Summary of DIEBOLD INC - Yahoo! Finance

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW
Management's discussion and analysis is provided as a supplement and should be read in conjunction with the condensed consolidated financial statements and accompanying notes that appear elsewhere in this quarterly report. Introduction
Diebold, Incorporated is a global leader in providing integrated self-service delivery and security systems and services to the financial, retail, commercial and government markets. Founded in 1859, and celebrating 150 years of innovation in 2009, the Company today has more than 16,000 employees with representation in nearly 90 countries worldwide.
During the past three years, the Company's management continued to execute against its strategic roadmap developed in 2006 to strengthen operations and build a strong foundation for future success in its two core lines of business:
financial self-service and security solutions. This roadmap was built around five key priorities: increase customer loyalty; improve quality; strengthen the supply chain; enhance communications and teamwork; and rebuild profitability. Looking to the remainder of 2009, the Company continues to face a challenging market environment and is taking the appropriate steps necessary to be successful and position itself for future growth. The Company continues to significantly reduce operating expenses on a dollar basis while maintaining its investment in future product and service solutions. The Company believes this strategy will help strengthen the Company's competitive position when its core markets return to growth. Also, the Company will continue to focus on remediation of its remaining internal control material weaknesses related to controls over financial reporting and is on target to complete its remediation plan by the end of 2009. Total costs incurred for remediation efforts were approximately $1,000 and $3,200 in the three and nine months ended September 30, 2009. Management estimates the total cost for remediation efforts in 2009 to be approximately $4,100, which includes $3,400 of consultation fees and $700 of internal costs, including software purchases.
For the third quarter of 2009, income from continuing operations attributable to Diebold, Incorporated, net of tax, was $24,486 or $0.37 per share, both down 49 percent from the third quarter of 2008. Total revenue during the quarter was $645,222, down 26 percent from the third quarter of 2008.
Income from continuing operations attributable to Diebold, Incorporated, net of tax, for the nine months ended September 30, 2009 was $65,203 or $0.98 per share, both down 28 percent from the same period of 2008. Total revenue during the nine months ended September 30, 2009 was $1,993,369, down 13 percent from the same period of 2008.
Vision and strategy
The Company's vision is, "To be recognized as the essential partner in creating and implementing ideas that optimize convenience, efficiency and security." This vision is the guiding principle behind the Company's transformation to becoming a more services-oriented Company. Today, service comprises more than 50 percent of the Company's revenue, and the Company expects that this percentage will grow over time as the Company's integrated services business continues to gain traction in the marketplace. For example, financial institutions are eager to reduce costs and optimize management and productivity of their ATM channels - and they are increasingly exploring outsourced solutions. The Company remains uniquely positioned to provide the infrastructure necessary to manage all aspects of an ATM network - hardware, software, maintenance, transaction processing, patch management and cash management - through its integrated product and services offerings. As evidence of the Company's success in delivering world-class services for financial institutions' non-core operations, the Company was listed among the International Association of Outsourcing Professionals™ 10 best outsourcing providers within the service industry in the 2009 Global Outsourcing 100 ™ rankings. In addition to being among the 10 best leaders of outsourcing providers within the service industry, the Company improved its overall position from the 2008 rankings in its third consecutive year on the list.
Another area of focus within the financial self-service business is broadening the Company's deposit automation solutions set, including check imaging, envelope-free currency acceptance, teller automation, and payment and document imaging solutions. The Company's ImageWay®check-imaging solution fulfills an industry-wide demand for cutting-edge technologies that enhance efficiencies. In 2008, the Company solidified its competitive position in deposit automation technology with an increase in shipments of deposit automation solutions by more than 50 percent from 2007 and expanded its solutions set with the launch of a bulk-check deposit capability. Diebold has shipped more than 25,000 deposit automation modules to date in the United States. In addition, this

Table of Contents

DIEBOLD, INCORPORATED AND SUBSIDIARIES FORM 10-Q as of September 30, 2009 (Dollars in thousands, except per share amounts)
summer the Company launched its latest innovation in its family of deposit automation solutions with the newly developed Enhanced Note Acceptor (ENA), a cash accepting device for ATMs. The ENA enables the deposit of up to 50 mixed-denomination notes in an easy, envelope-free transaction that authenticates and validates deposits, quickly and accurately. These types of development investments remain critical even as the Company streamlines its business and aggressively reduces its cost structure.
Within the security business, the Company is diversifying by expanding and enhancing offerings in its financial, government, commercial and retail markets. Critical areas of focus include expanding solutions within the financial market beyond traditional branch equipment and growing integrated/outsourcing services. For example, the Company recently announced an outsourcing agreement with Delta Community Credit Union, headquartered in Atlanta, Georgia, making the Company the single-source provider for access control, credential management and monitoring solutions at the credit union. An outsourced security model provides financial institutions with end-to-end solutions, while reducing costs, improving efficiencies and trimming administrative requirements. Additional growth strategies include broadening the Company's solutions portfolio in fire, energy management, remote video surveillance, logical security and integrated enterprise systems as well as expanding the distribution model such as with the Diebold Advanced Dealer Program. The Diebold Advanced Dealer Program was created to engage new distribution channels and will enable leading, pre-certified security dealers to leverage the Company's advanced monitoring services. The program will expand the Company's North American delivery network at local and regional levels, while enabling select dealers to provide new services to their customers. Authorized dealers can leverage the Company's sophisticated monitoring solutions, including Site Sentry(R) Remote Video Monitoring, Site Sentry(R) Remote Video Storage, managed access control and energy management. These solutions will enable end users to enhance security, reduce workforce demands, increase efficiencies and deliver enterprise-wide return on investment. During the third quarter of 2009, the Company sold its U.S. election systems business, primarily consisting of its subsidiary Premier Election Solutions, Inc. for $12,147. Consideration received included $5,000 of cash and contingent consideration with a fair value of $7,147, which represents 70 percent of any cash collected over a five-year period on the accounts receivable balance of the sold business as of August 31, 2009. The resulting pre-tax loss on the sale of $50,750 includes $56,566 of net assets of the business, primarily inventory, and $1,862 of other transactional costs. A few challenges to the sale of the Company's U.S. elections business have arisen, including a third-party lawsuit against the Company and the purchaser of the U.S. election systems business alleging antitrust violations, and a request for documents and information from the U.S. Department of Justice, Antitrust Division, and the State of Florida. The Company cannot predict the impact, if any, such challenges will have on the sale or the Company's results of operations.
Results of operations of this election systems business is included in loss from discontinued operations, net of tax, in the Company's condensed consolidated statements of operations. As previously disclosed, the Company closed its enterprise security operations in the Europe, Middle East and Africa (EMEA) region during the fourth quarter of 2008. Results of operations of this enterprise security business is also included in loss from discontinued operations, net of tax, in the Company's condensed consolidated statements of operations. Total loss from discontinued operations, net of tax, for the three months ended September 30, 2009 and 2008 was $203 and $1,098, respectively. Total loss from discontinued operations, net of tax, for the nine months ended September 30, 2009 and 2008 was $8,842 and $2,853, respectively.
The focus for the remainder of 2009 will be to continue to enhance and diversify the Company's offerings, realize synergies where sensible and make prudent decisions - taking swift action wherever necessary to capture profitable growth opportunities. The Company will focus on what it can control - providing customers with the most innovative and highest quality solutions and services, while maintaining an efficient cost structure. Cost savings initiatives
In 2006, the Company launched the SmartBusiness (SB) 100 initiative to deliver $100,000 in cost savings by the end of 2008. This key milestone was achieved in November 2008 with significant progress made in areas such as rationalization of product development, streamlining procurement, realigning the Company's manufacturing footprint and improving logistics.
In September 2008, the Company announced a new goal to achieve an additional $100,000 in cost savings called SB 200 with a goal of eliminating $70,000 by the middle of 2010 and the remainder to be eliminated by the end of 2011. In 2009, in the face of this challenging environment, the Company is accelerating its cost-reduction initiatives and is on track with the goal to eliminate $35,000 by the end of 2009.
The Company is committed to making the strategic decisions that not only streamline operations, but also enhance its ability to serve its customers. The Company remains confident in the ability to continue to execute on cost-reduction initiatives, delivering solutions that help improve customers' businesses and creating shareholder value. The Company has worked hard to redistribute and reduce its

