FORM 10-K
United States Securities and Exchange Commission
Washington, D.C. 20549
 
F O R M  10 - K
 
 
þ      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
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,
P.O. Box 3077, North Canton, Ohio
(Address of principal
executive offices)
  44720-8077
(Zip Code)
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (330) 490-4000
 
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT:
 
     
Title of each class   Name of each Exchange on Which Registered:
     
Common Shares $1.25 Par Value   New York Stock Exchange
 
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  Yes o  No þ
 
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 o  No þ
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
 
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. (Check one):
 
             
Large accelerated filer þ
  Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller reporting company)
  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 þ
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2007, the last business day of the registrant’s most recently completed second fiscal quarter. The aggregate market value was computed by using the closing price on the New York Stock Exchange on June 30, 2007 of $52.20 per share.
 
         
Common Shares, Par Value $1.25 per Share
  $ 3,391,411,136  
 
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
 
     
Class
Common Shares $1.25 Par Value
  Outstanding at August 29, 2008
66,100,607
 
DOCUMENTS INCORPORATED BY REFERENCE
 
None.
 
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TABLE OF CONTENTS
 
                 
PART I
    4  
 
ITEM 1:
    BUSINESS     4  
 
ITEM 1A:
    RISK FACTORS     7  
 
ITEM 1B:
    UNRESOLVED STAFF COMMENTS     15  
 
ITEM 2:
    PROPERTIES     15  
 
ITEM 3:
    LEGAL PROCEEDINGS     16  
 
ITEM 4:
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS     17  
       
PART II     18  
 
ITEM 5:
    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES     18  
 
ITEM 6:
    SELECTED FINANCIAL DATA     20  
 
ITEM 7:
    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     29  
 
ITEM 7A:
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     46  
 
ITEM 8:
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA     48  
 
ITEM 9:
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE     107  
 
ITEM 9A:
    CONTROLS AND PROCEDURES     107  
 
ITEM 9B:
    OTHER INFORMATION     112  
       
PART III     113  
 
ITEM 10:
    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE     113  
 
ITEM 11:
    EXECUTIVE COMPENSATION     118  
 
ITEM 12:
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS     154  
 
ITEM 13:
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE     157  
 
ITEM 14:
    PRINCIPAL ACCOUNTANT FEES AND SERVICES     158  
       
PART IV     160  
 
ITEM 15:
    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES     160  
SIGNATURES
    164  
EXHIBIT INDEX
    167  
 
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Special Note
 
Concurrently with filing this annual report on Form 10-K, we are filing our delayed quarterly reports for the quarters ended June 30, 2007, September 30, 2007, March 31, 2008 and June 30, 2008. These reports were delayed due to the Company’s discussions with the Office of the Chief Accountant (OCA) of the Securities and Exchange Commission (SEC) with regard to the Company’s practice of recognizing certain revenue on a bill and hold basis in its North America business segment, as well as due to the review of other accounting matters described below. As a result of those discussions with the OCA, the Company determined that its previous, long-standing method of accounting for bill and hold transactions was in error, representing a misapplication of generally accepted accounting principles, and that it would discontinue its use of bill and hold as a method of revenue recognition in its North America and International businesses. On January 9, 2008, management of the Company, in consultation with the Audit Committee of the Company’s Board of Directors and KPMG LLP, the Company’s independent registered public accounting firm, concluded that the Company’s financial statements for the fiscal years ended December 31, 2006, 2005, 2004 and 2003; the quarterly data in each of the quarters for the years ended December 31, 2006 and 2005; and the quarter ended March 31, 2007, must be restated and should no longer be relied upon. In addition, the Company, in consultation with its outside advisors, reviewed other accounting and financial reporting matters. This review has been completed and the results have been reported to the Audit Committee. Accordingly, the Company is restating its previously issued financial statements for those periods to reflect the discontinuation of the use of the bill and hold method of revenue recognition as well as the results of the review.
 
The adjustments made as a result of the restatement are more fully discussed in Note 2 to the Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data,” and the cumulative impact of the restated financial results at the beginning of Fiscal 2003 is presented in “Part II — Item 6 — Selected Financial Data.” Also, for discussion of the background of the restatement, see “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Audit of Restatement of Consolidated Financial Statements.” For a description of the material weaknesses identified by management as a result of the review and management’s plan to remediate those material weaknesses, see “Part II — Item 9A — Controls and Procedures.”
 
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Part I
 
ITEM 1: BUSINESS
(Dollars in thousands)
 
GENERAL DEVELOPMENT OF BUSINESS
 
Diebold, Incorporated (collectively with its subsidiaries, the Company) was incorporated under the laws of the state of Ohio in August 1876, succeeding a proprietorship established in 1859, and is engaged primarily in the sale, manufacture, installation and service of automated self-service transaction systems, electronic and physical security products, election systems and software. The Company specializes in technology that empowers people worldwide to access services when, where and how they may choose.
 
FINANCIAL INFORMATION ABOUT SEGMENTs
 
The Company’s segments comprise its three main sales channels: Diebold North America (DNA), Diebold International (DI) and Election Systems (ES) & Other. The DNA segment sells financial and retail systems, and also services financial and retail systems in the United States and Canada. The DI segment sells and services financial and retail systems over the remainder of the globe. The ES & Other segment includes the operating results of Premier Election Solutions, Inc. (PESI) and the voting and lottery related business in Brazil. Segment financial information can be found in Note 16 to the Consolidated Financial Statements, which is incorporated herein by reference.
 
NARRATIVE DESCRIPTION OF BUSINESS
 
The Company develops, manufactures, sells and services self-service transaction systems, electronic and physical security systems, software and various products used to equip bank facilities and electronic voting terminals. The Company’s primary customers include banks and financial institutions, as well as public libraries, government agencies, utilities and various retail outlets. Sales of systems and equipment are made directly to customers by the Company’s sales personnel and by manufacturers’ representatives and distributors globally. The sales/support organization works closely with customers and their consultants to analyze and fulfill the customers’ needs. In 2007, 2006 and 2005, the Company’s sales and services of financial systems and equipment and security solutions accounted for 97.9, 92.1 and 94.0 percent, respectively, of consolidated net sales.
 
PRODUCT GROUPS
 
Self-Service Products
 
The Company offers an integrated line of self-service banking products and Automated Teller Machines (ATMs). The Company is a leading global supplier of ATMs and holds the leading market position in many countries around the world.
 
Physical Security and Facility Products
 
The Company’s Physical Security and Facility Products division designs and sells several of the Company’s financial service solutions offerings, including the RemoteTellertm System (RTS). The business unit also develops vaults, safe deposit boxes and safes, drive-up banking equipment and a host of other banking facilities products.
 
Election Systems
 
The Company, through its wholly-owned subsidiaries PESI and Procomp Industria Eletronica S.A., is one of the larger providers of voting system equipment and related products in the world.
 
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Integrated Security Solutions
 
Diebold Integrated Security Solutions provide global sales, service, installation, project management and monitoring of original equipment manufacturer (OEM) electronic security products to financial, government, retail and commercial customers. These solutions provide the Company’s customers a single-source solution to their electronic security needs.
 
Software Solutions and Services
 
The Company offers software solutions consisting of multiple applications that process events and transactions. These solutions are delivered on the appropriate platform, allowing the Company to meet customer requirements while adding new functionality in a cost-effective manner.
 
The Company also provides professional services to assist in the implementation of software solutions. These services include communication network review, systems integration, custom software and project management that encompass all facets of a successful financial self-service implementation.
 
OPERATIONS
 
The principal raw materials used by the Company are steel, plastics, and electronic components, which are purchased from various major suppliers. Electronic parts and components are also procured from various suppliers. These materials and components are generally available in quantity at this time.
 
The Company had no customers that accounted for more than 10 percent of total net sales in 2007, 2006 and 2005.
 
The Company’s operating results and the amount and timing of revenue are affected by numerous factors including production schedules, customer priorities, sales volume and sales mix. During the past several years, the Company has dramatically changed the focus of its self-service business to that of a total solutions approach. The value of unfilled orders is not as meaningful an indicator of future revenues due to the significant portion of revenues derived from the Company’s growing service-based business, for which order information is not available. Therefore, the Company believes that backlog information is not material to an understanding of its business and does not disclose backlog information.
 
The Company carries working capital mainly related to accounts receivable and inventories. Inventories, generally, are only manufactured as orders are received from customers. The Company’s normal and customary payment terms are net 30 days from date of invoice. The Company generally does not offer extended payment terms. The Company’s government customers represent a small portion of the Company’s business. Domestically, with the exception of PESI, the Company’s contracts with its government customers do not contain fiscal funding clauses. In the event that such a clause exists, revenue would not be recognizable until the funding clause was satisfied. Internationally, contracts with Brazil’s government are subject to a twenty-five percent quantity adjustment prior to Diebold’s purchasing any raw materials under the contracted purchasing schedule. In general, with the exception of PESI, the Company recognizes revenue for delivered elements only when the fair values of undelivered elements are known, uncertainties regarding customer acceptance are resolved and there are no customer-negotiated refunds or return rights affecting the revenue recognized for the delivered elements.
 
COMPETITION
 
All phases of the Company’s business are highly competitive; some products being in competition directly with similar products and others competing with alternative products having similar uses or producing similar results. The Company believes, based upon outside independent industry surveys, that it is a leading manufacturer of self-service systems in the United States and is also a market leader internationally. In the area of automated transaction systems, the Company competes primarily with NCR Corporation, Wincor-Nixdorf, Grg Equipment Co., and Itautec. In serving the security products market for the financial services industry, the Company competes with national, regional and local security companies. Of these competitors, some
 
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compete in only one or two product lines, while others sell a broader spectrum of products competing with the Company. The unavailability of comparative sales information and the large variety of individual products make it difficult to give reasonable estimates of the Company’s competitive ranking in or share of the market in its security product fields of activity. However, Diebold is ranked as one of the top integrators in the security market.
 
In the election systems market, the Company provides product solutions and support for customers within the United States and Brazil. Competition in this market is typically from smaller, privately held, niche companies.
 
PATENTS, TRADEMARKS, LICENSES
 
The Company owns patents, trademarks and licenses relating to certain products in the United States and internationally. While the Company regards these as items of importance, it does not deem its business as a whole, or any industry segment, to be materially dependent upon any one item or group of items.
 
RESEARCH, DEVELOPMENT & ENGINEERING
 
The Company charged to expense $73,950 in 2007, $71,625 in 2006 and $59,937 in 2005 for research, development and engineering costs.
 
ENVIRONMENTAL
 
Compliance by the Company with federal, state and local environmental protection laws during 2007 had no material effect upon capital expenditures, earnings or the competitive position of the Company and its subsidiaries.
 
EMPLOYEES
 
The total number of employees at December 31, 2007 was 16,942 compared with 15,451 at the end of the preceding year. Diebold’s service staff is one of the financial industry’s largest, with professionals in more than 600 locations worldwide.
 
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
 
Sales to customers outside the United States in relation to total consolidated net sales were $1,434,931 or 48.4 percent in 2007, $1,373,514 or 46.7 percent in 2006, and $1,038,549 or 40.2 percent in 2005.
 
Property, plant and equipment, at cost, located in the United States totaled $424,657, $398,425 and $423,267 as of December 31, 2007, 2006 and 2005, respectively, and property, plant and equipment, at cost, located outside the United States totaled $151,139, $152,072, $122,991 as of December 31, 2007, 2006 and 2005, respectively.
 
Additional information regarding the Company’s international operations is included in the Note 16 to the Consolidated Financial Statements, which is incorporated herein by reference.
 
The Company’s non-U.S. operations are subject to normal international business risks not generally applicable to domestic business. These risks include currency fluctuation, new and different legal and regulatory requirements in local jurisdictions, political and economic changes and disruptions, tariffs or other barriers, potentially adverse tax consequences and difficulties in staffing and managing foreign operations.
 
AVAILABLE INFORMATION
 
This annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports are available, free of charge, on or through its website, www.diebold.com, as soon as practicable after such material is electronically filed with or furnished to the SEC. Additionally, these reports can be furnished free of charge to shareholders upon written request to Diebold Global Communications at the corporate address, or call +1 330 490-3790 or [800] 766-5859. The public
 
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may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.
 
ITEM 1A: RISK FACTORS
 
The following are certain risk factors that could affect the business, financial condition, operating results and cash flows of the Company. These risk factors should be considered in connection with evaluating the forward-looking statements contained in this annual report on Form 10-K because these risk factors could cause the Company’s actual results to differ materially from those expressed in any forward-looking statement. The risks the Company has highlighted below are not the only ones the Company faces. If any of these events actually occurs, the Company’s business, financial condition, operating results or cash flows could be negatively affected. The Company cautions the reader to keep in mind these risk factors and to refrain from attributing undue certainty to any forward-looking statements, which speak only as of the date of this annual report.
 
Demand for and supply of the Company’s products and services may be adversely affected by numerous factors, some of which the Company cannot predict or control, which could adversely affect the Company’s results of operations.
 
Numerous factors may affect the demand for and supply of the Company’s products and services, including:
 
  •  changes in the market acceptance of the Company’s products and services;
 
  •  customer and competitor consolidation;
 
  •  changes in customer preferences;
 
  •  declines in general economic conditions;
 
  •  changes in environmental regulations that would limit the Company’s ability to sell products and services in specific markets; and
 
  •  macro-economic factors affecting banks, credit unions and other financial institutions may lead to cost-cutting efforts by our customers, which could cause us to lose current or potential customers or achieve less revenue per customer.
 
If any of these factors occurs, the demand for and supply of the Company’s products and services could suffer, which would adversely affect the Company’s results of operations.
 
Increased raw material and energy costs could reduce the Company’s income.
 
The primary raw materials in the Company’s financial self-service, security and election systems business segments are steel, plastics and electronic components. The majority of the Company’s raw materials are purchased from various local, regional and global suppliers pursuant to long-term supply contracts. However, the price of these materials fluctuates under these contracts in tandem with the prices of raw materials that are used in the manufacture of the Company’s products.
 
In addition, energy prices, particularly petroleum, are cost drivers for the Company’s business. In recent years, the price of petroleum has been highly volatile, particularly due to the unstable political conditions in the Persian Gulf. Any increase in the costs of energy would also increase the Company’s transportation costs. Although the Company attempts to pass on higher raw material and energy costs to the Company’s customers, given the Company’s competitive markets, it is often not possible to pass on all of these increased costs.
 
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Our business may be affected by general economic conditions and uncertainty that may cause customers to defer or cancel sales commitments previously made to us.
 
Recent economic difficulties in the Unites States credit markets and certain international markets may lead to an economic recession in some or all of the markets in which we operate. A recession or even the risk of a potential recession may be sufficient reason for customers to delay, defer or cancel purchase decisions, including decisions previously made. Under difficult economic conditions, customers may seek to reduce discretionary spending by forgoing purchases of our products and services. This risk is magnified for capital goods purchases such as ATMs and physical security products. As a result of economic conditions and other factors, financial institutions have failed and may continue to fail; resulting in a loss of current or potential customers or causing them to defer or cancel sales. Any customer delays or cancellation in sales orders could materially affect our level of revenues and operating results.
 
The Company’s sales and operating results are sensitive to global economic conditions and cyclicality and could be adversely affected during economic downturns.
 
Demand for the Company’s products is affected by general economic conditions and the business conditions of the industries in which the Company sells our products and services. The business of most of the Company’s customers, particularly our financial institution and election systems customers is, to varying degrees, cyclical and has historically experienced periodic downturns. Any future downturns in general economic conditions could adversely affect the demand for our products and services and our sales and operating results. In addition, downturns in our customers’ industries, even during periods of strong general economic conditions, could adversely affect our sales and our operating results. As a result of economic conditions and other factors, financial institutions have failed and may continue to fail; resulting in a loss of current or potential customers or causing them to defer or cancel sales. Additionally, the unstable political conditions in the Persian Gulf could lead to financial, economic and political instability, which could lead to a further deterioration in general economic conditions.
 
The Company may be unable to achieve, or may be delayed in achieving, our cost-cutting initiatives, which may adversely affect our results of operations and cash flow.
 
