e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2007
OR
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o |
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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)
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Ohio
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34-0183970 |
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(State or other jurisdiction of incorporation or organization)
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(IRS Employer Identification Number) |
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5995 Mayfair Road, PO Box 3077, North Canton, Ohio
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44720-8077 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants 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 o No þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Common Stock, $1.25 Par Value 66,100,607 shares as of August 29, 2008
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
INDEX
2
Special Note
This quarterly report on Form 10-Q for the quarter ended September 30, 2007 was delayed due to the
Companys discussions with the Office of the Chief Accountant (OCA) of the Securities and Exchange
Commission (SEC) with regard to the Companys practice of recognizing certain revenue on a bill and
hold basis in its North America business segment, as well as due to the review of other accounting
matters described below. On December 21, 2007, the Company announced that in consultation with
outside advisors, it was conducting an internal review into certain accounting and financial
reporting matters, including, but not limited to, the review of various balance sheet accounts such
as prepaid expenses, accrued liabilities, capitalized assets, deferred revenue and reserves within both the Companys
North America and International businesses. On January 15, 2008, the Company announced that it had
concluded its discussion with the OCA and, as a result of those discussions, the Company determined
that its previous long-standing method of accounting for bill and hold transactions was in error,
representing a misapplication of United States generally accepted accounting principles (GAAP).
Management of the Company determined that the corrected method of recognizing revenue would be
adopted retroactively after an in-depth analysis and review with its outside auditors, KPMG LLP
(KPMG), an independent registered public accounting firm, the Audit Committee of the Companys
Board of Directors, and the OCA. Accordingly, management concluded that the previously issued
financial statements for the fiscal years ended December 31, 2006, 2005, 2004 and 2003; the
quarterly data in each of the quarters for the years ended December 31, 2006 and 2005; and the
quarter ended March 31, 2007, must be restated and should no longer be relied upon. As a result,
the Company restated its previously issued financial statements for those periods. Restated
financial information is presented in this quarterly report as well as Diebolds annual report on
Form 10-K for the year ended December 31, 2007. The annual report contains a discussion of the
restatement and the adjustments made as a result of the restatement.
3
PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
DIEBOLD, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
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September 30, |
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December 31, |
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2007 |
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2006 |
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(Unaudited) |
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(As Restated) |
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ASSETS |
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Current Assets |
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Cash and cash equivalents |
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$ |
141,750 |
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$ |
253,968 |
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Short-term investments |
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91,854 |
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99,571 |
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Trade receivables, less allowances of doubtful accounts
of $27,737 and $32,104, respectively |
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529,604 |
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618,315 |
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Inventories |
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591,171 |
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518,999 |
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Deferred income taxes |
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85,728 |
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86,290 |
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Prepaid expenses |
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48,486 |
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34,488 |
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Other current assets |
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157,039 |
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82,604 |
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Total current assets |
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1,645,632 |
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1,694,235 |
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Securities and other investments |
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66,686 |
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69,798 |
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Property, plant and equipment, at cost |
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559,147 |
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550,497 |
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Less accumulated depreciation and amortization |
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345,743 |
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342,409 |
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Property, plant and equipment, net |
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213,404 |
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208,088 |
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Goodwill |
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501,486 |
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459,354 |
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Other assets |
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199,036 |
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165,185 |
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Total assets |
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$ |
2,626,244 |
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$ |
2,596,660 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current Liabilities |
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Notes payable |
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$ |
36,855 |
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$ |
11,324 |
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Accounts payable |
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180,661 |
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156,306 |
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Deferred revenue |
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322,063 |
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368,717 |
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Other current liabilities |
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264,137 |
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245,683 |
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Total Current Liabilities |
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803,716 |
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782,030 |
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Notes payable long term |
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574,653 |
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665,481 |
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Pensions and other benefits |
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40,517 |
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41,142 |
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Postretirement and other benefits |
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32,054 |
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32,475 |
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Deferred income taxes |
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48,720 |
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26,405 |
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Other long-term liabilities |
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32,689 |
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28,814 |
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Minority interest |
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11,920 |
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21,880 |
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Commitments and contingencies |
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Shareholders Equity |
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Preferred shares, no par value, authorized 1,000,000 shares, none issued |
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Common shares, authorized 125,000,000 shares, issued 75,568,852 and
75,145,662, shares, respectively outstanding 69,955,928 and
65,595,596, shares, respectively |
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94,461 |
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93,932 |
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Additional capital |
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256,887 |
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235,242 |
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Retained earnings |
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1,062,504 |
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1,059,725 |
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Treasury shares, at cost
(9,612,924 and 9,550,066 shares, respectively) |
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(406,156 |
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(403,098 |
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Accumulated other comprehensive income |
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74,279 |
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12,632 |
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Total shareholders equity |
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1,081,975 |
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998,433 |
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Total liabilities and shareholders equity |
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$ |
2,626,244 |
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$ |
2,596,660 |
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See accompanying Notes to condensed consolidated financial statements.
4
DIEBOLD, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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(Unaudited) |
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(As Restated) |
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(Unaudited) |
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(As Restated) |
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Net sales |
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Products |
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$ |
359,972 |
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$ |
360,716 |
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$ |
978,629 |
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$ |
1,074,415 |
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Services |
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380,881 |
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365,966 |
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1,103,695 |
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1,051,675 |
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740,853 |
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726,682 |
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2,082,324 |
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2,126,090 |
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Cost of sales |
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Products |
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264,494 |
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247,340 |
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732,982 |
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757,449 |
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Services |
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299,300 |
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290,937 |
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878,408 |
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843,801 |
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563,794 |
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538,277 |
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1,611,390 |
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1,601,250 |
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Gross profit |
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177,059 |
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188,405 |
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470,934 |
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524,840 |
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Selling and administrative expense |
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117,532 |
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116,758 |
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342,568 |
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335,554 |
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Research, development and
engineering expense |
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18,894 |
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17,437 |
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53,115 |
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54,748 |
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(Gain) loss on sale of assets, net |
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14 |
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(6,407 |
) |
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322 |
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136,440 |
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134,195 |
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389,276 |
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390,624 |
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Operating profit |
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40,619 |
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|
54,210 |
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81,658 |
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134,216 |
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Other income (expense) |
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Investment income |
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6,221 |
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3,992 |
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16,875 |
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|
12,782 |
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Interest expense |
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(10,045 |
) |
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(9,556 |
) |
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(29,329 |
) |
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(24,955 |
) |
Miscellaneous, net |
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(1,227 |
) |
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|
977 |
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6,850 |
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(26 |
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Minority interest |
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(1,172 |
) |
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(1,578 |
) |
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(5,579 |
) |
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(4,510 |
) |
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Income before taxes |
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34,396 |
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48,045 |
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70,475 |
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117,507 |
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Taxes on income |
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6,247 |
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15,387 |
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20,874 |
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39,969 |
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Net income |
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$ |
28,149 |
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$ |
32,658 |
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$ |
49,601 |
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$ |
77,538 |
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Weighted-average shares outstanding: |
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Basic |
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65,926 |
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65,627 |
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65,798 |
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|
67,055 |
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Diluted |
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66,985 |
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|
66,424 |
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66,720 |
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67,646 |
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Earning per common share: |
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Basic |
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$ |
0.43 |
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$ |
0.50 |
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$ |
0.75 |
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$ |
1.16 |
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Diluted |
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$ |
0.42 |
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$ |
0.49 |
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$ |
0.74 |
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$ |
1.15 |
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See accompanying Notes to condensed consolidated financial statements.
5
DIEBOLD, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
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Nine Months Ended |
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September 30, |
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|
2007 |
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2006 |
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(Unaudited) |
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(As Restated) |
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Cash flow from operating activities: |
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Net income |
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$ |
49,601 |
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$ |
77,538 |
|
Adjustments to reconcile net income to cash
provided by operating activities: |
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Minority share of income |
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5,579 |
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|
4,510 |
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Depreciation and amortization |
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|
47,156 |
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|
53,818 |
|
Share-based compensation |
|
|
10,945 |
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|
13,354 |
|
Excess tax
benefits from share-based compensation |
|
|
(867 |
) |
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|
(247 |
) |
Deferred income taxes |
|
|
14,892 |
|
|
|
1,596 |
|
(Gain) loss on sale of assets, net |
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(6,407 |
) |
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|
322 |
|
Cash provided (used) by changes in certain assets and liabilities: |
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Trade receivables |
|
|
92,589 |
|
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|
95,941 |
|
Inventories |
|
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(48,164 |
) |
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|
(39,644 |
) |
Prepaid expenses |
|
|
(12,686 |
) |
|
|
(4,800 |
) |
Other current assets |
|
|
(11,134 |
) |
|
|
(3,766 |
) |
Accounts payable |
|
|
18,085 |
|
|
|
(36,753 |
) |
Deferred revenue |
|
|
(51,500 |
) |
|
|
(20,584 |
) |
Certain other assets and liabilities |
|
|
(70,241 |
) |
|
|
(18,062 |
) |
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|
|
|
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|
Net cash provided by operating activities |
|
|
37,848 |
|
|
|
123,223 |
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
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Cash flow from investing activities: |
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Payments for acquisitions, net of cash acquired |
|
|
(10,028 |
) |
|
|
(57,812 |
) |
Proceeds from maturities of investments |
|
|
54,788 |
|
|
|
45,979 |
|
Payments for purchases of investments |
|
|
(31,867 |
) |
|
|
(61,724 |
) |
Proceeds from sale of fixed assets |
|
|
7,594 |
|
|
|
6,442 |
|
Capital expenditures |
|
|
(34,323 |
) |
|
|
(28,313 |
) |
Increase in certain other assets |
|
|
(22,725 |
) |
|
|
(17,714 |
) |
|
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Net cash used by investing activities |
|
|
(36,561 |
) |
|
|
(113,142 |
) |
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Cash flow from financing activities: |
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Dividends paid |
|
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(46,820 |
) |
|
|
(43,739 |
) |
Notes payable borrowings |
|
|
556,480 |
|
|
|
1,174,608 |
|
Notes payable repayments |
|
|
(629,774 |
) |
|
|
(1,003,520 |
) |
Distribution of affiliates earnings to minority interest holder |
|
|
(15,440 |
) |
|
|
(718 |
) |
Excess tax
benefits from share-based compensation |
|
|
867 |
|
|
|
247 |
|
Issuance of common shares |
|
|
8,323 |
|
|
|
7,020 |
|
Repurchase of common shares |
|
|
|
|
|
|
(143,745 |
) |
|
|
|
|
|
|
|
Net cash used by financing activities |
|
|
(126,364 |
) |
|
|
(9,847 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
12,859 |
|
|
|
118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(112,218 |
) |
|
|
352 |
|
Cash and cash equivalents at the beginning of the period |
|
|
253,968 |
|
|
|
210,393 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the period |
|
$ |
141,750 |
|
|
$ |
210,745 |
|
|
|
|
|
|
|
|
See accompanying Notes to condensed consolidated financial statements.
6
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(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 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 thereto together with managements discussion and analysis of
financial condition and results of operations contained in the Companys annual report on Form 10-K
for the year ended December 31, 2007 and 2006. In the opinion of management, the accompanying condensed
consolidated financial statements reflect all adjustments of a normal recurring nature, as well as
all restatement adjustments discussed in Note 2, Background of the Restatement, considered necessary to
fairly state the financial position of the Company at September 30, 2007 and December 31, 2006 the
results of its operations for the three- and nine- month periods ended September 30, 2007 and
September 30, 2006 and its cash flows for the nine month periods ended September 30, 2007 and
September 30, 2006.
In addition, some of the Companys statements in this quarterly report on Form 10-Q may be
considered forward-looking and involve risks and uncertainties that could significantly impact
expected results. The results of operations for the nine-month period ended September 30, 2007 are
not necessarily indicative of results to be expected for the full year.
NOTE 2: BACKGROUND OF THE RESTATEMENT
In the first quarter of 2006, the Division of Enforcement of the Securities and Exchange
Commission (SEC) initiated an informal inquiry into certain of the Companys accounting and
financial reporting matters and requested the Company provide certain documents and information,
specifically related to its practice of recognizing certain revenue on a bill and hold basis.
In the third quarter of 2006, the Company was informed that the SECs previous informal inquiry
related to revenue recognition had been converted to a formal, non-public investigation.
On July 25, 2007, the Company announced that it would delay the release of its earnings results
for the quarter ended June 30, 2007, as well as the filing of its quarterly report on Form 10-Q
for that quarter, while the Company sought guidance from the Office of the Chief
Accountant of the SEC (OCA) as to the Companys revenue recognition policy. The guidance sought
related to the Companys long-standing practice of recognizing certain revenue on a bill and
hold basis within its North America business segment.
On October 2, 2007, the Company announced it was discontinuing its use of bill and hold as a
method of revenue recognition in both its North America business segment and its International
businesses.
On December 21, 2007, the Company announced that in consultation with outside advisors, it was
conducting an internal review into certain accounting and financial reporting matters,
including, but not limited to, the review of various balance sheet
accounts such as prepaid expenses,
accrued liabilities, capitalized assets, deferred revenue, and reserves within both the Companys North
America and International businesses. The review was conducted primarily by outside counsel of
the Company and was done in consultation and participation with the Companys internal audit
staff and management, as well as outside advisors including forensic accountants and independent
legal counsel to the Audit Committee.
During the course of the review, certain questions were raised as to certain prior accounting
and financial reporting items in addition to bill and hold revenue recognition, including
whether the prepaid expenses, accrued liabilities, capitalized assets, deferred revenue and
reserves had been recorded accurately and timely. Accordingly, the scope of the review was
expanded
beyond the initial revenue recognition issues to include these additional items. This review
has been completed as of the date of the filing of this quarterly report.
On January 15, 2008, the Company announced that it had concluded its discussion with the OCA
and, as a result of those discussions, the Company determined that its previous
long-standing method of accounting for bill and hold transactions was in error, representing
a misapplication of GAAP. In addition, the
Company
7
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands, except per share amounts)
disclosed that revenue previously recognized on a bill and hold basis would be
recognized upon customer acceptance of products at a customer location. Management of the
Company determined that this corrected method of recognizing revenue would be adopted
retroactively after an in-depth analysis and review with its outside auditors, KPMG LLP
(KPMG), an independent registered public accounting firm, the Audit Committee of the
Companys Board of Directors, and the OCA. Accordingly, management concluded that
previously issued financial statements for the fiscal years ended December 31, 2006, 2005,
2004, and 2003; the quarterly data in each of the quarters for the years ended December 31,
2006 and 2005; and the quarter ended March 31, 2007, must be restated and should no longer
be relied upon. As a result, the Company has restated its previously issued financial
statements for those periods. Restated financial information is presented in this quarterly
report as well as in Diebolds annual report on Form 10-K for the year ended December 31,
2007.
