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DBD > SEC Filings for DBD > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for DIEBOLD INC

Form 10-Q for DIEBOLD INC


9-Nov-2012

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of September 30, 2012
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)

(dollars in thousands, except per share amounts)

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Management's discussion and analysis should be read in conjunction with the condensed consolidated financial statements and accompanying notes that appear elsewhere in this quarterly report.
Introduction
Diebold, Incorporated (collectively, with its subsidiaries, the Company) is a global leader in providing integrated self-service delivery and security systems and services primarily to the financial, commercial, government, and retail markets. Founded in 1859, the Company today has approximately 17,000 employees with representation in nearly 90 countries worldwide. In 2011, the Company accelerated its transformation into a world-class, software-led services provider aligned with the security, convenience and efficiency needs of its customers. Three essential pillars provide the Company a clear path toward reaching this future:
• A strategy that leverages its leadership in software-led services, attuned with the needs of the Company's core global markets for financial self-service (FSS) and security solutions.

• The financial capacity to implement that strategy and fund the investments necessary to drive growth, while preserving the ability to return value to shareholders in the form of reliable, growing dividends and, as appropriate, share repurchases.

• A disciplined risk assessment process, focused on proactively identifying and mitigating potential risks to the Company's continued success.

The strategy to leverage the Company's capabilities in services, software and innovation is beginning to pay dividends and is meeting the needs of the Company's rapidly evolving markets. The Company believes this positions it for continued momentum in 2012 using its software-led services strategy and leading edge technology.
During the third quarter of 2012, the Company once again had strong performance in North America as deposit automation and integrated services continued to grow. In addition, the Company achieved solid top-line growth within its security business during the quarter. Given the strong start to the year and the continued underlying strength in its markets, the Company has increased confidence in its ability to generate top-line growth as it continues to build software-led services capabilities.
Income from continuing operations attributable to Diebold, Incorporated, net of tax, for the three months ended September 30, 2012 was $17,434 or $0.27 per share, a decrease of $24,321 and $0.38 per share, respectively, from the same period in 2011. Total revenue for the three months ended September 30, 2012 was $709,919, an increase of $597 compared to the same period in 2011. Income from continuing operation attributable to Diebold, Incorporated, net of tax, for the nine months ended September 30, 2012 was $89,099 or $1.39 per share, an increase of $24,557 and $0.40 per share, respectively, from the same period in 2011. Total revenue for the nine months ended September 30, 2012 was $2,151,598 an increase of $165,737 compared to the same period in 2011. 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 transformation to becoming a more software-led services company. Services comprise more than 50 percent of revenue. This percentage is expected to continue to grow over time as the Company continues to build on its strong base of maintenance and advanced services to deliver world-class integrated services.
Several years ago, the Company launched its Diebold Integrated Services® outsourcing business in North America. Initially the scale was small, generating about $5,000 in contract value in year one. In the ensuing years, the Company has achieved substantial growth in this business. During 2011, new integrated services contracts were signed exceeding $500,000 in total contract value compared with $150,000 in 2010. For 2012, new integrated services contracts signed reached nearly $243,000, an increase of over 11 percent from the same period of 2011. Also in the third quarter of 2012, the Company continued its commitment to enhance and strengthen its Integrated Services outsourcing model by announcing the addition of two data centers located in Verizon's Terremark facilities in Richardson, Texas and Manassas, Virginia. The integrated fabric of advanced data center capabilities combined with Verizon's reach, reliability and global scale will increase performance and disaster recovery capabilities for the Company's customers with optimal geographic diversity and business resiliency.
In addition to service and integrated services, another demand driver in the global ATM marketplace continues to be deposit


Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of September 30, 2012
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)