The Company has launched a number of cost-cutting initiatives, including the Company’s restructuring initiatives, to improve operating efficiencies and reduce operating costs. Although the Company is anticipating a substantial amount of annual cost savings associated with these cost-cutting initiatives, we may be unable to sustain the cost savings that the Company has achieved. In addition, if the Company is unable to achieve, or has any unexpected delays in achieving additional cost savings, the Company’s results of operations and cash flow may be adversely affected. Even if the Company meets the goals pursuant to these initiatives, the Company may not receive the expected financial benefits of these initiatives.
 
The Company faces competition that could adversely affect our sales and financial condition.
 
All phases of the Company’s business are highly competitive; some products being in competition directly with similar products and others competing with alternative products having similar uses or producing similar results. The Company encounters competition in price, delivery, service, performance, product innovation, product recognition and quality.
 
Because of the potential for consolidation in any market, the Company’s competitors may become larger, which could make them more efficient and permit them to be more price-competitive. Increased size could also permit them to operate in wider geographic areas and enhance their abilities in other areas such as research and development and customer service, which could also reduce the Company’s profitability.
 
The Company’s competitors can be expected to continue to develop and introduce new and enhanced products, which could cause a decline in market acceptance of the Company’s products. In addition, the Company’s competitors could cause a reduction in the prices for some of the Company’s products as a result of intensified price competition. Also, the Company may be unable to effectively anticipate and react to new entrants in the marketplace for the Company’s products.
 
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Competitive pressures can also result in the loss of major customers. An inability to compete successfully could have an adverse effect on our results of operations, financial condition and cash flows in any given period.
 
In international markets, we compete with local service providers that may have competitive advantages.
 
In a number of international markets, especially those in Asia Pacific and Latin America, we face substantial competition from local service providers that offer competing products and services. Some of these companies may have a dominant market share in their territories and may be owned by local stakeholders, which could give them a competitive advantage. Local providers of competing products and services may also have a substantial advantage over us in attracting customers in their country due to more established branding in that country, greater knowledge with respect to the tastes and preferences of customers residing in that country and/or their focus on a single market. Further, the local providers may have greater regulatory and operational flexibility than the Company due to the fact that we are subject to both U.S. and foreign regulatory requirements.
 
Because our operations are conducted worldwide, they are affected by risks of doing business abroad.
 
The Company generates a significant percentage of our revenue from sales and service operations conducted outside the United States. Revenue from international operations amounted to approximately 48.4 percent in 2007, 46.7 percent in 2006 and 40.2 percent in 2005 of total revenue during these respective periods. Accordingly, our international operations are subject to the risks of doing business abroad, including the following:
 
  •  fluctuations in currency exchange rates;
 
  •  transportation delays and interruptions;
 
  •  political and economic instability and disruptions;
 
  •  restrictions on the transfer of funds;
 
  •  the imposition of duties and tariffs;
 
  •  import and export controls;
 
  •  changes in governmental policies and regulatory environments;
 
  •  labor unrest and current and changing regulatory environments;
 
  •  the uncertainty of product acceptance by different cultures;
 
  •  the risks of divergent business expectations or cultural incompatibility inherent in establishing joint ventures with foreign partners;
 
  •  difficulties in staffing and managing multi-national operations;
 
  •  limitations on our ability to enforce legal rights and remedies;
 
  •  reduced protection for intellectual property rights in some countries; and
 
  •  potentially adverse tax consequences.
 
Any of these events could have an adverse effect on our international operations in the future by reducing the demand for our products, decreasing the prices at which the Company can sell our products or otherwise having an adverse effect on our business, financial condition or results of operations. The Company may not be able to continue to operate in compliance with applicable customs, currency exchange control regulations, transfer pricing regulations or any other laws or regulations to which the Company may be subject. In addition, these laws or regulations may be modified in the future, and the Company may not be able to operate in compliance with those modifications.
 
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The Company may expand operations into international markets in which we may have limited experience or rely on business partners.
 
We are continually looking to expand the Company’s products and services into international markets. We have currently developed, through joint ventures, strategic investments, subsidiaries and branch offices, sales and service offerings in over 90 countries outside of the United States. As we expand into new international markets, we will have only limited experience in marketing and operating our products and services in such markets. In other instances, we may rely on the efforts and abilities of foreign business partners in such markets. Certain international markets may be slower than domestic markets in adopting our products and services and so our operations in international markets may not develop at a rate that supports our level of investment.
 
The failure of governments to certify election systems products may hinder our growth and harm our business.
 
The Help America Vote Act (HAVA) required that jurisdictions have HAVA-compliant equipment by January 1, 2006; however, despite that deadline, numerous jurisdictions have not yet become HAVA-compliant. Further, individual states and municipalities have the discretion as to how they will become compliant with HAVA. It is uncertain at this time the extent to which challenges raised about reliability and security of the Company’s election systems products, including the risk that such products will not be certified for use or will be decertified, could adversely effect our business, financial condition and results of operation.
 
The Company could be subject to differing and inconsistent laws, regulations and certification requirements with respect to our election systems products. If that were to happen, the Company may find it necessary to eliminate, modify or cancel components of our services that could result in additional development costs and the possible loss of revenue. Future legislative changes or other changes in the laws could have an adverse effect on our business, financial condition and results of operations.
 
Our election systems products might not achieve market acceptance, which could adversely affect our growth.
 
The rate at which state and local government bodies have accepted electronic voting products has varied significantly by locale. Despite the passing of the HAVA deadline, the Company expects to continue to experience variations in the degree to which these programs are accepted. The Company’s ability to grow will depend on the extent to which our potential customers accept our products. This acceptance may be limited by:
 
  •  the failure of jurisdictions to certify our election systems products;
 
  •  jurisdictions decertifying products that had previously been certified;
 
  •  the failure of prospective customers to conclude that our products are valuable and should be used;
 
  •  the reluctance of our prospective customers to replace their existing solutions with our products; and
 
  •  marketing efforts of our competitors.
 
Concerns about security and negative publicity regarding our election systems segment could slow acceptance of our election systems products.
 
Because of the political nature of our election systems business, various individuals and advocacy groups may raise challenges in the media and elsewhere, including legal challenges, about the reliability and security of the Company’s election systems products and services. Our election systems business is vulnerable to these types of challenges because the electronic election systems industry is emerging. Furthermore, in the event of adverse publicity, whether directed at us or our competitors’ products, due to processing errors or other system failures, the electronic election systems industry could suffer as a whole, which would have an adverse effect on our business, financial condition and results of operations. In addition, these efforts may adversely affect the Company’s relations with its election systems customers.
 
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The Company is currently subject to shareholder class action litigation, the unfavorable outcome of which might have a material adverse effect on our financial condition, results of operations and cash flows.
 
A number of shareholder class action lawsuits have been filed against us and certain of our current and former officers and directors, alleging violations of the federal securities laws and breaches of fiduciary duties with respect to the Company’s 401(k) savings plan. The shareholder class action was dismissed and the court entered a judgment in favor of the defendants in August 2008, but the plaintiffs have appealed the court’s decision. The Company believes that these lawsuits are without merit and the Company intends to defend itself vigorously. The Company cannot, however, determine with certainty the outcome or resolution of these claims or any future related claims, or the timing for their resolution. In addition to the expense and burden incurred in defending this litigation and any damages that the Company may suffer, our management’s efforts and attention may be diverted from the ordinary business operations in order to address these claims. If the final resolution of this litigation is unfavorable to us, our financial condition, results of operations and cash flows might be materially adversely affected.
 
Any failure by us to manage acquisitions, divestitures and other significant transactions successfully could harm our financial results, business and prospects.
 
As part of our business strategy, the Company frequently engages in discussions with third parties regarding possible investments, acquisitions, strategic alliances, joint ventures, divestitures and outsourcing arrangements and enter into agreements relating to such extraordinary transactions in order to further our business objectives. In order to pursue this strategy successfully, the Company must identify suitable candidates for and successfully complete extraordinary transactions, some of which may be large and complex, and manage post-closing issues such as the integration of acquired companies or employees. Integration and other risks of extraordinary transactions can be more pronounced for larger and more complicated transactions, or if multiple transactions are pursued simultaneously. If the Company failed to identify and complete successfully extraordinary transactions that further our strategic objectives, the Company may be required to expend resources to develop products and technology internally, the Company may be at a competitive disadvantage or the Company may be adversely affected by negative market perceptions, any of which may have a material adverse effect on our revenue, gross margin and profitability.
 
Integration issues are complex, time-consuming and expensive and, without proper planning and implementation, could significantly disrupt our business. The challenges involved in integration include:
 
  •  combining product offerings and entering into new markets in which the Company is not experienced;
 
  •  convincing customers and distributors that the transaction will not diminish client service standards or business focus, preventing customers and distributors from deferring purchasing decisions or switching to other suppliers (which could result in our incurring additional obligations in order to address customer uncertainty), and coordinating sales, marketing and distribution efforts;
 
  •  consolidating and rationalizing corporate information technology infrastructure, which may include multiple legacy systems from various acquisitions and integrating software code;
 
  •  minimizing the diversion of management attention from ongoing business concerns;
 
  •  persuading employees that business cultures are compatible, maintaining employee morale and retaining key employees, integrating employees into the Company, correctly estimating employee benefit costs and implementing restructuring programs;
 
  •  coordinating and combining administrative, manufacturing, research and development and other operations, subsidiaries, facilities and relationships with third parties in accordance with local laws and other obligations while maintaining adequate standards, controls and procedures; and
 
  •  achieving savings from supply chain and administration integration.
 
11


 

 
The Company evaluates and enters into extraordinary transactions on an ongoing basis. The Company may not fully realize all of the anticipated benefits of any transaction, and the timeframe for achieving benefits of a transaction may depend partially upon the actions of employees, suppliers or other third parties. In addition, the pricing and other terms of our contracts for extraordinary transactions require us to make estimates and assumptions at the time the Company enters into these contracts, and, during the course of our due diligence, the Company may not identify all of the factors necessary to estimate our costs accurately. Any increased or unexpected costs, unanticipated delays or failure to achieve contractual obligations could make these agreements less profitable or unprofitable.
 
Managing extraordinary transactions requires varying levels of management resources, which may divert our attention from other business operations. These extraordinary transactions could result in significant costs and expenses and charges to earnings, including those related to severance pay, early retirement costs, employee benefit costs, asset impairment charges, charges from the elimination of duplicative facilities and contracts, in-process research and development charges, inventory adjustments, assumed litigation and other liabilities, legal, accounting and financial advisory fees, and required payments to executive officers and key employees under retention plans. Moreover, the Company could incur additional depreciation and amortization expense over the useful lives of certain assets acquired in connection with extraordinary transactions, and, to the extent that the value of goodwill or intangible assets with indefinite lives acquired in connection with an extraordinary transaction becomes impaired, the Company may be required to incur additional material charges relating to the impairment of those assets. In order to complete an acquisition, the Company may issue common stock, potentially creating dilution for existing shareholders, or borrow funds, affecting our financial condition and potentially our credit ratings. Any prior or future downgrades in our credit rating associated with an acquisition could adversely affect our ability to borrow and result in more restrictive borrowing terms. In addition, our effective tax rate on an ongoing basis is uncertain, and extraordinary transactions could impact our effective tax rate. The Company also may experience risks relating to the challenges and costs of closing an extraordinary transaction and the risk that an announced extraordinary transaction may not close. As a result, any completed, pending or future transactions may contribute to financial results that differ from the investment community’s expectations.
 
System security risks and systems integration issues could disrupt our internal operations or services provided to customers, and any such disruption could harm our revenue, increase our costs and expenses and harm our reputation and stock price.
 
Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate our confidential information or that of third parties, create system disruptions or cause shutdowns. As a result, the Company could incur significant expenses in addressing problems created by security breaches of our network. Moreover, the Company could lose existing or potential customers or incur significant expenses in connection with our customers’ system failures. In addition, sophisticated hardware and operating system software and applications that the Company produce or procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of the system. The costs to us to eliminate or alleviate security problems, viruses and bugs could be significant, and the efforts to address these problems could result in interruptions, delays or cessation of service that could impede our sales, manufacturing, distribution or other critical functions.
 
Portions of our information technology infrastructure also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. The Company may not be successful in implementing new systems, and transitioning data and other aspects of the process could be expensive, time consuming, disruptive and resource-intensive. Such disruptions could adversely impact our ability to fulfill orders and interrupt other processes. Delayed sales, lower margins or lost customers resulting from these disruptions could adversely affect our financial results, stock price and reputation.
 
In order to be successful, the Company must attract, retain and motivate key employees, and failure to do so could seriously harm us.
 
In order to be successful, the Company must attract, retain and motivate executives and other key employees, including those in managerial, administration, technical, sales, marketing and information technology support positions. The Company also
 
12


 

must keep employees focused on our strategies and goals. Hiring and retaining qualified executives, engineers and qualified sales representatives are critical to our future, and competition for experienced employees in these areas can be intense. The failure to hire or loss of key employees could have a significant impact on our operations.
 
The Company may not be able to generate sufficient cash flows to fund our operations and make adequate capital investments.
 
Our cash flows from operations depend primarily on sales and service margins. To develop new product and service technologies, support future growth, achieve operating efficiencies and maintain product quality, the Company must make significant capital investments in manufacturing technology, facilities and capital equipment, research and development, and product and service technology. In addition to cash provided from operations, the Company has from time to time utilized external sources of financing. Depending upon general market conditions or other factors, the Company may not be able to generate sufficient cash flows to fund our operations and make adequate capital investments.
 
New product developments may be unsuccessful.
 
The Company is constantly looking to develop new products and services that complement our traditional product and service offerings or leverage the underlying design or process technology of our traditional product and service offerings. The Company makes significant investments in product and service technologies and anticipates expending significant resources for new product development over the next several years. There can be no assurance that our product development efforts will be successful, that we will be able to cost effectively manufacture these new products, that we will be able to successfully market these products or that margins generated from sales of these products will recover costs of development efforts.
 
An adverse determination that our products or manufacturing processes infringe the intellectual property rights of others could materially adversely affect the Company’s business, results of operations or financial condition.
 
As is common in any high technology industry, from time to time, others have asserted, and may in the future assert, that our products or manufacturing processes infringe their intellectual property rights. A court determination that our products or manufacturing processes infringe the intellectual property rights of others could result in significant liability and/or require us to make material changes to our products and/or manufacturing processes. The Company is unable to predict the outcome of assertions of infringement made against the Company. Any of the foregoing could have a material adverse effect on our business, results of operations or financial condition.
 
United Technologies’ unsolicited acquisition proposal has created a distraction for our management and uncertainty that may adversely affect our business.
 
On February 29, 2008, we received an unsolicited proposal from United Technologies Corporation (UTC) to acquire all of the outstanding common shares of the Company. On March 3, 2008, our Board of Directors announced that, after carefully reviewing the proposal, it unanimously concluded that the proposal is not in the best interests of the Company and its shareholders. Any further actions taken by UTC in connection with their proposal (and any alternate proposals that may be made by other parties) may be a significant distraction for our management and employees and may require the expenditure of significant time and resources by us. UTC’s unsolicited acquisition proposal has also created uncertainty for our employees and this uncertainty may adversely affect our ability to retain key employees and to hire new talent. UTC’s unsolicited acquisition proposal may also create uncertainty for current and potential customers, suppliers and other business partners, which may cause them to terminate, or not to renew or enter into, arrangements with us. Additionally, we and members of our Board of Directors had been named in at least one purported shareholder class action complaint relating to the UTC proposal as more fully described in Part I, Item 3 “Legal Proceedings” of this annual report. These lawsuits or any future lawsuits may become time consuming and expensive. These consequences, alone or in combination, may harm our business.
 
13


 

Anti-takeover provisions could make it more difficult for a third party to acquire us.
 
We have adopted a shareholder rights plan and initially declared a dividend distribution of one right for each outstanding share of common stock to shareholders of record as of February 11, 1999, including any transfer or new issuance of common shares of the Company. Under certain circumstances, if a person or group acquires 20 percent or more of our outstanding common stock, holders of the rights (other than the person or group triggering their exercise) will receive one one-thousandth of a share of Series A Junior Participating Preferred Stock, without par value. The rights expire on February 10, 2009, unless extended by our Board of Directors. Because the rights may substantially dilute the stock ownership of a person or group attempting to take us over without the approval of our Board of Directors, our rights plan could make it more difficult for a third party to acquire us (or a significant percentage of our outstanding capital stock) without first negotiating with our Board of Directors regarding that acquisition. Further, certain provisions of our charter documents, including provisions limiting the ability of shareholders to raise matters at a meeting of shareholders without giving advance notice and permitting cumulative voting, which may make it more difficult for a third party to gain control of our Board of Directors and may have the effect of delaying or preventing changes in control or management of the Company, which could have an adverse effect on the market price of our stock. Additionally, Ohio corporate law provides that certain notice and informational filings and special shareholder meeting and voting procedures must be followed prior to consummation of a proposed “control share acquisition,” as defined in the Ohio Revised Code. Assuming compliance with the prescribed notice and information filings, a proposed control share acquisition may be made only if, at a special meeting of shareholders, the acquisition is approved by both a majority of the voting power of the Company represented at the meeting and a majority of the voting power remaining after excluding the combined voting power of the “interested shares,” as defined in the Ohio Revised Code. The application of these provisions of the Ohio Revised Code also could have the effect of delaying or preventing a change of control.
 
The SEC investigation, Department of Justice investigation, internal accounting and financial reporting review and restatement of the Company’s financial statements may harm the Company’s business in the future.
 
The Company has incurred substantial expenses for legal and accounting services due to the SEC’s investigation and the U.S. Department of Justice (DOJ) investigation as well as the Company’s own internal investigation and the restatement of its financial statements. The Company could incur substantial additional costs to defend and resolve litigation or other governmental investigations or proceedings arising out of or related to the completed investigation. In addition, the Company could be exposed to enforcement or other actions with respect to these matters by the SEC’s Division of Enforcement or the DOJ.
 
In addition, these activities have diverted the Company’s management’s attention from the conduct of its business. The diversion of resources to address issues arising out of the investigation and financial restatement may harm our business, operating results and financial condition in the future.
 
The Company’s failure to maintain effective internal control over financial reporting may be insufficient to allow it to accurately report its financial results or prevent fraud, which could cause its financial statements to become materially misleading and adversely affect the trading price of its common stock.
 
The Company’s management is responsible for maintaining a system of internal control over financial reporting (ICOFR) that provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (GAAP). Management is also responsible for maintaining evidence, including documentation, to provide reasonable support for its assessment. This evidence will also allow a third party, such as the Company’s external auditor, to validate the work performed by management.
 
ICOFR cannot provide absolute assurance due to its inherent limitations; it is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human error. ICOFR also can be circumvented by collusion or improper management override. Because of such limitations, ICOFR cannot prevent or detect all misstatements, whether unintentional errors or fraud. However, these inherent limitations are known features of the financial reporting process, therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
 
14


 

During the year ended December 31, 2007, the Company’s management determined that there were material weaknesses in its internal control over financial reporting. The Company’s material weaknesses could harm shareholder and business confidence in our financial reporting, our ability to obtain financing and other aspects of our business. The Company has enhanced, and is continuing to enhance, its internal controls in order to remediate the material weaknesses. Implementing new internal controls and testing the internal control framework will require the dedication of additional resources, management time and expense. If the Company fails to establish and maintain the adequacy of its internal control over financial reporting, including any failure to implement required new or improved controls, or if the Company experiences difficulties in their implementation, its business, financial condition and operating results could be harmed.
 
Any material weakness or unsuccessful remediation could affect investor confidence in the accuracy and completeness of the Company’s financial statements. As a result, the Company’s ability to obtain any additional financing, or additional financing on favorable terms, could be materially and adversely affected, which, in turn, could materially and adversely affect its business, its financial condition and the market value of its securities and require the Company to incur additional costs to improve its internal control systems and procedures. In addition, perceptions of the Company among customers, lenders, investors, securities analysts and others could also be adversely affected.
 
The Company can give no assurances that the measures it has taken to date, or any future measures it may take, will remediate the material weaknesses identified or that any additional material weaknesses will not arise in the future due to its failure to implement and maintain adequate internal controls over financial reporting. In addition, even if the Company is successful in strengthening its controls and procedures, those controls and procedures may not be adequate to prevent or identify irregularities or ensure the fair presentation of its financial statements included in its periodic reports filed with the SEC.
 
Delays in filing periodic reports and financial restatements may adversely affect the Company’s stock price.
 
The Company did not file its quarterly reports on Form 10-Q for the quarters ended June 30, 2007, September 30, 2007, March 31, 2008 and June 30, 2008 and this annual report on Form 10-K for the year ended December 31, 2007 within the time periods required by SEC regulations. The Company’s delays in filing its periodic reports and related financial statements may harm investor confidence and negatively affect the Company’s stock price. In addition, the restatement may also result in other negative ramifications, including the potential loss of confidence by suppliers, customers, employees, investors, and security analysts, the loss of institutional investor interest and fewer business development opportunities.
 
ITEM 1B: UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2: PROPERTIES
 
The Company’s corporate offices are located in North Canton, Ohio. The Company owns manufacturing facilities in Canton and Newark, Ohio; Lynchburg, Virginia, and Lexington, North Carolina. The Company also has manufacturing facilities in Belgium, Brazil, China, Hungary and India. The Company has selling, service and administrative offices in the following locations: throughout the United States, and in Argentina, Australia, Austria, Barbados, Belgium, Belize, Brazil, Canada, Chile, China, Colombia, Costa Rica, Czech Republic, Dominican Republic, Ecuador, France, Germany, Greece, Guatemala, Haiti, Honduras, Hong Kong, Hungary, India, Indonesia, Italy, Japan, Malaysia, Mexico, Namibia, Netherlands, New Zealand, Nicaragua, Panama, Paraguay, Peru, Philippines, Portugal, Poland, Romania, Russia, Singapore, Slovakia, South Africa, Spain, Switzerland, Taiwan, Thailand, Turkey, the United Arab Emirates, the United Kingdom, Uruguay, Venezuela and Vietnam. The Company leases a majority of the selling, service and administrative offices under operating lease agreements.
 
The Company considers that its properties are generally in good condition, are well maintained, and are generally suitable and adequate to carry on the Company’s business.
 
15


 

 
ITEM 3: LEGAL PROCEEDINGS
 
The Company is a party to several lawsuits that were incurred in the normal course of business, none of which individually or in the aggregate is considered material by management in relation to the Company’s financial position or results of operations. In management’s opinion, the Company’s consolidated financial statements would not be materially affected by the outcome of any present legal proceedings, commitments, or asserted claims.
 
In addition to the routine legal proceedings noted above, the Company has been served with various lawsuits, filed against it and certain current and former officers and directors, by shareholders and participants in the Company’s 401(k) savings plan, alleging violations of the federal securities laws and breaches of fiduciary duties with respect to the 401(k) plan. These complaints seek compensatory damages in an unspecific amount, fees and expenses related to such lawsuits and the granting of extraordinary equitable and/or injunctive relief. For each of these lawsuits, the date each complaint was filed, the name of the plaintiff and the federal court in which such lawsuit is pending are as follows:
 
  •  Konkol v. Diebold Inc., et al., No. 5:05CV2873 (N.D. Ohio, filed December 13, 2005).
 
  •  Ziolkowski v. Diebold Inc., et al., No. 5:05CV2912 (N.D. Ohio, filed December 16, 2005).
 
  •  New Jersey Carpenter’s Pension Fund v. Diebold, Inc., No. 5:06CV40 (N.D. Ohio, filed January 6, 2006).
 
  •  Rein v. Diebold, Inc., et al., No. 5:06CV296 (N.D. Ohio, filed February 9, 2006).
 
  •  Graham v. Diebold, Inc., et al., No. 5:05CV2997 (N.D. Ohio, filed December 30, 2005).
 
  •  McDermott v. Diebold, Inc., et al., No. 5:06CV170 (N.D. Ohio, filed January 24, 2006).
 
  •  Barnett v. Diebold, Inc., et al., No. 5:06CV361 (N.D. Ohio, filed February 15, 2006).
 
  •  Farrell v. Diebold, Inc., et al., No. 5:06CV307 (N.D. Ohio, filed February 8, 2006).
 
  •  Forbes v. Diebold, Inc., et al., No. 5:06CV324 (N.D. Ohio, filed February 10, 2006).
 
  •  Gromek v. Diebold, Inc., et al., No. 5:06CV579 (N.D. Ohio, filed March 14, 2006).
 
The Konkol, Ziolkowski, New Jersey Carpenter’s Pension Fund, Rein and Graham cases, which allege violations of the federal securities laws, have been consolidated into a single proceeding. The McDermott, Barnett, Farrell, Forbes and Gromek cases, which allege breaches of fiduciary duties under the Employee Retirement Income Security Act of 1974 with respect to the 401(k) plan, likewise have been consolidated into a single proceeding. The Company and the individual defendants deny the allegations made against them, regard them as without merit, and intend to defend themselves vigorously. On August 22, 2008, the court dismissed the consolidated amended complaint in the consolidated securities litigation and entered a judgment in favor of the defendants. On September 16, 2008, the plaintiffs in the consolidated securities litigation filed a notice of appeal with the U.S. Court of Appeals for the Sixth Circuit.
 
The Company filed a lawsuit on May 30, 2008 (Premier Election Solutions, Inc., et al. v. Board of Elections of Cuyahoga County, et al., Case No. 08-CV-05-7841, (Franklin Cty. Ct Common Pleas)) against the Board of Elections of Cuyahoga County, Ohio, the Board of County Commissioners of Cuyahoga County, Ohio, Cuyahoga County, Ohio (collectively, the County), and Ohio Secretary of State Jennifer Brunner (Secretary) regarding several Ohio contracts under which the Company provided electronic voting systems and related services to the State of Ohio and a number of its counties. The lawsuit was precipitated by the County’s threats to sue the Company for unspecified damages. The complaint seeks a declaration that the Company met its contractual obligations. In response, on July 15, 2008, the County filed an answer and counterclaim alleging that the voting system was defective and seeking declaratory relief and unspecified damages under several theories of recovery. The Secretary has also filed an answer and counterclaim seeking declaratory relief and unspecified damages under a number of theories of recovery.
 
16


 

Management is unable to determine the financial statement impact, if any, of the federal securities class action, the 401(k) class action and the electronic voting systems action.
 
Additionally, certain current and former officers and directors had been named as defendants in two shareholder derivative actions filed in federal court, purportedly on behalf of the Company (Recht v. O’Dell et al., No. 5:06CV233 (N.D. Ohio, filed January 31, 2006) and Wietschner v. Diebold, Inc., et al., No. 5:06CV418 (N.D. Ohio, filed February 23, 2006)). The complaints asserted claims of breach of fiduciary duties against the defendants on behalf of the Company in connection with alleged violations of the federal securities laws. The derivative cases were consolidated into a single proceeding. On February 29, 2008, the court dismissed the consolidated amended derivative complaint.
 
The Company and certain directors had been named as defendants by an individual purporting to seek relief on behalf of a putative class of shareholders (Albert Stein v. Diebold Incorporated, et al., Case No. 2008 CV 01144 (Stark Cty. Ct. Common Pleas, filed March 4, 2008)). The complaint was voluntarily dismissed by the plaintiff on June 25, 2008. The complaint alleged breaches of fiduciary duties with respect to the Company’s rejection of an unsolicited offer by United Technologies Corporation to purchase all of the Company’s outstanding shares. The complaint sought an injunction requiring certain actions and other equitable relief and attorneys’ fees and expenses. The Company and the individual defendants had moved to dismiss the complaint, which motion was pending as of the dismissal.
 
The Company was informed during the first quarter of 2006 that the staff of the SEC had begun an informal inquiry relating to the Company’s revenue recognition policy. In the second quarter of 2006, the Company was informed that the SEC’s inquiry had been converted to a formal, non-public investigation. In the fourth quarter of 2007, the Company also learned that the DOJ had begun a parallel investigation. The Company is continuing to cooperate with the government in connection with these investigations. The Company cannot predict the length, scope or results of the investigations, or the impact, if any, on its results of operations.
 
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
No matters were submitted to a vote of security holders during the fourth quarter of 2007.
 
17


 

 
Part II
 
ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
The common shares of the Company are listed on the New York Stock Exchange with a symbol of DBD. The price ranges of common shares of the Company for the periods indicated below are as follows:
 
                                                 
    2007     2006     2005  
    High     Low     High     Low     High     Low  
1st Quarter
  $ 48.42     $ 42.50     $ 43.84     $ 36.40     $ 57.75     $ 51.70  
2nd Quarter
    52.70       47.25       46.35       39.15       57.80       44.85  
3rd Quarter
    54.50       42.49       44.90       36.93       50.21       33.78  
4th Quarter
    45.90       28.32       47.13       41.41       41.00       33.10  
Full Year
  $ 54.50     $ 28.32     $ 47.13     $ 36.40     $ 57.80     $ 33.10  
 
There were approximately 66,922 shareholders at December 31, 2007, which includes an estimated number of shareholders who have shares held in their accounts by banks, brokers, and trustees for benefit plans and the agent for the dividend reinvestment plan.
 
On the basis of amounts paid and declared, the annualized quarterly dividends per share were $0.94, $0.86 and $0.82 in 2007, 2006 and 2005, respectively.
 
Information concerning the Company’s share repurchases made during the fourth quarter of 2007:
 
                                 
                Total Number of
    Maximum Number of
 
    Total Number
          Shares Purchased as
    Shares that may yet
 
    of Shares
    Average Price
    Part of Publicly
    be Purchased Under
 
 Period   Purchased(1)     Paid Per Share     Announced Plans(2)     the Plans(2)  
October
          N/A               2,926,500  
November
    500     $ 35.69             2,926,500  
December
    564     $ 28.92             2,926,500  
                                 
Total
    1,064     $ 32.31             2,926,500  
                                 
 
(1) Includes 1,064 shares surrendered or deemed surrendered to the Company in connection with the Company’s stock-based compensation.
 
(2) The total number of shares repurchased as part of the publicly announced share repurchase plan was 9,073,500 as of December 31, 2007. The plan was approved by the Board of Directors in April 1997 and authorized the repurchase of up to two million shares. The plan was amended in June 2004 to authorize the repurchase of an additional two million shares, and was further amended in August and December 2005 to authorize the repurchase of an additional six million shares. On February 14, 2007, the Board of Directors approved an increase in the Company’s share repurchase program by authorizing the repurchase of up to an additional two million of the Company’s outstanding common shares. The plan has no expiration date.
 
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PERFORMANCE GRAPH
 
Set forth below is a line graph comparing the yearly percentage change in the cumulative shareholder return, which includes the reinvestment of cash dividends, of the Company’s common shares with the cumulative total return of (i) the S&P 500 Index, (ii) the S&P MidCap 400 Index, and (iii) a Custom Composite Index (28 stocks) made up of companies selected by the Company based on similarity to the Company’s line of business and similar market capitalization. The comparison covers the five-year period starting December 31, 2002 and ended December 31, 2007. The comparisons in this graph are required by rules promulgated by the Commission and are not intended to forecast future performance of the Corporation’s common shares.
 
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Diebold, Inc., The S&P 500 Index,
The S&P Midcap 400 Index And A Custom Composite Index (28 Stocks)
 
(PERFORMANCE GRAPH)
 
* $100 invested on 12/31/02 in stock or index-including reinvestment of dividends.
Fiscal year ending December 31.
 
Copyright© 2008, Standard & Poor’s, a division of the McGraw — Hill Companies, Inc. All rights reserved. www.researchdatagroup.com/s&p.htm
 
 
** As of December 31, 2007, the Custom Composite Index included 28 stocks as follows: Affiliated Computer Services Inc, Ametek Inc, Benchmark Electronics Inc, Cooper Industries Limited, Corning Inc, Crane Company, Deluxe Corp., Donaldson Inc, Dover Corp., Fiserv Inc, FMC Technologies Inc, Harris Corp., Hubbell Inc, International Game Technology, Lennox International Inc, Mettler Toledo International, NCR Corp., Pall Corp., PerkinElmer Inc, Pitney-Bowes Inc, Rockwell Automation Inc, Rockwell Collins Inc, Sauer Danfoss Inc, Teleflex Inc, Thermo Fisher Scientific Inc., Thomas & Betts Corp., Unisys Corp. and Varian Medical Systems Inc. During 2006, Avaya, American Power Conversion, and Genlyte Group, Inc. were included in the Custom Composite Index but ceased trading in 2007 and were removed from the peer group. Also, during 2006, Fisher Scientific International was included in the Custom Composite Index but was acquired by Thermo-Electron, d.b.a Thermo Fisher Scientific Inc.
 