8
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands, except per share amounts)
The following tables present the effects of the restatement adjustments by financial
statement line item for the three-month period ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Month Period Ended September 30, 2006 |
|
|
|
|
|
|
|
Adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Recognition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As |
|
|
|
|
|
|
|
|
|
|
Account |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Provision for |
|
|
|
|
|
|
Reported |
|
|
Bill & Hold |
|
|
Other |
|
|
Reconciliations |
|
|
Inventory |
|
|
Capitalization |
|
|
Other |
|
|
Adjustments |
|
|
Income Tax |
|
|
As Restated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
364,335 |
|
|
$ |
(4,154 |
) |
|
$ |
1,013 |
|
|
$ |
(478 |
) |
|
$ |
(148 |
) |
|
$ |
|
|
|
$ |
148 |
|
|
$ |
(3,619 |
) |
|
$ |
|
|
|
$ |
360,716 |
|
Services |
|
|
366,404 |
|
|
|
(224 |
) |
|
|
(125 |
) |
|
|
(89 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(438 |
) |
|
|
|
|
|
|
365,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
730,739 |
|
|
|
(4,378 |
) |
|
|
888 |
|
|
|
(567 |
) |
|
|
(148 |
) |
|
|
|
|
|
|
148 |
|
|
|
(4,057 |
) |
|
|
|
|
|
|
726,682 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
257,525 |
|
|
|
(945 |
) |
|
|
(1,058 |
) |
|
|
(8,574 |
) |
|
|
(305 |
) |
|
|
|
|
|
|
697 |
|
|
|
(10,185 |
) |
|
|
|
|
|
|
247,340 |
|
Services |
|
|
291,122 |
|
|
|
(298 |
) |
|
|
(108 |
) |
|
|
261 |
|
|
|
(40 |
) |
|
|
|
|
|
|
|
|
|
|
(185 |
) |
|
|
|
|
|
|
290,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
548,647 |
|
|
|
(1,243 |
) |
|
|
(1,166 |
) |
|
|
(8,313 |
) |
|
|
(345 |
) |
|
|
|
|
|
|
697 |
|
|
|
(10,370 |
) |
|
|
|
|
|
|
538,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
182,092 |
|
|
|
(3,135 |
) |
|
|
2,054 |
|
|
|
7,746 |
|
|
|
197 |
|
|
|
|
|
|
|
(549 |
) |
|
|
6,313 |
|
|
|
|
|
|
|
188,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative
expense |
|
|
116,403 |
|
|
|
37 |
|
|
|
(227 |
) |
|
|
(784 |
) |
|
|
|
|
|
|
1,430 |
|
|
|
(101 |
) |
|
|
355 |
|
|
|
|
|
|
|
116,758 |
|
Research, development and
engineering expense |
|
|
17,299 |
|
|
|
103 |
|
|
|
|
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138 |
|
|
|
|
|
|
|
17,437 |
|
Gain (loss) on sale of
assets, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133,702 |
|
|
|
140 |
|
|
|
(227 |
) |
|
|
(749 |
) |
|
|
|
|
|
|
1,430 |
|
|
|
(101 |
) |
|
|
493 |
|
|
|
|
|
|
|
134,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
48,390 |
|
|
|
(3,275 |
) |
|
|
2,281 |
|
|
|
8,495 |
|
|
|
197 |
|
|
|
(1,430 |
) |
|
|
(448 |
) |
|
|
5,820 |
|
|
|
|
|
|
|
54,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income |
|
|
4,026 |
|
|
|
|
|
|
|
(34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34 |
) |
|
|
|
|
|
|
3,992 |
|
Interest expense |
|
|
(9,643 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87 |
|
|
|
87 |
|
|
|
|
|
|
|
(9,556 |
) |
Miscellaneous, net |
|
|
502 |
|
|
|
(1 |
) |
|
|
|
|
|
|
750 |
|
|
|
|
|
|
|
|
|
|
|
(274 |
) |
|
|
475 |
|
|
|
|
|
|
|
977 |
|
Minority interest |
|
|
(1,564 |
) |
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14 |
) |
|
|
|
|
|
|
(1,578 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
41,711 |
|
|
|
(3,290 |
) |
|
|
2,247 |
|
|
|
9,245 |
|
|
|
197 |
|
|
|
(1,430 |
) |
|
|
(635 |
) |
|
|
6,334 |
|
|
|
|
|
|
|
48,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes on income |
|
|
12,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,218 |
|
|
|
15,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
29,542 |
|
|
$ |
(3,290 |
) |
|
$ |
2,247 |
|
|
$ |
9,245 |
|
|
$ |
197 |
|
|
$ |
(1,430 |
) |
|
$ |
(635 |
) |
|
$ |
6,334 |
|
|
$ |
(3,218 |
) |
|
$ |
32,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares
outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
65,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,627 |
|
Diluted |
|
|
66,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands, except per share amounts)
The following tables present the effects of the restatement adjustments by financial
statement line item for the nine-month period ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Month Period Ended September 30, 2006 |
|
|
|
|
|
|
|
Adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Recognition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As |
|
|
|
|
|
|
|
|
|
|
Account |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Provision for |
|
|
|
|
|
|
Reported |
|
|
Bill & Hold |
|
|
Other |
|
|
Reconciliations |
|
|
Inventory |
|
|
Capitalization |
|
|
Other |
|
|
Adjustments |
|
|
Income Tax |
|
|
As Restated |
|
|
|
(in thousands) |
|
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
1,031,323 |
|
|
$ |
31,474 |
|
|
$ |
12,808 |
|
|
$ |
(1,190 |
) |
|
$ |
1,748 |
|
|
$ |
|
|
|
$ |
(1,748 |
) |
|
$ |
43,092 |
|
|
$ |
|
|
|
$ |
1,074,415 |
|
Services |
|
|
1,049,503 |
|
|
|
3,799 |
|
|
|
(183 |
) |
|
|
(1,444 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,172 |
|
|
|
|
|
|
|
1,051,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,080,826 |
|
|
|
35,273 |
|
|
|
12,625 |
|
|
|
(2,634 |
) |
|
|
1,748 |
|
|
|
|
|
|
|
(1,748 |
) |
|
|
45,264 |
|
|
|
|
|
|
|
2,126,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
735,297 |
|
|
|
28,124 |
|
|
|
7,784 |
|
|
|
(8,856 |
) |
|
|
(3,209 |
) |
|
|
|
|
|
|
(1,691 |
) |
|
|
22,152 |
|
|
|
|
|
|
|
757,449 |
|
Services |
|
|
844,138 |
|
|
|
2,618 |
|
|
|
(335 |
) |
|
|
(2,096 |
) |
|
|
(524 |
) |
|
|
|
|
|
|
|
|
|
|
(337 |
) |
|
|
|
|
|
|
843,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,579,435 |
|
|
|
30,742 |
|
|
|
7,449 |
|
|
|
(10,952 |
) |
|
|
(3,733 |
) |
|
|
|
|
|
|
(1,691 |
) |
|
|
21,815 |
|
|
|
|
|
|
|
1,601,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
501,391 |
|
|
|
4,531 |
|
|
|
5,176 |
|
|
|
8,318 |
|
|
|
5,481 |
|
|
|
|
|
|
|
(57 |
) |
|
|
23,449 |
|
|
|
|
|
|
|
524,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative
expense |
|
|
338,135 |
|
|
|
218 |
|
|
|
(878 |
) |
|
|
(4,390 |
) |
|
|
|
|
|
|
2,752 |
|
|
|
(283 |
) |
|
|
(2,581 |
) |
|
|
|
|
|
|
335,554 |
|
Research, development and
engineering expense |
|
|
53,873 |
|
|
|
773 |
|
|
|
|
|
|
|
102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
875 |
|
|
|
|
|
|
|
54,748 |
|
Gain (loss) on sale of
assets, net |
|
|
322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
392,330 |
|
|
|
991 |
|
|
|
(878 |
) |
|
|
(4,288 |
) |
|
|
|
|
|
|
2,752 |
|
|
|
(283 |
) |
|
|
(1,706 |
) |
|
|
|
|
|
|
390,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
109,061 |
|
|
|
3,540 |
|
|
|
6,054 |
|
|
|
12,606 |
|
|
|
5,481 |
|
|
|
(2,752 |
) |
|
|
226 |
|
|
|
25,155 |
|
|
|
|
|
|
|
134,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income |
|
|
12,913 |
|
|
|
|
|
|
|
(131 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(131 |
) |
|
|
|
|
|
|
12,782 |
|
Interest expense |
|
|
(25,598 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
643 |
|
|
|
643 |
|
|
|
|
|
|
|
(24,955 |
) |
Impairment of asset |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous, net |
|
|
(3,663 |
) |
|
|
|
|
|
|
|
|
|
|
2,013 |
|
|
|
|
|
|
|
|
|
|
|
1,624 |
|
|
|
3,637 |
|
|
|
|
|
|
|
(26 |
) |
Minority interest |
|
|
(4,393 |
) |
|
|
(117 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(117 |
) |
|
|
|
|
|
|
(4,510 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
88,320 |
|
|
|
3,423 |
|
|
|
5,923 |
|
|
|
14,619 |
|
|
|
5,481 |
|
|
|
(2,752 |
) |
|
|
2,493 |
|
|
|
29,187 |
|
|
|
|
|
|
|
117,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes on income |
|
|
28,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,114 |
|
|
|
39,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
59,465 |
|
|
$ |
3,423 |
|
|
$ |
5,923 |
|
|
$ |
14,619 |
|
|
$ |
5,481 |
|
|
$ |
(2,752 |
) |
|
$ |
2,493 |
|
|
$ |
29,187 |
|
|
$ |
(11,114 |
) |
|
$ |
77,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares
outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
67,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,055 |
|
Diluted |
|
|
67,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bill and Hold The
largest of the revenue recognition adjustments relates to the
Companys previous long-standing method of accounting for bill and hold transactions under Staff
Accounting Bulletin 104, Revenue Recognition in Financial Statements (SAB 104), in its North
America and International businesses. On January 15, 2008, the Company announced that it had
concluded its discussions with the OCA with regard to its practice of recognizing certain
revenue on a bill and hold basis in its North America business segment. As a result of those
discussions, the Company determined that its previous, long-standing method of accounting for
bill and hold transactions was in error, representing a misapplication of GAAP. To correct for
this error, the Company announced it would discontinue the use of bill and hold as a method of
revenue recognition in its North America and International businesses and restate its financial
statements for this change.
The Company completed an analysis of transactions and recorded adjusting journal entries related
to revenue and costs recognized previously under a bill and hold basis that is now recognized
upon customer acceptance of products at a customer location. Within the North America business
segment, when the Company is contractually responsible for installation, customer acceptance
will be upon completion of the installation of all of the items at a job site and the Companys
demonstration that the items are in operable condition. Where items are contractually only
delivered to a customer, revenue recognition of these items will continue upon shipment or
delivery to a customer location depending on the terms in the contract. Within the
International business segment, customer acceptance is upon either delivery or
completion of the installation depending on the terms in the
10
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands, except per share amounts)
contract with the customer. The Company restated for transactions affecting both product revenue for hardware sales and service
revenue for installation and other services that had been previously recognized on a bill and
hold basis.
Other Revenue Adjustments The Company also adjusted for other specific revenue
transactions in both its North America and International businesses related to transactions
largely where the Company recognized revenue in incorrect periods. The majority of these
adjustments were related to misapplication of GAAP related to revenue recognition requirements
as defined within SAB 104. Generally, the Company recorded adjustments for transactions when
the Company previously recognized revenue prior to title and/or risk of loss transferring to the
customer.
Account Reconciliations
Many of the restatement adjustments relate to inaccurate account balances not identified timely
due to lack of account reconciliations or inaccurate reconciliations of various accrued
liabilities, reserves, prepaid expenses, and select other balance sheet accounts. During the course of
the internal review, the Company reviewed certain accruals, reserves,
prepaid expenses and select other
balance sheet accounts, including the underlying supporting documentation and estimates to
evaluate and determine if the account balances required adjustment. The Company determined that
a number of accounts required adjustments related to either inaccurate or incomplete data
extracted from systems, misinterpretations of data from systems, faulty analysis, and/or known
differences not previously recorded. These adjustments were made across various accounts and
accounting periods. The largest of these adjustments related to the following areas:
Service Contract Revenue The Company records deferred service revenue upon billing to
customers and recognizes the related revenue ratably over the life of the service contract.
Within the North America business segment, the sub ledger that tracks the service contract
activity is the National Service Contract Administration (NSCA) system. During 2007, the
Company determined that the deferred service revenue reconciliations since 2003 were in error as
there was a misinterpretation of system data and exclusion of certain leasing transactions
within the prior reconciliations, which created a difference between the NSCA sub ledger system
and the general ledger. The Company subsequently initiated and completed a project to
reconstruct the sub ledger balance and reconcile differences between the deferred service
revenue accounts in the general ledger and the NSCA sub ledger system. The Company determined
that the above errors largely originated in 2003 creating a carry forward out of balance
condition in the deferred service revenue general ledger account balance into 2007. The Company
corrected the deferred service revenue balance in the general ledger for these errors.
Accounts Payable Float and Related Reserve Within the North America business segment,
the Accounts Payable Float account is used to record liabilities for goods received that were
ordered via purchase order, but not yet invoiced from a supplier, as well as invoices that have
been received and matched to a purchase order for goods received, but not yet approved for
payment due to differences between the invoice and the purchase order. At times, and in error,
these same invoices could be processed via direct payment and expensed a second time. This
results in the Accounts Payable Float account accruing for items that ultimately are paid via
direct payment of invoices, which results in an overstatement of the Accounts Payable Float
account. To adjust for this overstatement, the Company recorded a reserve to the Accounts
Payable Float account representing the Companys estimate of the overstatement of the Accounts
Payable Float balances based on historical aging trends and final disposition of purchases with
suppliers, which indicated that a percentage of these vendors had previously been paid via the
direct payment process.
In the 2003 reconciliation between the Accounts Payable Float aged sub ledger balance and the
reserve for the Account Payables Float general ledger account balance, it was determined that
the general ledger account balance was not properly stated. The reserve balance within the
general ledger was not adjusted for aged unmatched and aged receipts from vendors within the
Accounts Payable Float account. At that time, the Company adjusted the account related to the
reserve for the Accounts Payable Float to reflect the balance as supported by the aged sub
ledger report.
During the course of the restatement, the Company evaluated the Accounts Payable Float and
related reserve general ledger account balances in conjunction with the existing reconciliation
process related to the reconciliation performed in 2003 and identified an error in the Companys
analysis. The error related to improper inclusion of intercompany related transactions in the
establishment of the adjustment as well as the lack of timely adjustments of the general ledger
to the supported subledger data. The Company made the necessary adjustments to reflect the
proper account balances in both the Accounts Payable Float and Related Reserve for all
accounting periods.
Installation Allowance Within the North America business segment, Installation
Allowance historically related to the liability for the installation work yet to be performed
related to uninstalled equipment for which revenue had been recognized. The installation
allowance liability is based on an estimated percentage of the installation sales price. During
2005, the Company
11
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands, except per share amounts)
determined that the general ledger installation allowance liability balance
and the balance per the installation sub ledger were out of balance and that the sub ledger did
not include specific uninstalled sales orders thereby understating the installation allowance
liability. As a result, an analysis of detailed sales orders was performed and an adjustment
was recorded to the general ledger to reflect the underlying supporting detail as of November
2005. During the restatement process, the Company reconciled the year end sub ledger
information to the general ledger for the restatement periods and made adjustments to record the
correction originally recorded in November 2005 into the proper accounting periods.
With the
Companys discontinuance of its use of bill and hold as a method
of revenue recognition, the need to record an Installation
Allowance has been eliminated for these sales. As such, the restated
Installation Accrual reflects only installation services
performed or outsourced by the Company for which revenue has been
recognized, but liabilities for the installation services have not
been paid. Further, an Installation Prepaid is recognized for Company
payments for installation services performed by third parties prior
to revenue recognition.
A/P Wire Clearing (Prepaid Wire Account) The A/P Wire Clearing relates to the
Companys process for making payments to vendors by wire transfer rather than by check.
Verification between departments is required in order to
ensure that payments via wire transfer are properly and timely recorded as an expense or asset.
In 2006, it was determined that
the A/P Wire Clearing account balance had not been reconciled in recent years and that the
account balance was not supported. Based on the analysis performed in 2006, the Company adjusted the
account to record the unsupported difference in the account balance. During the restatement
process, the Company determined the account balances for periods prior to 2006 based on detailed
supporting documentation contained errors, and recorded the 2006 adjustment in the proper time periods.
Other Accruals, Reserves and Prepaids During the restatement process, the Company
identified several accrual accounts related to warranty, freight, product trade-ins and
stock-based compensation, as well as reserves and prepaid accounts, that were either not
adjusted to supported balances on a timely basis or not reconciled on a timely basis.
The Company reviewed these accruals, reserves and prepaid accounts
including the underlying estimates to assess whether any previously recorded balances required
adjustment. During the restatement process, the Company recorded adjustments where necessary to
the accrual, reserve and prepaid expense accounts.
Inventory
During the restatement process, the Company adjusted its inventory balances to accurately record
the differences between sub ledger detail and general ledger balances, to adjust select
inventory balances to lower-of-cost-or-market valuations and to adjust balances for excess,
slow-moving and obsolete inventory. Several of the more significant adjustments are described
below:
Finished Goods Inventory The largest of the inventory adjustments recorded related to
the Companys finished goods inventory within its North America business segment. The Companys
finished goods inventory largely includes inventory to be installed, but also includes returned
goods from customers pending manufacturing rework or final disposition. Prior to 2005 the Company did not maintain a sub ledger report that detailed
the inventory account balances at an order level and thus used analyses and trends to support
the recorded general ledger balance. During 2005, the Company constructed the finished goods inventory
sub ledger at an order level and reconciled the sub ledger balance to the general ledger account
balance. As a result, adjustments were recorded in 2005 to the finished goods inventory account
to correct for differences between the general ledger and sub ledger.
During the restatement process, the Company reconstructed the inventory sub ledger detail by
order for periods prior to 2005 and evaluated the methodology and process for determining
finished good account balances and inventory reserve amounts. As a result, the Company recorded
the above 2005 adjustments into the proper time periods, as well as made adjustments based on
further improvements to the accuracy of the sub ledger reports created.
Refurbished Inventory The Companys refurbished inventory within its North America
business segment consists of used equipment that is acquired through purchases, lease transfers,
returned goods and trade-ins. During the restatement process, it was determined that the
general ledger account balances were not properly stated as the balances were not supported by
sub ledger detail and reconciliations were not consistently performed during periods prior to
2006. In addition, the
Company determined that the valuation of the inventory was not being recorded at the lower of
cost or market and adjustments for excess and obsolete inventory were not being recorded.
During the restatement, the Company reconstructed the refurbished equipment sub ledger
quantities and determined the appropriate inventory value for the refurbished equipment. The
Company adjusted the inventory account balances for the refurbished inventory to the calculated
amounts making adjustments for both lower of cost or market valuations as well as excess and
obsolete inventory.
12
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands, except per share amounts)
Capitalization
During the restatement process, the Company recorded adjustments related to amounts recorded for
fair value assigned to select assets based on a review of the underlying transactions related to
the assets. The most significant capitalization adjustment is described below:
ERP Capitalization During 2006, the Company employed a consulting firm to analyze the
future value of specific functionality designed previously within its enterprise resource
planning system (ERP). Previous to this, the Company had outsourced its information technology
function and ERP implementation to another consulting firm. As a result of additional
analysis performed by the Company, in December 2006, the Company recorded an impairment charge
against the gross asset value of the ERP system.
During the restatement process, the Company reviewed the history and accounting composition of
the ERP asset. As a result of this analysis, the Company determined that the ERP asset value was
overstated due to a number of factors, including unsupported manual journal entries, errors
related to amounts of cost capitalized to the asset, and certain capitalized costs which failed
to meet the criteria of capitalization under SOP 98-1. Portions of the improperly capitalized
costs identified in the restatement were included in the impairment charge originally recorded
in 2006, thus an adjustment to the original 2006 impairment charge was also recorded to exclude
these costs in the restated impairment charge.
Other
In conjunction with the restatement process, the Company also made other adjustments and
reclassifications to its financial statements in various years, including, but not limited to:
(1) past immaterial unrecorded audit adjustments, (2) adjustments for liabilities for
contingencies and intangible assets identified at the date of acquisition in connection with
certain acquisitions, (3) select intercompany and related elimination transactions, and (4)
correction for previous gain calculations on sale of discontinued operations.
13
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands, except per share amounts)
The following tables present the effects of the restatement adjustments on the Consolidated
Balance Sheet at December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
|
As Reported |
|
|
Adjustments |
|
|
As Restated |
|
|
|
(in thousands) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
253,814 |
|
|
$ |
154 |
|
|
$ |
253,968 |
|
Short-term investments |
|
|
99,571 |
|
|
|
|
|
|
|
99,571 |
|
Trade receivables, less
allowances of doubtful
accounts of $32,104 |
|
|
610,893 |
|
|
|
7,422 |
|
|
|
618,315 |
|
Inventories |
|
|
442,804 |
|
|
|
76,195 |
|
|
|
518,999 |
|
Deferred income taxes |
|
|
72,537 |
|
|
|
13,753 |
|
|
|
86,290 |
|
Prepaid expenses |
|
|
37,019 |
|
|
|
(2,531 |
) |
|
|
34,488 |
|
Other current assets |
|
|
79,043 |
|
|
|
3,561 |
|
|
|
82,604 |
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
1,595,681 |
|
|
|
98,554 |
|
|
|
1,694,235 |
|
|
|
|
|
|
|
|
|
|
|
Securities and other investments |
|
|
70,088 |
|
|
|
(290 |
) |
|
|
69,798 |
|
Property, plant and equipment at cost |
|
|
556,849 |
|
|
|
(6,352 |
) |
|
|
550,497 |
|
Less accumulated depreciation and amortization |
|
|
339,961 |
|
|
|
2,448 |
|
|
|
342,409 |
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
216,888 |
|
|
|
(8,800 |
) |
|
|
208,088 |
|
Goodwill |
|
|
460,339 |
|
|
|
(985 |
) |
|
|
459,354 |
|
Other assets |
|
|
171,283 |
|
|
|
(6,098 |
) |
|
|
165,185 |
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
2,514,279 |
|
|
$ |
82,381 |
|
|
$ |
2,596,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable |
|
$ |
11,324 |
|
|
$ |
|
|
|
$ |
11,324 |
|
Accounts payable |
|
|
158,388 |
|
|
|
(2,082 |
) |
|
|
156,306 |
|
Deferred revenue |
|
|
170,921 |
|
|
|
197,796 |
|
|
|
368,717 |
|
Other current liabilities |
|
|
258,103 |
|
|
|
(12,420 |
) |
|
|
245,683 |
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
598,736 |
|
|
|
183,294 |
|
|
|
782,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable long term |
|
|
665,481 |
|
|
|
|
|
|
|
665,481 |
|
Pensions and other benefits |
|
|
41,142 |
|
|
|
|
|
|
|
41,142 |
|
Postretirement and other benefits |
|
|
32,942 |
|
|
|
(467 |
) |
|
|
32,475 |
|
Deferred income taxes |
|
|
28,412 |
|
|
|
(2,007 |
) |
|
|
26,405 |
|
Other long-term liabilities |
|
|
28,814 |
|
|
|
|
|
|
|
28,814 |
|
Minority interest |
|
|
27,351 |
|
|
|
(5,471 |
) |
|
|
21,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred shares, no par value, authorized 1,000,000
shares, none issued |
|
|
|
|
|
|
|
|
|
|
|
|
Common shares, authorized 125,000,000
shares, issued 75,145,662 |
|
|
93,932 |
|
|
|
|
|
|
|
93,932 |
|
Additional capital |
|
|
235,229 |
|
|
|
13 |
|
|
|
235,242 |
|
Retained earnings |
|
|
1,169,607 |
|
|
|
(109,882 |
) |
|
|
1,059,725 |
|
Treasury shares, at cost (9,550,066 shares) |
|
|
(403,098 |
) |
|
|
|
|
|
|
(403,098 |
) |
Accummulated
other comprehensive income |
|
|
(4,269 |
) |
|
|
16,901 |
|
|
|
12,632 |
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
1,091,401 |
|
|
|
(92,968 |
) |
|
|
998,433 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
2,514,279 |
|
|
$ |
82,381 |
|
|
$ |
2,596,660 |
|
|
|
|
|
|
|
|
|
|
|
14
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands, except per share amounts)
Statement of Cash Flows
The following tables present the major subtotals for Diebolds Consolidated Statement of
Cash Flows and the effects of the related impacts of the restatement adjustments discussed
above for the nine months ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, 2006 |
|
|
|
(As Reported) |
|
|
(As Restated) |
|
Net cash provided by: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
59,465 |
|
|
$ |
77,538 |
|
Non-cash adjustments |
|
|
83,295 |
|
|
|
73,353 |
|
Changes in working capital |
|
|
(12,758 |
) |
|
|
(9,606 |
) |
Changes in noncurrent assets and liabilities |
|
|
24,701 |
|
|
|
(18,062 |
) |
|
|
|
|
|
|
|
Operating activities |
|
|
154,703 |
|
|
|
123,223 |
|
Investing activities |
|
|
(139,166 |
) |
|
|
(113,142 |
) |
Financing activities |
|
|
(10,406 |
) |
|
|
(9,847 |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
|
(2,871 |
) |
|
|
118 |
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
2,260 |
|
|
|
352 |
|
Cash and cash equivalents at beginning of period |
|
|
207,900 |
|
|
|
210,393 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
210,160 |
|
|
$ |
210,745 |
|
|
|
|
|
|
|
|
NOTE 3: SHARE-BASED COMPENSATION
The Companys share-based compensation policy is consistent with the requirements of Statement of
Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)),
which requires that all share-based payments to employees be 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 was recognized as a component of selling, general and administrative
expenses. Total share-based compensation expense for the three and nine months ended September, 30,
2007 and 2006 was $3,828, $10,945, and $3,508 and $13,354, respectively.
Options outstanding and exercisable under the Companys 1991 Equity and Performance Incentive Plan,
as amended and restated, as of September 30, 2007 and changes during the nine months ended
September 30, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Weighted Average |
|
|
Aggregate |
|
|
|
Number of |
|
|
Average |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Contractual Term |
|
|
Value (1) |
|
|
|
(in thousands) |
|
|
(per share) |
|
|
(in years) |
|
|
(in thousands) |
|
Outstanding at January 1, 2007 |
|
|
2,945 |
|
|
$ |
40.70 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
237 |
|
|
|
47.27 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(231 |
) |
|
|
35.82 |
|
|
|
|
|
|
|
|
|
Expired or forfeited |
|
|
(62 |
) |
|
|
43.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2007 |
|
|
2,889 |
|
|
|
41.57 |
|
|
|
5 |
|
|
$ |
17,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2007 |
|
|
2,167 |
|
|
$ |
40.48 |
|
|
|
5 |
|
|
$ |
15,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The aggregate intrinsic value represents the total pre-tax intrinsic value (the
difference between the closing price of the Companys common shares on the last trading
day of the third quarter of 2007 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 September 30, 2007. The amount of aggregate
intrinsic value will change based on the fair market value of the Companys common
shares. |
The following tables summarize information on unvested restricted stock units and performance
shares outstanding for the nine-month period ended September 30, 2007:
15
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Weighted-Average |
|
|
|
Shares |
|
|
Grant-Date Fair Value |
|
Restricted Stock Units (RSUs): |
|
(in thousands) |
|
|
(per share) |
|
Unvested at January 1, 2007 |
|
|
308 |
|
|
$ |
45.12 |
|
Exercised |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(37 |
) |
|
|
48.86 |
|
Vested |
|
|
(84 |
) |
|
|
46.79 |
|
Granted |
|
|
138 |
|
|
|
47.27 |
|
|
|
|
|
|
|
|
Unvested at September 30, 2007 |
|
|
325 |
|
|
$ |
45.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Weighted-Average |
|
|
|
Shares |
|
|
Grant-Date Fair Value |
|
Performance Shares: |
|
(in thousands) |
|
|
(per share) |
|
Unvested at January 1, 2007 |
|
|
556 |
|
|
$ |
51.72 |
|
Granted |
|
|
205 |
|
|
|
58.65 |
|
Forfeited |
|
|
(192 |
) |
|
|
52.05 |
|
Exercised |
|
|
|
|
|
|
|
|
Vested |
|
|
(51 |
) |
|
|
50.22 |
|
|
|
|
|
|
|
|
Unvested at September 30, 2007 |
|
|
518 |
|
|
$ |
54.49 |
|
|
|
|
|
|
|
|
Unvested 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 4: EARNINGS PER SHARE
The basic and diluted earnings per share computations in the condensed consolidated statements of
income are based on the weighted-average number of shares outstanding during each period reported.
The following data show the amounts used in computing earnings per share and the effect on the
weighted-average number of shares of potentially dilutive common shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September |
|
|
Nine Months Ended |
|
|
|
30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
(As Restated) |
|
|
|
|
|
|
(As Restated) |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
28,149 |
|
|
$ |
32,658 |
|
|
$ |
49,601 |
|
|
$ |
77,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average shares |
|
|
65,926 |
|
|
|
65,627 |
|
|
|
65,798 |
|
|
|
67,055 |
|
Effect of dilutive shares |
|
|
1,059 |
|
|
|
797 |
(1) |
|
|
922 |
|
|
|
591 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average shares |
|
|
66,985 |
|
|
|
66,424 |
|
|
|
66,720 |
|
|
|
67,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.43 |
|
|
$ |
0.50 |
|
|
$ |
0.75 |
|
|
$ |
1.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.42 |
|
|
$ |
0.49 |
|
|
$ |
0.74 |
|
|
$ |
1.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive shares not used
in calculating diluted
weighted-average shares |
|
|
720 |
|
|
|
992 |
|
|
|
727 |
|
|
|
981 |
|
16
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands, except per share amounts)
|
|
|
(1) |
|
The 2006 effect of dilutive shares was restated to include the effect of shares
deferred under the Companys deferred compensation plans for executives and officers. |
NOTE 5: INVENTORIES
The Company primarily values inventories at the lower of cost or market applied on a first-in,
first-out (FIFO) basis, with the notable exceptions of Brazil and Premier Election Solutions, Inc.
that value inventory using the average cost method, which approximates FIFO. At each reporting
period, the Company identifies and writes down its excess or obsolete inventory to its net
realizable value based on forecasted usage, orders and inventory aging. With the development of
new products, the Company also rationalizes its product offerings and will write down discontinued
product to the lower of cost or net realizable value.
Major classes of inventories are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
December 31, 2006 |
|
|
|
|
|
|
|
(As Restated) |
|
Finished goods |
|
$ |
303,943 |
|
|
$ |
242,865 |
|
Service parts |
|
|
153,214 |
|
|
|
139,720 |
|
Work in process |
|
|
67,694 |
|
|
|
94,124 |
|
Raw Materials |
|
|
66,320 |
|
|
|
42,290 |
|
|
|
|
|
|
|
|
Total inventory |
|
$ |
591,171 |
|
|
$ |
518,999 |
|
|
|
|
|
|
|
|
NOTE 6: OTHER COMPREHENSIVE INCOME (LOSS)
Items considered to be other comprehensive income (loss) include adjustments made for foreign
currency translation (under SFAS No. 52) and pensions (under
SFAS No. 87 and SFAS No. 158), and hedging activities (under
SFAS No. 133) Components of comprehensive
income consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
(As Restated) |
|
Net income |
|
$ |
49,601 |
|
|
$ |
77,538 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
Translation adjustment |
|
|
58,302 |
|
|
|
23,212 |
|
Realized and unrealized (loss) gain on hedges |
|
|
(245 |
) |
|
|
4,074 |
|
Pension adjustment |
|
|
3,590 |
|
|
|
4,118 |
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
111,248 |
|
|
$ |
108,942 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income is reported separately from retained earnings and
additional capital in the condensed consolidated balance sheets. Components of accumulated other
comprehensive income consist of the following for the nine months ended September 30, 2007 and the
year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
December 31, 2006 |
|
|
|
|
|
|
|
(As restated) |
|
Translation adjustment |
|
$ |
107,801 |
|
|
$ |
49,499 |
|
Realized and unrealized gain on hedges |
|
$ |
3,751 |
|
|
$ |
3,996 |
|
Pension adjustment |
|
|
(37,273 |
) |
|
|
(40,863 |
) |
|
|
|
|
|
|
|
Total accumulated other comprehensive income |
|
$ |
74,279 |
|
|
$ |
12,632 |
|
|
|
|
|
|
|
|
17
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands, except per share amounts)
NOTE 7: INCOME TAXES
The effective tax rate for the nine months ended September 30, 2007 was 29.6 percent versus 34.0
percent in the same period in 2006. The decrease in effective tax rate was the result of income
mix both domestically and internationally in jurisdictions with lower tax
rates and favorable resolution of an accounting method change.
Effective January 1, 2007, the Company adopted Financial Accounting Standards Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB
Statement No. 109 (FIN 48). FIN 48 clarifies the recognition, measurement, presentation and
disclosure in the Companys financial statements of uncertain tax positions taken or expected to be
taken in a tax return. The adoption of FIN 48 had no material effect on the financial statements.
As a result, there was no cumulative effect related to adoption. However, certain amounts have been
reclassified in the statement of financial position in order to comply with the requirements of FIN
48.
At January 1, 2007, the Company
had an unrecognized tax benefit of approximately $9,020. The entire amount of unrecognized tax
benefits, if recognized, would affect the Companys effective tax rate. As of the date of
adoption, the Company does not anticipate a material increase or
decrease in the total unrecognized tax benefits during the next
12 months. The Company is currently under federal audit by the
Internal Revenue Service (IRS) for tax years 2003 and 2004. All
federal tax years prior to 2003 are closed by statute.
The
Company is subject to tax examination in various U.S. state
jurisdictions for tax years 2002 to the present, as well as various
foreign jurisdictions for tax years 1997 to the present.
The Company classifies interest
expense and penalties related to the underpayment of income taxes in the financial
statements as income tax expense. Consistent with the treatment of interest expense, the Company
accrues interest income on overpayments of income taxes where applicable and classifies
interest income as a reduction of income tax expense in the financial statements. Total net
interest expense and penalties as of the date of adoption were $2,318.
NOTE 8: BENEFIT PLANS
The Company has several pension plans covering substantially all United States employees. Plans
covering salaried employees provide pension benefits that are based on the employees compensation
during the 10 years before retirement. The Companys funding policy for salaried plans is to
contribute annually, if required, at an actuarially determined rate. Plans covering hourly
employees and union members generally provide benefits of stated amounts for each year of service.
The Companys funding policy for hourly plans is to make at least the minimum annual contributions
required by applicable regulations. Employees of the Companys operations in countries outside of
the United States 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 benefits (referred to as
Other Benefits) for certain retired employees. Eligible employees may be entitled to these
benefits based upon years of service with the Company, age at retirement and collective bargaining
agreements. Currently, the Company has made no commitments to increase these benefits for existing
retirees or for employees who may become eligible for these benefits in the future. Currently,
there are no plan assets and the Company funds the benefits as the claims are paid.
18
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
Pension Benefits |
|
|
Other Benefits |
|
Components of Net Periodic Benefit Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
2,865 |
|
|
$ |
2,794 |
|
|
$ |
2 |
|
|
$ |
2 |
|
Interest cost |
|
|
6,403 |
|
|
|
5,761 |
|
|
|
340 |
|
|
|
327 |
|
Expected return on plan assets |
|
|
(8,252 |
) |
|
|
(7,749 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
154 |
|
|
|
191 |
|
|
|
(129 |
) |
|
|
(126 |
) |
Recognized net actuarial loss |
|
|
1,012 |
|
|
|
1,110 |
|
|
|
183 |
|
|
|
198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension benefit cost |
|
$ |
2,182 |
|
|
$ |
2,107 |
|
|
$ |
396 |
|
|
$ |
401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
Pension Benefits |
|
|
Other Benefits |
|
Components of Net Periodic Benefit Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
8,596 |
|
|
$ |
8,381 |
|
|
$ |
5 |
|
|
$ |
6 |
|
Interest cost |
|
|
19,209 |
|
|
|
17,282 |
|
|
|
1,019 |
|
|
|
967 |
|
Expected return on plan assets |
|
|
(24,756 |
) |
|
|
(23,246 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
462 |
|
|
|
573 |
|
|
|
(387 |
) |
|
|
(406 |
) |
Recognized net actuarial loss |
|
|
2,966 |
|
|
|
3,357 |
|
|
|
549 |
|
|
|
594 |
|
Special termination benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension benefit cost |
|
$ |
6,477 |
|
|
$ |
6,347 |
|
|
$ |
1,186 |
|
|
$ |
1,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows
Previously, the Company disclosed expected payments related to the 2007 plan year of $14,778 to its
qualified and non-qualified pension plans and $2,441 to its other postretirement benefit plan. In
the third quarter of 2007, the Company changed its expectation for the total contributions to the
qualified plan and non-qualified pension plans to $15,348. The Companys expectation for
contributions to its other post retirement benefit plans has not changed. As of September 30, 2007
and 2006, contributions of $10,593 and $11,838 have been made to the qualified and unqualified
pension plans, respectively.
NOTE 9: SEGMENT INFORMATION
The Companys segments are comprised of its three main sales channels: Diebold North America (DNA),
Diebold International (DI) and Election Systems (ES) & Other. These sales channels are evaluated
based on revenue from customers and operating profit contribution to the total corporation. The
reconciliation between segment information and the condensed consolidated financial statements is
disclosed. Revenue summaries by geographic segment and product and service solutions are also
disclosed. All income and expense items below operating profit are not allocated to the segments
and are not disclosed.
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. The
ES & Other segment includes the operating results of Premier Election Solutions, Inc. and the
voting and lottery related business in Brazil. Each of the sales channels buys the goods it sells
from the Companys manufacturing plants or through external suppliers. Intercompany sales between
legal entities are eliminated in consolidation and intersegment revenue is not significant. Each
year, intercompany pricing is agreed upon which drives sales channel operating profit contribution.
As permitted under SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information,
certain information not routinely used in the management of these segments, information not
allocated back to the segments or information that is impractical
19
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands, except per share amounts)
to report is not shown. Items
not allocated are as follows: interest income, interest expense, equity in the net income of investees accounted for by the
equity method, and income tax expense
or benefit.
The
following table presents Diebolds revenue by reportable segment
for the three- and nine-month
periods ended September 30, 2007 and 2006, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DNA |
|
DI |
|
ES & Other |
|
Total |
For the quarter ended September 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer revenue |
|
$ |
388,912 |
|
|
$ |
343,274 |
|
|
$ |
8,667 |
|
|
$ |
740,853 |
|
Operating profit (loss) |
|
|
31,860 |
|
|
|
11,377 |
|
|
|
(2,618 |
) |
|
|
40,619 |
|
Capital expenditures |
|
|
2,196 |
|
|
|
7,887 |
|
|
|
212 |
|
|
|
10,295 |
|
Depreciation |
|
|
8,565 |
|
|
|
3,214 |
|
|
|
200 |
|
|
|
11,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended September 30, 2006 (As Restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer revenue |
|
$ |
391,837 |
|
|
$ |
271,407 |
|
|
$ |
63,438 |
|
|
$ |
726,682 |
|
Operating profit |
|
|
39,791 |
|
|
|
3,700 |
|
|
|
10,719 |
|
|
|
54,210 |
|
Capital expenditures |
|
|
1,569 |
|
|
|
3,964 |
|
|
|
353 |
|
|
|
5,886 |
|
Depreciation |
|
|
9,342 |
|
|
|
4,062 |
|
|
|
154 |
|
|
|
13,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer revenue |
|
$ |
1,115,007 |
|
|
$ |
928,124 |
|
|
$ |
39,193 |
|
|
$ |
2,082,324 |
|
Operating profit (loss) |
|
|
81,405 |
|
|
|
1,900 |
|
|
|
(1,647 |
) |
|
|
81,658 |
|
Capital expenditures |
|
|
14,849 |
|
|
|
18,431 |
|
|
|
1,043 |
|
|
|
34,323 |
|
Depreciation |
|
|
21,169 |
|
|
|
13,250 |
|
|
|
598 |
|
|
|
35,017 |
|
Property, plant and equipment, at cost |
|
|
412,446 |
|
|
|
140,621 |
|
|
|
6,080 |
|
|
|
559,147 |
|
Total assets |
|
|
804,833 |
|
|
|
1,667,760 |
|
|
|
153,651 |
|
|
|
2,626,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2006 (As Restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer revenue |
|
$ |
1,116,388 |
|
|
$ |
833,396 |
|
|
$ |
176,306 |
|
|
$ |
2,126,090 |
|
Operating profit |
|
|
92,780 |
|
|
|
14,110 |
|
|
|
27,326 |
|
|
|
134,216 |
|
Capital expenditures |
|
|
14,550 |
|
|
|
11,632 |
|
|
|
2,131 |
|
|
|
28,313 |
|
Depreciation |
|
|
20,965 |
|
|
|
12,683 |
|
|
|
656 |
|
|
|
34,304 |
|
Property, plant and equipment, at cost |
|
|
413,327 |
|
|
|
137,585 |
|
|
|
5,036 |
|
|
|
555,948 |
|
Total assets |
|
|
822,004 |
|
|
|
1,502,837 |
|
|
|
182,181 |
|
|
|
2,507,022 |
|
20
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands, except per share amounts)
The
following table presents Diebolds revenue by geographic region for the three- and nine-month
periods ended September 30, 2007 and 2006, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
(As Restated) |
|
|
|
|
|
|
(As Restated) |
|
The Americas |
|
$ |
525,600 |
|
|
$ |
549,235 |
|
|
$ |
1,503,814 |
|
|
$ |
1,597,985 |
|
Asia Pacific |
|
|
79,899 |
|
|
|
72,397 |
|
|
|
220,465 |
|
|
|
198,893 |
|
Europe, Middle East, and Africa |
|
|
135,354 |
|
|
|
105,050 |
|
|
|
358,045 |
|
|
|
329,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from customers |
|
$ |
740,853 |
|
|
$ |
726,682 |
|
|
$ |
2,082,324 |
|
|
$ |
2,126,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table presents Diebolds revenue by Product and Service Solution for the three- and
nine-month periods ended September 30, 2007 and 2006, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
(As Restated) |
|
|
|
|
|
|
(As Restated) |
|
Financial self-service: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
270,509 |
|
|
$ |
230,853 |
|
|
$ |
720,823 |
|
|
$ |
702,139 |
|
Services |
|
|
249,227 |
|
|
|
242,170 |
|
|
|
733,361 |
|
|
|
696,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial self-service |
|
|
519,736 |
|
|
|
473,023 |
|
|
|
1,454,184 |
|
|
|
1,398,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
86,509 |
|
|
|
76,564 |
|
|
|
238,158 |
|
|
|
222,246 |
|
Services |
|
|
125,941 |
|
|
|
113,657 |
|
|
|
350,789 |
|
|
|
329,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total security |
|
|
212,450 |
|
|
|
190,221 |
|
|
|
588,947 |
|
|
|
551,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial self-service
& security |
|
|
732,186 |
|
|
|
663,244 |
|
|
|
2,043,131 |
|
|
|
1,949,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Election systems: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
2,954 |
|
|
|
52,295 |
|
|
|
19,648 |
|
|
|
116,097 |
|
Services |
|
|
5,713 |
|
|
|
9,118 |
|
|
|
19,545 |
|
|
|
25,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total election systems |
|
|
8,667 |
|
|
|
61,413 |
|
|
|
39,193 |
|
|
|
141,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lottery systems |
|
|
|
|
|
|
2,025 |
|
|
|
|
|
|
|
35,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from customers |
|
$ |
740,853 |
|
|
$ |
726,682 |
|
|
$ |
2,082,324 |
|
|
$ |
2,126,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands, except per share amounts)
NOTE 10: GUARANTEES AND PRODUCT WARRANTIES
The Company has applied the provisions of Financial Accounting Standards Board (FASB)
Interpretation 45, Guarantors Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others, to its agreements that contain guarantees or
indemnification clauses. These disclosure requirements expand those required by SFAS No. 5, Accounting
for Contingencies, by requiring a guarantor to disclose certain types of guarantees, even if the
likelihood of requiring the guarantors performance is remote. The following is a description of
arrangements in effect as of September 30, 2007 in which the Company is the guarantor.
In connection with the construction of certain manufacturing facilities, the Company guaranteed
repayment of principal and interest on variable rate industrial development revenue bonds by
obtaining letters of credit. The bonds were issued with a 20-year original term and are scheduled
to mature in 2017. At September 30, 2007, the carrying value
of the liability was $11,900.
The Company provides its global operations guarantees and standby letters of credit through various
financial institutions to suppliers, regulatory agencies and insurance providers. If the Company
is not able to make payment, the suppliers, regulatory agencies and insurance providers may draw on
the pertinent bank. At September 30, 2007, the maximum future payment obligations relative to
these various guarantees totaled $62,105, of which $22,663 represented standby letters of credit to
insurance providers; there was no associated liability recorded for
any guarantees. At September 30, 2006, the maximum
future payment obligations relative to these various guarantees totaled $41,470, of which $21,163
represented standby letters of credit to insurance providers. There
was no associated liability recorded for any guarantees as of
September 30, 2007 and 2006.
The Company provides its customers a standard manufacturers 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 Companys warranty liability balance are illustrated in the following table:
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
Warranty Liability |
|
|
|
|
Balance at January 1 |
|
$ |
22,511 |
|
Current period accruals |
|
|
20,446 |
|
Current period settlements |
|
|
(21,064 |
) |
|
|
|
|
Balance at September 30 |
|
$ |
21,893 |
|
|
|
|
|
NOTE 11: ACQUISITIONS
The following mergers and acquisitions were accounted for as purchase business combinations and,
accordingly, the purchase price has been or will be allocated to identifiable tangible and
intangible assets acquired and liabilities assumed, based upon their respective fair values, with
the excess allocated to goodwill. Results of operations from the date of acquisition of these
companies are included in the condensed consolidated statements of operations of the Company.
The Company elected not to disclose proforma information as the amounts are immaterial.
Effective January 1, 2007, the Company acquired Brixlogic, Inc. (Brixlogic) based in San Mateo,
California for approximately $8,349. Brixlogic is a software development firm previously used by
the Company for various software development projects. Other intangibles, net of amortization,
resulting from the acquisition amounted to approximately $8,331 at September 30, 2007. Brixlogic is
included as part of the Companys DNA segment.
In December 2006, the Company acquired the remaining 45 percent of Diebold Colombia, S.A.
(Colombia) held by J.J.F. Panama, Inc. and C.R. Panama, Inc. The acquisition was effected in a
combination of 56 percent stock and 44 percent cash for a total purchase price of $6,945. Goodwill
amounted to approximately $5,826 at September 30, 2007. As a result of this acquisition, this
organization became a wholly owned subsidiary of the Company and is included as part of the
Companys DI segment.
In August 2006, the Company acquired Bitelco Telecommunications, Ltd. and Bitelco Services, Ltd.
(Bitelco) based in Santiago, Chile for approximately $9,564. Bitelco is a leading security company
specializing in product integration, installation, project management and service. Bitelco
provides electronic security, fire detection and suppression, and telecommunications security
22
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands, except per share amounts)
solutions for the financial, commercial, government and retail markets. Goodwill and other
intangibles, net of amortization, resulting from the acquisition amounted to approximately $1,853
and $4,174, respectively, at September 30, 2007. Bitelco is included as a part of the Companys DI
segment.
In July 2006, the Company acquired Firstline, Inc. (Firstline) for $14,080. Firstline, located in
Gold River, California, is a first- and second-line ATM maintenance service provider operating
throughout the west coast of the U.S. and also provides limited cash handling services. Goodwill
and other intangibles, net of amortization, resulting from the acquisition amounted to
approximately $8,492 and $7,113, respectively, at September 30, 2007. Firstline is included as
part of the Companys DNA segment.
In June 2006, the Company acquired Actcom, Incorporated (Actcom), a privately-held company based in
Virginia Beach, Virginia, for approximately $11,367. Actcom is a leader in identification and
enterprise security. Actcoms primary customers include U.S. federal government agencies, such as
the Department of Defense, as well as state and municipal government agencies. Goodwill resulting
from the acquisition amounted to approximately $8,823 at September 30, 2007. Actcom is included as
part of the Companys DNA segment.
In May 2006, the Company acquired ERAS Joint Venture, LLP (ERAS) for $14,000. ERAS is a processing
and imaging provider of outsourced serviced and installed systems based in Miami, Florida.
Goodwill and other intangibles, net of amortization, resulting from the acquisition amounted to
approximately $7,909 and $4,158, respectively, at September 30, 2007. ERAS is included as part of
the Companys DNA segment.
In February 2006, the Company purchased the membership interests of Genpass Service Solutions, LLC
(GSS) for $11,931. GSS is an independent, third-party ATM maintenance and service provider for
approximately 6,000 ATMs in thirty-four states within the U.S. and has been integrated within the
Companys DNA service organization. Goodwill and other intangibles, net of amortization, amounted
to approximately $7,287 and $165, respectively, at September 30, 2007.
NOTE 12: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company uses derivatives to mitigate the negative economic consequences associated with the
fluctuations in currencies and interest rates. SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, requires that all derivative instruments be recorded on the balance sheet at
fair value and that the changes in the fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for qualifying hedges allows
derivative gains and losses to be reflected in the income statement together with the hedged
exposure, and requires that a company formally document, designate and assess the effectiveness of
transactions that receive hedge accounting treatment. The Company does not enter into any
speculative positions with regard to derivative instruments.
23
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands, except per share amounts)
NOTE 13: RESTRUCTURING CHARGES
During the first quarter of 2006, the Company initiated a restructuring plan related to realignment
of its global research and development efforts. The Company anticipated total costs to be
approximately $12,400. In addition to this plan, during the second quarter of 2006, the Company
incurred restructuring charges related to the termination of an Information Technology (IT)
outsourcing agreement and product development rationalization.
For the quarter ended September 30, 2006, total restructuring charges were approximately $2,442,
primarily from costs associated with the realignment of the European service and research and
development operations, as well as realignment of the companys global manufacturing operations.
The accrual balance as of September 30, 2006 was immaterial. Restructuring expenses were incurred
as follows: $263 related to product cost of sales, $779 related to service cost of sales, $966
related to selling and administrative expense, $434 related to research and development. These
restructuring charges were incurred in the following segments: $2,424 related to DI and the
remaining $18 to DNA.
For the nine months ended September 30, 2006, total restructuring charges were $17,363, primarily
related to the termination of the companys IT outsourcing agreement, realignment of global service
and research and development efforts, realignment of global manufacturing, and product development
rationalization of $7,000, $6,819, $2,082, and $1,000, respectively. Restructuring expenses were
incurred as follows: $2,086 related to product cost of sales, $9,780 related to selling and
administrative, $4,185 related to research and development, and the remaining primarily related to
service cost of sales. These restructuring charges were incurred in the following segments: $6,534
related to DNA, $10,284 related to DI and $545 related to ES & Other.
During the first quarter of 2006, the Company announced a plan (DCM plan) to close its production
facility in Cassis, France in an effort to optimize its global manufacturing operations. As of
September 30, 2007, the Company anticipates total remaining costs related to the closure of this
facility to be approximately $4,425. For the quarter ended September 30, 2007, the Company
incurred $734 in expense through product cost of sales. Total restructuring charges incurred to
date under the DCM plan are $18,552.
During the first quarter of 2007, the Company identified one hundred twenty-five Cassis employees
to be terminated. Actual termination dates varied based upon each individual employees
circumstances. The Company expects the restructuring plan, including all terminations, to be
substantially complete by the end of the second quarter of 2008.
There were no restructuring expenses related to the Companys DNA or ES & Other operating segments.
Restructuring expenses for the DI operating segment are presented in the following table:
24
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands, except per share amounts)
|
|
|
|
|
|
|
DI |
|
Costs incurred during the three months ended September 30, 2007: |
|
|
|
|
Employee severance costs |
|
$ |
328 |
|
Other (1) |
|
|
406 |
|
|
|
|
|
Total costs incurred during the three months ended September 30, 2007 |
|
$ |
734 |
|
|
|
|
|
|
|
|
|
|
Costs incurred for the nine months ended September 30, 2007: |
|
|
|
|
Employee severance costs |
|
$ |
16,464 |
|
Other (1) |
|
|
8,526 |
|
|
|
|
|
Total costs incurred to date |
|
|
24,990 |
|
Gain on sale of building |
|
|
(6,438 |
) |
|
|
|
|
Total net costs incurred to date |
|
$ |
18,552 |
|
|
|
|
|
|
Expected remaining costs at September 30, 2007: |
|
|
|
|
Employee severance costs |
|
$ |
2,757 |
|
Other (1) |
|
|
1,668 |
|
|
|
|
|
Total costs |
|
$ |
4,425 |
|
|
|
|
|
|
|
|
(1) |
|
Other costs include legal and contract termination fees, asset impairment costs, and costs
to transfer usable inventory and equipment. |
As of September 30, 2007, the restructuring accrual related to the DCM plan is presented in the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance |
|
|
Liabilities |
|
|
Liabilities |
|
|
|
|
|
|
Balance |
|
|
|
January 1, 2007 |
|
|
Incurred |
|
|
Paid/Settled |
|
|
Adjustments (2) |
|
|
Sept 30, 2007 |
|
Employee severance costs |
|
$ |
|
|
|
$ |
16,464 |
|
|
$ |
(13,211 |
) |
|
$ |
402 |
|
|
$ |
3,655 |
|
Other (1) |
|
|
|
|
|
|
8,526 |
|
|
|
(6,153 |
) |
|
|
234 |
|
|
|
2,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expected costs |
|
$ |
|
|
|
$ |
24,990 |
|
|
$ |
(19,364 |
) |
|
$ |
636 |
|
|
$ |
6,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other costs include legal and contract termination fees, asset impairment costs, and costs to
transfer usable inventory and equipment. |
|
(2) |
|
Foreign currency translation. |
During the third quarter of 2007, DI announced its plans to downsize its operations in Germany
(Germany plan) in an effort to remove excess capacity. For the quarter ended September 30, 2007,
total Germany plan restructuring expenses incurred were $104 through product cost of sales, $181
through service cost of sales, and $200 through operating expenses. During the quarter, the Company
notified seventeen employees of termination. As of September 30, 2007, the Company anticipates
remaining total costs to be incurred of approximately $2,821. The Company expects the Germany
restructuring plan, including all terminations, to be substantially
complete by the end of the first quarter of 2008. As of September 30, 2007, the Germany plan
accrual balance was immaterial to the Company.
NOTE 14: SUBSEQUENT EVENTS
25
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands, except per share amounts)
The Company has previously announced that it had identified a series of actions that it planned to
initiate during 2008 in order to realign its global manufacturing footprint, including a transition
from a four-plant global Opteva production footprint down to two plants. While the Company is
still finalizing its plans in connection with this manufacturing realignment, on August 11, 2008,
the Company notified its employees and the union representing the bargaining unit at its Newark,
Ohio-area manufacturing facility that it intends to close this operation and move all of its
production to the Companys plant in Lexington, North Carolina. As a result of this planned
closure, the Company is anticipating total restructuring charges of approximately $12,000,
consisting of approximately $11,000 in cash charges and approximately $1,000 in non-cash charges.
The cash charges consist primarily of employee separation charges, including pension obligations,
while the non-cash charges consist primarily of charges to reduce select property, plant and
equipment to their net realizable value. The Company also expects a small gain of approximately
$1,000 to $2,000 in connection with the potential subsequent sale of the facility that will
partially offset the restructuring charges. The Company anticipates the product relocation and
employee reductions to begin in October 2008, and that the Newark-area facility will be closed no
later than the end of the first quarter of 2009. The job eliminations associated with this planned
closing will be included in the global workforce reduction target that was announced on February 6,
2008.
As previously disclosed, five shareholder lawsuits were filed against the Company and certain
current and former officers and directors in 2005 and 2006, alleging violations of the federal
securities laws. The complaints sought unspecified compensatory damages, attorneys fees and
extraordinary equitable and/or injunctive relief. The cases were consolidated into a single
proceeding in the Northern District of Ohio, captioned In re Diebold, Inc. Securities Litigation.
On August 22, 2008, the court granted the Companys motion to dismiss the consolidated cases, and
entered a judgment in favor of the Company and the other defendants, dismissing the complaint with
prejudice; however, the plaintiffs have filed a notice of appeal. A separate class action against the Company and certain current and former officers and
directors filed by participants in the Companys 401(k) plan, alleging breaches of duties under the
Employee Retirement Income Security Act of 1974, remains outstanding.
The
Company filed a lawsuit on May 30, 2008 against the Board of
Elections of Cuyahoga County, Ohio, the Board of County
Commissioners of Cuyahoga County, Ohio, Cuyahoga County, Ohio
(collectively, the County), and Ohio Secretary of State Jennifer
Brunner (Secretary) regarding several Ohio contracts under which the
Company provided electronic voting systems and related services to
the State of Ohio and a number of its counties. The lawsuit was
precipitated by the Countys threats to sue the Company for
unspecified damages. The complaint seeks a declaration that the
Company met its contractual obligations. In response, on
July 15, 2008, the County filed an answer and counterclaim
alleging that the voting system was defective and seeking declaratory
relief and unspecified damages under several theories of recovery.
The Secretary has also filed an answer and counterclaim seeking
declaratory relief and unspecified damages under a number of theories
of recovery.
26
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of September 30, 2007
(Unaudited)
(In thousands, except per share amounts)
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BACKGROUND OF THE RESTATEMENT
In the first quarter of 2006, the Division of Enforcement of the Securities and Exchange
Commission (SEC) initiated an informal inquiry into certain of the Companys accounting and
financial reporting matters and requested the Company provide certain documents and information,
specifically related to its practice of recognizing certain revenue on a bill and hold basis.
In the third quarter of 2006, the Company was informed that the SECs previous informal inquiry
related to revenue recognition had been converted to a formal, non-public investigation.
On July 25, 2007, the Company announced that it would delay the release of its earnings results
for the quarter ended June 30, 2007, as well as the filing of its quarterly report on Form 10-Q
for that quarter, while the Company sought guidance from the Office of the Chief
Accountant of the SEC (OCA) as to the Companys revenue recognition policy. The guidance sought
related to the Companys long-standing practice of recognizing certain revenue on a bill and
hold basis within its North America business segment.
On October 2, 2007, the Company announced it was discontinuing its use of bill and hold as a
method of revenue recognition in both its North America business segment and its International
businesses.
On December 21, 2007, the Company announced that, in consultation with outside advisors, it was
conducting an internal review into certain accounting and financial reporting matters,
including, but not limited to, the review of various balance sheet
accounts such as prepaid expenses,
accrued liabilities, capitalized assets, deferred revenue and reserves within both the Companys North
America and International businesses. The review was conducted primarily by outside counsel of
the Company and was done in consultation and participation with the Companys internal audit
staff and management, as well as outside advisors including forensic accountants and independent
legal counsel to the Audit Committee.
During the course of the review, certain questions were raised as to certain prior accounting
and financial reporting items in addition to bill and hold revenue recognition, including
whether prepaids, accruals, capitalized assets, deferred revenue, and reserves had been recorded
accurately and timely. Accordingly, the Company informed the SEC that the scope of the review
was expanded beyond the initial revenue recognition discussions. This review has been
completed as of the date of the filing of this quarterly report on Form 10-Q.
On January 15, 2008, the Company announced that it had concluded its discussion with the OCA
and, as a result of those discussions, the Company determined that its previous long-standing
method of accounting for bill and hold transactions was in error, representing a misapplication
of U.S. generally accepted accounting principles (GAAP). In addition, the Company disclosed
that revenue previously recognized on a bill and hold basis would be recognized upon customer
acceptance of products at a customer location. Management of the Company determined that this
corrected method of recognizing revenue would be adopted retroactively after an in-depth
analysis and review with its outside auditors, KPMG LLP (KPMG), an independent registered public
accounting firm, the Audit Committee of the Companys Board of Directors, and the OCA.
Accordingly, management concluded that previously issued financial statements for the fiscal
years ended December 31, 2006, 2005, 2004, and 2003; the quarterly data in each of the quarters
for the years ended December 31, 2006 and 2005; and the quarter ended March 31, 2007, must be
restated and should no longer be relied upon. As a result, the Company has restated its
previously issued financial statements for those periods. Restated financial information is
presented in this quarterly report as well as in Diebolds annual report on Form 10-K for the
year ended December 31, 2007.
OVERVIEW
Diebold has been in business for more than 148 years providing innovative, safe and reliable
self-service delivery and security systems to the financial, retail, commercial and government
markets. Drawing from a rich past as the nations premier manufacturer of safes and vaults, Diebold
today is in the midst of a fundamental transformation. In 2007, the Company has continued its work
on the operational initiatives set forth in 2006: increase customer loyalty, improve quality,
strengthen supply chain, enhance communications and teamwork, and rebuild profitability. The
progress made to date has strengthened Diebolds operations globally by optimizing manufacturing,
supply chain, services support, software development and sales and marketing activities. Many of
these initiatives support the Companys three-year effort to reduce its overall cost structure by
$100,000 by the end of 2008. The program, which
27
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of September 30, 2007
(Unaudited)
(In thousands, except per share amounts)
began in 2006, is known as Smart Business 100 and is progressing as expected. To date, significant
efficiencies in streamlining the supply chain have been made in the U.S., with other regions
reporting solid results, as well.
Also
during the third quarter of 2007, convenience and technology took center stage in the financial
industry and Diebold remains an innovative performer. For instance, five new U.S. patents granted
recently to Diebold could well change where, when and how often consumers bank. The patents cover a
variety of applications to enable mobile devices to interact directly with banks ATMs.
Diebold also has taken another high-tech step through the introduction of its Outsourcing
Assessment Center. This is an on-screen, analytical tool that allows financial institutions to
evaluate their current ATM channels against industry standards, then learn how outsourcing can
positively impact their bottom lines. Diebold remains an outsourcing expert to which financial
institutions continue to turn for assistance in servicing, managing, and even running significant
parts of their operations.
In July 2007, the Company celebrated the sale of its 100,000th Opteva ATM and in August
2007 the Company signed an agreement with Vietnam Private Bank to purchase one thousand Opteva
ATMs, the largest sale of its kind for the company in Vietnam.
In addition, Diebold created a new structure for its Diebold Election Systems subsidiary to allow
it to operate more independently. The changes included establishing a separate board which will
include independent directors to oversee the new entity, creating a new management structure to
effectively support the election systems company, and moving manufacturing to a third party. The
subsidiary has been renamed Premier Election Solutions. The Company will continue to provide the
necessary resources and support for this business to operate efficiently and successfully, but has
not ruled out divesting a portion or all of its ownership interest in the newly realigned company.
The business drivers of the Companys future performance include several factors that include, but
are not limited to:
|
|
|
timing of a self-service upgrade and/or replacement cycle in mature markets such as the
United States; |
|
|
|
|
high levels of deployment growth for new self-service products in emerging markets such
as Asia-Pacific; |
|
|
|
|
demand for new service offerings, including outsourcing or operating a network of ATMs; |
|
|
|
|
demand beyond expectations for security products and services for the financial, retail
and government sectors; |
|
|
|
|
implementation and timeline for new election systems in the United States; |
|
|
|
|
the Companys strong financial position; and |
|
|
|
|
the Companys ability to successfully integrate acquisitions. |
RESULTS OF OPERATIONS
The
following table summarizes the results of our operations for the
three- and nine-month periods
ended September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
Dollars |
|
Net Sales |
|
Dollars |
|
Net Sales |
|
Dollars |
|
Net Sales |
|
Dollars |
|
Net Sales |
|
|
|
|
|
|
|
|
|
|
(As Restated) |
|
(As Restated) |
|
|
|
|
|
|
|
|
|
(As Restated) |
|
(As Restated) |
Net sales |
|
$ |
740,853 |
|
|
|
100.0 |
% |
|
$ |
726,682 |
|
|
|
100.0 |
% |
|
$ |
2,082,324 |
|
|
|
100.0 |
% |
|
$ |
2,126,090 |
|
|
|
100.0 |
% |
Gross profit |
|
|
177,059 |
|
|
|
23.9 |
% |
|
|
188,405 |
|
|
|
25.9 |
% |
|
|
470,934 |
|
|
|
22.6 |
% |
|
|
524,840 |
|
|
|
24.7 |
% |
Operating expenses |
|
|
136,440 |
|
|
|
18.4 |
% |
|
|
134,195 |
|
|
|
18.5 |
% |
|
|
389,276 |
|
|
|
18.7 |
% |
|
|
390,624 |
|
|
|
18.4 |
% |
Operating profit |
|
|
40,619 |
|
|
|
5.5 |
% |
|
|
54,210 |
|
|
|
7.5 |
% |
|
|
81,658 |
|
|
|
3.9 |
% |
|
|
134,216 |
|
|
|
6.3 |
% |
Net income |
|
|
28,149 |
|
|
|
3.8 |
% |
|
|
32,658 |
|
|
|
4.5 |
% |
|
|
49,601 |
|
|
|
2.4 |
% |
|
|
77,538 |
|
|
|
3.6 |
% |
Diluted Earnings
Per Share |
|
|
0.42 |
|
|
|
N/A |
|
|
|
0.49 |
|
|
|
N/A |
|
|
|
0.74 |
|
|
|
N/A |
|
|
|
1.15 |
|
|
|
N/A |
|
28
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of September 30, 2007
(Unaudited)
(In thousands, except per share amounts)
Third Quarter 2007 Comparisons with Third Quarter 2006
Net Sales
The
following table represents information regarding our net sales for
the three-month periods ended September
30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
September 30, |
|
|
|
|
2007 |
|
2006 |
|
% Change |
|
|
(As Restated) |
Net sales |
|
$ |
740,853 |
|
|
$ |
726,682 |
|
|
|
2.0 |
% |
Net sales for the third quarter of 2007 totaled $740,853 and were $14,171 or 2.0 percent higher
than net sales for the third quarter of 2006. The increase in net sales included a net positive
currency impact of approximately $27,550. Financial self-service
revenue increased by $46,713 or
9.9 percent over the comparable period in 2006 with revenue from Europe, Middle East, and Africa
(EMEA) increasing 31.7 percent, revenue from Asia Pacific increasing by 8.2 percent, and revenue
from the Americas increasing by 3.3 percent. Security solutions revenue increased by $22,229 or
11.7 percent over the third quarter of 2006, due to growth in the Americas of $20,683 or 12.0
percent and Asia Pacific growth of $2,525 or 21.8 percent. Election systems revenue of $8,667
decreased by $52,746 or 85.9 percent over the third quarter of 2006 as political debates over
electronic voting negatively impacted the U.S. election systems business resulting in decreased
sales of election systems products and no Brazilian voting revenue in the third quarter of 2007
compared to $22,832 in the third quarter of 2006. There was no lottery systems revenue for the
quarter ended September 30, 2007 compared to $2,025 for the comparable period in 2006.
Gross Profit
The
following table represents information regarding our gross profit for
the three-month periods ended
September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
September 30, |
|
|
|
|
2007 |
|
2006 |
|
% Change |
|
|
|
|
|
|
(As Restated) |
|
|
|
|
Gross profit |
|
$ |
177,059 |
|
|
$ |
188,405 |
|
|
|
-6.0 |
% |
Gross profit margin |
|
|
23.9 |
% |
|
|
25.9 |
% |
|
|
-2.0 |
% |
Gross profit for the third quarter of 2007 totaled $177,059 and was $11,346 or 6.0 percent lower
than gross profit in the third quarter of 2006. Product gross margin was 26.5 percent compared to
31.4 percent in the comparable period of 2006. Restructuring charges of approximately $838 were
included in product costs of sales for the third quarter of 2007 while restructuring charges of
approximately $263 were recorded in the third quarter of 2006. The decrease in product gross
margin was primarily the result of lower election systems revenue and a higher mix of financial
self-service revenue from lower margin market segments, partially offset by the Companys ongoing
cost-reduction program. Service gross margin in the third quarter of 2007 increased to 21.4
percent compared to 20.5 percent in the third quarter of 2006 mainly due to higher profitability in
the U.S. service business.
Operating Expenses
The
following table represents information regarding our operating
expenses for the three-month periods ended
September 30, 2007 and 2006:
29
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of September 30, 2007
(Unaudited)
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
% Change |
|
|
|
|
|
|
|
(As Restated) |
|
|
|
|
|
Selling and administrative expense |
|
$ |
117,532 |
|
|
$ |
116,758 |
|
|
|
0.7 |
% |
Research, development and engineering expense |
|
|
18,894 |
|
|
|
17,437 |
|
|
|
8.4 |
% |
(Gain) loss on sale of assets, net |
|
|
14 |
|
|
|
|
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
136,440 |
|
|
$ |
134,195 |
|
|
|
1.7 |
% |
Percent of net sales |
|
|
18.4 |
% |
|
|
18.5 |
% |
|
|
-0.1 |
% |
Selling and administrative expense for the third quarter of 2007 was $117,532 or 15.9 percent of
net sales as compared to $116,758 or 16.1 percent of net sales in the third quarter of 2006. There
was $200 of restructuring charges in the third quarter of 2007 compared to restructuring charges of
$966 or 0.1 percent of net sales included in selling and administrative expense for the third
quarter of 2006. Restructuring charges for the third quarter of 2006 were primarily related to the
realignment of the European service operations. Selling and administrative expense was impacted by
non-routine expenses of $3,323 or 0.4 percent of net sales in the third quarter of 2007 and $76 in
the comparable quarter of 2006. The non-routine expenses consisted primarily of legal, audit and
consultation fees related to the internal review of other accounting items, restatement of
financial statements, and the ongoing SEC and DOJ investigations and other advisory fees. Research,
development, and engineering expense for the third quarter of 2007 was 2.6 percent of net sales as
compared to 2.4 percent in 2006. In the third quarter of 2007, there were no restructuring charges
included in research, development, and engineering expense as compared to restructuring charges of
$434 for the comparable period in 2006.
Operating Profit
The
following table represents information regarding our operating profit
for the three-month periods ended
September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
September 30, |
|
|
|
|
2007 |
|
2006 |
|
% Change |
|
|
|
|
|
|
(As Restated) |
|
|
|
|
Operating profit |
|
$ |
40,619 |
|
|
$ |
54,210 |
|
|
|
-25.1 |
% |
Operating profit margin |
|
|
5.5 |
% |
|
|
7.5 |
% |
|
|
-2.0 |
% |
Operating profit for the third quarter of 2007 totaled $40,619 and was $13,591 or 25.1 percent
lower than operating profit for the comparable period of 2006. The decrease was mainly due to
lower election systems revenue. Operating profit was also adversely impacted by restructuring
charges of $1,219 or 0.2 percent of net sales in the third quarter of 2007 compared to $2,442 or
0.3 percent of net sales for the comparable period in 2006. In addition, non-routine expenses of
$3,323 or 0.4 percent of net sales affected operating profit in the third quarter of 2007 compared
to $76 for the same period in 2006.
Other Income (Expense) and Minority Interest
The following table represents information regarding our other income (expense) and minority
interest for the three-month periods ended September 30, 2007 and 2006:
30
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of September 30, 2007
(Unaudited)
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
% Change |
|
|
|
|
|
|
|
(As Restated) |
|
|
|
|
|
Investment income |
|
$ |
6,221 |
|
|
$ |
3,992 |
|
|
|
55.8 |
% |
Interest expense |
|
|
(10,045 |
) |
|
|
(9,556 |
) |
|
|
5.1 |
% |
Miscellaneous, net |
|
|
(1,227 |
) |
|
|
977 |
|
|
|
-225.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
Other expense |
|
$ |
(5,051 |
) |
|
$ |
(4,587 |
) |
|
|
10.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of net sales |
|
|
-0.7 |
% |
|
|
-0.6 |
% |
|
|
-0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest |
|
$ |
(1,172 |
) |
|
$ |
(1,578 |
) |
|
|
-25.7 |
% |
Investment income for the third quarter of 2007 was $6,221 and increased by $2,229 or 55.8 percent
compared to the same period in 2006. Interest expense for the third quarter of 2007 was $10,045 an
increase of $489 or 5.1 percent compared to the third quarter of 2006. Miscellaneous, net was
$2,204 lower in 2007 mainly due to a change in foreign exchange gain (loss) between years.
Minority interest was $406 lower in the third quarter of 2007 than the comparable period in 2006.
Net Income
The following table represents information regarding our net income for the three-month periods
ended September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
September 30, |
|
|
|
|
2007 |
|
2006 |
|
% Change |
|
|
|
|
|
|
(As Restated) |
|
|
|
|
Net income |
|
$ |
28,149 |
|
|
$ |
32,658 |
|
|
|
-13.8 |
% |
Percent of net sales |
|
|
3.8 |
% |
|
|
4.5 |
% |
|
|
-0.7 |
% |
Effective tax rate |
|
|
18.2 |
% |
|
|
32.0 |
% |
|
|
-13.8 |
% |
Net Income for the third quarter of 2007 was $28,149, a decrease of $4,509 or 13.8 percent compared
with the third quarter of 2006. The effective tax rate for the third quarter of 2007 was 18.2
percent versus 32.0 percent for the comparable period in 2006.
Segment Revenue and Operating Profit Summary
Diebold
North America (DNA) third quarter of 2007 net sales of $388,912
decreased $2,925 or 0.7
percent over third quarter of 2006 net sales of $391,837. The decrease in DNA net sales was due to
lower financial self-service revenue offset by higher security revenue. Diebold International (DI)
third quarter of 2007 net sales of $343,274 increased by $71,867 or 26.5 percent compared with net
sales in the comparable period in 2006 of $271,407. The increase in DI net sales was attributable
to strong revenue growth in Europe, Middle East and Africa (EMEA), Brazil, and Latin America.
Election Systems (ES) & Other third quarter of 2007 net sales of
$8,667 decreased by $54,771 or
86.3 percent compared to third quarter of 2006 net sales of
$63,438. This decrease was primarily
due to U.S. election systems revenue being down by $29,914 and a decrease of $22,832 in Brazilian
election systems revenue. Also, the decrease in ES & Other net sales was due to no Brazilian
lottery systems revenue in the third quarter of 2007 compared to $2,025 in the third quarter of
2006.
DNA third
quarter of 2007 operating profit of $31,860 decreased $7,931, or 19.9 percent, compared
with third quarter of 2006 operating profit of $39,791. This decrease was due primarily to a
higher mix of revenue from the lower margin security business and unfavorable financial
self-service sales mix. DI operating profit for the third quarter of 2007 was $11,377, an increase
of $7,677 or 207.5 percent compared with the third quarter of 2006. The favorable movement in DI
operating profit was due to international financial self-service revenue growth. ES & Other third
quarter of 2007 operating loss of $2,618 compared to an operating profit of $10,719 in the third
quarter of 2006. This decrease was a result of lower sales volume in the election systems business
as well as no
revenue or profit from the lottery systems business compared to the third quarter of 2006.
Refer to Note 9 to the condensed consolidated financial statements for details of segment revenue
and operating profit.
Nine Months ended September 30, 2007 Comparisons with Nine Months ended September 30, 2006
31
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of September 30, 2007
(Unaudited)
(In thousands, except per share amounts)
Net Sales
The
following table represents information regarding our net sales for
the nine-month periods ended September
30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
September 30, |
|
|
|
|
2007 |
|
2006 |
|
% Change |
|
|
|
|
|
|
(As Restated) |
|
|
|
|
Net sales |
|
$ |
2,082,324 |
|
|
$ |
2,126,090 |
|
|
|
-2.1 |
% |
Net sales for the nine months ended September 30, 2007 totaled $2,082,324 and were $43,766 or 2.1
percent lower than net sales for the comparable period in 2006. Net sales in the first nine months
of 2007 included a net positive currency impact of approximately $60,650. Financial self-service
revenue for the nine months ended September 30, 2007 increased
by $55,647 or 4.0 percent over the
comparable period in 2006 with revenue from Asia Pacific and EMEA both increasing by 9.4 percent,
and revenue from the Americas increasing by 1.2 percent. Security solutions revenue for the nine
months ended September 30, 2007 increased by $37,700 or 6.8 percent versus the comparable period in
2006. Election systems revenue of $39,193 decreased by $101,959 or 72.2 percent compared to the
nine months ended September 30, 2006. There was no lottery systems revenue in the nine months
ended September 30, 2007 in comparison with $35,154 in the same period of 2006.
Gross Profit
The
following table represents information regarding our gross profit for
the nine-month periods ended
September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
September 30, |
|
|
|
|
|
2007 |
|
2006 |
|
|
% Change |
|
|
|
|
|
|
(As Restated) |
|
|
|
|
|
Gross profit |
|
$ |
470,934 |
|
|
$ |
524,840 |
|
|
|
-10.3 |
% |
Gross profit margin |
|
|
22.6 |
% |
|
|
24.7 |
% |
|
|
-2.1 |
% |
Gross profit for the nine months ended September 30, 2007 totaled $470,934 and was $53,906 or 10.3
percent lower than gross profit for the nine months ended September 30, 2006. Product gross margin
was 25.1 percent in the nine months ended September 30, 2007 compared to 29.5 percent in the
comparable period in 2006. Product gross margins were adversely affected by restructuring charges
of approximately $25,094 in the first nine months of 2007 mainly related to the closing of the
manufacturing operations in Cassis, France and charges of approximately $2,086 for the comparable
period in 2006. Lower election systems revenue, no lottery revenue, and a higher mix of revenue
from the international financial self-service business also negatively impacted total product gross
margin in the first nine months of 2007. Service gross margin in the nine months ended September
30, 2007 increased to 20.4 percent compared with 19.8 percent in the nine months ended September
30, 2006. Service gross margins were adversely affected by restructuring charges of $181 in the
first nine months of 2007 with $1,409 in the comparable period of 2006. The service margin
increase resulted mainly from improved gross margin in the U.S. service business.
Operating Expenses
The following table represents information regarding our operating expenses for the nine-month
periods ended September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
% Change |
|
|
|
|
|
|
|
(As Restated) |
|
|
|
|
|
Selling and administrative expense |
|
$ |
342,568 |
|
|
$ |
335,554 |
|
|
|
2.1 |
% |
Research, development and engineering expense |
|
|
53,115 |
|
|
|
54,748 |
|
|
|
-3.0 |
% |
(Gain) loss on sale of assets, net |
|
|
(6,407 |
) |
|
|
322 |
|
|
|
-2089.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
389,276 |
|
|
$ |
390,624 |
|
|
|
-0.3 |
% |
Percent of net sales |
|
|
18.7 |
% |
|
|
18.4 |
% |
|
|
0.3 |
% |
32
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of September 30, 2007
(Unaudited)
(In thousands, except per share amounts)
Selling and administrative expense for the nine months ended September 30, 2007 was $342,568 or
16.5 percent of net sales as compared to $335,554 or 15.8 percent of net sales for the first nine
months of 2006. The increase in selling and administrative expense as a percent of sales between
years resulted in part due to lower sales volume, a weakening of the U.S. dollar, and incremental
spend related to acquisitions. There was $200 of restructuring charges in the first nine months of
2007 compared to restructuring charges of $9,780 or 0.5 percent of net sales included in selling
and administrative expense for the comparable period in 2006. Restructuring charges for the first
nine months of 2006 were primarily related to the termination of an IT outsourcing agreement. In
addition, selling and administrative expense was impacted by non-routine expenses of $4,212 for the
nine months ended September 30, 2007 compared to $391 of non-routine expenses for the nine months
ended September 30, 2006. The non-routine expenses consisted primarily of legal, audit and
consultation fees related to the internal review of other accounting items, restatement of
financial statements and the ongoing SEC investigation and other advisory fees. Research,
development, and engineering expense for the first nine months of 2007 decreased by $1,633 compared
to the same period in 2006 mainly due to lower restructuring charges. In the first nine months of
2007, there were no restructuring charges in research, development, and engineering expense versus
$4,185 for the comparable period in 2006. The gain on sale of assets in the first nine months of
2007 resulted from the gain on sale of the Companys manufacturing plant in Cassis, France of
$6,438 associated with the Companys restructuring initiatives.
Operating Profit
The following table represents information regarding our operating profit for the nine-month
periods ended September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
September 30, |
|
|
|
|
2007 |
|
2006 |
|
% Change |
|
|
|
|
|
|
(As Restated) |
|
|
|
|
Operating profit |
|
$ |
81,658 |
|
|
$ |
134,216 |
|
|
|
-39.2 |
% |
Operating profit margin |
|
|
3.9 |
% |
|
|
6.3 |
% |
|
|
-2.4 |
% |
Operating profit for the nine months ended September 30, 2007 totaled $81,658 and was $52,558 or
39.2 percent lower than operating profit for the comparable period of 2006. Operating profit
margin decreased mainly due to lower election systems revenue and no lottery systems revenue in the
first nine months of 2007 compared to the same period in 2006 and increased operating expenses
resulting from a weakening of the U.S. dollar, and incremental spend related to acquisitions.
Operating profit was also adversely impacted by restructuring charges of $19,037 or 0.9 percent of
net sales in the first nine months of 2007 compared to $17,460 or 0.8 percent of net sales for the
comparable period in 2006. In addition, non-routine expenses of $4,212 or 0.2 percent of net sales
affected the operating profit in the first nine months of 2007 compared to $391 for the comparable
period in 2006.
Other Income (Expense) and Minority Interest
The following table represents information regarding our other income (expense) and minority
interest for the nine-month periods ended September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
% Change |
|
|
|
|
|
|
|
(As Restated) |
|
|
|
|
|
Investment income |
|
$ |
16,875 |
|
|
$ |
12,782 |
|
|
|
32.0 |
% |
Interest expense |
|
|
(29,329 |
) |
|
|
(24,955 |
) |
|
|
17.5 |
% |
Miscellaneous, net |
|
|
6,850 |
|
|
|
(26 |
) |
|
|
-26446.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
$ |
(5,604 |
) |
|
$ |
(12,199 |
) |
|
|
-54.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of net sales |
|
|
-0.3 |
% |
|
|
-0.6 |
% |
|
|
0.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest |
|
$ |
(5,579 |
) |
|
$ |
(4,510 |
) |
|
|
23.7 |
% |
33
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of September 30, 2007
(Unaudited)
(In thousands, except per share amounts)
Investment income for the nine months ended September 30, 2007 was $16,875 and increased by $4,093
or 32.0 percent compared to the same period in 2006. Interest expense for the first nine months of
2007 was $29,329, an increase of $4,374 or 17.5 percent versus the comparable period in 2006 mainly
due to higher interest rates. Miscellaneous, net was $6,876 higher in 2007 mainly due to higher
foreign exchange gain in the first nine months of 2007 compared to the same period 2006. Minority
interest was $1,069 higher for the nine months ended September 30, 2007 versus the comparable
period in 2006.
Net Income
The
following table represents information regarding our net income for
the nine-month periods ended September
30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
September 30, |
|
|
|
|
2007 |
|
2006 |
|
% Change |
|
|
|
|
|
|
(As Restated) |
|
|
|
|
Net income |
|
$ |
49,601 |
|
|
$ |
77,538 |
|
|
|
-36.0 |
% |
Percent of net sales |
|
|
2.4 |
% |
|
|
3.6 |
% |
|
|
-1.2 |
% |
Effective tax rate |
|
|
29.6 |
% |
|
|
34.0 |
% |
|
|
-4.4 |
% |
Net income
for the nine months ended September 30, 2007 was $46,901 and
decreased $27,937 or 36.0
percent over net income for the nine months ended September 30, 2006. The effective tax rate for
the first nine months of 2007 was 29.6 percent versus 34.0 percent for the comparable period in
2006.
Segment Revenue and Operating Profit Summary
DNA net
sales of $1,115,007 for the nine months ended September 30, 2007
decreased $1,381 or 0.1
percent over the comparable period of 2006 net sales of $1,116,388. DI net sales of $928,124 for
the nine months ended September 30, 2007 increased by $94,728 or 11.4 percent over comparable
period of 2006 net sales of $833,396. The increase in DI net sales was attributed to strong
financial
self-service revenue growth of $31,520 in Brazil and higher revenue from EMEA and Asia Pacific of
$28,833 and $21,572, respectively. ES & Other net sales of
$39,193 for the nine months ended
September 30, 2007 decreased $137,113 or 77.8 percent compared to the nine months ended September
30, 2006. Purchasing delays by county and state governments within the United States, as a result
of ongoing political debates over electronic voting, adversely affected the overall election
systems business in 2007.