(dollars in thousands, except per share amounts)

automation, or the process of depositing a cash or check into an ATM without the use of an envelope. Among the largest U.S. national banks there has been extensive deployment of deposit automation-enabled terminals, and the Company saw continued demand from this space during the third quarter of 2012. However, only approximately 25 percent of bank ATMs globally are currently configured for automated deposits, representing further opportunities for Diebold as banks continue to upgrade their ATM fleets with deposit automation capabilities. In its security business, the Company has an equal, if not greater, potential for a successful integrated services approach. Security challenges and the systems to address them have grown increasingly complex. This environment has created a greater appetite among financial institutions and other customers for outsourcing solutions, particularly in the areas of monitoring, services and software. Today, the Company is bringing its expertise back into the financial sector with a focused effort on bank branch and large, complex and technologically demanding projects. The Company has created new customer-focused teams that possess the high levels of specialized expertise in logical and enterprise security required in this business. The Company is leveraging best practices, and some of its best talent, from its FSS integrated services business to build the foundation for a new security outsourcing business. During the third quarter of 2012, the Company announced the expansion of its security relationships with two of the largest banks in the United States, KeyBank and Regions Financial Corporation. As KeyBank's strategic partner for electronic security solutions, the Company announced the installation of numerous access control, intrusion detection, alarm, surveillance and security solutions for KeyBank in just the past year. In regards to Regions Financial Corporation, the Company now staffs the bank's in-house central station located in Birmingham, Alabama and monitors alarm video and other systems for the bank's entire enterprise, including more than 2,400 sites.
Moving forward, the Company intends to create shareholder value by leveraging its growing advantage in software and services capabilities, taking advantage of key market opportunities around the world and further leveraging opportunities in the security business. In addition, the Company made a strategic acquisition during the quarter, GAS Tecnologia (GAS), a leading Internet banking, online payment and mobile banking security company in Brazil. Many additional opportunities lie ahead, and the Company will continue to invest in developing new software, services and security solutions, particularly in emerging markets. Cost savings initiatives, restructuring, impairment and other charges Over the past several years, the Company's SmartBusiness (SB) initiatives have led to rationalization of product development, streamlined procurement, realignment of the Company's manufacturing footprint and improved logistics. Building on that success, the Company's SB 300 initiatives in 2011 shifted the focus from reducing cost of sales to lowering operating expenses and are targeted to achieve an additional $100,000 in efficiencies by the end of 2013. 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 its ability to continue to execute on cost-reduction initiatives, deliver solutions that help improve customers' businesses and create shareholder value. The Company incurred pre-tax net restructuring charges of $2,462 and $1,437 during the three months ended September 30, 2012 and and 2011, respectively, and $4,902 and $17,723 during the nine months ended September 30, 2012 and 2011, respectively. Restructuring charges in 2012 and 2011 primarily related to the Company's global realignment plan, global shared services plan and Europe, Middle East and Africa (EMEA) reorganization plan. The global realignment plan, which began in the third quarter 2012, includes realignment of resources and certain international facilities to better support opportunities in target markets and leverage software-led services technology to support customers in efforts to optimize overall operational performance. The global shared services plan 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 global back-office work that resides in other geographies to the global shared services center. Net restructuring charges in the third quarter 2012 included $(2,840) of restructuring accrual benefits related to the Company's EMEA reorganization.
In the nine months ended September 30, 2012, the Company recorded an impairment charge of $14,631 related to an other than temporary impairment of an equity method investment and the impairment of 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 nine months ended September 30, 2011, the Company recorded $2,962 of software intangible asset impairment charges.
Other charges consist of items that the Company determines are non-routine in nature. Net non-routine expenses of $1,913 and $13,064 impacted the nine months ended September 30, 2012 and 2011, respectively. Net non-routine expenses for 2012 and 2011 consisted primarily of legal and compliance costs related to the global Foreign Corrupt Practices Act (FCPA) investigation.


Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of September 30, 2012
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)

(dollars in thousands, except per share amounts)

Business Drivers
The business drivers of the Company's future performance include, but are not limited to:
• demand for new service offerings, including integrated services and outsourcing;

• demand for security products and services for the financial sectors;

• timing of self-service equipment upgrades and/or replacement cycles, including deposit automation in mature markets such as the United States; and

• high levels of deployment growth for new self-service products in emerging markets, such as Asia Pacific.

RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and results of
operations provides information that will assist in understanding the financial
statements and the changes in certain key items in those financial statements.
The following discussion should be read in conjunction with the condensed
consolidated financial statements and the accompanying notes that appear
elsewhere in this quarterly report.
                                      Three Months Ended                                     Nine Months Ended
                                         September 30,                                         September 30,
                                2012                      2011                       2012                        2011
                                       % of                      % of                        % of                        % of
                         Dollars     Net sales     Dollars     Net sales      Dollars      Net sales      Dollars      Net sales
Net sales              $ 709,919         100.0   $ 709,322         100.0   $ 2,151,598         100.0   $ 1,985,861         100.0
Gross profit             173,210          24.4     194,386          27.4       552,019          25.7       513,280          25.8
Operating expenses       150,552          21.2     139,974          19.7       434,824          20.2       424,897          21.4
Operating profit          22,658           3.2      54,412           7.7       117,195           5.4        88,383           4.5
Income from
continuing
operations                18,064           2.5      42,782           6.0        91,821           4.3        68,530           3.5
Income from
discontinued
operations, net of
tax                            -             -           -             -             -             -           518             -
Net income
attributable to
noncontrolling
interests                    630           0.1       1,027           0.1         2,722           0.1         3,988           0.2
Net income
attributable to
Diebold,
Incorporated              17,434           2.5      41,755           5.9        89,099           4.1        65,060           3.3

Third Quarter 2012 Comparisons to Third Quarter 2011 Net Sales
The following table represents information regarding our net sales for the three months ended September 30:
2012 2011 $ Change % Change Net sales $ 709,919 $ 709,322 $ 597 0.1

FSS sales in the third quarter of 2012 improved $6,917 or 1.3 percent compared to the same period of 2011. The increase in FSS sales included a net unfavorable currency impact of $29,287 or 6.0 percent, of which approximately 54 percent related to the Brazilian real. The following division highlights include the impact of foreign currency. Diebold North America (DNA) sales increased $21,562 or 9.1 percent due to growth within the U.S. regional and national bank business. Diebold International (DI) sales decreased by $14,646 or 5.1 percent related to the following: Latin America, including Brazil, decreased $10,498 or 8.8 percent, EMEA decreased $2,968 or 4.1 percent, and Asia Pacific decreased $1,179 or 1.3 percent. The decrease in Latin America, including Brazil, was driven by the negative currency impact in Brazil, partially offset by improvement in Mexico and Venezuela. The decrease in EMEA was led by the unfavorable currency impact, particularly the euro and rand, coupled with higher volume in South Africa compared to the same period of the prior year. The Asia Pacific variance was driven by unfavorable currency, mostly the rupee, as well as lower volume across a mix of geographies, partially offset with higher volume in China.


Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of September 30, 2012
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)

(dollars in thousands, except per share amounts)

Security solutions sales in the third quarter of 2012 increased by $11,079 or 7.7 percent compared to the same period of 2011. The increase was driven by an improvement in DNA of $9,772 or 7.7 percent combined with growth in DI of $1,308 or 7.6 percent. The DNA variance was driven by higher product volumes and associated services across all industries, especially non-financial, compared to the same period of the prior year. The improvement in DI was influenced by higher volume in Latin America, particularly in Colombia.

The Brazilian-based election and lottery systems sales decreased by $17,399 in the third quarter of 2012 compared to the same period of 2011. The variance was driven by a $21,270 decrease in election sales due to lower volume, partially offset with a $3,871 increase in lottery unit sales compared to the third quarter of 2011.

