to approximately $395,000 for its material indirect tax matters, of which approximately $355,000 and $26,000, respectively, relates to the Brazilian indirect tax matter and Thailand customs matter disclosed above. The aggregate risk related to indirect taxes is adjusted as the applicable statutes of limitations expire.

Legal Contingencies
At June 30, 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

18

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


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 $(785) and $313 as of June 30, 2014 and December 31, 2013, respectively. The net (loss) gain recognized in AOCI on net investment hedge derivative instruments was $(3,038) and $3,818 in the three months ended June 30, 2014 and 2013, respectively, and $(5,495) and $4,105 in the six months ended June 30, 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 gain (loss), net and forward-based gains/losses represent interest expense. The fair value of the Company’s non-designated foreign exchange forward contracts was $(668) and $705 as of June 30, 2014 and December 31, 2013, respectively.
The following table summarizes the (loss) gain recognized on non-designated foreign-exchange derivative instruments for the three and six months ended June 30:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,

 
2014
 
2013
 
2014
 
2013
Interest expense
 
$
(1,538
)
 
$
(1,812
)
 
$
(2,969
)
 
$
(2,627
)
Foreign exchange gain (loss), net
 
360

 
9,553

 
1,591

 
10,955

 
 
$
(1,178
)
 
$
7,741

 
$
(1,378
)
 
$
8,328

Interest Rate
Cash Flow Hedges The Company has variable rate debt that is subject to fluctuations in interest related cash flows due to changes in market interest rates. The Company’s policy allows derivative instruments designated as cash flow hedges that fix a portion of future variable-rate interest expense. As of June 30, 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 $(1,839) and $(2,351) as of June 30, 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 $224 and $518 for the three months ended June 30, 2014 and 2013, respectively, and $491 and $834 for the six months ended June 30, 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 $959 from AOCI to interest expense within the next 12 months.









19

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


NOTE 16: RESTRUCTURING AND OTHER CHARGES
Restructuring Charges
The following table summarizes the impact of the Company’s restructuring charges on the condensed consolidated statements of operations:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2014
 
2013
 
2014
 
2013
Cost of sales – services
 
$
139

 
$
4,235

 
$
839

 
$
6,859

Cost of sales – products
 
54

 
78

 
68

 
217

Selling and administrative expense
 
487

 
1,629

 
4,952

 
7,516

Research, development and engineering expense
 
16

 
1,613

 
(26
)
 
2,466

Total
 
$
696

 
$
7,555

 
$
5,833

 
$
17,058


The following table summarizes the Company’s restructuring charges by reporting segment:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2014
 
2013
 
2014
 
2013
Severance
 
 
 
 
 
 
 
 
North America (NA)
 
$
559

 
$
3,883

 
$
2,697

 
$
13,411

Asia Pacific (AP)
 
52

 
604

 
307

 
604

Europe, Middle East and Africa (EMEA)
 
(10
)
 
355

 
587

 
257

Latin America (LA)
 

 

 
1,242

 

Brazil
 
32

 
2,634

 
937

 
2,646

Total Severance
 
633

 
7,476

 
5,770

 
16,918

 
 
 
 
 
 
 
 
 
Other
 
 
 
 
 
 
 
 
EMEA
 
63

 
79

 
63

 
140

Total Other
 
63

 
79

 
63

 
140

Total
 
$
696

 
$
7,555

 
$
5,833

 
$
17,058


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 $696 and $7,555 for the three months ended June 30, 2014 and 2013, respectively, and $5,833 and $17,058 for the six months ended June 30, 2014 and 2013, respectively, related to the Company's multi-year realignment plan. Restructuring charges for the six months ended June 30, 2014 primarily related to a business process outsourcing initiative. As of June 30, 2014, the Company anticipates additional restructuring costs of $7,500 to $10,000 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 June 30, 2014, cumulative total restructuring costs for the multi-year realignment plan were $62,849, $2,866, $5,534, $1,694 and $8,635 in NA, AP, EMEA, LA and Brazil, respectively.









20

Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


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
 
5,833

 
17,058

Liabilities paid/settled
 
(33,123
)
 
(17,788
)
Balance at June 30
 
$
7,999

 
$
11,114

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 income (expenses) of $11,074 and $(54,386) impacted the six months ended June 30, 2014 and 2013, respectively. Non-routine income for the first six months of 2014 related primarily to a $13,709 pre-tax gain from the sale of the Eras, recognized in gain on sale of assets, net in the condensed consolidated statements of operations. Non-routine expenses for the first six months of 2013 included $28,000 of additional pre-tax losses related to the settlement of the global Foreign Corrupt Practices Act investigation, a $17,500 pre-tax charge related to settlement of the securities legal action and executive severance costs, including accelerated share-based compensation expense of $2,982 (pre-tax) all recognized in selling and administrative expense, partially offset by non-routine income of $2,191 related to a pre-tax gain from the sale of certain U.S. manufacturing operations to a long-time supplier recognized in gain on sale of assets, net in the condensed consolidated statements of operations.

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.

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Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


Assets and Liabilities Recorded at Fair Value
Assets and liabilities subject to fair value measurement are as follows:
 
 
June 30, 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
 
$
144,273

 
$
144,273

 
$

 
$
215,010

 
$
215,010

 
$

U.S. dollar indexed bond funds
 
8,697

 

 
8,697

 
27,978

 

 
27,978

Assets held in rabbi trusts
 
10,015

 
10,015

 

 
10,377

 
10,377

 

Foreign exchange forward contracts
 
217

 

 
217

 
1,382

 

 
1,382

Total
 
$
163,202

 
$
154,288

 
$
8,914

 
$
254,747

 
$
225,387


$
29,360

Liabilities
 

 
 
 
 
 
 
 
 
 
 
Deferred compensation
 
$
10,015

 
$
10,015

 
$

 
$
10,377

 
$
10,377

 
$

Foreign exchange forward contracts
 
1,670

 

 
1,670

 
364

 

 
364

Interest rate swaps
 
1,839

 

 
1,839

 
2,351

 

 
2,351

Total
 
$
13,524

 
$
10,015

 
$
3,509

 
$
13,092

 
$
10,377

 
$
2,715


The Company uses the end of period when determining the timing of transfers between levels. During the six months ended June 30, 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/Merrill Lynch. The related deferred compensation liability is recorded at fair value.
Foreign Exchange Forward Contracts A substantial portion of the Company’s operations and revenues are international. As a result, changes in foreign exchange rates can create substantial foreign exchange gains and losses from the revaluation of non-functional currency monetary assets and liabilities. The foreign exchange contracts are valued using the market approach based on observable market transactions of forward rates.
Interest Rate Swaps The Company has variable rate debt and is subject to fluctuations in interest-related cash flows due to changes in market interest rates. The Company’s policy 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.

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Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


The fair value and carrying value of the Company’s debt instruments are summarized as follows: