10-Q 1 dbd630201210q.htm FORM 10-Q DBD 6.30.2012 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
__________________________________________________
Form 10-Q
__________________________________________________ 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 1-4879 
_________________________________________________
Diebold, Incorporated
(Exact name of registrant as specified in its charter)
_________________________________________________ 
Ohio
 
34-0183970
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification Number)
 
 
 
5995 Mayfair Road, PO Box 3077, North Canton, Ohio
 
44720-8077
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (330) 490-4000
__________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x     No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
(Do not check if a smaller reporting company)
o
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
Number of shares of common stock outstanding as of July 27, 2012 was 63,212,049.



DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q

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



PART I – FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS
DIEBOLD, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
 
 
June 30,
2012
 
December 31,
2011
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
320,541

 
$
333,920

Short-term investments
 
270,859

 
286,853

Trade receivables, less allowances for doubtful accounts of $23,144 and $22,128, respectively
 
451,038

 
414,969

Inventories
 
486,089

 
440,900

Deferred income taxes
 
109,097

 
114,250

Prepaid expenses
 
31,206

 
31,452

Other current assets
 
132,168

 
110,011

Total current assets
 
1,800,998

 
1,732,355

Securities and other investments
 
74,946

 
74,869

Property, plant and equipment, at cost
 
635,422

 
642,256

Less accumulated depreciation and amortization
 
455,739

 
449,562

Property, plant and equipment, net
 
179,683

 
192,694

Goodwill
 
245,163

 
253,063

Deferred income taxes
 
89,522

 
91,090

Other assets
 
179,017

 
173,372

Total assets
 
$
2,569,329

 
$
2,517,443

LIABILITIES AND EQUITY
 
 
 
 
Current liabilities
 
 
 
 
Notes payable
 
$
61,717

 
$
21,722

Accounts payable
 
229,371

 
221,964

Deferred revenue
 
243,074

 
241,992

Payroll and other benefits liabilities
 
61,904

 
79,854

Other current liabilities
 
244,335

 
258,685

Total current liabilities
 
840,401

 
824,217

Long-term debt
 
630,037

 
606,154

Pensions and other benefits
 
135,837

 
148,399

Postretirement and other benefits
 
23,222

 
23,196

Deferred income taxes
 
30,186

 
32,029

Other long-term liabilities
 
26,885

 
25,188

Commitments and contingencies
 

 

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

 

Common shares, $1.25 par value, 125,000,000 authorized shares, 77,591,365 and 76,840,956 issued shares, 63,188,535 and 62,513,615 outstanding shares, respectively
 
96,989

 
96,051

Additional capital
 
348,574

 
327,805

Retained earnings
 
1,026,562

 
991,210

Treasury shares, at cost (14,402,830 and 14,327,341 shares, respectively)
 
(550,633
)
 
(547,737
)
Accumulated other comprehensive income
 
(70,755
)
 
(40,343
)
Total Diebold, Incorporated shareholders' equity
 
850,737

 
826,986

Noncontrolling interests
 
32,024

 
31,274

Total equity
 
882,761

 
858,260

Total liabilities and equity
 
$
2,569,329

 
$
2,517,443

See accompanying notes to condensed consolidated financial statements.

3


DIEBOLD, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
 
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2012
 
2011
 
2012
 
2011
Net sales
 
 
 
 
 
 
 
 
Services
 
$
396,909

 
$
388,951

 
$
793,774

 
$
753,325

Products
 
346,279

 
273,431

 
647,905

 
523,214

 
 
743,188

 
662,382

 
1,441,679


1,276,539

Cost of sales
 
 
 
 
 
 
 
 
Services
 
294,092

 
288,123

 
579,488

 
564,013

Products
 
263,527

 
204,769

 
483,382

 
393,632

 
 
557,619

 
492,892

 
1,062,870

 
957,645

Gross profit
 
185,569

 
169,490

 
378,809

 
318,894

Selling and administrative expense
 
118,803

 
122,051

 
238,598

 
243,162

Research, development and engineering expense
 
20,172

 
19,375

 
38,973

 
38,799

Impairment of assets
 
6,701

 
2,962

 
6,701

 
2,962

 
 
145,676

 
144,388

 
284,272

 
284,923

Operating profit
 
39,893

 
25,102

 
94,537

 
33,971

Other income (expense)
 
 
 
 
 
 
 
 
Investment income
 
8,039

 
9,669

 
19,994

 
20,567

Interest expense
 
(7,461
)
 
(9,515
)
 
(15,069
)
 
(18,188
)
Foreign exchange gain, net
 
1,102

 
1,492

 
1,647

 
446

Miscellaneous, net
 
431

 
1,434

 
341

 
1,457

Income from continuing operations before taxes
 
42,004

 
28,182

 
101,450

 
38,253

Taxes on income
 
14,212

 
6,580

 
27,693

 
12,505

Income from continuing operations
 
27,792

 
21,602

 
73,757

 
25,748

Income from discontinued operations, net of tax
 

 
529

 

 
518

Net income
 
27,792

 
22,131

 
73,757

 
26,266

Net income attributable to noncontrolling interests
 
1,290

 
1,327

 
2,092

 
2,961

Net income attributable to Diebold, Incorporated
 
$
26,502

 
$
20,804

 
$
71,665

 
$
23,305

 
 
 
 
 
 
 
 
 
Basic weighted-average shares outstanding
 
63,064

 
65,028

 
62,899

 
65,393

Diluted weighted-average shares outstanding
 
64,035

 
65,482

 
63,795

 
65,842

 
 
 
 
 
 
 
 
 
Basic earnings per share
 
 
 
 
 
 
 
 
Income from continuing operations, net of tax
 
$
0.42

 
$
0.31

 
$
1.14

 
$
0.35

Income from discontinued operations, net of tax
 

 
0.01

 

 
0.01

Net income attributable to Diebold, Incorporated
 
$
0.42

 
$
0.32

 
$
1.14

 
$
0.36

 
 
 
 
 
 
 
 
 
Diluted earnings per share
 
 
 
 
 
 
 
 
Income from continuing operations, net of tax
 
$
0.41

 
$
0.31

 
$
1.12

 
$
0.34

Income from discontinued operations, net of tax
 

 
0.01

 

 
0.01

Net income attributable to Diebold, Incorporated
 
$
0.41

 
$
0.32

 
$
1.12

 
$
0.35

 
 
 
 
 
 

 

Amounts attributable to Diebold, Incorporated
 
 
 
 
 

 

Income from continuing operations, net of tax
 
$
26,502

 
$
20,275

 
$
71,665

 
$
22,787

Income from discontinued operations, net of tax
 

 
529

 

 
518

Net income attributable to Diebold, Incorporated
 
$
26,502

 
$
20,804

 
$
71,665

 
$
23,305

See accompanying notes to condensed consolidated financial statements.


4


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

 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2012
 
2011
 
2012
 
2011
Net income
 
$
27,792

 
$
22,131

 
$
73,757

 
$
26,266

Other comprehensive income, net of tax:
 


 


 
 
 
 
Foreign currency hedges and translation
 
(66,033
)
 
34,149

 
(40,468
)
 
49,094

Interest rate hedges:
 


 


 
 
 
 
Net (loss) gain recognized in other comprehensive income
 
(101
)
 
(262
)
 
69

 
(222
)
Less: reclassification adjustment for net gains included in net income
 
76

 
78

 
170

 
167

 
 
(177
)
 
(340
)
 
(101
)
 
(389
)
Pension and other postretirement benefits:
 
 
 
 
 
 
 
 
Net actuarial loss amortization
 
4,305

 
2,491

 
8,637

 
4,994

Net prior service cost (benefit) amortization
 
(65
)
 
(65
)
 
(129
)
 
(129
)
Other
 
5

 
(894
)
 
10

 
(2,604
)
 
 
4,245

 
1,532

 
8,518

 
2,261

Unrealized gain (loss), net on securities:
 
 
 
 
 
 
 
 
Net gain (loss) recognized in other comprehensive income
 
3,333

 
(1,167
)
 
2,917

 
(2,004
)
Less: reclassification adjustment for net gain (loss) included in net income
 
1,180

 
(1,304
)
 
1,508

 
(1,468
)
 
 
2,153

 
137

 
1,409

 
(536
)
Other comprehensive (loss) income, net of tax
 
(59,812
)
 
35,478

 
(30,642
)
 
50,430

Comprehensive (loss) income
 
(32,020
)
 
57,609

 
43,115

 
76,696

Less: comprehensive income attributable to noncontrolling interests
 
1,068

 
1,659

 
1,862

 
3,564

Comprehensive (loss) income attributable to Diebold, Incorporated
 
$
(33,088
)
 
$
55,950

 
$
41,253

 
$
73,132

See accompanying notes to condensed consolidated financial statements.

5


DIEBOLD, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
 
 
Six Months Ended
 
 
June 30,
 
 
2012
 
2011
Cash flow from operating activities:
 
 
 
 
Net income
 
$
73,757

 
$
26,266

Adjustments to reconcile net income to cash flow from operating activities:
 
 
 
 
Depreciation and amortization
 
38,795

 
39,034

Share-based compensation
 
5,704

 
6,617

Excess tax benefits from share-based compensation
 
(1,591
)
 
(1,390
)
Impairment of assets
 
6,701

 
2,962

Equity in earnings of an investee
 
(592
)
 
(859
)
Cash flow from changes in certain assets and liabilities:
 
 
 
 
Trade receivables
 
(44,841
)
 
(28,284
)
Inventories
 
(54,882
)
 
(36,452
)
Prepaid expenses
 
84

 
3,055

Other current assets
 
(32,583
)
 
(34,952
)
Accounts payable
 
10,406

 
(13,392
)
Deferred revenue
 
1,908

 
8,611

Certain other assets and liabilities
 
(36,836
)
 
(71,190
)
Net cash used in operating activities
 
(33,970
)
 
(99,974
)
Cash flow from investing activities:
 
 
 
 
Proceeds from sale of discontinued operations
 

 
2,520

Proceeds from maturities of investments
 
156,491

 
139,020

Proceeds from sale of investments
 
16,157

 
26,761

Payments for purchases of investments
 
(176,404
)
 
(135,798
)
Proceeds from sale of assets
 
283

 
182

Capital expenditures
 
(20,669
)
 
(23,687
)
Collections on purchased finance receivables
 
7,072

 
12,976

Increase in certain other assets
 
(4,549
)
 
(9,183
)
Net cash (used in) provided by investing activities
 
(21,619
)
 
12,791

Cash flow from financing activities:
 
 
 
 
Dividends paid
 
(36,313
)
 
(37,090
)
Debt issuance costs
 

 
(1,733
)
Debt borrowings
 
430,260

 
350,679

Debt repayments
 
(366,773
)
 
(227,563
)
Distributions of affiliates earnings to noncontrolling interest holders
 
(1,112
)
 
(1,045
)
Excess tax benefits from share-based compensation
 
1,591

 
1,390

Issuance of common shares
 
16,003

 
4,017

Repurchase of common shares
 
(2,896
)
 
(57,591
)
Net cash provided by financing activities
 
40,760

 
31,064

Effect of exchange rate changes on cash and cash equivalents
 
1,450

 
6,201

Decrease in cash and cash equivalents
 
(13,379
)
 
(49,918
)
Cash and cash equivalents at the beginning of the period
 
333,920

 
328,658

Cash and cash equivalents at the end of the period
 
$
320,541

 
$
278,740

See accompanying notes to condensed consolidated financial statements.


6

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2012
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


NOTE 1: CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of Diebold, Incorporated and its subsidiaries (collectively, the Company) have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with U.S. generally accepted accounting principles (GAAP); however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the results for the interim periods.
The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in the Company’s annual report on Form 10-K for the year ended December 31, 2011. In addition, some of the Company’s statements in this quarterly report on Form 10-Q may involve risks and uncertainties that could significantly impact expected future results. The results of operations for the three and six months ended June 30, 2012 are not necessarily indicative of results to be expected for the full year.
RECENTLY ADOPTED ACCOUNTING GUIDANCE
In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-05, Presentation of Comprehensive Income (ASU 2011-05), which eliminates the option to present components of other comprehensive income (OCI) as part of the statement of changes in stockholders’ equity. The amendments in this standard require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Subsequently, in December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income (ASU 2011-12), which indefinitely defers the requirement in ASU 2011-05 to present on the face of the financial statements reclassification adjustments for items that are reclassified from OCI to net income in the statement(s) where the components of net income and the components of OCI are presented. The Company has provided the required statements of comprehensive income for the three and six months ended June 30, 2012 and 2011.
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04). ASU 2011-04 amended Accounting Standards Codification 820, Fair Value Measurements and Disclosures, to converge the fair value measurement guidance in U.S. GAAP and International Financial Reporting Standards (IFRSs). ASU 2011-04 changes the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Disclosure requirements have been expanded to include additional information about transfers between level 1 and level 2 of the fair value hierarchy and level 3 measurements regarding the sensitivity of fair value to changes in unobservable inputs and any interrelationships between those inputs. Additionally, ASU 2011-04 clarifies the FASB’s intent about the application of existing fair value measurements including: (a) the application of the highest and best use valuation premise concepts; (b) measuring the fair value of an instrument classified in a reporting entity's stockholders' equity; and (c) quantitative information required for fair value measurements categorized within level 3. The adoption of this guidance did not have an impact on the Company's condensed consolidated financial statements; however, the Company provided additional disclosure as required by ASU 2011-04 in note 16.
RECENTLY ISSUED ACCOUNTING GUIDANCE
In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, which requires certain additional disclosure requirements about financial instruments and derivatives instruments that are subject to netting arrangements. The new disclosures are required for annual reporting periods beginning on or after January 1, 2013, and interim periods within those periods. The adoption of this update will not have an impact on the financial statements of the Company.










7

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2012
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)

NOTE 2: EARNINGS PER SHARE
Basic earnings per share is based on the weighted-average number of common shares outstanding. Diluted earnings per share includes the dilutive effect of potential common shares outstanding. Under the two-class method of computing earnings per share, non-vested share-based payment awards that contain rights to receive non-forfeitable dividends are considered participating securities. The Company’s participating securities include restricted stock units (RSUs), deferred shares and shares that were vested, but deferred by the employee. The Company calculated basic and diluted earnings per share under both the treasury stock method and the two-class method. For the three and six months ended June 30, 2012 and 2011, there was no impact in the per share amounts calculated under the two methods. Accordingly, the treasury stock method is disclosed below.
The following represents amounts used in computing earnings per share and the effect on the weighted-average number of shares of dilutive potential common shares:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2012
 
2011
 
2012
 
2011
Numerator:
 
 
 
 
 
 
 
 
Income used in basic and diluted earnings per share:
 
 
 
 
 
 
 
 
Income from continuing operations, net of tax
 
$
26,502

 
$
20,275

 
$
71,665

 
$
22,787

Income from discontinued operations, net of tax
 

 
529

 

 
518

Net income attributable to Diebold, Incorporated
 
$
26,502

 
$
20,804

 
$
71,665

 
$
23,305

Denominator (in thousands):
 
 
 
 
 
 
 
 
Weighted-average number of common shares used in basic earnings per share
 
63,064

 
65,028

 
62,899

 
65,393

Effect of dilutive shares
 
971

 
454

 
896

 
449

Weighted-average number of shares used in diluted earnings per share
 
64,035

 
65,482

 
63,795

 
65,842

Basic earnings per share:
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
0.42

 
$
0.31

 
$
1.14

 
$
0.35

Income from discontinued operations
 

 
0.01

 

 
0.01

Net income attributable to Diebold, Incorporated
 
$
0.42

 
$
0.32

 
$
1.14

 
$
0.36

Diluted earnings per share:
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
0.41

 
$
0.31

 
$
1.12

 
$
0.34

Income from discontinued operations
 

 
0.01

 

 
0.01

Net income attributable to Diebold, Incorporated
 
$
0.41

 
$
0.32

 
$
1.12

 
$
0.35

Anti-dilutive shares (in thousands):
 
 
 
 
 
 
 
 
Anti-dilutive shares not used in calculating diluted weighted-average shares
 
1,980

 
2,092

 
1,985

 
2,057


 















8

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2012
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)

NOTE 3: EQUITY
The following table presents changes in shareholders' equity attributable to Diebold, Incorporated and the noncontrolling interests:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
Diebold, Incorporated shareholders' equity
 
 
 
 
 
 
 
Balance at beginning of period
$
894,047

 
$
947,030

 
$
826,986

 
$
961,155

Comprehensive (loss) income attributable to Diebold, Incorporated
(33,088
)
 
55,950

 
41,253

 
73,132

Common shares
252

 
43

 
938

 
580

Additional capital
7,756

 
2,865

 
20,769

 
11,122

Treasury shares
(11
)
 
(36,140
)
 
(2,896
)
 
(57,591
)
Dividends declared and paid
(18,219
)
 
(18,440
)
 
(36,313
)
 
(37,090
)
Balance at end of period
$
850,737

 
$
951,308

 
$
850,737

 
$
951,308

 
 
 
 
 
 
 
 
Noncontrolling interests
 
 
 
 
 
 
 
Balance at beginning of period
$
30,956

 
$
30,254

 
$
31,274

 
$
28,659

Comprehensive income attributable to noncontrolling interests
1,068

 
1,659

 
1,862

 
3,564

Distributions to noncontrolling interest holders

 
(735
)
 
(1,112
)
 
(1,045
)
Balance at end of period
$
32,024

 
$
31,178

 
$
32,024

 
$
31,178


NOTE 4: SHARE-BASED COMPENSATION
The Company’s share-based compensation payments to employees are recognized in the statement of income based on their grant-date fair values during the period in which the employee is required to provide services in exchange for the award. Share-based compensation is recognized as a component of selling and administrative expense. Total share-based compensation expense was $1,907 and $3,181 for the three months ended June 30, 2012 and 2011, respectively, and $5,704 and $6,617 for the six months ended June 30, 2012 and 2011, respectively.

Options outstanding and exercisable as of June 30, 2012 under the Company’s 1991 Equity and Performance Incentive Plan (as Amended and Restated as of April 13, 2009) and changes during the six months ended June 30, 2012, were as follows:
 
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value (1)
 
 
(in thousands)
 
(per share)
 
(in years)
 
 
Outstanding at January 1, 2012
 
3,201

 
$
36.70

 
 
 
 
Expired or forfeited
 
(447
)
 
$
37.24

 
 
 
 
Exercised
 
(532
)
 
$
30.05

 
 
 
 
Granted
 
570

 
$
34.98

 
 
 
 
Outstanding at June 30, 2012
 
2,792

 
$
37.53

 
6
 
$
9,293

Options exercisable at June 30, 2012
 
1,669

 
$
40.83

 
4
 
$
4,470

Options vested and expected to vest (2) at June 30, 2012
 
2,761

 
$
37.59

 
6
 
$
9,152

(1)
The aggregate intrinsic value (the difference between the closing price of the Company’s common shares on the last trading day of the second quarter of 2012 and the exercise price, multiplied by the number of “in-the-money” options) that would have been received by the option holders had all option holders exercised their options on June 30, 2012. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s common shares.
(2)
The options expected to vest are the result of applying the pre-vesting forfeiture rate assumption to total outstanding non-vested options.


9

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2012
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)

The following table summarizes information on non-vested RSUs, performance shares and deferred shares for the six months ended June 30, 2012:
 
 
Number of
Shares
 
Weighted-Average
Grant-Date Fair
Value
 
 
(in thousands)
 
 
RSUs:
 
 
 
 
Non-Vested at January 1, 2012
 
717

 
$
30.69

Forfeited
 
(44
)
 
$
30.43

Vested
 
(127
)
 
$
24.84

Granted
 
235

 
$
35.31

Non-Vested at June 30, 2012
 
781

 
$
33.05

Performance Shares (1):
 
 
 
 
Non-Vested at January 1, 2012
 
727

 
$
34.70

Forfeited
 
(216
)
 
$
31.01

Vested
 
(86
)
 
$
29.25

Granted
 
301

 
$
44.25

Non-Vested at June 30, 2012
 
726

 
$
40.40

Director Deferred Shares:
 
 
 
 
Non-Vested at January 1, 2012
 
19

 
$
33.98

Vested
 
(19
)
 
$
33.98

Granted
 
28

 
$
40.54

Non-Vested at June 30, 2012
 
28

 
$
40.54

Vested at June 30, 2012
 
115

 
$
33.90

Outstanding at June 30, 2012
 
143

 
$
35.22

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

NOTE 5: INCOME TAXES
The effective tax rate on continuing operations for the three months ended June 30, 2012 was 33.8 percent compared to 23.3 percent for the same period of 2011. The 10.5 percentage point increase is attributable to the growth of income during 2012 in regions with higher tax rates. Additionally, a non-recurring discrete item related to state tax benefits reduced the effective tax rate for the three months ended June 30, 2011.
The effective tax rate on continuing operations for the six months ended June 30, 2012 was 27.3 percent compared to 32.7 percent for the same period of 2011. The 5.4 percentage point decrease was mainly due to operating losses in certain Europe, Middle East and Africa (EMEA) jurisdictions for which no tax benefit was recognized in the 2011 effective tax rate. The impact was significant on the 2011 tax rate because these operating losses were relatively large when compared to consolidated income from continuing operations before taxes for the period.

NOTE 6: INVESTMENTS
The Company’s investments, primarily in Brazil, consist of certificates of deposit and U.S. dollar indexed bond funds, which are classified as available-for-sale and stated at fair value based upon quoted market prices and net asset values, respectively. Unrealized gains and losses are recorded in OCI. Realized gains and losses are recognized in investment income and are determined using the specific identification method. Realized gains (losses), net from the sale of securities were $1,180 and $(1,304) for the three months ended June 30, 2012 and 2011, respectively, and $1,508 and $(1,468) for the six months ended June 30, 2012 and 2011, respectively. Proceeds from the sale of available-for-sale securities were $16,157 and $26,761 during the six months ended June 30, 2012 and 2011, respectively.



10

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2012
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)

The Company’s investments, excluding cash surrender value of insurance contracts of $68,053 and $67,699 as of June 30, 2012 and December 31, 2011, respectively, consist of the following:
 
 
Cost Basis
 
Unrealized
Gain (Loss)
 
Fair Value
As of June 30, 2012
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
Certificates of deposit
 
$
245,989

 
$

 
$
245,989

U.S. dollar indexed bond funds
 
22,123

 
2,747

 
24,870

 
 
$
268,112

 
$
2,747

 
$
270,859

Long-term investments:
 
 
 
 
 
 
Assets held in a rabbi trust
 
$
6,765

 
$
128

 
$
6,893

As of December 31, 2011
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
Certificates of deposit
 
$
269,033

 
$

 
$
269,033

U.S. dollar indexed bond funds
 
16,482

 
1,338

 
17,820

 
 
$
285,515

 
$
1,338

 
$
286,853

Long-term investments:
 
 
 
 
 
 
Assets held in a rabbi trust
 
$
7,428

 
$
(258
)
 
$
7,170


NOTE 7: ALLOWANCE FOR CREDIT LOSSES
Trade Receivables The Company evaluates the collectability of trade receivables based on (1) a percentage of sales related to historical loss experience and current trends and (2) periodic adjustments for known events such as specific customer circumstances and changes in the aging of accounts receivable balances. After all efforts at collection have been unsuccessful, the account is deemed uncollectible and is written off.

Financing Receivables The Company evaluates the collectability of notes and finance lease receivables (collectively, financing receivables) on a customer-by-customer basis and evaluates specific customer circumstances, aging of invoices, credit risk changes and payment patterns and historical loss experience. When the collectability is determined to be at risk based on the above criteria, the Company records the allowance for credit losses, which represents the Company’s current exposure less estimated reimbursement from insurance claims. After all efforts at collection have been unsuccessful, the account is deemed uncollectible and is written off. The following table summarizes the Company’s allowance for credit losses and recorded investment in financing receivables for the six months ended June 30, 2012:
 
 
Finance
Leases
 
Notes
Receivable
 
Total
Allowance for credit losses
 
 
 
 
 
 
Balance at January 1, 2012
 
$
210

 
$
2,047

 
$
2,257

Provision for credit losses
 
247

 

 
247

Recoveries
 
41

 

 
41

Write-offs
 

 

 

Balance at June 30, 2012
 
$
498

 
$
2,047

 
$
2,545

 
 
 
 
 
 
 
Allowance resulting from individual impairment evaluation
 
$
498

 
$
2,047

 
$
2,545

Allowance resulting from collective impairment evaluation
 

 

 

 
 
 
 
 
 
 
Financing receivables individually evaluated for impairment
 
$
95,753

 
$
13,829

 
$
109,582

Financing receivables collectively evaluated for impairment
 

 

 





11

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2012
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)

The following table summarizes the Company’s allowance for credit losses and recorded investment in financing receivables for the six months ended June 30, 2011:
 
 
Finance
Leases
 
Notes
Receivable
 
Total
Allowance for credit losses
 
 
 
 
 
 
Balance at January 1, 2011
 
$
378

 
$
470

 
$
848

Provision for credit losses
 
9

 
1,652

 
1,661

Recoveries
 
94

 
5,454

 
5,548

Write-offs
 
(354
)
 
(5,956
)
 
(6,310
)
Balance at June 30, 2011
 
$
127

 
$
1,620

 
$
1,747

 
 
 
 
 
 
 
Allowance resulting from individual impairment evaluation
 
$
127

 
$
1,620

 
$
1,747

Allowance resulting from collective impairment evaluation
 

 

 

 
 
 
 
 
 
 
Financing receivables individually evaluated for impairment
 
$
117,205

 
$
16,540

 
$
133,745

Financing receivables collectively evaluated for impairment
 

 

 

The Company records interest income and any fees or costs related to financing receivables using the effective interest method over the term of the lease or loan. The Company reviews the aging of its financing receivables to determine past due and delinquent accounts. Credit quality is reviewed at inception and is re-evaluated as needed based on customer-specific circumstances. Receivable balances 60 days to 89 days past due are reviewed and may be placed on nonaccrual status based on customer-specific circumstances. Receivable balances are placed on nonaccrual status upon reaching greater than 89 days past due. Upon receipt of payment on nonaccrual financing receivables, interest income is recognized and accrual of interest is resumed once the account has been made current or the specific circumstances have been resolved.
As of June 30, 2012 and December 31, 2011, the recorded investment in past-due finance lease receivables on nonaccrual status was $4,928 and $1,740, respectively. The recorded investment in finance lease receivables past due 90 days or more and still accruing interest was $98 and $114 as of June 30, 2012 and December 31, 2011, respectively. The recorded investment in impaired notes receivable as of June 30, 2012 and December 31, 2011 was $2,047 and $2,047, respectively, and was fully reserved. The following table summarizes the Company’s aging of past-due notes receivable balances:
 
 
June 30, 2012
 
December 31, 2011
30-59 days past due
 
$

 
$

60-89 days past due
 

 

> 89 days past due
 
1,633

 
1,495

Total past due
 
$
1,633

 
$
1,495


NOTE 8: INVENTORIES
Major classes of inventories are summarized as follows:
 
 
June 30, 2012
 
December 31, 2011
Finished goods
 
$
210,081

 
$
188,571

Service parts
 
163,422

 
152,597

Raw materials and work in process
 
112,586

 
99,732

Total inventories
 
$
486,089

 
$
440,900

 







12

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2012
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)

NOTE 9: OTHER ASSETS
Included in other assets are net capitalized software development costs of $50,884 and $51,117 as of June 30, 2012 and December 31, 2011, respectively. Amortization expense on capitalized software of $4,231 and $4,832 was included in product cost of sales for the three months ended June 30, 2012 and 2011, respectively, and $8,601 and $9,408 for the six months ended June 30, 2012 and 2011, respectively. Other long-term assets also consist of patents, trademarks and other intangible assets. Where applicable, other assets are stated at cost and, if applicable, are amortized ratably over the relevant contract period or the estimated life of the assets. Fees to renew or extend the term of the Company’s intangible assets are expensed when incurred. Impairment of long-lived assets is recognized when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the expected future undiscounted cash flows are less than the carrying amount of the asset group, an impairment loss may be recognized at that time to reduce the asset to the lower of its fair value or its net book value. The Company recorded $2,962 of software intangible asset impairment charges within Diebold North America (DNA) continuing operations in the second quarter of 2011.
Investment in Affiliate Investment in the Company’s non-consolidated affiliate is accounted for under the equity method and consists of a 50 percent ownership in Shanghai Diebold King Safe Company, Ltd. The balance of this investment as of June 30, 2012 and December 31, 2011 was $12,053 and $11,461, respectively, and fluctuated based on equity earnings and dividends. Equity earnings from the non-consolidated affiliate are included in miscellaneous, net in the condensed consolidated statements of income and were $345 and $434 for the three months ended June 30, 2012 and 2011, respectively, and $592 and $859 for the six months ended June 30, 2012 and 2011, respectively.

NOTE 10: DEBT
Outstanding debt balances were as follows:
 
 
June 30, 2012
 
December 31, 2011
Notes payable:
 
 
 
 
Uncommitted lines of credit
 
$
61,538

 
$
21,572

Other
 
179

 
150

 
 
$
61,717

 
$
21,722

Long-term debt:
 
 
 
 
Credit facility
 
$
315,000

 
$
291,000

Senior notes
 
300,000

 
300,000

Industrial development revenue bonds
 
11,900

 
11,900

Other
 
3,137

 
3,254

 
 
$
630,037

 
$
606,154

As of June 30, 2012, the Company had various international short-term uncommitted lines of credit with borrowing limits of $108,932. The weighted-average interest rate on outstanding borrowings on the short-term uncommitted lines of credit as of June 30, 2012 and December 31, 2011 was 2.59 percent and 4.23 percent, respectively. The decline in the weighted-average interest rate is attributable to the change in mix of borrowings in foreign entities. Short-term uncommitted lines mature in less than one year. The amount available under the short-term uncommitted lines at June 30, 2012 was $47,394.
In June 2011, the Company entered into a five-year credit facility, which replaced its previous credit facility. As of June 30, 2012, the Company had borrowing limits under the credit facility totaling $500,000. Under the terms of the credit facility agreement, the Company has the ability, subject to various approvals, to increase the borrowing limits by $250,000. Up to $50,000 of the revolving credit facility is available under a swing line subfacility. The weighted-average interest rate on outstanding credit facility borrowings as of June 30, 2012 and December 31, 2011 was 1.24 percent and 1.49 percent, respectively, which is variable based on the London Interbank Offered Rate (LIBOR). The amount available under the credit facility as of June 30, 2012 was $185,000.

In March 2006, the Company issued senior notes in an aggregate principal amount of $300,000 with a weighted-average fixed interest rate of 5.50 percent. The maturity dates of the senior notes are staggered, with $75,000, $175,000 and $50,000 becoming due in 2013, 2016 and 2018, respectively. Additionally, the Company entered into a derivative transaction to hedge interest rate risk on $200,000 of the senior notes, which was treated as a cash flow hedge. This reduced the effective interest rate from 5.50 percent to 5.36 percent. As of June 30, 2012, although due within twelve months, $75,000 of the senior notes remain classified

13

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2012
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)

as long-term debt because of the Company's intent and ability to fund the repayment using amounts available under its credit facility, unless an alternative source of financing with more favorable terms is available upon maturity.
In 1997, industrial development revenue bonds were issued on behalf of the Company. The proceeds from the bond issuances were used to construct new manufacturing facilities in the United States. The Company guaranteed the payments of principal and interest on the bonds by obtaining letters of credit. The bonds were issued with a 20-year original term and are scheduled to mature in 2017. Each industrial development revenue bond carries a variable interest rate, which is reset weekly by the remarketing agents. The weighted-average interest rate on the bonds was 0.86 percent and 0.77 percent as of June 30, 2012 and December 31, 2011, respectively.
The Company’s debt agreements contain various restrictive financial covenants, including net debt to capitalization and net interest coverage ratios. As of June 30, 2012, the Company was in compliance with the financial covenants in its debt agreements.

NOTE 11: BENEFIT PLANS
The Company has pension plans covering certain U.S. employees that have been closed to new participants since July 1, 2003. Plans that cover certain salaried employees provide pension benefits based on the employee’s compensation during the ten years before retirement. The Company’s funding policy for salaried plans is to contribute annually based on actuarial projections and applicable regulations. Plans covering certain hourly employees and union members generally provide benefits of stated amounts for each year of service. The Company’s funding policy for hourly plans is to make at least the minimum annual contributions required by applicable regulations. Employees of the Company’s operations in countries outside of the U.S. participate to varying degrees in local pension plans, which in the aggregate are not significant.
In addition to providing pension benefits, the Company provides healthcare and life insurance benefits (referred to as other benefits) for certain retired employees. Eligible employees may be entitled to these benefits based upon years of service with the Company, age at retirement and collective bargaining agreements. Currently, the Company has made no commitments to increase these benefits for existing retirees or for employees who may become eligible for these benefits in the future. There are no plan assets and the Company funds the benefits as the claims are paid.
The following table sets forth the net periodic benefit cost for the Company’s defined benefit pension plans and other benefits for the three months ended June 30:
 
 
Pension Benefits
 
Other Benefits
 
 
2012
 
2011
 
2012
 
2011
Components of net periodic benefit cost
 
 
 
 
 
 
 
 
Service cost
 
$
2,861

 
$
2,713

 
$

 
$

Interest cost
 
7,958

 
7,872

 
203

 
232

Expected return on plan assets
 
(10,206
)
 
(10,184
)
 

 

Amortization of prior service cost (benefit)
 
64

 
64

 
(129
)
 
(129
)
Recognized net actuarial loss
 
4,183

 
2,394

 
122

 
97

Net periodic pension benefit cost
 
$
4,860

 
$
2,859

 
$
196

 
$
200

 
The following table sets forth the net periodic benefit cost for the Company’s defined benefit pension plans and other benefits for the six months ended June 30:
 
 
Pension Benefits
 
Other Benefits
 
 
2012
 
2011
 
2012
 
2011
Components of net periodic benefit cost
 
 
 
 
 
 
 
 
Service cost
 
$
5,723

 
$
5,426

 
$

 
$

Interest cost
 
15,916

 
15,744

 
407

 
465

Expected return on plan assets
 
(20,411
)
 
(20,367
)
 

 

Amortization of prior service cost (benefit)
 
129

 
129

 
(258
)
 
(258
)
Recognized net actuarial loss
 
8,394

 
4,800

 
243

 
194

Net periodic pension benefit cost
 
$
9,751

 
$
5,732

 
$
392

 
$
401


14

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2012
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)

Cash Flows
There have been no significant changes to the 2012 plan year contribution amounts previously disclosed. For the six months ended June 30, 2012 and 2011, contributions of $13,780 and $21,500, respectively, were made to the qualified and non-qualified pension plans.

NOTE 12: GUARANTEES AND PRODUCT WARRANTIES
In 1997, industrial development revenue bonds were issued on behalf of the Company. The Company guaranteed the payments of principal and interest on the bonds (refer to note 10) by obtaining letters of credit. The carrying value of the bonds was $11,900 as of June 30, 2012 and December 31, 2011.
The Company provides its global operations guarantees and standby letters of credit through various financial institutions to suppliers, customers, regulatory agencies and insurance providers. If the Company is not able to make payment or fulfill contractual obligations, the suppliers, customers, regulatory agencies and insurance providers may draw on the pertinent bank. At June 30, 2012, the maximum future payment obligations related to these various guarantees totaled $76,321, of which $23,435 represented standby letters of credit to insurance providers, and no associated liability was recorded. At December 31, 2011, the maximum future payment obligations relative to these various guarantees totaled $71,321, of which $22,623 represented standby letters of credit to insurance providers, and no associated liability was recorded.
The Company provides its customers a manufacturer’s warranty and records, at the time of the sale, a corresponding estimated liability for potential warranty costs. Estimated future obligations due to warranty claims are based upon historical factors such as labor rates, average repair time, travel time, number of service calls per machine and cost of replacement parts.
Changes in the Company’s warranty liability balance are illustrated in the following table:
 
 
2012
 
2011
Balance at January 1
 
$
63,355

 
$
78,313

Current period accruals (a)
 
29,867

 
30,066

Current period settlements
 
(26,371
)
 
(34,058
)
Balance at June 30
 
$
66,851

 
$
74,321

(a)
includes the impact of foreign exchange rate fluctuations

NOTE 13: COMMITMENTS AND CONTINGENCIES
At June 30, 2012, the Company was a party to several lawsuits that were incurred in the normal course of business, none of which individually or in the aggregate are considered material by management in relation to the Company’s financial position or results of operations. In management’s opinion, the condensed consolidated financial statements would not be materially affected by the outcome of these legal proceedings, commitments or asserted claims. In addition to these routine legal proceedings, the Company was a party to a securities action, which is described in note 15 of the consolidated financial statements contained in the Company’s annual report on Form 10-K for the year ended December 31, 2011.

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

The Company has voluntarily self-reported its findings to the SEC and the U.S. Department of Justice (DOJ) and is cooperating with these agencies in their review. The Company was previously informed that the SEC's inquiry had been converted to a formal, non-public investigation. The Company also received a subpoena for documents from the SEC and a voluntary request for documents from the DOJ in connection with the investigation. As of June 30, 2012, the Company's accrued estimated loss related to the potential outcome of this matter is not considered material to the condensed consolidated financial statements. Because the SEC and DOJ investigations are ongoing, there can be no assurance that their review will not find evidence of additional transactions that potentially implicate the FCPA. The Company has recently begun initial discussions with the government toward a possible resolution to this matter. At this time, the Company cannot predict the results of the government investigations, and resolution of

15

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2012
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)

these matters with the SEC and the DOJ could result in changes in management's estimates of losses, which could be material to the Company’s consolidated financial statements.

NOTE 14: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company uses derivatives to mitigate the economic consequences associated with fluctuations in currencies and interest rates.
FOREIGN EXCHANGE
Net Investment Hedges The Company has international subsidiaries with net balance sheet positions that generate cumulative translation adjustments within OCI. The Company uses derivatives to manage potential changes in value of its net investments in Brazil. The Company uses the forward-to-forward method for its quarterly retrospective and prospective assessments of hedge effectiveness. No ineffectiveness results if the notional amount of the derivative matches the portion of the net investment designated as being hedged because the Company uses derivative instruments with underlying exchange rates consistent with its functional currency and the functional currency of the hedged net investment. Changes in value that are deemed effective are accumulated in OCI where they will remain until they are reclassified to income together with the gain or loss on the entire investment upon substantial liquidation of the subsidiary. The fair value of the Company’s net investment hedge contracts was $4,037 and $1,768 as of June 30, 2012 and December 31, 2011, respectively. The gain recognized in OCI on net investment hedge derivative instruments was $4,295 and $2,269 in the three and six months ended June 30, 2012, respectively.
Non-Designated Hedges A substantial portion of the Company’s operations and revenues are international. As a result, changes in foreign exchange rates can create substantial foreign exchange gains and losses from the revaluation of non-functional currency monetary assets and liabilities. The Company’s policy allows the use of foreign exchange forward contracts with maturities of up to 24 months to mitigate the impact of currency fluctuations on those foreign currency asset and liability balances. The Company elected not to apply hedge accounting to its foreign exchange forward contracts. Thus, spot-based gains/losses offset revaluation gains/losses within foreign exchange loss, net and forward-based gains/losses represent interest expense. The fair value of the Company’s non-designated foreign exchange forward contracts was $(1,212) and $(1,558) as of June 30, 2012 and December 31, 2011, respectively.
The following table summarizes the (loss) gain recognized on non-designated foreign-exchange derivative instruments:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
Income Statement Location
 
2012
 
2011
 
2012
 
2011
Interest expense
 
$
(1,275
)
 
$
(2,027
)
 
$
(2,666
)
 
$
(3,876
)
Foreign exchange gain (loss), net
 
3,033

 
4,479

 
599

 
(1,738
)
 
 
$
1,758

 
$
2,452

 
$
(2,067
)
 
$
(5,614
)
INTEREST RATE
Cash Flow Hedges The Company has variable rate debt and is subject to fluctuations in interest related cash flows due to changes in market interest rates. The Company’s policy allows derivative instruments designated as cash flow hedges that fix a portion of future variable-rate interest expense. As of June 30, 2012, the Company has two pay-fixed receive-variable interest rate swaps, with a total notional amount of $50,000, to hedge against changes in the LIBOR benchmark interest rate on a portion of the Company’s LIBOR-based borrowings. Changes in value that are deemed effective are accumulated in OCI and reclassified to interest expense when the hedged interest is accrued. To the extent that it becomes probable that the Company’s variable rate borrowings will not occur, the gains or losses on the related cash flow hedges will be reclassified from OCI to interest expense.
In December 2005 and January 2006, the Company executed cash flow hedges by entering into receive-variable and pay-fixed interest rate swaps, with a total notional amount of $200,000, related to the senior notes issuance in March 2006. Amounts previously recorded in OCI related to the pre-issuance cash flow hedges will continue to be reclassified on a straight-line basis through February 2016.
 
The fair value of the Company’s interest rate contracts was $(3,733) and $(3,796) as of June 30, 2012 and December 31, 2011, respectively.
Gains and losses related to interest rate contracts that are reclassified from accumulated OCI are recorded in interest expense on the statement of income. The Company anticipates reclassifying $849 from OCI to interest expense within the next 12 months.

16

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2012
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)

NOTE 15: RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES
Restructuring Charges
The following table summarizes the impact of the Company’s restructuring charges (accrual adjustments) on the condensed consolidated statements of income:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2012
 
2011
 
2012
 
2011
Cost of sales – services
 
$
(196
)
 
$
2,555

 
$
(865
)
 
$
8,629

Cost of sales – products
 
100

 
251

 
105

 
374

Selling and administrative expense
 
813

 
1,667

 
3,200

 
7,271

Research, development and engineering expense
 

 
12

 

 
12

Total
 
$
717

 
$
4,485

 
$
2,440

 
$
16,286

The following table summarizes the Company’s net restructuring charges (accrual adjustments) within continuing operations for its DNA and Diebold International (DI) reporting segments:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2012
 
2011
 
2012
 
2011
DNA
 
 
 
 
 
 
 
 
Severance
 
$
450

 
$
802

 
$
1,557

 
$
795

DI
 
 
 
 
 
 
 
 
Severance
 
164

 
2,844

 
292

 
14,449

Other (1)
 
103

 
839

 
591

 
1,042

Total
 
$
717

 
$
4,485

 
$
2,440

 
$
16,286

(1)
Other costs in the DI segment include legal fees, accelerated depreciation and lease termination fees.
Restructuring charges of $377 and $2,100 for the three and six months ended June 30, 2012, respectively, related to the Company’s global shared services plan, which entails expanding the Company's current information technology (IT) center in India to create a global shared services center that provides centralized IT and financial services for the Company. Expanding the shared services center requires transferring IT and financial services-related jobs residing in other geographies. As of June 30, 2012, the Company anticipates additional restructuring costs of $1,200 in 2012 and up to $8,300 in future periods. As management concludes on certain aspects of the global shared services plan, the anticipated future costs related to this plan are subject to change.
Restructuring (accrual adjustments) charges of $(34) and $3,452 for the three months ended June 30, 2012 and 2011, respectively, and $296 and $15,032 for the six months ended June 30, 2012 and 2011, respectively, related to the Company’s plan for the EMEA reorganization, which realigns resources and leveraged the existing shared services center. As of June 30, 2012, the Company anticipates additional restructuring costs of $2,600 during the remainder of 2012 and an additional $400 into 2013 related to this plan.
Other net restructuring charges were $374 and $1,033 for the three months ended June 30, 2012 and 2011, respectively, and $44 and $1,254 for the six months ended June 30, 2012 and 2011, respectively.

The following table summarizes the Company’s cumulative total restructuring costs for the significant plans:
 
 
Global Shared Services
 
EMEA
Reorganization
Costs incurred to date:
 
 
 
 
DNA
 
$
1,930

 
$

DI
 
170

 
19,746

Total costs incurred to date
 
$
2,100

 
$
19,746



17

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2012
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)

The following table summarizes the Company’s restructuring accrual balances and related activity:
Balance at January 1, 2012
 
$
10,136

Liabilities incurred
 
2,440

Liabilities paid
 
(3,587
)
Balance at June 30, 2012
 
$
8,989


Impairment and Other Charges
In the second quarter of 2012, the Company recorded an impairment charge within DNA of $6,701 related to a portion of its global enterprise resource planning (ERP) system. Previously capitalized software and software-related costs were impaired due to changes in the ERP implementation plan related to configuration and design. In the second quarter of 2011, the Company recorded $2,962 of software intangible asset impairment charges within DNA.
Other charges consist of items that the Company determines are non-routine in nature. Net non-routine expense of $1,267 and $10,479 were included in selling and administrative expense for the six months ended June 30, 2012 and 2011, respectively. Net non-routine expenses for 2012 and 2011 consisted primarily of legal and compliance costs related to the FCPA investigation.
NOTE 16: FAIR VALUE OF ASSETS AND LIABILITIES
The Company measures its financial assets and liabilities using one or more of the following three valuation techniques:
Market approach – Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
Cost approach – Amount that would be required to replace the service capacity of an asset (replacement cost).
Income approach – Techniques to convert future amounts to a single present amount based upon market expectations.
The hierarchy that prioritizes the inputs to valuation techniques used to measure fair value is divided into three levels:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 – Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active or inputs, other than quoted prices in active markets, that are observable either directly or indirectly.
Level 3 – Unobservable inputs for which there is little or no market data.
 
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety.




















18

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2012
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)

Assets and Liabilities Recorded at Fair Value
Assets and liabilities subject to fair value measurement are as follows:
 
 
June 30, 2012
 
December 31, 2011
 
 
 
 
Fair Value Measurements Using
 
 
 
Fair Value Measurements Using
 
 
Fair Value
 
Level 1
 
Level 2
 
Fair Value
 
Level 1
 
Level 2
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
 
$
245,989

 
$
245,989

 
$

 
$
269,033

 
$
269,033

 
$

U.S. dollar indexed bond funds
 
24,870

 

 
24,870

 
17,820

 

 
17,820

Assets held in a rabbi trust
 
6,893

 
6,893

 

 
7,170

 
7,170

 

Foreign exchange forward contracts
 
3,960

 

 
3,960

 
2,193

 

 
2,193

Total
 
$
281,712

 
$
252,882

 
$
28,830

 
$
296,216

 
$
276,203


$
20,013

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Deferred compensation
 
$
6,893

 
$
6,893

 
$

 
$
7,170

 
$
7,170

 
$

Foreign exchange forward contracts
 
1,135

 

 
1,135

 
1,983

 

 
1,983

Interest rate swaps
 
3,733

 

 
3,733

 
3,796

 

 
3,796

Total
 
$
11,761

 
$
6,893

 
$
4,868

 
$
12,949

 
$
7,170

 
$
5,779


The Company uses the end of period when determining the timing of transfers between levels. During the six months ended June 30, 2012 and 2011, there were no transfers between levels.
Short-Term Investments The Company has investments in certificates of deposit that are recorded at cost, which approximates fair value. Additionally, the Company has investments in U.S. dollar indexed bond funds that are classified as available-for-sale and stated at fair value. U.S. dollar indexed bond funds are reported at net asset value, which is the practical expedient for fair value as determined by banks where funds are held.
Assets Held in a Rabbi Trust / Deferred Compensation The fair value of the assets held in a rabbi trust is derived from investments in a mix of money market, fixed income and equity funds managed by Vanguard. The related deferred compensation liability is recorded at fair value.
Foreign Exchange Forward Contracts A substantial portion of the Company’s operations and revenues are international. As a result, changes in foreign exchange rates can create substantial foreign exchange gains and losses from the revaluation of non-functional currency monetary assets and liabilities. The foreign exchange contracts are valued using the market approach based on observable market transactions of forward rates.
Interest Rate Swaps The Company has variable rate debt and is subject to fluctuations in interest-related cash flows due to changes in market interest rates. The Company’s policy is to periodically enter into derivative instruments designated as cash flow hedges to fix some portion of future variable rate based interest expense. The Company has a pay-fixed receive-variable interest rate swap to hedge against changes in the LIBOR benchmark interest rate on a portion of the Company’s LIBOR-based borrowings. The fair value of the swap is determined using the income approach and is calculated based on LIBOR rates at the reporting date.
Assets and Liabilities Recorded at Carrying Value
The fair value of the Company’s cash and cash equivalents, trade receivables and accounts payable, approximates the carrying value due to the relative short maturity of these instruments. The fair value and carrying value of the Company’s debt instruments are summarized as follows:
 
 
June 30, 2012
 
December 31, 2011
 
 
Fair Value
 
Carrying
Value
 
Fair Value
 
Carrying
Value
Notes payable
 
$
61,717

 
$
61,717

 
$
21,722

 
$
21,722

Long-term debt
 
641,112

 
630,037

 
612,551

 
606,154

Total debt instruments
 
$
702,829

 
$
691,754

 
$
634,273

 
$
627,876


19

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2012
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)

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

NOTE 17: SEGMENT INFORMATION
The Company’s segments are comprised of two sales channels: DNA and DI. The DNA segment sells and services financial and retail systems in the United States and Canada. The DI segment sells and services financial and retail systems over the remainder of the globe as well as voting and lottery solutions in Brazil.
The reconciliation between segment information and the condensed consolidated financial statements is disclosed. Revenue summaries by geographic area and product and service solutions are also disclosed. Certain information not routinely used in the management of the DNA and DI segments are not allocated back to the segments. Items not allocated are as follows: investment income; interest expense; equity in the net income of investees accounted for by the equity method; income tax expense or benefit; foreign exchange gains and losses; miscellaneous, net; and discontinued operations. The Company has reclassified the presentation of prior-year operating profit (loss) to conform to the current year presentation due to changes in corporate allocations. 
 
The following table presents information regarding the Company’s segments:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2012
 
2011
 
2012
 
2011
DNA
 
 
 
 
 
 
 
 
Customer revenues
 
$
398,897

 
$
337,992

 
$
798,817

 
$
643,956

Intersegment revenues
 
13,294

 
20,362

 
26,901

 
39,988

Operating profit
 
36,004

 
23,172

 
91,301

 
39,324

Capital expenditures
 
7,315

 
5,106

 
12,600

 
10,885

Depreciation
 
9,645

 
7,362

 
16,540

 
14,121

Property, plant and equipment, at cost
 
457,904

 
463,850

 
457,904

 
463,850

Total assets
 
1,072,470

 
1,028,612

 
1,072,470

 
1,028,612

DI
 
 
 
 
 
 
 
 
Customer revenues
 
344,291

 
324,390

 
642,862

 
632,583

Intersegment revenues
 
15,704

 
12,934

 
34,479

 
28,200

Operating profit (loss)
 
3,889

 
1,930

 
3,236