Gross Profit
The following table represents information regarding our gross profit for the
three months ended September 30:
                             2012          2011        $ Change     % Change
Gross profit - services   $ 100,518     $ 111,428     $ (10,910 )      (9.8 )
Gross profit - products      72,692        82,958       (10,266 )     (12.4 )
Total gross profit        $ 173,210     $ 194,386     $ (21,176 )     (10.9 )
Gross margin - services        25.0 %        28.6 %
Gross margin - products        23.6 %        25.9 %
Total gross margin             24.4 %        27.4 %

The decrease in service gross margin was influenced by DNA and Latin America, including Brazil. The decrease in DNA was driven by a decline in the U.S. service volume coupled with higher employee expenses, an increase in scrap expense, and fewer fleet rebates, partially offset with growth in software-led services. The decrease in Latin America, including Brazil was driven by customer mix as well as higher restructuring charges. Total service gross margin for the third quarter of 2012 included $956 of net restructuring charges compared to $1,331 of net restructuring accrual benefits related to the EMEA reorganization in the same period of 2011.

The decrease in product gross margin was driven primarily by DI as volume was down in Latin America, including Brazil paired with customer and product mix differences. In addition, product gross margin in DNA was down compared to the prior year influenced by the customer mix within the regional and national bank business. Total product gross margin for the third quarter of 2012 included $2,064 of net restructuring accrual benefits related to the EMEA reorganization compared to $630 of net restructuring charges in the same period of 2011. Operating Expenses
The following table represents information regarding our operating expenses for the three months ended September 30:

                                       2012            2011          $ Change        % Change
Selling and administrative
expense                            $   120,455     $   121,508     $    (1,053 )         (0.9 )
Research, development and
engineering expense                     22,167          18,466           3,701           20.0
Impairment of assets                     7,930               -           7,930            N/M
Total operating expenses           $   150,552     $   139,974     $    10,578            7.6

Selling and administrative expense decreased $1,053 or 0.9 percent in the third quarter of 2012 compared to the same period of 2011. The improvement was due to $5,078 of favorable currency impact and lower non-routine expenses, partially offset by higher compensation and benefits and net restructuring charges. Selling and administrative expense in the third quarter of 2012 and 2011 included non-routine expenses of $646 and $2,584, respectively, of which the majority pertained to legal, consultative, and audit costs related to the global FCPA investigation. In addition, selling and administrative expense included $2,454 and $2,131 of restructuring charges in the third quarter of 2012 and 2011, respectively. The majority of the 2012 restructuring charges related to the Company's global realignment plan. The 2011 restructuring charges related mainly to the EMEA reorganization.


Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS as of September 30, 2012
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(unaudited)

(dollars in thousands, except per share amounts)

Research, development and engineering expense as a percent of net sales in the third quarter of 2012 and 2011 were 3.1 percent and 2.6 percent, respectively. The increase as a percent of net sales was associated with higher operational spend for the development of next generation hardware and software platforms. Research, development and engineering expense also included higher restructuring charges associated with the Company's global realignment plan.

During the third quarter of 2012, the Company recorded an impairment of $7,930 related to its 50 percent ownership in Shanghai Diebold King Safe Company, Ltd.

Operating Profit
The following table represents information regarding our operating profit for
the three months ended September 30:
                             2012         2011       $ Change     % Change
Operating profit          $ 22,658     $ 54,412     $ (31,754 )     (58.4 )
Operating profit margin        3.2 %        7.7 %

The decrease in operating profit in the third quarter of 2012 compared to the same period of 2011 was influenced largely by the lower service and product margins driven by the mix of services and products across geographies. In addition, the increase in operating expenses, particularly the impairment charge, contributed to the lower operating margin between periods. All of these items combined to produce a 4.5 percent decrease in operating profit margin in the third quarter of 2012 compared to the same period of 2011. Income from Continuing Operations
The following table represents information regarding our income from continuing operations for the three months ended September 30:

                                       2012         2011       $ Change     % Change
Income from continuing operations   $ 18,064     $ 42,782     $ (24,718 )     (57.8 )
Percent of net sales                     2.5 %        6.0 %
Effective tax rate                      30.2 %       20.8 %

The decrease in net income from continuing operations in the third quarter of 2012 compared to the same period of 2011 was influenced by a lower operating margin, partially offset with improvement in other income. As noted above, the lower operating margin was driven by the geographic mix of services and products, the lower service and product margins, and the increase in operating expenses. The 9.4 percentage point increase is due to non-recurring discrete items, including adjustments from an IRS exam, which reduced the effective tax rate in the third quarter of 2011.
Segment Analysis and Operating Profit Summary The following table represents information regarding our revenue by reporting segment for the three months ended September 30:

                     2012         2011       $ Change    % Change
DNA               $ 395,477    $ 364,144    $ 31,333         8.6
DI                  314,442      345,178     (30,736 )      (8.9 )
Total net sales   $ 709,919    $ 709,322    $    597         0.1

The increase in DNA net sales was driven by continued growth in the FSS business, particularly related to higher product volume in both the U.S. regional and national bank business. The increase in product volume also influenced growth in service installations and software-led services related to these orders. In addition, security product volume and associated services improved across all industries, especially non-financial, compared to the prior year.

The decrease in DI net sales was influenced by a net unfavorable currency impact of $36,753, of which approximately 63 percent related to the Brazilian real. Operationally, DI realized higher FSS volumes in all of the divisions, an increase in lottery sales from Brazil, and growth in security sales within Latin America. These increases were partially offset with lower election system sales in Brazil.


Table of Contents
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
               AND RESULTS OF OPERATIONS as of September 30, 2012
                     DIEBOLD, INCORPORATED AND SUBSIDIARIES
                                  (unaudited)
                (dollars in thousands, except per share amounts)

The following table represents information regarding our operating profit by
reporting segment for the three months ended September 30:
                            2012        2011       $ Change     % Change
DNA                      $ 22,764     $ 42,522    $ (19,758 )     (46.5 )
DI                           (106 )     11,890      (11,996 )    (100.9 )
Total operating profit   $ 22,658     $ 54,412    $ (31,754 )     (58.4 )

DNA operating profit for the third quarter of 2012 decreased by $19,758 compared to the same period of 2011. The decrease was driven by a decline in the U.S. service volume compared to the prior-year period coupled with higher employee expenses, an increase in scrap expense, and fewer fleet rebates. In addition, operating expense was unfavorable related to increases in impairment charges, research, development and engineering expense, compensation and benefits costs, and net restructuring charges. These decreases were partially offset with higher volume in the U.S. regional bank business and improvement from software-led services.

DI operating profit for the third quarter of 2012 decreased by $11,996 compared to the same period of 2011. The decrease was influenced primarily by the fewer election system sales in Brazil combined with customer mix differences in Latin America, including Brazil compared to the prior-year period. Partially offsetting the decreases, an improvement in operating expenses was realized across a mix of geographies, inclusive of higher impairment charges. Refer to note 17 to the condensed consolidated financial statements for further details of segment revenue and operating profit.
Nine Months Ended September 30, 2012 Comparisons to Nine Months Ended September 30, 2011
Net Sales
The following table represents information regarding our net sales for the nine months ended September 30:
2012 2011 $ Change % Change Net sales $ 2,151,598 $ 1,985,861 $ 165,737 8.3

FSS sales in the first nine months of 2012 improved $184,100 or 12.3 percent compared to the same period of 2011. The increase in FSS sales included a net unfavorable currency impact of $72,015 or 5.7 percent, of which approximately 50 percent related to the Brazilian real. The following division highlights include the impact of foreign currency. DNA sales increased $193,702 or 31.3 percent as a result of significant growth within the U.S. regional and national bank business influenced by the Americans with Disabilities Act compliance and a focus on deposit automation technology. With the expiration of the Americans with Disabilities Act compliance deadline, the rate of growth in regional sales . . .

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