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ITEM 6: SELECTED FINANCIAL DATA
(In thousands)
 
We have restated the selected financial data presented in this annual report as of December 31, 2006, December 31, 2005, December 31, 2004 and December 31, 2003, and for the fiscal years ended on those dates. The restatement reflects the results of the internal review by the Company, in consultation with its outside advisors and the Audit Committee of the Board of Directors, as well as other adjustments identified by management through this process.
 
This “Part II — Item 6 — Selected Financial Data” includes the following:
 
  •  The restated selected financial data for the annual periods described above;
 
  •  The annual financial data for the year ended December 31, 2007; and
 
  •  Schedules presenting details of the nature and impact of the restatement adjustments. Additional information regarding these adjustments can be found in Note 2 to the Consolidated Financial Statements. The adjustments that relate to fiscal years prior to 2003 are reflected in beginning retained earnings for 2003. The cumulative impact of these adjusting entries decreased retained earnings by approximately $89,000, net of tax, at the beginning of 2003.
 
The following balance sheet data as of December 31, 2007 and December 31, 2006 and results of operations for the years ended December 31, 2007, December 31, 2006 and December 31, 2005 are derived from our audited financial statements included in “Part II — Item 8 — Financial Statements and Supplementary Data.” The data for years ended December 31, 2004 and 2003 are derived from our unaudited restated financial statements.
 
20


 

SELECTED FINANCIAL DATA
 
The following table should be read in conjunction with “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II — Item 8 — Financial Statements and Supplementary Data.”
 
                                                                         
    Year ended December 31,  
    2007     2006     2005     2004     2003  
          As
    As
    As
    As
    As
    As
    As
    As
 
          Reported     Restated     Reported     Restated     Reported     Restated     Reported     Restated  
    (In millions, except per share data)  
Results of Operations
                                                                       
Net sales
  $ 2,965     $ 2,906     $ 2,940     $ 2,587     $ 2,583     $ 2,357     $ 2,388     $ 2,086     $ 1,994  
Cost of sales
    2,281       2,196       2,202       1,962       1,929       1,688       1,715       1,470       1,432  
                                                                         
Gross profit
    684       710       738       625       654       669       673       616       562  
                                                                         
Income from continuing operations, net of tax
    40       87       105       83       92       182       177       171       133  
Income from discontinued operations, net of tax
                      14       10       2       2       2       2  
                                                                         
Net Income
  $ 40     $ 87     $ 105     $ 97     $ 102     $ 184     $ 179     $ 173     $ 135  
                                                                         
Basic earnings per common share:
                                                                       
Income from continuing operations
    0.60       1.30       1.57       1.17       1.30       2.52       2.46       2.37       1.83  
Income from discontinued operations
                      0.20       0.15       0.03       0.03       0.02       0.03  
                                                                         
Net Income
  $ 0.60     $ 1.30     $ 1.57     $ 1.37     $ 1.45     $ 2.55     $ 2.49     $ 2.39     $ 1.86  
                                                                         
Diluted earnings per common share:
                                                                       
Income from continuing operations
    0.59       1.29       1.55       1.17       1.29       2.50       2.43       2.35       1.82  
Income from discontinued operations
                      0.20       0.14       0.03       0.03       0.02       0.02  
                                                                         
Net Income
  $ 0.59     $ 1.29     $ 1.55     $ 1.37     $ 1.43     $ 2.53     $ 2.46     $ 2.37     $ 1.84  
                                                                         
Number of Weighted-Average Shares Outstanding
                                                                       
Basic weighted-average shares outstanding
    65,841       66,669       66,669       70,577       70,577       72,000       72,000       72,417       72,417  
Diluted weighted-average shares outstanding
    66,673       66,885       67,253       70,966       71,340       72,534       72,823       72,924       73,087  
Common dividends paid
  $ 62,442     $ 57,408     $ 57,964     $ 57,770     $ 58,196     $ 53,240     $ 53,506     $ 49,242     $ 49,330  
Common dividends paid per share
    0.94       0.86       0.86       0.82       0.82       0.74       0.74       0.68       0.68  
 
21


 

                                                                         
    Year ended December 31,  
    2007     2006     2005     2004     2003  
          As
    As
    As
    As
    As
    As
    As
    As
 
          Reported     Restated     Reported     Restated     Reported     Restated     Reported     Restated  
    (In millions, except per share data)  
Consolidated Balance Sheet Data
                                                                       
(as of period end)
                                                                       
Current assets
  $ 1,631     $ 1,596     $ 1,694     $ 1,481     $ 1,596     $ 1,290     $ 1,382     $ 1,164     $ 1,278  
Current liabilities
    751       599       782       580       796       740       944       619       844  
Net working capital
    880       997       912       901       800       550       438       545       434  
Property, plant and equipment, net
    220       217       208       235       226       225       219       209       206  
Total long-term liabilities
    766       824       816       617       568       142       140       142       140  
Total assets
    2,631       2,514       2,597       2,350       2,409       2,131       2,210       1,898       2,000  
Shareholders’ equity
    1,115       1,091       998       1,153       1,045       1,249       1,126       1,137       1,016  
 
CUMULATIVE ADJUSTMENTS TO PREVIOUSLY REPORTED RETAINED EARNINGS
 
The following tables present the impact of the restatement adjustments on previously reported retained earnings for the years ended December 31, 2006, 2005, 2004 and 2003. See Note 2 to the Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data” for further discussion of the restatement.
 
                                 
    Year ended December 31,  
    2006     2005     2004     2003  
    (In thousands)  
Retained earnings as reported
  $ 1,169,607     $ 1,140,468     $ 1,101,492     $ 970,935  
Cumulative restatement adjustments
    (109,882 )     (127,331 )     (132,295 )     (127,465 )(1)
                                 
Retained earnings as restated
  $ 1,059,725     $ 1,013,137     $ 969,197     $ 843,470  
                                 
                                 
 
(1) Includes a $88,972 decrease in ending retained earnings at December 31, 2002 for the cumulative impact of the adjustments for the periods prior to 2003.
 
22


 

 
CUMULATIVE ADJUSTMENTS TO PREVIOUSLY REPORTED BEGINNING RETAINED EARNINGS
 
                                 
    Year ended December 31,  
    2006     2005     2004     2003  
    (In thousands)  
Retained earnings as restated:
                               
Beginning retained earnings as reported
  $ 1,140,468     $ 1,101,492     $ 970,935     $ 847,091  
Cumulative adjustments to beginning retained earnings
    (127,331 )     (132,295 )     (127,465 )     (88,972 )
                                 
Beginning retained earnings as restated
    1,013,137       969,197       843,470       758,119  
Net income as reported
    86,547       96,746       183,797       173,086  
Net income restatement adjustments
    18,005       5,389       (4,563 )     (38,405 )
                                 
Net income as restated
    104,552       102,135       179,234       134,681  
                                 
Dividends declared and paid as reported
    (57,408 )     (57,770 )     (53,240 )     (49,242 )
Dividends declared and paid adjustments
    (556 )     (426 )     (266 )     (88 )
                                 
Dividends declared and paid as restated
    (57,964 )     (58,196 )     (53,506 )     (49,330 )
                                 
Retained earnings as restated
  $ 1,059,725     $ 1,013,137     $ 969,198     $ 843,470  
                                 
 
CUMULATIVE ADJUSTMENTS TO PREVIOUSLY REPORTED BEGINNING RETAINED EARNINGS BY CATEGORY
 
The following table presents the impact of the restatement adjustments on previously reported beginning retained earnings for the years beginning January 1, 2006, 2005, 2004 and 2003, with the adjustments identified by the nature of the error. See Note 2 to the Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data” for further discussion of the restatement.
 
                                 
    Years Beginning January 1,  
    2006     2005     2004     2003  
    (In thousands)  
Beginning retained earnings as reported
  $ 1,140,468     $ 1,101,492     $ 970,935     $ 847,091  
Revenue Recognition — Bill & Hold
    (67,151 )     (81,957 )     (95,550 )     (66,026 )
Revenue Recognition — Other
    (11,201 )     (7,285 )     (5,886 )     (1,525 )
Account Reconciliations
    (62,806 )     (77,122 )     (68,503 )     (34,462 )
Inventory
    (9,953 )     (12,051 )     (9,694 )     (10,763 )
Capitalization
    (18,232 )     (12,911 )     (8,932 )     (7,674 )
Other
    (1,384 )     2,372       1,615       384  
Tax
    44,176       57,012       59,573       31,094  
Dividends declared and paid adjustments
    (780 )     (353 )     (88 )      
                                 
Cumulative adjustments to beginning retained earnings
    (127,331 )     (132,295 )     (127,465 )     (88,972 )
                                 
Beginning retained earnings as restated
  $ 1,013,137     $ 969,197     $ 843,470     $ 758,119  
                                 
 
23


 

SUMMARY OF IMPACT OF RESTATEMENT ADJUSTMENTS ON INCOME BEFORE TAXES FOR THE YEARS ENDED DECEMBER 31, 2006, 2005, 2004 AND 2003
 
The following table presents the increase (decrease) of the significant restatement adjustments on income from continuing operations before taxes for the years ended December 31, 2006, 2005, 2004 and 2003:
 
                                                             
        Revenue Recognition     Account
                      Total
 
        Bill & Hold     Other     Reconciliations     Inventory     Capitalization     Other     Adjustments  
        (In thousands)  
2006
                                                           
    Bill & Hold Revenue   $ 1,582                                     $ 1,582  
    Service Contract Revenue                 (2,350 )                       (2,350 )
    ERP Capitalization                             653             653  
    AP Float and Related Reserve                 1,121                         1,121  
    Installation Allowance                 666                         666  
    Finished Goods Inventory                       335                   335  
    Refurbished Inventory                       2,317                   2,317  
    AP Wire Clearing Account                 6,168                         6,168  
                                                             
Subtotal
        1,582             5,605       2,652       653             10,492  
    All Other Adjustments, net           3,791       12,216       3,409       (316 )     3,427       22,527  
                                                             
Total
      $ 1,582     $ 3,791     $ 17,821     $ 6,061     $ 337     $ 3,427     $ 33,019  
                                                             
2005
                                                           
    Bill & Hold Revenue   $ 14,807                                     $ 14,807  
    Service Contract Revenue                 (1,165 )                       (1,165 )
    ERP Capitalization                             (6,787 )           (6,787 )
    AP Float and Related Reserve                 (362 )                       (362 )
    Installation Allowance                 8,050                         8,050  
    Finished Goods Inventory                       9,074                   9,074  
    Refurbished Inventory                       (1,517 )                 (1,517 )
    AP Wire Clearing Account                 (842 )                       (842 )
                                                             
Subtotal
        14,807             5,681       7,557       (6,787 )           21,258  
    All Other Adjustments, net           (2,026 )     8,634       (5,459 )     1,465       (1,206 )     1,408  
                                                             
Total
      $ 14,807     $ (2,026 )   $ 14,315     $ 2,098     $ (5,322 )   $ (1,206 )   $ 22,666  
                                                             
2004
                                                           
    Bill & Hold Revenue   $ 13,593                                   $ 13,593  
    Service Contract Revenue                 (2,296 )                       (2,296 )
    ERP Capitalization                             (2,953 )           (2,953 )
    AP Float and Related Reserve                 (346 )                       (346 )
    Installation Allowance                 (2,091 )                       (2,091 )
    Finished Goods Inventory                       1,439                   1,439  
    Refurbished Inventory                       (1,617 )                 (1,617 )
    AP Wire Clearing Account                 1,674                         1,674  
                                                             
Subtotal
        13,593             (3,059 )     (178 )     (2,953 )           7,403  
    All Other Adjustments, net           (1,398 )     (6,430 )     (2,180 )     (1,026 )     759       (10,275 )
                                                             
Total
      $ 13,593     $ (1,398 )   $ (9,489 )   $ (2,358 )   $ (3,979 )   $ 759     $ (2,872 )
                                                             
2003
                                                           
    Bill & Hold Revenue   $ (29,526 )                                 $ (29,526 )
    Service Contract Revenue                 (16,615 )                       (16,615 )
    ERP Capitalization                             (472 )           (472 )
    AP Float and Related Reserve                 (9,778 )                       (9,778 )
    Installation Allowance                 (2,183 )                       (2,183 )
    Finished Goods Inventory                       (4,301 )                 (4,301 )
    Refurbished Inventory                       1,317                   1,317  
    AP Wire Clearing Account                 (4,223 )                       (4,223 )
                                                             
Subtotal
        (29,526 )           (32,799 )     (2,984 )     (472 )           (65,781 )
    All Other Adjustments, net           (3,557 )     (1,997 )     4,054       (785 )     1,230       (1,055 )
                                                             
Total
      $ (29,526 )   $ (3,557 )   $ (34,796 )   $ 1,070     $ (1,257 )   $ 1,230     $ (66,836 )
                                                             
 
24


 

IMPACT OF RESTATEMENT ADJUSTMENTS ON 2006 ON NET INCOME
 
The following table presents the impact of the restatement adjustments on the Consolidated Statement of Income for the year ended December 31, 2006:
 
                                                                                 
    Year ended December 31, 2006  
          Adjustments              
          Revenue Recognition                                            
    As
                Account
                      Total
    Provision for
    As
 
    Reported     Bill & Hold     Other     Reconciliations     Inventory     Capitalization     Other     Adjustments     Income Tax     Restated  
    (In thousands)  
Net sales
                                                                               
Products
  $ 1,469,250     $ 24,057     $ 9,090     $ (1,399 )   $ 1,636     $     $ (1,636 )   $ 31,748             $ 1,500,998  
Services
    1,436,982       3,325       (1,631 )     (64 )                       1,630               1,438,612  
                                                                                 
      2,906,232       27,382       7,459       (1,463 )     1,636             (1,636 )     33,378               2,939,610  
Cost of sales
                                                                               
Products
    1,046,617       22,787       4,663       (10,371 )     (3,866 )           (2,454 )     10,759               1,057,376  
Services
    1,149,097       2,409       (573 )     (5,725 )     (559 )     (4 )           (4,452 )             1,144,645  
                                                                                 
      2,195,714       25,196       4,090       (16,096 )     (4,425 )     (4 )     (2,454 )     6,307               2,202,021  
                                                                                 
Gross profit
    710,518       2,186       3,369       14,633       6,061       4       818       27,071               737,589  
                                                                                 
Selling and administrative expense
    463,862       155       (577 )     (1,961 )           2,792       (203 )     206               464,068  
Research, development and engineering expense
    70,995       594             36                         630               71,625  
Impairment of asset
    22,462                               (3,125 )           (3,125 )             19,337  
(Gain) loss on sale of assets, net
    328                                                         328  
                                                                                 
      557,647       749       (577 )     (1,925 )           (333 )     (203 )     (2,289 )             555,358  
                                                                                 
Operating profit
    152,871       1,437       3,946       16,558       6,061       337       1,021       29,360               182,231  
                                                                                 
Other income (expense)
                                                                               
Investment income
    19,224             (155 )                             (155 )             19,069  
Interest expense
    (36,024 )                                   730       730               (35,294 )
Miscellaneous, net
    (5,025 )                 1,263                   1,676       2,939               (2,086 )
Minority interest
    (6,597 )     145                                     145               (6,452 )
                                                                                 
Income from continuing operations before taxes
    124,449       1,582       3,791       17,821       6,061       337       3,427       33,019               157,468  
                                                                                 
Income tax adjustments
                  1,053                               1,053               1,053  
Taxes on income
    37,902                                                               13,961       51,863  
Income from continuing operations
    86,547       1,582       2,738       17,821       6,061       337       3,427       31,966       (13,961 )     104,552  
Income from discontinued operations, net of tax
                                                             
                                                                                 
Net income
  $ 86,547     $ 1,582     $ 2,738     $ 17,821     $ 6,061     $ 337     $ 3,427     $ 31,966     $ (13,961 )   $ 104,552  
                                                                                 
Basic weighted-average shares outstanding
    66,669                                                                       66,669  
Diluted weighted-average shares outstanding
    66,885                                                                       67,253  
Basic earnings per share
                                                                               
Income from continuing operations
  $ 1.30                                                                     $ 1.57  
Income from discontinued operations
  $                                                                     $  
Net income
  $ 1.30                                                                     $ 1.57  
Diluted earnings per share
                                                                               
Income from continuing operations
  $ 1.29                                                                     $ 1.55  
Income from discontinued operations
  $                                                                     $  
Net income
  $ 1.29                                                                     $ 1.55  
 
25


 

IMPACT OF RESTATEMENT ADJUSTMENTS ON 2005 NET INCOME
 
The following table presents the impact of the restatement adjustments on the Consolidated Statement of Income for the year ended December 31, 2005:
 
                                                                                 
    Year ended December 31, 2005  
          Adjustments  
          Revenue
                                           
          Recognition                                            
    As
                Account
                      Total
    Provision for
    As
 
    Reported     Bill & Hold     Other     Reconciliations     Inventory     Capitalization     Other     Adjustments     Income Tax     Restated  
    (In thousands)  
Net sales
                                                                               
Products
  $ 1,293,419     $ (8,347 )   $ (10,664 )   $ 4,147     $ (1,544 )   $     $ 1,544     $ (14,864 )           $ 1,278,555  
Services
    1,293,630       11,742       (56 )     (881 )                       10,805               1,304,435  
                                                                                 
      2,587,049       3,395       (10,720 )     3,266       (1,544 )           1,544       (4,059 )             2,582,990  
Cost of sales
                                                                               
Products
    952,321       (17,657 )     (8,991 )     (2,975 )     (3,976 )           1,750       (31,849 )             920,472  
Services
    1,009,246       6,903       (436 )     (6,634 )     334       (403 )           (236 )             1,009,010  
                                                                                 
      1,961,567       (10,754 )     (9,427 )     (9,609 )     (3,642 )     (403 )     1,750       (32,085 )             1,929,482  
                                                                                 
Gross profit
    625,482       14,149       (1,293 )     12,875       2,098       403       (206 )     28,026               653,508  
                                                                                 
Selling and administrative expense
    403,804             597       (1,157 )           5,725       1,905       7,070               410,874  
Research, development and engineering expense
    60,409       (694 )           222                         (472 )             59,937  
Impairment of asset
                                                             
(Gain) loss on sale of assets, net
    (50 )                                                       (50 )
                                                                                 
      464,163       (694 )     597       (935 )           5,725       1,905       6,598               470,761  
                                                                                 
Operating profit
    161,319       14,843       (1,890 )     13,810       2,098       (5,322 )     (2,111 )     21,428               182,747  
                                                                                 
Other income (expense)
                                                                               
Investment income
    12,165             (136 )     (25 )                       (161 )             12,004  
Interest expense
    (16,511 )                                   311       311               (16,200 )
Miscellaneous, net
    (11,893 )                 530                   594       1,124               (10,769 )
Minority interest
    (6,829 )     (36 )                                   (36 )             (6,865 )
                                                                                 
Income from continuing operations before taxes
    138,251       14,807       (2,026 )     14,315       2,098       (5,322 )     (1,206 )     22,666               160,917  
                                                                                 
Income tax adjustments
                  1,892                               1,892               1,892  
Taxes on income
    55,347                                                               11,716       67,063  
Income from continuing operations
    82,904       14,807       (3,918 )     14,315       2,098       (5,322 )     (1,206 )     20,774       (11,716 )     91,962  
Income from discontinued operations, net of tax
    13,842                                     (2,549 )     (2,549 )     (1,120 )     10,173  
                                                                                 
Net Income
  $ 96,746     $ 14,807     $ (3,918 )   $ 14,315     $ 2,098     $ (5,322 )   $ (3,755 )   $ 18,225     $ (12,836 )   $ 102,135  
                                                                                 
Basic weighted-average shares outstanding
    70,577                                                                       70,577  
Diluted weighted-average shares outstanding
    70,966                                                                       71,340  
Basic earnings per share
                                                                               
Income from continuing operations
  $ 1.17                                                                     $ 1.30  
Income from discontinued operations
  $ 0.20                                                                     $ 0.15  
Net income
  $ 1.37                                                                     $ 1.45  
Diluted earnings per share
                                                                               
Income from continuing operations
  $ 1.17                                                                     $ 1.29  
Income from discontinued operations
  $ 0.20                                                                     $ 0.14  
Net income
  $ 1.37                                                                     $ 1.43  
 
26


 

IMPACT OF RESTATEMENT ADJUSTMENTS ON 2004 NET INCOME
 
The following table presents the impact of the restatement adjustments on the Consolidated Statement of Income for the year ended December 31, 2004:
 
                                                                                 
    Year ended December 31, 2004  
          Adjustments              
          Revenue Recognition                                            
    As
                Account
                      Total
    Provision for
    As
 
    Reported     Bill & Hold     Other     Reconciliations     Inventory     Capitalization     Other     Adjustments     Income Tax     Restated  
    (In thousands)  
Net sales
                                                                               
Products
  $ 1,158,340     $ 29,144     $ (9,000 )   $ (2,732 )   $ (42 )   $     $ 42     $ 17,412             $ 1,175,752  
Services
    1,198,768       16,102       (307 )     (2,019 )                       13,776               1,212,544  
                                                                                 
      2,357,108       45,246       (9,307 )     (4,751 )     (42 )           42       31,188               2,388,296  
Cost of sales
                                                                               
Products
    789,287       21,954       (7,616 )     (2,071 )     703             11       12,981               802,268  
Services
    898,925       10,130       (293 )     2,089       1,613       383             13,922               912,847  
                                                                                 
      1,688,212       32,084       (7,909 )     18       2,316       383       11       26,903               1,715,115  
                                                                                 
Gross profit
    668,896       13,162       (1,398 )     (4,769 )     (2,358 )     (383 )     31       4,285               673,181  
                                                                                 
Selling and administrative expense
    336,657                   3,382             3,590       (188 )     6,784               343,441  
Research, development and engineering expense
    58,759       (269 )           (73 )           (40 )           (382 )             58,377  
Impairment of asset
                                                             
(Gain) loss on sale of assets, net
    141                                                         141  
                                                                                 
      395,557       (269 )           3,309             3,550       (188 )     6,402               401,959  
                                                                                 
Operating profit
    273,339       13,431       (1,398 )     (8,078 )     (2,358 )     (3,933 )     219       (2,117 )             271,222  
                                                                                 
Other income (expense)
                                                                               
Investment income
    12,299                                                         12,299  
Interest expense
    (10,657 )                                   186       186               (10,471 )
Miscellaneous, net
    (1,814 )                 (1,411 )           (46 )     354       (1,103 )             (2,917 )
Minority interest
    (7,718 )     162                                     162               (7,556 )
                                                                                 
Income from continuing operations before taxes
    265,449       13,593       (1,398 )     (9,489 )     (2,358 )     (3,979 )     759       (2,872 )             262,577  
                                                                                 
Income tax adjustments
                        (871 )                       (871 )             (871 )
Taxes on income
    83,640                                                               2,561       86,201  
Income from continuing operations
    181,809       13,593       (1,398 )     (8,618 )     (2,358 )     (3,979 )     759       (2,001 )     (2,561 )     177,247  
Income from discontinued operations, net of tax
    1,988                                                         1,988  
                                                                                 
Net income
  $ 183,797     $ 13,593     $ (1,398 )   $ (8,618 )   $ (2,358 )   $ (3,979 )   $ 759     $ (2,001 )   $ (2,561 )   $ 179,235  
                                                                                 
Basic weighted-average shares outstanding
    72,000                                                                       72,000  
Diluted weighted-average shares outstanding
    72,534                                                                       72,823  
Basic earnings per share
                                                                               
Income from continuing operations
  $ 2.52                                                                     $ 2.46  
Income from discontinued operations
  $ 0.03                                                                     $ 0.03  
Net income
  $ 2.55                                                                     $ 2.49  
Diluted earnings per share
                                                                               
Income from continuing operations
  $ 2.50                                                                     $ 2.43  
Income from discontinued operations
  $ 0.03                                                                     $ 0.03  
Net income
  $ 2.53                                                                     $ 2.46  
 
27


 

Impact of Restatement Adjustments on 2003 Net Income
 
The following table presents the impact of the restatement adjustments on the Consolidated Statement of Income for the year ended December 31, 2003:
 
                                                                                 
    Year ended December 31, 2003  
          Adjustments              
          Revenue Recognition                                            
    As
                Account
                      Total
    Provision for
    As
 
    Reported     Bill & Hold     Other     Reconciliations     Inventory     Capitalization     Other     Adjustments     Income Tax     Restated  
    (In thousands)  
Net sales
                                                                               
Products
  $ 1,008,000     $ (69,243 )   $ (5,136 )   $ 2,326     $     $     $     $ (72,053 )           $ 935,947  
Services
    1,078,431       (19,366 )           (977 )                       (20,343 )             1,058,088  
                                                                                 
      2,086,431       (88,609 )     (5,136 )     1,349                         (92,396 )             1,994,035  
Cost of sales
                                                                               
Products
    672,307       (46,755 )     (1,662 )     20,438       80       500       (15 )     (27,414 )           $ 644,893  
Services
    797,321       (12,278 )     83       3,180       (1,150 )     27             (10,138 )           $ 787,183  
                                                                                 
      1,469,628       (59,033 )     (1,579 )     23,618       (1,070 )     527       (15 )     (37,552 )             1,432,076  
                                                                                 
Gross profit
    616,803       (29,576 )     (3,557 )     (22,269 )     1,070       (527 )     15       (54,844 )             561,959  
                                                                                 
Selling and administrative expense
    306,333                   10,369             1,234       (470 )     11,133               317,466  
Research, development and engineering expense
    58,678       (50 )           (87 )           100             (37 )             58,641  
Impairment of asset
                                                             
(Gain) loss on sale of assets, net
    178                                                         178  
                                                                                 
      365,189       (50 )           10,282             1,334       (470 )     11,096               376,285  
                                                                                 
Operating profit
    251,614       (29,526 )     (3,557 )     (32,551 )     1,070       (1,861 )     485       (65,940 )             185,674  
                                                                                 
Other income (expense)
                                                                               
Investment income
    12,996     $     $     $ (868 )   $     $     $       (868 )             12,128  
Interest expense
    (9,351 )                                   54       54               (9,297 )
Miscellaneous, net
    3,746                   (1,377 )           604       691       (82 )             3,664  
Minority interest
    (7,547 )                                                       (7,547 )
                                                                                 
Income from continuing operations before taxes
    251,458       (29,526 )     (3,557 )     (34,796 )     1,070       (1,257 )     1,230       (66,836 )             184,622  
                                                                                 
Income tax adjustments
                  802       (754 )                       48               48  
Taxes on income
    80,188                                                               (28,479 )     51,709  
Income from continuing operations
    171,270       (29,526 )     (4,359 )     (34,042 )     1,070       (1,257 )     1,230       (66,884 )     28,479       132,865  
                                                                               
Income from discontinued operations, net of tax
    1,816                                                         1,816  
                                                                                 
Net income
  $ 173,086     $ (29,526 )   $ (4,359 )   $ (34,042 )   $ 1,070     $ (1,257 )   $ 1,230     $ (66,884 )   $ 28,479     $ 134,681  
                                                                                 
Basic weighted-average shares outstanding
    72,417                                                                       72,417  
Diluted weighted-average shares outstanding
    72,924                                                                       73,087  
Basic earnings per share
                                                                               
Income from continuing operations
  $ 2.37                                                                     $ 1.83  
Income from discontinued operations
  $ 0.02                                                                     $ 0.03  
Net income
  $ 2.39                                                                     $ 1.86  
Diluted earnings per share
                                                                               
Income from continuing operations
  $ 2.35                                                                     $ 1.82  
Income from discontinued operations
  $ 0.02                                                                     $ 0.02  
Net income
  $ 2.37                                                                     $ 1.84  
 
28


 

ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands)
 
BACKGROUND OF THE RESTATEMENT
 
In the first quarter of 2006, the Division of Enforcement of the SEC initiated an informal inquiry into certain of the Company’s accounting and financial reporting matters and requested the Company provide certain documents and information, specifically related to its practice of recognizing certain revenue on a bill and hold basis. In the third quarter of 2006, the Company was informed that the SEC’s previous informal inquiry related to revenue recognition had been converted to a formal, non-public investigation.
 
On July 25, 2007, the Company announced that it would delay the release of its earnings results for the quarter ended June 30, 2007, as well as the filing of its quarterly report on Form 10-Q for that quarter, while the Company sought guidance from the OCA as to the Company’s revenue recognition policy. The guidance sought related to the Company’s long-standing practice of recognizing certain revenue on a bill and hold basis within its North America business segment.
 
On October 2, 2007, the Company announced it was discontinuing its use of bill and hold as a method of revenue recognition in both its North America business segment and its International businesses.
 
On December 21, 2007, the Company announced that, in consultation with outside advisors, it was conducting an internal review into certain accounting and financial reporting matters, including, but not limited to, the review of various balance sheet accounts such as prepaids, accruals, capitalized assets, deferred revenue and reserves within both the Company’s North America and International businesses. The review was conducted primarily by outside counsel of the Company and was done in consultation with and participation with the Company’s internal audit staff and management, as well as outside advisors including forensic accountants and independent legal counsel to the Audit Committee.
 
During the course of the review, certain questions were raised as to certain prior accounting and financial reporting items in addition to bill and hold revenue recognition, including whether the prepaid expenses, accrued liabilities, capitalized assets, deferred revenue and reserves had been recorded accurately and timely. Accordingly, the scope of the review was expanded beyond the initial revenue recognition issues to include these additional items. This review has been completed as of the date of the filing of this annual report.
 
On January 15, 2008, the Company announced that it had concluded its discussion with the OCA and, as a result of those discussions, the Company determined that its previous long-standing method of accounting for bill and hold transactions was in error, representing a misapplication of U.S. generally accepted accounting principles (GAAP). In addition, the Company disclosed that revenue previously recognized on a bill and hold basis would be recognized upon customer acceptance of products at a customer location. Management of the Company determined that this corrected method of recognizing revenue would be adopted retroactively after an in-depth analysis and review with its outside auditors, KPMG LLP (KPMG), an independent registered public accounting firm, the Audit Committee of the Company’s Board of Directors, and the OCA. Accordingly, management concluded that previously issued financial statements for the fiscal years ended December 31, 2006, 2005, 2004 and 2003; the quarterly data in each of the quarters for the years ended December 31, 2006 and 2005; and the quarter ended March 31, 2007, must be restated and should no longer be relied upon. As a result, the Company has restated its previously issued financial statements for those periods. Restated financial information is presented in this annual report on Form 10-K for the year ended December 31, 2007.
 
29


 

OVERVIEW
 
Diebold has been in business for more than 148 years providing innovative, safe and reliable self-service delivery and security systems to the financial, retail, commercial and government markets. Drawing from a rich past as the nation’s premier manufacturer of safes and vaults, Diebold today is in the midst of a fundamental transformation. During 2007, Diebold made significant progress in rationalizing product development, streamlining procurement, realigning its manufacturing footprint and improving logistics. These efforts have enabled the Company to improve quality and productivity and decrease costs.
 
The Company expects to achieve a key milestone on time — its Smart Business 100 program — to deliver $100,000 in cost savings from 2006 to the end of 2008. By the end of 2007, $65,000 in cost savings have been realized.
 
In addition to its ongoing $100,000 cost-reduction program, Diebold is targeting to reduce its global workforce by eight hundred full-time positions, or approximately five percent of its workforce. The majority of these reductions are contemplated to occur in North America, Brazil and select areas of Western Europe.
 
The Company is committed to making the strategic moves that not only streamline operations, but also enhance its ability to serve its customers. Therefore, strengthening its manufacturing position in Europe, Middle East and Africa (EMEA) has been a top priority for the Company. Diebold continued to ramp up production at its new manufacturing facility in Budapest, Hungary throughout 2007. The facility is now the primary source of ATMs for the Diebold EMEA market. The Company believes it now has an optimal manufacturing footprint with strategic locations in Hungary, India, Brazil and China, and a lean operation in North America with additional opportunities to reduce manufacturing costs and build a more competitive cost structure.
 
The focus on services and software is playing an increasingly important role. With the costs of operating an ATM increasing, financial institutions are eager to optimize management and productivity of their ATM channels — and they are increasingly exploring outsourced solutions. Outsourcing is about more than cost. It is a business strategy that customers are employing so they can provide their customers with the most innovative products and services available. For these reasons, the Company developed its industry-leading Diebold Integrated Services® platform, which incorporates cross-disciplinary functions into comprehensive, turnkey outsourcing solutions. For the second year in a row, Diebold was named one of the world’s top outsourcing service providers by the International Association of Outsourcing Professionals.
 
Software is growing in importance in the value equation for financial self-service customers. Agilis EmPower®, a flexible, open software platform, features software development tools and services that enable financial institutions to react quickly to changing customer needs and exchange information across banking delivery channels. At the same time, it seamlessly integrates into a financial institution’s service-oriented architecture.
 
Diebold is the first major ATM provider in the United States to introduce bulk check deposit technology with the release of its bulk document Intelligent Depositorytm module (IDM). IDM technology accepts and magnetically reads checks inserted in any orientation and can even process crumpled, curled or creased checks.
 
The Company’s efforts in the key China market were successful between July and December 2007. Diebold finalized agreements to sell more than 6,000 ATMs to Chinese financial institutions. The ATMs will increase security, upgrade the quality of financial service to consumers and improve customer satisfaction within China’s financial self-service networks.
 
Diebold has extended coverage and improved services by signing an agreement with General Business Machines (GBM) to form a direct operation that offers Diebold solutions to customers in Central America and the Caribbean region. The new operation, Diebold Central America, will serve both the financial industry and security customers in each country in the region.
 
Diebold recorded a fourth quarter 2007 non-cash asset impairment charge of $46,319 related to previously recorded goodwill. This impairment charge represents substantially all of the goodwill on Premier Election Solutions’ balance sheet from Diebold’s previous acquisitions of Global Election Systems and Data Information Management Systems. While Diebold continues to fully support its elections subsidiary, the Company also continues to pursue strategic alternatives to ownership of the subsidiary.
 
30


 

The Company intends the discussion of its financial condition and results of operations that follows to provide information that will assist in understanding the financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect the financial statements.
 
The business drivers of the Company’s future performance include several factors that include, but are not limited to:
 
  •  timing of a self-service upgrade and/or replacement cycle in mature markets such as the United States;
 
  •  high levels of deployment growth for new self-service products in emerging markets such as Asia Pacific;
 
  •  demand for new service offerings, including outsourcing or operating a network of ATMs;
 
  •  demand beyond expectations for security products and services for the financial, retail and government sectors;
 
  •  implementation and timeline for new election systems in the United States;
 
  •  the Companys strong financial position; and
 
  •  the Company’s ability to successfully integrate acquisitions.
 
31


 

 
The table below presents the changes in comparative financial data from 2007 to 2005. Comments on significant year-to-year fluctuations follow the table. The following discussion should be read in conjunction with the Consolidated Financial Statements and the related Notes that appear elsewhere in this annual report.
 
                                                                 
    Year ended December 31,  
    2007     2006     2005  
          % of
    %
          % of
    %
          % of
 
    Dollars     Net Sales     Change     Dollars     Net Sales     Change     Dollars     Net Sales  
                      (As Restated)     (As Restated)  
    (In thousands, except percentages)  
Net sales
                                                               
Products
  $ 1,429,646       48.22       (4.75 )   $ 1,500,998       51.06       17.40     $ 1,278,555       49.50  
Services
    1,535,191       51.78       6.71       1,438,612       48.94       10.29       1,304,435       50.50  
                                                                 
      2,964,837       100.00       0.86       2,939,610       100.00       13.81       2,582,990       100.00  
                                                                 
Cost of sales
                                                               
Products
    1,070,286       36.10       1.22       1,057,376       35.97       14.87       920,472       35.64  
Services
    1,210,701       40.84       5.77       1,144,645       38.94       13.44       1,009,010       39.06  
                                                                 
      2,280,987       76.94       3.59       2,202,021       74.91       14.12       1,929,482       74.70  
                                                                 
Gross profit
    683,850       23.06       (7.29 )     737,589       25.09       12.87       653,508       25.30  
Selling and administrative expenses
    470,615       15.87       1.41       464,068       15.79       12.95       410,874       15.91  
Research, development and engineering expense
    73,950       2.49       3.25       71,625       2.44       19.50       59,937       2.32  
Impairment of asset
    46,319       1.56       139.54       19,337       0.66                     0.00  
(Gain) loss on sale of assets, net
    (6,392 )     (0.22 )     (2048.8 )     328       0.01       (756.00 )     (50 )     (0.00 )
                                                                 
      584,492                       555,358                       470,761          
Operating profit
    99,358       3.35       (45.48 )     182,231       6.20       (0.28 )     182,747       7.08  
Other income (expense), net
    (15,655 )     (0.53 )     (14.50 )     (18,311 )     (0.62 )     22.36       (14,965 )     (0.58 )
Minority interest
    (8,365 )     (0.28 )     29.65       (6,452 )     (0.22 )     (6.02 )     (6,865 )     (0.27 )
                                                                 
Income from continuing operations before tax
    75,338       2.54       (52.16 )     157,468       5.36       (2.14 )     160,917       6.23  
Taxes on income
    35,797       1.21       (32.35 )     52,916       1.80       (23.26 )     68,955       2.67  
                                                                 
Income from continuing operations
    39,541       1.33       (62.18 )     104,552       3.56       13.69       91,962       3.56  
Income from discontinued operations — net of tax
                                                909       0.04  
Gain on sale of discontinued operations — net of tax
                                                9,264       0.36  
                                                                 
Income from discontinued operations
                                                10,173       0.39  
                                                                 
Net income
  $ 39,541       1.33       (62.18 )   $ 104,552       3.56       2.37     $ 102,135       3.95  
                                                                 
 
32


 

RESULTS OF OPERATIONS
 
2007 COMPARISON WITH 2006
 
Net Sales
 
The following table represents information regarding our net sales for the years ended December 31, 2007 and 2006:
 
                         
    Year ended December 31,        
    2007     2006     % Change  
          (As Restated)        
Net Sales
  $ 2,964,837     $ 2,939,610       0.9 %
 
Net sales for 2007 totaled $2,964,837 and were $25,227 or 0.9 percent higher than net sales for 2006. The increase in net sales included a net positive currency impact of approximately $100,567. Financial self-service revenue in 2007 increased by $132,486 or 6.8 percent over 2006, due to solid growth in the international market segments and a weakening of the U.S. dollar which accounted for 4.6 percent of the growth. Security solutions revenue increased by $62,329 or 8.1 percent for 2007. Election systems/lottery net sales of $63,703 decreased by $169,588 or 72.7 percent compared to 2006. The year-over-year decline was related to decreases in both electronic voting equipment revenue of $137,723 and decreased Brazilian lottery systems revenue of $31,865.
 
Gross Profit
 
The following table represents information regarding our gross profit for the years ended December 31, 2007 and 2006:
 
                         
    Year ended December 31,        
    2007     2006     % Change  
          (As Restated)        
Gross Profit
  $ 683,850     $ 737,589       (7.3 )%
Gross Profit Margin
    23.1 %     25.1 %     (2.0 )%
 
Gross profit for 2007 totaled $683,850 and was $53,739 or 7.3 percent lower than gross profit for 2006. Product gross margin was 25.1 percent in 2007 compared to 29.6 percent in 2006. Product gross margin was adversely impacted by $27,349 of restructuring charges in 2007 compared to $3,299 of restructuring charges in 2006. The 2007 restructuring charges were primarily related to the closure of the manufacturing plant in Cassis, France. In addition, product gross margin was adversely affected by lower election systems/lottery revenue and decreased profitability in the U.S. election systems business in 2007 compared to 2006. Service gross margin for 2007 was 21.1 percent compared with 20.4 percent for 2006. The increase in service gross margin was mainly due to higher revenue and profitability in Diebold International (DI) which was partly attributable to a decrease in restructuring charges of $2,640 from 2006 to 2007.
 
33


 

Operating Expenses
 
The following table represents information regarding our operating expenses for the years ended December 31, 2007 and 2006:
 
                             
      Year ended December 31,          
      2007     2006       % Change  
            (As Restated)          
Selling and administrative expense
    $ 470,615     $ 464,068         1.4 %
Research, development, and engineering expense
      73,950       71,625         3.2 %
Impairment of asset
      46,319       19,337         139.5 %
(Gain) loss on sale of assets, net
      (6,392 )     328         (2048.8 )%
                             
Total Operating Expenses
    $ 584,492     $ 555,358         5.2 %
Percent of Net Sales
      19.7 %     18.9 %       0.8 %
 
Selling and administrative expense for 2007 was 15.9 percent of net sales, nearly flat from 15.8 percent for 2006. Selling and administrative expense was adversely impacted by $1,299 of restructuring charges in 2007 compared to $14,867 of restructuring charges in 2006 mainly associated with the termination of the information technology outsourcing agreement, realignment of global service, and relocation of the Company’s European headquarters. In addition, non-routine expenses of $7,288 primarily from legal, audit and consultation fees related to the internal review of other accounting items, restatement of financial statements and the ongoing SEC and DOJ investigations and other advisory fees adversely impacted 2007 compared with $791 of similar expenses for 2006. Selling and administrative expense in 2007 was also unfavorably impacted by a weakening of the U.S. dollar and incremental spend related to acquisitions. In 2007, the Company reduced the reserve for the election systems trade receivable related to two counties in California by approximately $10,090 due to payments received. Research, development, and engineering expense for 2007 was 2.5 percent of net sales as compared to 2.4 percent in 2006. Restructuring charges of $63 were included in research, development, and engineering expense for 2007 as compared to $4,950 of restructuring charges in 2006 primarily related to product development rationalization. The impairment of assets in 2007 was a non-cash charge of $46,319 related to the goodwill impairment for Premier Election Solutions, Inc. (PESI). In 2006, the non-cash charge of $19,337 related to the impairment of a portion of the costs previously capitalized relative to the Company’s enterprise resource planning system implementation. The gain on sale of assets for 2007 of $6,392 was primarily related to the sale of the Company’s manufacturing facility in Cassis, France of which $6,438 was associated with the Company’s restructuring initiatives.
 
Operating Profit
 
The following table represents information regarding our operating profit for the years ended December 31, 2007 and 2006:
 
                         
    Year ended December 31,        
    2007     2006     % Change  
          (As Restated)        
Operating Profit
  $ 99,358     $ 182,231       (45.5 )%
Operating Profit Margin
    3.4 %     6.2 %     (2.8 )%
 
Operating profit for 2007 totaled $99,358 or 3.4 percent of net sales and was $82,873 or 45.5 percent lower than operating profit for 2006. The decrease in operating profit resulted mainly from lower election systems/lottery revenue, decreased profitability in the U.S. election systems business in 2007 compared to 2006, and higher expense related to the impairment of assets. Additional contributing factors were increased operating expenses resulting from a weakening of the U.S. dollar and incremental spend related to acquisitions. Restructuring charges of $23,592 or 0.8 percent of net sales mainly related to the
 
34


 

closure of the manufacturing plant in Cassis, France, adversely affected the operating profit in 2007 compared to $26,977 or 0.9 percent of net sales for the comparable period in 2006. The 2006 restructuring charges were primarily associated with the consolidation of global research and development and other service consolidations, termination of the information technology outsourcing agreement, relocation of the Company’s European headquarters, realignment of the Company’s global manufacturing operations, and product development rationalization. In addition, non-routine expenses as described previously of $7,288 or 0.2 percent of net sales affected the operating profit in 2007 compared to $791 for the comparable period in 2006.
 
Other Income (Expense) and Minority Interest
 
The following table represents information regarding our other income (expense) and minority interest for the years ended December 31, 2007 and 2006:
 
                               
      Year ended December 31,          
      2007       2006       % Change  
              (As Restated)          
Investment Income
    $  22,489       $  19,069         17.9 %
Interest Expense
      (42,237 )       (35,294 )       19.7 %
Miscellaneous, Net
      4,093         (2,086 )       (296.2 )%
                               
Other Income (Expense)
    $  (15,655 )     $  (18,311 )       (14.5 )%
                               
Percentage of Net Sales
      (0.5 )%       (0.6 )%       0.1 %
Minority Interest
      (8,365 )       (6,452 )       29.6 %
 
Investment income for 2007 was $22,489 and increased $3,420 or 17.9 percent compared to 2006. Interest expense for 2007 was $42,237 and increased $6,943 or 19.7 percent compared to 2006. The increase in interest expense was mainly the result of higher interest rates year-over-year. Miscellaneous income, net for 2007 was $4,093 as compared to miscellaneous expense, net for 2006 of $2,086 primarily due to movement from a position of foreign exchange loss in 2006 to a foreign exchange gain in 2007. Minority interest was higher in 2007 by $1,913.
 
Net Income
 
The following table represents information regarding our net income for the years ended December 31, 2007 and 2006:
 
                               
      Year ended December 31,          
      2007       2006       % Change  
              (As Restated)          
Net Income
    $  39,541       $  104,552         (62.2 )%
Percent of Net Sales
      1.3 %       3.6 %       (2.3 )%
Effective Tax Rate
      47.5 %       33.6 %       13.9 %
                               
 
Net Income for 2007 was $39,541 and decreased $65,011 or 62.2 percent as compared to net income for 2006. The decrease was primarily related to lower election systems/lottery revenue, decreased profitability in the U.S. election systems business in 2007 compared to 2006 and higher expense related to the impairment of assets between years. The effective tax rate for 2007 was 47.5 percent and 33.6 percent in 2006. For the details of the reconciliation between the U.S. statutory rate and the Company’s effective tax rate, see Note 13 to the Consolidated Financial Statements.
 
35


 

Segment Revenue and Operating Profit Summary
 
Diebold North America (DNA) net sales of $1,543,055 for 2007 increased $23,386 or 1.5 percent over 2006 net sales of $1,519,669. The increase in DNA net sales was due to increased revenue from the security solutions product and service offerings. DI net sales of $1,358,079 for 2007 increased by $171,429 or 14.4 percent over 2006 net sales of $1,186,650. The increase in DI net sales was due to revenue growth across all operating units, led by growth of $50,281 in EMEA and $46,910 in Asia Pacific. Election Systems (ES) & Other net sales of $63,703 for 2007 decreased $169,588 or 72.7 percent over 2006. The decrease was due to decreases in Brazilian voting revenue of $24,728 and U.S.-based election systems revenue of $112,995, as ongoing political debates over electronic voting negatively impacted the U.S. election systems business, resulting in decreased sales of election systems products. Revenue from lottery systems was $4,573 for 2007, a decrease of $31,865 over 2006.
 
DNA operating profit for 2007 decreased by $6,796 or 5.7 percent compared to 2006. The decrease was due to higher operating expenses consisting of incremental spend related to acquisitions as well as higher non-routine expenses associated with the legal, audit and consultation fees for the internal review of other accounting items, restatement of financial statements, and the on-going SEC and DOJ investigations and other advisory fees. DI operating profit for 2007 increased by $25,037 or 112.7 percent compared to 2006. The increase was mainly due to strong financial self-service revenue growth and increased profitability. The improvement was partially offset by an increase in restructuring charges from 2006 to 2007 of $3,949 and higher non-routine expenses previously mentioned. Operating profit for ES & Other decreased by $101,114, moving from an operating profit of $40,224 in 2006 to an operating loss of $60,890 in 2007. The decrease in ES & Other operating profit primarily resulted from the goodwill impairment for PESI in 2007 and lower revenue associated with the sales of election systems/lottery products and services. In 2007, the Company reduced the reserve for the election systems trade receivable related to two counties in California by approximately $10,090 primarily due to payments received.
 
2006 COMPARISON WITH 2005
 
The Company has classified the operations of its former campus card system business as a discontinued operation for 2005 as a result of the sale of this business on July 1, 2005. Income from discontinued operations net of tax in 2005 was $10,173. Included in the income from discontinued operations in 2005 was a $9,264 gain from the sale of the campus card system business, net of tax . The following discussion and analysis pertains to the Company’s continuing operations.
 
Net Sales
 
The following table represents information regarding our net sales for the years ended December 31, 2006 and 2005:
 
                               
      Year ended December 31,          
      2006       2005       % Change  
      (As Restated)       (As Restated)          
Net Sales
    $ 2,939,610       $ 2,582,990         13.8 %
 
Net sales for 2006 totaled $2,939,610 and were $356,620 or 13.8 percent higher than net sales for 2005. The increase in net sales included a net positive currency impact of approximately $43,541. Financial self-service revenue in 2006 increased by $184,848 or 10.5 percent over 2005, primarily due to strong growth in the international market segments led by an increase in EMEA of $104,833. Security solutions revenue increased by $93,990 or 14.0 percent for 2006, due primarily to increases in the retail, government and financial security markets as a result of growth in the market, complemented by growth resulting from strategic acquisitions and increased market share. Election systems/lottery net sales of $233,291 increased by $77,782 or 50.0 percent compared to 2005. The increase was related to an increase in U.S.-based electronic voting equipment revenue of $39,906 compared to 2005, as more localities purchased equipment in order to comply with Help America Vote Act and higher Brazilian election systems/lottery revenue in 2006.
 
36


 

Gross Profit
 
The following table represents information regarding our gross profit for the years ended December 31, 2006 and 2005:
 
                               
      Year ended December 31,          
      2006       2005       % Change  
      (As Restated)       (As Restated)          
Gross Profit
    $ 737,589       $ 653,508         12.9 %
Gross Profit Margin
      25.1 %       25.3 %       (0.2 )%
 
Gross profit for 2006 totaled $737,589 and was $84,081 or 12.9 percent higher than gross profit for 2005. Product gross margin was 29.6 percent in 2006 compared to 28.0 percent in 2005. The increase in product gross margin was mainly due to higher election systems/lottery revenue and improved profitability in the U.S. election systems business, partially offset by unfavorable geographic mix. Product gross margin was adversely affected by $3,299 of restructuring charges in 2006 compared to $13,688 in 2005. Restructuring charges in 2005 were largely related to severance and other employee costs associated with staff reductions as a result of removing excess manufacturing capacity, primarily in the Cassis, France facility, and the closing of the Danville, Virginia manufacturing operation. Service gross margin for 2006 was 20.4 percent compared with 22.6 percent for 2005. The decline in service gross margin was mainly due to lower profitability in EMEA and DNA, service acquisitions that operated below expected gross margin levels, and increased investments in customer service engineers and associated resources to continue improving performance in targeted areas. In addition, service gross margin was adversely affected by $3,959 of restructuring charges included in service cost of sales in 2006, compared to $4,431 in 2005.
 
Operating Expenses
 
The following table represents information regarding our operating expenses for the years ended December 31, 2006 and 2005:
 
                               
      Year ended December 31,          
      2006       2005       % Change  
      (As Restated)       (As Restated)          
Selling and administrative expense
    $  464,068       $  410,874         12.9 %
Research, development, and engineering expense
      71,625         59,937         19.5 %
Impairment of asset
      19,337                 100.0 %
(Gain) loss on sale of assets, net
      328         (50 )       (756.0 )%
                               
Total Operating Expenses
    $ 555,358       $ 470,761         18.0 %
Percent of Net Sales
      18.9 %       18.2 %       0.7 %
 
Selling and administrative expense for 2006 was 15.8 percent of net sales, nearly flat from 15.9 percent for 2005. Selling and administrative expense increased 12.9 percent from 2005 to 2006 due in part to higher information technology expenses and professional fees associated with the Company’s continued enterprise resource planning and software implementation project, incremental spend related to acquisitions, and increased compensation costs due to adopting SFAS No. 123(R), which now requires share-based payments to be expensed. In the fourth quarter of 2005, the Company recorded $15,490 in expense to reserve for approximately $32,500 election systems trade receivable related to two counties in California. In 2006, approximately $18,505 of the election systems trade receivable was collected and the reserve for this receivable was reduced by $1,318. Included in selling and administrative expense for 2006 was $14,867 or 0.5 percent of net sales in restructuring charges as
 
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compared to $17,998 or 0.7 percent of net sales in 2005. The 2006 restructuring charges were mainly associated with the termination of the information technology outsourcing agreement, realignment of global service, and relocation of the Company’s European headquarters. In 2005, the restructuring charges were primarily related to severance and other employee costs associated with staff reductions. Research, development, and engineering expense for 2006 was 2.4 percent of net sales as compared to 2.3 percent in 2005. Restructuring charges of $4,950 were included in research, development, and engineering expense for 2006 as compared to $347 of restructuring charges in 2005. The restructuring charges in 2006 were primarily related to product development rationalization. The impairment of assets in 2006 was a non-cash charge of $19,337 related to the impairment of a portion of the costs previously capitalized relative to the Company’s enterprise resource planning system implementation.
 
Operating Profit
 
The following table represents information regarding our operating profit for the years ended December 31, 2006 and 2005:
 
                               
      Year ended December 31,          
      2006       2005       % Change  
      (As Restated)       (As Restated)          
Operating Profit
    $ 182,231       $ 182,747         (0.3 )%
Operating Profit Margin
      6.2 %       7.1 %       (0.9 )%
 
Operating profit for 2006 totaled $182,231 or 6.2 percent of net sales as compared to operating profit for 2005 of $182,747 or 7.1 percent of net sales. The decrease in operating profit as a percent of net sales was mainly attributable to the non-cash charge in 2006 related to the impairment of a portion of the costs previously capitalized relative to the Company’s enterprise resource planning system implementation and lower gross profit margin in 2006, partially offset by a $9,389 decrease in restructuring charges from $36,464 or 1.4 percent of net sales in 2005 to $27,075 or 0.9 percent of net sales in 2006.
 
Other Income (Expense) and Minority Interest
 
The following table represents information regarding our other income (expense) and minority interest for the years ended December 31, 2006 and 2005:
 
                               
      Year ended December 31,          
      2006       2005       % Change  
      (As Restated)       (As Restated)          
Investment Income
    $ 19,069       $ 12,004         58.9 %
Interest Expense
      (35,294 )       (16,200 )       117.9 %
Miscellaneous, Net
      (2,086 )       (10,769 )       (80.6 )%
                               
Other Income (Expense)
    $ (18,311 )     $ (14,965 )       22.4 %
                               
Percentage of Net Sales
      (0.6 )%       (0.6 )%       0.0 %
Minority Interest
      (6,452 )       (6,865 )       (6.0 )%
 
Investment income for 2006 was $19,069 and increased $7,065 or 58.9 percent over investment income for 2005, with the increase due to a larger investment portfolio in 2006. Interest expense for 2006 was $35,294 and increased $19,094 or 117.9 percent compared to 2005. The increase in interest expense was due to higher borrowing levels and higher interest rates year-over-year. Miscellaneous, net for 2006 was an expense of $2,086 and decreased $8,683 from 2005 mainly due to a decrease in foreign exchange loss. Minority interest was lower in 2006 by $413.
 
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Net Income
 
The following table represents information regarding our net income for the years ended December 31, 2006 and 2005:
 
                               
      Year ended December 31,          
      2006       2005       % Change  
      (As Restated)          
Net Income
    $ 104,552       $ 102,135         2.4 %
Percent of Net Sales
      3.6 %       4.0%         (0.4 )%
Effective Tax Rate
      33.6 %       42.9%         (9.3 )%
                               
 
Net income for 2006 was $104,552 and increased by $2,417 or 2.4 percent compared to net income for 2005. Net income as a percent of sales was lower in 2006 primarily due to the non-cash charge in 2006 related to the impairment of assets and the gain on sale of the campus card system business in 2005. The decrease was partially offset by higher election systems/lottery revenue, improved profitability in the U.S. election systems business, and a decrease in restructuring charges. The effective tax rate for 2006 was 33.6 percent as compared to 42.9 percent for 2005. For the details of the reconciliation between the U.S. statutory rate and the Company’s effective tax rate, see Note 13 to the Consolidated Financial Statements.
 
Segment Revenue and Operating Profit Summary
 
DNA net sales of $1,519,669 for 2006 increased $61,721 or 4.2 percent over 2005 net sales of $1,457,948. The increase in DNA net sales was primarily due to increased revenue from the security solutions product and service offerings. DI net sales of $1,186,650 for 2006 increased by $217,117 or 22.4 percent over 2005 net sales of $969,533. The increase in DI net sales was due to revenue growth across all operating units, led by strong growth of $111,058 in EMEA. ES & Other net sales of $233,291 for 2006 increased $77,782 or 50.0 percent over 2005.
 
DNA operating profit for 2006 decreased by $52,922 or 30.6 percent compared to 2005. The decrease was primarily due to a higher mix of revenue from the lower margin security business and increased service costs. DI operating profit for 2006 increased by $4,131 or 22.8 percent compared to 2005. The increase was primarily due to lower restructuring charges in 2006 and increased revenue throughout the geographic regions. The operating profit in ES & Other increased by $48,275 or 599.6 percent, moving from an operating loss of $8,051 in 2005 to operating profit of $40,224 in 2006. This increase in ES & Other operating profit was mainly the result of improved profitability in the U.S. based electronic voting business. In 2005, the Company recorded $15,490 in expense to reserve for a trade receivable related to two counties in California
 
Refer to Note 16 to the Consolidated Financial Statements for further details of segment revenue and operating profit.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Capital resources are obtained from income retained in the business, borrowings under the Company’s senior notes, committed and uncommitted credit facilities, long-term industrial revenue bonds, and operating and capital leasing arrangements. Refer to Notes 7 and 8 to the Consolidated Financial Statements regarding information on outstanding and available credit facilities and bonds. The Company’s future commitments relating to operating lease agreements are reflected in the table below. Management expects that the Company’s capital resources will be sufficient to finance planned working capital needs, investments in facilities or equipment, and the purchase of the Company’s shares for the next 12 months. Part of the Company’s growth strategy is to pursue strategic acquisitions. The Company has made acquisitions in the past and intends to make acquisitions in the future. The Company intends to finance any future acquisitions with either cash provided from operations, borrowings under available credit facilities, proceeds from debt or equity offerings and/or the issuance of common shares.
 
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During 2007, the Company generated $150,260 in cash from operating activities, a decrease of $82,666 or 35.5 percent from 2006. Cash flows from operating activities are generated primarily from operating income and controlling the components of working capital. Net cash provided by operations during 2007 was negatively affected by the $76,473 increase in deferred revenue compared with an increase of $1,686 in 2006 related to the timing and frequency of service contract billings. The change in certain other assets and liabilities also negatively affected cash flows from operations by $52,581 in 2007 as compared with a positive impact of $14,123 in 2006. The change in certain other assets and liabilities was primarily the result of a decrease in estimated income taxes payable and an increase in finance receivables. Additionally, cash flows from operations were negatively impacted by the decrease in net income of $65,011 year over year, partially offset by an increase in asset impairments of $26,981 with $46,319 in 2007 related to election systems goodwill compared to $19,338 in 2006 related to the Company’s ERP system. These negative impacts were also partially offset by cash inflows from the decrease in trade receivables and the increase in accounts payable. The $107,501 decrease in trade receivables in 2007 was $29,389 higher than the $78,112 decrease in 2006. Total sales increased by $25,227 in 2007 versus 2006 while days sales outstanding (DSO) decreased 11 days over the same time period. DSO was 51 days at December 31, 2007 compared with 62 days at December 31, 2006. The improvement in DSO occurred in all regions and business segments but was largely related to collections in the Election Systems business. The $6,331 increase in accounts payable in 2007 was a $42,362 change from the $36,031 decrease in 2006 due to the timing of payments primarily in the US, Asia Pacific and EMEA regions.
 
Net cash used for investing activities was $80,370 in 2007, a decrease of $90,954 or 53.1 percent over 2006. The decrease was the result of lower payments for acquisitions, which decreased by $56,198, moving from $74,320 in 2006 for eight acquisitions in the domestic and Latin America regions, as well as earn-out payments for prior acquisitions, to $18,122 in 2007 for three domestic acquisitions and earn-out payments for prior acquisitions. The Company also had net proceeds from investments in 2007 of $6,845 compared to net payments for investment purchases in 2006 of $45,344. These items were partially offset by the increase in certain other assets of $29,076 in 2007 compared to an increase of $19,588 in 2006, primarily related to increased investments in capitalized software and a 2007 investment in a joint venture.
 
Net cash used for financing activities was $135,276 in 2007, an increase of $111,502 or 469.0 percent over 2006. The increase was the result of increased net repayments on borrowings of $236,387, moving from net proceeds from borrowings of $172,329 in 2006 to net repayments of borrowings of $64,058 in 2007. Also, the Company paid $4,480 more in dividends and $17,518 more to minority interest holders in 2007. These increases in cash used for financing activities were partially offset by the decrease in common shares repurchased of $148,057.
 
The following table summarizes the Company’s approximate obligations and commitments to make future payments under contractual obligations as of December 31, 2007:
 
                                                   
              Payment Due by Period  
      Total       Less Than 1 Year       1-3 Years       3-5 Years       More Than 5 Years  
      (In thousands)  
Operating lease obligations
    $  254,577       $  75,834       $  106,698       $  45,758       $  26,287  
Industrial development revenue bonds
      11,900                                 11,900  
Notes payable
      624,071         14,807         309,264                 300,000  
Purchase commitments
      24,381         8,036         16,345                  
                                                   
      $ 914,929       $ 98,677       $ 432,307       $ 45,758       $ 338,187  
                                                   
 
The Company also has uncertain tax positions of $10,714, recorded in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (FIN 48),
 
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and pension and post-retirement benefit payments payable to employees (refer to Notes 13 and 11, respectively, of the consolidated financial statements) for which there is a high degree of uncertainty as to the expected timing of payments.
 
On March 2, 2006, the Company issued senior notes in an aggregate principal amount of $300,000. The maturity date of the senior notes are staggered, with $75,000, $175,000 and $50,000 becoming due in 2013, 2016 and 2018, respectively. The Company used $270,000 of the net proceeds from this offering to repay notes payable under its revolving credit facility and used the remaining $30,000 in operations. See Note 7 to the Consolidated Financial Statements for further information. The Company does not participate in transactions that facilitate off-balance sheet arrangements.
 
The Company has a credit facility with J.P. Morgan Chase Bank, N.A. with borrowing limits of $300,000 and €150,000. Under the terms of the credit facility agreement, the Company has the ability to increase the borrowing limits an additional $150,000. This facility expires on April 27, 2010. As of December 31, 2007, $309,264 was outstanding under the Company’s credit facility and $209,556 was available for borrowing.
 
The average rate on the bank credit lines was 5.46 percent and 4.66 percent for the years ended December 31, 2007 and 2006 respectively. Interest on financing charged to expense for the years ended December 31, 2007, 2006 and 2005, was $33,077, $34,883 and $12,874, respectively.
 
The Company’s financing agreements contain various restrictive covenants, including net debt to capitalization and interest coverage ratios. Under both the agreements with J.P. Morgan Chase Bank, N.A. and the note purchase agreement governing the senior notes, we are obligated to provide financial statements within a specified period of time after the end of each quarter and to provide audited financial statements within a specified period of time after the end of our fiscal year. Due to the delay in completing our financial statements, we received waivers under both aforementioned agreements from the lenders that allow us to waive the requirement to provide financial statements until September 30, 2008. Giving effect to the waivers, we were in compliance with the covenants as of December 31, 2007.
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
Management’s discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s consolidated financial statements. The consolidated financial statements of the Company are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of the consolidated financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Management of the Company uses historical information and all available information to make these estimates and assumptions. Actual amounts could differ from these estimates and different amounts could be reported using different assumptions and estimates.
 
The Company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements. Management believes that, of its significant accounting policies, its policies concerning revenue recognition, allowance for bad debts and credit risk, inventories, goodwill, and pensions and postretirement benefits are the most critical because they are affected significantly by judgments, assumptions and estimates. Additional information regarding these policies is included below.
 
Revenue Recognition The Company’s revenue recognition policy is consistent with the requirements of Statement of Position 97-2, Software Revenue Recognition (SOP 97-2), and Staff Accounting Bulletin 104 (SAB 104). In general, the Company records revenue when it is realized, or realizable and earned. The Company considers revenue to be realized or realizable and earned when the following revenue recognition requirements are met: persuasive evidence of an arrangement exists, which is a customer contract; the products or services have been accepted by the customer via delivery or installation acceptance; the sales price is fixed or determinable within the contract; and collectability is probable.
 
For product sales, the Company determines that the earnings process is complete when title, risk of loss and the right to use equipment has transferred to the customer. Within the North America business segment this occurs upon customer acceptance and acceptance, where the Company is contractually responsible for installation, is upon completion of the installation of all of the items at a job site and the Company’s demonstration the items are in operable condition. Where items are contractually only delivered to a customer, revenue recognition of these items is upon shipment or delivery to a customer location depending on the terms in the contract. Within the International business segment, customer acceptance is upon either delivery or completion of the installation depending on the terms in the contract with the customer.
 
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The Company offers the following product groups and related services to its customers:
 
Self-Service Products Self-service products pertain to Automated Teller Machines (ATMs). Included within the ATM is software, which operates the ATM. The related software is considered an integral part of the equipment since without it, the equipment cannot function. Revenue is recognized in accordance with SOP 97-2. The Company also provides service contracts on ATMs.
 
Service contracts typically cover a 12-month period and can begin at any given month during the year after the standard 90-day warranty period expires. The service provided under warranty is significantly limited as compared to those offered under service contracts. Further, warranty is not considered a separate element of the sale. The Company’s warranty covers only replacement of parts inclusive of labor. Service contracts are tailored to meet the individual needs of each customer. Service contracts provide additional services beyond those covered under the warranty, and usually include preventative maintenance service, cleaning, supplies stocking and cash handling all of which are not essential to the functionality of the equipment. For sales of service contracts, where the service contract is the only element of the sale, revenue is recognized ratably over the life of the contract period. In contracts that involve multiple-element arrangements, amounts deferred for services are determined based upon vendor specific objective evidence of the fair value of the elements as prescribed in SOP 97-2. The Company determines fair value of deliverables within a multiple element arrangement based on the price charged when each element is sold separately.
 
Physical Security and Facility Products The Company’s Physical Security and Facility Products division designs and manufactures several of the Company’s financial service solutions offerings, including the RemoteTellertm System (RTS). The business unit also develops vaults, safe deposit boxes and safes, drive-up banking equipment and a host of other banking facilities products. Revenue on sales of the products described above is recognized when the four revenue recognition requirements of SAB 104 have been met.
 
Election Systems The Company, through its wholly owned subsidiaries, Premier Election Solutions, Inc. (PESI) and Amazonia Industria Eletronica S.A. Procomp, offers electronic voting systems. Election systems revenue consists of election equipment, software, training, support, installation and maintenance. The election equipment and software components are included in product revenue. The training, support, installation and maintenance components are included in service revenue. The election systems contracts contain multiple deliverable elements and custom terms and conditions. Revenue on election systems contracts is recognized in accordance with SOP 97-2. The Company recognizes revenue for delivered elements only when the fair values of undelivered elements are known, uncertainties regarding customer acceptance are resolved and there are no customer-negotiated refund or return rights affecting the revenue recognized for delivered elements. The Company determines fair value of deliverables within a multiple element arrangement based on the price charged when each element is sold separately. Some contracts may contain discounts and, as such, revenue is recognized using the residual value method of allocation of revenue to the product and service components of contracts.
 
Integrated Security Solutions Diebold Integrated Security Solutions provides global sales, service, installation, project management and monitoring of original equipment manufacturer (OEM) electronic security products to financial, government, retail and commercial customers. These solutions provide the Company’s customers a single-source solution to their electronic security needs. Revenue is recognized in accordance with SAB 104. Revenue on sales of the products described above is recognized upon shipment, installation or customer acceptance of the product as defined in the customer contract. In contracts that involve multiple-element arrangements, amounts deferred for services are determined based upon vendor specific objective evidence of the fair value of the elements as prescribed in EITF 00-21, Accounting for Revenue Arrangements with Multiple Deliverables.
 
Software Solutions and Services The Company offers software solutions consisting of multiple applications that process events and transactions (networking software) along with the related server. Sales of networking software represent software solutions to customers that allow them to network various different vendors’ ATMs onto one network and revenue is recognized in accordance with SOP 97-2.
 
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Included within service revenue is revenue from software support agreements, which are typically 12 months in duration and pertain to networking software. For sales of software support agreements, where the agreement is the only element of the sale, revenue is recognized ratably over the life of the contract period. In contracts that involve multiple-element arrangements, amounts deferred for support are determined based upon vendor specific objective evidence of the fair value of the elements as prescribed in SOP 97-2.
 
Allowance for Bad Debts and Credit Risk The Company evaluates the collectability of accounts receivable based on a number of criteria. These criteria are (1) a percentage of sales, which is based on historical loss experience and current trends, which is recorded as a reserve for uncollectible accounts as sales occur throughout the year and (2) periodic adjustments for known events such as specific customer circumstances and changes in the aging of accounts receivable balances. Since the Company’s receivable balance is concentrated primarily in the financial and government sectors, an economic downturn in these sectors could result in higher than expected credit losses.
 
Inventories The Company primarily values inventories at the lower of cost or market applied on a first-in, first-out (FIFO) basis, with the notable exceptions of Brazil and PESI that value inventory using the average cost method, which approximates FIFO. At each reporting period, the Company identifies and writes down its excess and obsolete inventory to its net realizable value based on forecasted usage, orders and inventory aging. With the development of new products, the Company also rationalizes its product offerings and will write down discontinued product to the lower of cost or net realizable value.
 
Goodwill The Company tests all existing goodwill at least annually for impairment using the fair value approach on a “reporting unit” basis in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. The Company’s reporting units are defined as Domestic and Canada, Brazil, Latin America, Asia Pacific, EMEA and Election Systems. The Company uses the discounted cash flow method and the guideline company method for determining the fair value of its reporting units. As required by SFAS 142, the determination of implied fair value of the goodwill for a particular reporting unit is the excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities in the same manner as the allocation in a business combination. Implied fair value goodwill is determined as the excess of the fair value of the reporting unit over the fair value of its assets and liabilities. The Company’s fair value model uses inputs such as estimated future segment performance. The Company uses the most current information available and performs the annual impairment analysis as of November 30 each year and between annual tests if an event occurs or circumstances change that would more likely than not reduce the carrying value of a reporting unit below its carrying amount. However, actual circumstances could differ significantly from assumptions and estimates made and could result in future goodwill impairment.
 
Pensions and Postretirement Benefits Annual net periodic expense and benefit liabilities under the Company’s defined benefit plans are determined on an actuarial basis. Assumptions used in the actuarial calculations have a significant impact on plan obligations and expense. Annually, management and the investment committee of the Board of Directors review the actual experience compared with the more significant assumptions used and make adjustments to the assumptions, if warranted. The healthcare trend rates are reviewed with the actuaries based upon the results of their review of claims experience. The expected long-term rate of return on plan assets is determined using the plans’ current asset allocation and their expected rates of return based on a geometric averaging over 20 years. The discount rate is determined by analyzing the average return of high-quality (i.e., AA-rated) fixed-income investments and the year-over-year comparison of certain widely used benchmark indices as of the measurement date. The rate of compensation increase assumptions reflects the Company’s long-term actual experience and future and near-term outlook. Pension benefits are funded through deposits with trustees. The market-related value of plan assets is calculated under an adjusted market value method. The value is determined by adjusting the fair value of assets to reflect the investment gains and losses (i.e., the difference between the actual investment return and the expected investment return on the market-related value of assets) during each of the last five years at the rate of 20 percent per year. Postretirement benefits are not funded and the Company’s policy is to pay these benefits as they become due.
 
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At the end of 2006, the Company adopted SFAS 158, Employers’ Accounting for Defined Pension and Other Postretirement Plans, which changes the accounting requirements for defined benefit pension and other postretirement plans. SFAS 158 requires that the Company recognize the funded status of each of its plans in the consolidated balance sheet.
 
Amortization of unrecognized net gain or loss resulting from experience different from that assumed and from changes in assumptions (excluding asset gains and losses not yet reflected in market-related value) is included as a component of net periodic benefit cost for a year if, as of the beginning of the year, that unrecognized net gain or loss exceeds five percent of the greater of the projected benefit obligation or the market-related value of plan assets. If amortization is required, the amortization is that excess divided by the average remaining service period of participating employees expected to receive benefits under the plan.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
Statement of Financial Accounting Standards No. 161 In March 2008, the Financial Accounting Standards Board (FASB) issued SFAS 161, Disclosures about Derivatives Instruments and Hedging Activities — an amendment of FASB Statement 133. SFAS 161 applies to all entities and requires specified disclosures for derivative instruments and related hedged items accounted for under SFAS 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No 161 amends and expands SFAS 133’s existing disclosure requirements to provide financial statement users with a better understanding of how and why an entity uses derivatives, how derivative instruments and related hedged items are accounted for under SFAS 133, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The adoption of SFAS 161 is not expected to have a material impact on the Company’s financial position, results of operations or liquidity.
 
Statement of Financial Accounting Standards No. 160 In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements — an Amendment to ARB 51. SFAS 160 applies to all entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. Under SFAS 160, noncontrolling interests in a subsidiary that are currently recorded within “mezzanine” (or temporary) equity or as a liability will be included in the equity section of the balance sheet. In addition, this statement requires expanded disclosures in the financial statements that clearly identify and distinguish between the interests of the parent’s owners and the interest of the noncontrolling owners of the subsidiary. SFAS 160 is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008. Application of SFAS 160’s disclosure requirements is retroactive. The Company is in the process of determining the effects that adoption of SFAS 160 will have on its consolidated financial statements.
 
Statement of Financial Accounting Standards No. 141(R) In December 2007, the FASB issued SFAS 141(R), Business Combinations, which amends the accounting and reporting requirements for business combinations. SFAS 141(R) places greater reliance on fair value information, requiring more acquired assets and liabilities to be measured at fair value as of the acquisition date. The pronouncement also requires acquisition-related transaction and restructuring costs to be expensed rather than treated as a capitalized cost of acquisition. SFAS 141(R) is effective for fiscal years beginning on or after December 15, 2008 and the Company will implement its requirements in future business combinations. The Company does not expect the adoption of SFAS 141(R) to have a material impact on the Company’s historical financial position, results of operations or liquidity.
 
Emerging Issues Task Force Issue No. 06-10 In June 2007, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 06-10, Accounting for Collateral Assignment Split Dollar Life Insurance, which applies to entities that participate in collateral assignment split-dollar life insurance arrangement that extend into an employee’s retirement period (often referred to as “key person” life insurance.) The pronouncement requires employers to recognize a liability for the postretirement obligation associated with a collateral assignment arrangement if, based on an agreement with an employee, the employer has agreed to maintain a life insurance policy during the postretirement period or to provide a death benefit. The guidance is effective for fiscal years beginning after December 15, 2007 including interim periods within those years. The adoption of EITF 06-10 will not have a material impact on the Company’s financial position, results of operations or liquidity.
 
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Emerging Issues Task Force Issue No. 06-11 In June 2007, the FASB ratified EITF Issue No. 06-11, Accounting for Income Tax Benefits on Share-Based Payment Awards. EITF 06-11 requires entities to record the tax benefit associated with dividends or dividend equivalents on certain share-based payment awards that are charged to retained earnings, as an increase in additional paid-in capital. Generally, the payment of such dividends can be treated as deductible compensation for tax purposes. EITF 06-11 is to be applied prospectively for tax benefits on dividends declared beginning after December 15, 2007. The adoption of EITF 06-11 will not have a material impact on the Company’s financial position, results of operations or liquidity.
 
Statement of Financial Accounting Standards No. 159 In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statement No. 115, which permits an entity the option to choose to measure certain financial assets and financial liabilities at fair value. The fair value option may be elected on an instrument-by-instrument basis with few exceptions. In addition, SFAS 159 amends previous accounting guidance to extend the fair value option to available-for-sale and held-to-maturity securities. SFAS 159 applies to all entities and is effective as of the beginning of the first fiscal year that begins after November 15, 2007. The Company does not expect the adoption of SFAS 159 to have a material impact on the Company’s financial position, results of operations or liquidity.
 
Statement of Financial Accounting Standards No. 158 In September 2006, the FASB issued SFAS 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS 158 requires an entity to recognize the funded status of a defined benefit postretirement plan in its statement of financial position measured as the difference between the fair value of plan assets and the benefit obligation. For a pension plan, the benefit obligation would be the projected benefit obligation; for any other postretirement benefit plan, the benefit obligation would be the accumulated postretirement benefit obligation. The pronouncement also requires disclosure of additional information in the notes to financial statements about certain effects of net periodic benefit cost in the subsequent fiscal year that arise from delayed recognition of the actuarial gains and losses and the prior services costs and credits. The Company adopted these requirements as of December 31, 2006. For fiscal years ending after December 15, 2008, the pronouncement also requires entities to recognize the actuarial gains and losses and the prior service costs and credits that arise during the period, but which are not recognized as components of net periodic benefit cost as a component of other comprehensive income. SFAS 158 also requires entities to measure defined benefit plan assets and obligations as of the date of the employer’s statement of financial position. The Company is currently evaluating the impact of the adoption of these requirements on its financial statements.
 
Statement of Financial Accounting Standards No. 157 In September 2006, the FASB issued SFAS 157, Fair Value Measurements, which is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. This statement defines fair value, establishes a fair value hierarchy, and requires separate disclosure of fair value measurements by level within the fair value hierarchy. The Company does not expect the adoption of SFAS 157 to have a material impact on the Company’s financial position, results of operations or liquidity.
 
FORWARD-LOOKING STATEMENT DISCLOSURE
 
In this annual report on Form 10-K, statements that are not reported financial results or other historical information are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give current expectations or forecasts of future events and are not guarantees of future performance. These forward-looking statements relate to, among other things, the Company’s future operating performance, the Company’s share of new and existing markets, the Company’s short- and long-term revenue and earnings growth rates, the Company’s implementation of cost-reduction initiatives and measures to improving pricing, including the optimization of the Company’s manufacturing capacity, and the ongoing SEC and DOJ investigations. The use of the words “will,” “believes,” “anticipates,” “expects,” “intends” and similar expressions is intended to identify forward-looking statements that have been made and may in the future be made by or on behalf of the Company.
 
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Although the Company believes that these forward-looking statements are based upon reasonable assumptions regarding, among other things, the economy, its knowledge of its business, and on key performance indicators that impact the Company, these forward-looking statements involve risks, uncertainties and other factors that may cause actual results to differ materially from those expressed in or implied by the forward-looking statements. The Company is not obligated to update forward-looking statements, whether as a result of new information, future events or otherwise.
 
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Some of the risks, uncertainties and other factors that could cause actual results to differ materially from those expressed in or implied by the forward-looking statements include, but are not limited to:
 
  •  the results of the SEC and DOJ investigations;
 
  •  competitive pressures, including pricing pressures and technological developments;
 
  •  changes in the Company’s relationships with customers, suppliers, distributors and/or partners in its business ventures;
 
  •  changes in political, economic or other factors such as currency exchange rates, inflation rates, recessionary or expansive trends, taxes and regulations and laws affecting the worldwide business in each of the Company’s operations, including Brazil, where a significant portion of the Company’s revenue is derived;
 
  •  acceptance of the Company’s product and technology introductions in the marketplace;
 
  •  the amount of charges in connection with the planned closure of the Company’s Newark, Ohio facility;
 
  •  unanticipated litigation, claims or assessments;
 
  •  variations in consumer demand for financial self-service technologies, products and services;
 
  •  challenges raised about reliability and security of the Company’s election systems products, including the risk that such products will not be certified for use or will be decertified;
 
  •  changes in laws regarding the Company’s election systems products and services;
 
  •  potential security violations to the Company’s information technology systems;
 
  •  the Company’s ability to successfully execute its strategy related to the elections systems business; and
 
  •  the Company’s ability to achieve benefits from its cost-reduction initiatives and other strategic changes.
 
ITEM 7A: QUANTITATIVE AND QUALITA