Table of Contents

DIEBOLD, INCORPORATED AND SUBSIDIARIES FORM 10-Q as of September 30, 2009 (Dollars in thousands, except per share amounts)
manufacturing capacity to be more aligned with current demand. Most recently, the Company announced that it is ending all remaining Opteva ATM manufacturing in its Lexington, North Carolina facility. This will drive more volume and improved utilization through the Company's Budapest and Shanghai facilities. These efforts, as well as continued competitive advantage on services, have positioned the Company to not have to compromise its pricing philosophy for the sake of increased volume.
Restructuring and Other Charges
During the three and nine months ended September 30, 2009, the Company incurred restructuring charges of $1,772 or $0.02 per share and $10,228 or $0.11 per share, respectively. The majority of these charges were related to severance and other costs from the 2008 announced reduction in the Company's global workforce, field office and warehousing facilities.
There were no non-routine expenses in the three months ended September 30, 2009. The three months ended September 30, 2008 included non-routine expenses of $24,665, primarily from legal, audit and consultation fees related to the internal review of other accounting items, restatement of financial statements, government investigations and other advisory fees.
Non-routine expenses of $15,005 and $41,839 impacted the nine months ended September 30, 2009 and 2008, respectively. During the nine months ended September 30, 2009, the Company incurred non-routine expenses of $1,328 in legal and other consultation fees recorded in selling and administrative expense related to the government investigations and a $25,000 charge, recorded in miscellaneous net, related to an agreement in principle with the staff of the U.S. Securities and Exchange Commission (SEC) to settle civil charges stemming from the staff's pending enforcement inquiry. The agreement in principle with the staff of the SEC remains subject to the final approval of the SEC, and there can be no assurance that the SEC will accept the terms of the settlement negotiated with the staff. In addition, the nine months ended September 30, 2009 selling and administrative expense was offset by $11,323 of non-routine income, including $10,616 of reimbursements from the Company's director and officer (D&O) insurance carriers related to legal and other expenses incurred as part of the government investigations. The Company continues to pursue reimbursement of the remaining incurred legal and other expenditures with its D&O insurance carriers. Non-routine expenses for the nine months ended September 30, 2008 were primarily from legal, audit and consultation fees related to the internal review of other accounting items, restatement of financial statements, government investigations and other advisory fees. Also, during the nine months ended September 30, 2008, the Company incurred an impairment charge of $4,376 related to the write-down of intangible assets from the 2004 acquisition of TFE Technology Holdings, a maintenance provider of network and hardware service solutions to federal and state government agencies and commercial firms. The following discussion of the Company's financial condition and results of operations provide information that will assist in understanding the financial statements and the changes in certain key items in those financial statements. The business drivers of the Company's future performance 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; and

• demand beyond expectations for security products and services for the financial, retail and government sectors.

Table of Contents

                     DIEBOLD, INCORPORATED AND SUBSIDIARIES
                       FORM 10-Q as of September 30, 2009
                (Dollars in thousands, except per share amounts)
RESULTS OF OPERATIONS
The following table summarizes the results of our operations for the three and
nine months ended September 30, 2009 and 2008:

                                              Three months ended                                                     Nine months ended
                                                September 30,                                                          September 30,
                                     2009                             2008                               2009                                2008
                                             % of                             % of                                % of                                % of
                           Dollars        Net sales         Dollars         Net sales          Dollars          Net sales          Dollars          Net sales
Net sales                 $ 645,222            100.0       $ 869,089             100.0       $ 1,993,369             100.0       $ 2,290,691             100.0
Gross profit                152,209             23.6         227,942              26.2           473,446              23.8           581,237              25.4
Operating expenses          121,039             18.8         161,876              18.6           351,192              17.6           448,017              19.6
Operating profit             31,170              4.8          66,066               7.6           122,254               6.1           133,220               5.8
Income from
continuing operations        25,237              3.9          49,962               5.7            69,347               3.5            95,742               4.2
Loss from
discontinued
operations, net of
tax                         (31,641 )           (4.9 )        (1,098 )            (0.1 )         (40,280 )            (2.0 )          (2,853 )            (0.1 )
Net income
attributable to
noncontrolling
interests                      (751 )           (0.1 )        (2,348 )            (0.3 )          (4,144 )            (0.2 )          (5,364 )            (0.2 )
Net (loss) income
attributable to
Diebold, Incorporated        (7,155 )           (1.1 )        46,516               5.4            24,923               1.3            87,525               3.8
Diluted earnings per
share:
Net income from
continuing operations     $    0.37                        $    0.72                         $      0.98                         $      1.36
Loss from
discontinued
operations                    (0.48 )                          (0.02 )                             (0.61 )                             (0.04 )

Net (loss) income
attributable to
Diebold, Incorporated     $   (0.11 )                      $    0.70                         $      0.37                         $      1.32

Third Quarter 2009 Comparisons with Third Quarter 2008 Net Sales
The following table represents information regarding our net sales for the three months ended September 30, 2009 and 2008:

Three months ended September 30, 2009 2008 $ Change % Change Net sales $ 645,222 $ 869,089 $ (223,867 ) (25.8 )

Financial self-service revenue in the third quarter of 2009 decreased by $129,267 or 21.0 percent compared to the same period of 2008. The decrease in financial self-service revenue included a net negative currency impact of $18,709, of which approximately 65.7 percent related to the Brazilian real. Revenue was down from prior year in all geographic areas. The Americas were down $65,425 or 16.9 percent due to spend reductions in the regional bank segment as well as unfavorable currency impact. EMEA decreased $48,036 or 40.3 percent driven predominantly by decreased sales in Russia from the comparable period in 2008 as poor economic conditions persist and there is no current expectation for recovery in 2009. Asia Pacific decreased $15,806 or 14.6 percent due to strong performance in China during the third quarter of 2008.
Security solutions revenue decreased by $36,776 or 18.8 percent from the third quarter of 2008. The Americas were down $26,780 or 15.0 percent due to weakness in the North American banking segment, which accounted for 48.9 percent of the decrease. Market weakness in the commercial and government segments also contributed to the overall decrease in security solutions revenue. Asia Pacific decreased $9,494 or 61.8 percent from the same period of 2008 due to projects in Australia in the third quarter of 2008 that did not recur in 2009. There was no election systems revenue in the third quarter of 2009 as compared to $58,580 of Brazilian-based revenue in the same quarter of 2008 because the business has historically been cyclical, recurring every other year. The Brazilian lottery systems revenue increased $756 in the third quarter of 2009 compared to the same period of 2008.

Table of Contents

                     DIEBOLD, INCORPORATED AND SUBSIDIARIES
                       FORM 10-Q as of September 30, 2009
                (Dollars in thousands, except per share amounts)
Gross Profit
The following table represents information regarding our gross profit for the
three months ended September 30, 2009 and 2008:

                                 Three months ended
                                    September 30,            $ Change/
                                 2009          2008        % Point Change     % Change
        Gross profit          $ 152,209     $ 227,942      $     (75,733 )      (33.2 )
        Gross profit margin        23.6          26.2               (2.6 )

Product gross margin was 21.4 percent in the third quarter of 2009 compared to 27.9 percent in the same period of 2008. Benefits realized from cost savings initiatives in the third quarter of 2009 were more than offset by unfavorable sales mix within North America. Unfavorable sales mix within North America was driven by a significant reduction in U.S. regional bank revenue with a smaller deterioration in U.S. national bank revenue. Product gross margin was also adversely affected by the loss of distributor business in the EMEA region and no Brazilian-based election sales in 2009. Gross profit margin on Brazil-based election sales in 2008 was favorable, contributing to the quarter over quarter decline. Product gross margin was unfavorably impacted by $702 of restructuring charges in the third quarter of 2009 and $8,434 in the same period of 2008. Service gross margin was 25.3 percent in the third quarter of 2009 compared to 24.4 percent in the same period of 2008. The year-over-year improvement in service margin was driven by lower fuel prices, continued productivity gains, and lower restructuring charges, partially offset by higher scrap expense in North America. Restructuring charges affecting service gross margin were $535 for the third quarter of 2009 as compared to $2,265 in the same period of 2008. Operating Expenses
The following table represents information regarding our operating expenses for the three months ended September 30, 2009 and 2008:

                                                       Three months ended
                                                         September 30,                  $ Change/
                                                     2009             2008            % Point Change          % Change
Selling and administrative expense                 $ 103,624        $ 142,846        $        (39,222 )           (27.5 )
Research, development and engineering expense         17,415           19,030                  (1,615 )            (8.5 )

Total operating expenses                           $ 121,039        $ 161,876        $        (40,837 )           (25.2 )

Percentage of net sales                                 18.8             18.6                     0.2

Selling and administrative expense was lower in the third quarter of 2009 due to lower commissions on decreased sales volume, lower non-routine expenses, lower restructuring charges, continued focus on cost reduction initiatives, and strengthening of the U.S. dollar. The third quarter of 2008 included non-routine expenses of $24,665 compared to $0 in the same period of 2009. These non-routine expenses consisted of legal, audit and consultation fees primarily related to the internal review of other accounting items, restatement of financial statements and the ongoing government investigations as well as other advisory fees. Restructuring charges of $410 were included in the third quarter of 2009 compared to $2,059 of restructuring charges in the same period of 2008. Research, development and engineering expense decreased $1,615 due to lower restructuring charges, but increased as a percent of net sales due to lower sales volume in 2009. Research, development and engineering expense as a percent of net sales was 2.7 percent in the third quarter of 2009 compared to 2.2 percent in the same period of 2008.
Total operating expense as a percentage of revenue for the third quarter of 2009 was 18.8 percent, an increase of 0.2 percentage points from the comparable period of 2008. Operating expense as a percentage of revenue was higher due to significant decreases in revenue, partially offset by ongoing cost-reduction efforts.

Table of Contents

                     DIEBOLD, INCORPORATED AND SUBSIDIARIES
                       FORM 10-Q as of September 30, 2009
                (Dollars in thousands, except per share amounts)
Operating Profit
The following table represents information regarding our operating profit for
the three months ended September 30, 2009 and 2008:

                                    Three months ended
                                      September 30,            $ Change/
                                    2009          2008       % Point Change     % Change
       Operating profit           $ 31,170     $ 66,066      $     (34,896 )      (52.8 )
       Operating profit margin         4.8          7.6               (2.8 )

The decrease in operating profit resulted from lower gross profit related to the decline in sales volume, as well as unfavorable customer sales mix within North America and Brazilian-based election sales in 2009. The decline in gross profit was partially offset by lower operating expenses in the third quarter of 2009 resulting from lower non-routine expenses, lower restructuring charges, and strengthening of the U.S. dollar.
Other Income (Expense)
The following table represents information regarding our other income (expense) for the three months ended September 30, 2009 and 2008:

                                Three months ended
                                   September 30,             $ Change/
                                2009          2008         % Point Change       % Change
    Investment income         $   8,344     $   6,577     $          1,767           26.9
    Interest expense             (8,223 )     (11,272 )              3,049          (27.0 )
    Miscellaneous, net           (1,969 )      (1,206 )               (763 )         63.3

    Other income (expense)    $  (1,848 )   $  (5,901 )   $          4,053          (68.7 )

    Percentage of net sales        (0.3 )        (0.7 )                0.4

The change in interest expense was due to lower interest rates and lower borrowing levels in the third quarter of 2009. Investment income benefited from a gain on investments related to deferred compensation. The change in miscellaneous expense resulted from $590 of higher foreign exchange losses, net in the third quarter of 2009 compared to the same period of 2008. Income from Continuing Operations
The following table represents information regarding our income from continuing operations for the three months ended September 30, 2009 and 2008:

                                         Three months ended
                                           September 30,            $ Change/
                                         2009          2008       % Point Change     % Change
  Income from continuing operations    $ 25,237     $ 49,962      $     (24,725 )      (49.5 )
  Percent of net sales                      3.9          5.7               (1.8 )
  Effective tax rate                       13.9         17.0               (3.1 )

The decrease in net income from continuing operations was related to lower gross . . .