DNA operating profit for the nine
months ended September 30, 2007 decreased by $11,375 or 12.3
percent versus the comparable period in 2006. DI operating profit for the nine months ended
September 30, 2007 decreased by $12,210 or 86.5 percent versus the first nine months of the
comparable period in 2006. The decrease in DI operating profit was mainly due to higher
restructuring charges in the first nine months of 2007 compared to the same period in 2006. The
operating profit in ES & Other decreased by $28,973 or 106.0 percent, moving from an operating
profit of $27,326 in the nine months ended September 30, 2006 to an operating loss of $1,647 in the
first nine months of 2007. This decrease in ES & Other operating profit was a result of lower
revenue.
Refer to Note 9 to the condensed consolidated financial statements for further details of segment
revenue and operating profit.
LIQUIDITY AND CAPITAL RESOURCES
Capital resources are obtained from income retained in the business, senior notes, committed and
uncommitted credit facilities, long-term industrial revenue bonds, and operating and capital
leasing arrangements. Management expects that cash provided from the Companys capital resources
will be sufficient to finance planned working capital needs, investments in facilities or
equipment, and the purchase of Company common shares for at least the next twelve months. Part of
the Companys growth strategy is to pursue strategic acquisitions. The Company has made
acquisitions in the past and intends to make acquisitions in the future. The Company intends to
finance any future acquisitions with either cash provided from operations, borrowings under
available credit facilities, proceeds from debt or equity offerings and/or the issuance of common
shares.
The following table summarizes the results of our Condensed Consolidated Statement of Cash Flows:
34
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of September 30, 2007
(Unaudited)
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
(As Restated) |
|
Net cash flow provided (used) by: |
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
37,848 |
|
|
$ |
123,223 |
|
Investing activities |
|
|
(36,561 |
) |
|
|
(113,142 |
) |
Financing activities |
|
|
(126,364 |
) |
|
|
(9,847 |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
|
12,859 |
|
|
|
118 |
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
$ |
(112,218 |
) |
|
$ |
352 |
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2007, the
Company generated $37,848 in cash from
operating activities, a decrease of $85,375 or 69.3 percent from the same period in 2006. Cash
flows from operating activities are generated primarily from net income and controlling the
components of working capital. Cash flows from operations during the nine months ended September
30, 2007 were negatively affected by the $27,937 decrease in net income, a decrease in deferred
revenue and increases in certain other assets and liabilities, prepaid expenses and other current
assets, and inventories, which were partially offset by an increase in accounts payable. The
decrease in deferred revenue related to timing of service contract billings and was $51,500, which
was $30,916 more than the decrease in the first nine months of 2006. The increase in certain other
assets and liabilities in the first nine months of 2007 was $70,241 as compared with $18,062 in the
comparable period of 2006 and was primarily the result of timing of tax payments as well an
increase in finance receivables. The increase in prepaid expenses and other current assets was
$23,820, and was $15,254 higher than the $8,566 increase in the comparable period in 2006. The
increase inventories in the nine months ended September 30, 2007 was $48,164, largely due to strong
anticipated future orders, and was $8,520 more than the increase in inventories during the nine
months ended September 30, 2006.
Cash flows from operations during the nine months ended September 30, 2007 compared to the same
period in 2006 were also negatively affected by a lower decrease in accounts receivable. Despite a
decrease in days sales outstanding (DSO) from 69 days at
September 30, 2006 to 61 days at September 30, 2007, the decrease in accounts receivable of $92,589
in 2007 was $3,352 less than the decrease of $95,941 in the nine months ended September 30, 2006.
These negative impacts to cash flows from operations were partially offset by an increase in
accounts payable of $18,085 for the nine months ended September 30, 2007 compared to a decrease of
$36,753 in the comparable period of 2006.
Net cash used for investing activities was $36,561 for the nine months ended September 30, 2007, a
decrease of $76,581 or 67.7 percent from the same period in 2006. The decrease was primarily the
result of $57,812 used for 2006 acquisitions of Actcom, Incorporated, ERAS Joint Venture, LLP,
Genpass Service Solutions, LLC, Bitelco Telecommunications, Ltd., and Firstline, Inc., compared to
$10,028 of earnout payments in 2007 for previous acquisitions. In addition, the Company had net
proceeds from maturities of investments of $22,921 in the first nine months of 2007 compared to net
payments for purchases of investments of $15,745 in comparable period of 2006, decreasing the net
cash used for investing activities by $38,666 year over year. These decreases were partially
offset by a $6,010 increase in capital expenditures and a $5,011 increase in certain other assets,
primarily related to investments in capitalized software and a joint venture.
Net cash used for financing activities was $126,364 for the nine months ended September 30, 2007,
an increase of $116,517, or 1,183.3 percent over the comparable period of 2006. The increase was
the result of increased net repayments on borrowings of $244,382, moving from net proceeds from
borrowings of $171,088 in the first nine months of 2006 to net repayments of borrowings of $73,294
in 2007. Also, the Company paid $3,081 more in dividends and $14,722 more to minority interest holders in
the same period in 2007. These increases in cash used for financing activities were partially
offset by the decrease in common shares repurchased of $143,745.
In March 2006, the Company secured fixed-rate long-term financing of $300,000 in senior notes in
order to take advantage of favorable long-term interest rates. 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. The Company used $270,000 of the net proceeds from the offering to reduce the
outstanding balance under its revolving credit facility. All other contractual cash obligations
with initial and remaining terms in excess of one year and contingent liabilities remained
generally unchanged at September 30, 2007 compared to December 31, 2006.
35
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of September 30, 2007
(Unaudited)
(In thousands, except per share amounts)
At September 30, 2007, the Company had U.S. dollar denominated private placement debt outstanding
of $300,000, U.S. dollar denominated outstanding bank credit lines approximating $217,395, euro
denominated outstanding bank credit lines approximating 62,795 (translated at $89,653) and Indian
rupee denominated outstanding bank credit lines approximating 177,386 (translated at $4,460). An
additional $239,502 was available under committed credit line agreements, and $56,597 was available
under uncommitted lines of credit.
The
Companys financing agreements contain various restrictive covenants,
including net debt to capitalization and interest coverage ratios. Under both the
agreements with J.P. Morgan Chase Bank, N.A. and the note purchase agreement governing the
senior notes, we are obligated to provide financial statements within a specified period of
time after the end of each quarter and to provide audited financial statements within a
specified period of time after the end of our fiscal year. Due to the delay in completing
our financial statements, we received waivers under both aforementioned agreements from the
lenders that allow us to waive the requirement to provide financial statements until
September 30, 2008. Giving effect to the waivers, we were in compliance with the covenants
as of September 30, 2007.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Managements discussion and analysis of the Companys financial condition and results of
operations are based upon the Companys consolidated financial statements. The preparation of
these financial statements requires the use of estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the periods presented. Management of the Company uses
historical information and all available information to make these estimates and assumptions.
Actual amounts could differ from these estimates and different amounts could be reported using
different assumptions and estimates.
Management believes that, of its significant accounting policies, its policies concerning revenue
recognition, allowance for bad debts and credit risk, inventories, goodwill, and pensions and
postretirement benefits are the most critical because they are affected significantly by
judgments, assumptions and estimates. Additional information regarding these policies is included
below.
Revenue
Recognition The Companys revenue recognition policy is consistent with the
requirements of Statement of Position 97-2, Software Revenue Recognition (SOP 97-2), and Staff
Accounting Bulletin 104 (SAB 104). In general, the Company records revenue when it is realized,
or realizable and earned. The Company considers revenue to be realized or realizable and earned
when the following revenue recognition requirements are met: persuasive evidence of an
arrangement exists, which is a customer
contract; the products or services have been accepted by the customer via delivery or
installation acceptance; the sales price is fixed or determinable within the contract; and
collectability is probable.
For product sales, the Company determines that the earnings process is complete when title, risk
of loss and the right to use equipment has transferred to the customer. Within the North
America business segment this occurs upon customer acceptance and acceptance, where the Company
is contractually responsible for installation, is upon completion of the installation of all of
the items at a job site and the Companys demonstration the Items are in operable condition.
Where items are contractually only delivered to a customer, revenue recognition of these items
is upon shipment or delivery to a customer location depending on the terms in the contract.
Within the International business segment, customer acceptance is upon either delivery
or completion of the installation depending on the terms in the contract with the customer.
The Company offers the following product groups and related services to its customers:
Self-Service Products Self-service products pertain to ATMs. Included within the ATM is
software, which operates the ATM. The related software is considered an integral part of the
equipment since without it, the equipment cannot function. Revenue is recognized in accordance
with SOP 97-2. The Company also provides service contracts on ATMs.
Service contracts typically cover a 12-month period and can begin at any given month during the
year after the standard 90-day warranty period expires. The service provided under warranty is
significantly limited as compared to those offered under service contracts. Further, warranty is
not considered a separate element of the sale. The Companys warranty covers only replacement of
parts inclusive of labor. Service contracts are tailored to meet the individual needs of each
customer. Service contracts provide additional services beyond those covered under the warranty,
and usually include preventative maintenance service, cleaning, supplies stocking and cash
handling all of which are not essential to the functionality of the equipment. For sales of
service contracts, where the service contract is the only element of the sale, revenue is
recognized ratably over the life of the contract period. In contracts that involve
multiple-element arrangements, amounts deferred for services are determined based upon vendor
specific
36
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of September 30, 2007
(Unaudited)
(In thousands, except per share amounts)
objective evidence of the fair value of the elements as prescribed in SOP 97-2. The
Company determines fair value of deliverables within a multiple element arrangement based on the
price charged when each element is sold separately.
Physical Security and Facility Products The Companys Physical Security and Facility Products
division designs and manufactures several of the Companys financial service
solutions offerings, including the RemoteTeller System (RTS). The business unit also
develops vaults, safe deposit boxes and safes, drive-up banking equipment and a host of other
banking facilities products. Revenue on sales of the products described above is recognized when
the four revenue recognition requirements of SAB 104 have been met.
Election Systems The Company, through its wholly owned subsidiaries, Premier Election Solutions,
Inc. (PESI) and Amazonia Industria Eletronica S.A. Procomp, offers electronic voting systems.
Election systems revenue consists of election equipment, software, training, support,
installation and maintenance. The election equipment and software components are included in
product revenue. The training, support, installation and maintenance components are included in
service revenue. The election systems contracts contain multiple deliverable elements and custom
terms and conditions. Revenue on election systems contracts is recognized in accordance with
SOP 97-2. The Company recognizes revenue for delivered elements only when the fair values of
undelivered elements are known, uncertainties regarding customer acceptance are resolved and
there are no customer-negotiated refund or return rights affecting the revenue recognized for
delivered elements. The Company determines fair value of deliverables within a multiple element
arrangement based on the price charged when each element is sold separately. Some contracts may
contain discounts and, as such, revenue is recognized using the residual value method of
allocation of revenue to the product and service components of contracts.
Integrated Security Solutions Diebold Integrated Security Solutions provides global sales,
service, installation, project management and monitoring of original equipment manufacturer
(OEM) electronic security products to financial, government, retail and commercial customers.
These solutions provide the Companys customers a single-source solution to their electronic
security needs. Revenue is recognized in accordance with SAB 104. Revenue on sales of the
products described above is recognized upon shipment, installation or customer acceptance of the
product as defined in the customer contract. In contracts that involve multiple-element
arrangements, amounts deferred for services are determined based upon vendor specific objective
evidence of the fair value of the elements as prescribed in EITF 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables.
Software Solutions and Services The Company offers software solutions consisting of multiple
applications that process events and transactions (networking software) along with the related
server. Sales of networking software represent software solutions to
customers that allow them to network various different vendors ATMs onto one network and
revenue is recognized in accordance with SOP 97-2.
Included within service revenue is revenue from software support agreements, which are typically
12 months in duration and pertain to networking software. For sales of software support
agreements, where the agreement is the only element of the sale, revenue is recognized ratably
over the life of the contract period. In contracts that involve multiple-element arrangements,
amounts deferred for support are determined based upon vendor specific objective evidence of the
fair value of the elements as prescribed in SOP 97-2.
Allowance for Bad Debts and Credit Risk The Company evaluates the collectability of accounts
receivable based on a number of criteria. These criteria are (1) a percentage of sales, which is
based on historical loss experience and current trends, which is recorded as a reserve for uncollectible accounts
as sales occur throughout the year and (2) periodic adjustments for known events such as specific
customer circumstances and changes in the aging of accounts receivable balances. Since the
Companys receivable balance is concentrated primarily in the financial and government sectors,
an economic downturn in these sectors could result in higher than expected credit losses.
Inventories The Company primarily values inventories at the lower of cost or market applied on a
first-in, first-out (FIFO) basis, with the notable exceptions of Brazil and election systems that
value inventory using the average cost method, which approximates FIFO. At each reporting period,
the Company identifies and writes down its excess and obsolete inventory to its net realizable
value based on forecasted usage, orders and inventory aging. With the development of new
products, the Company also rationalizes its product offerings and will write down discontinued
product to the lower of cost or net realizable value.
Goodwill The Company tests all existing goodwill at least annually for impairment using the fair
value approach on a reporting unit basis in accordance with Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets (SFAS 142). The Companys reporting
units are defined as Domestic and Canada, Brazil, Latin America, Asia Pacific, EMEA and Election
Systems. The Company uses the discounted cash flow method and the guideline company method for
determining the fair value of its reporting units. As required by SFAS 142, the determination of
implied fair value of the goodwill for a particular reporting unit is the excess of the fair
37
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of September 30, 2007
(Unaudited)
(In thousands, except per share amounts)
value of a reporting unit over the amounts assigned to its assets and liabilities in the same
manner as the allocation in a business combination. Implied fair value goodwill is determined as
the excess of the fair
value of the reporting unit over the fair value of its assets and
liabilities. The Companys fair value model uses inputs such as estimated future segment
performance. The Company uses the most current information available and performs the annual
impairment analysis as of November 30 each year and between annual tests if an event occurs or
circumstances change that would more likely than not reduce the carrying value of a reporting
unit below its carrying amount. However, actual circumstances could differ significantly from
assumptions and estimates made and could result in future goodwill impairment.
Pensions and Postretirement Benefits Annual net periodic expense and benefit liabilities under
the Companys defined benefit plans are determined on an actuarial basis. Assumptions used in the
actuarial calculations have a significant impact on plan obligations and expense. Annually,
management and the investment committee of the Board of Directors review the actual experience
compared with the more significant assumptions used and make adjustments to the assumptions, if
warranted. The healthcare trend rates are reviewed with the actuaries based upon the results of
their review of claims experience. The expected long-term rate of return on plan assets is
determined using the plans current asset allocation and their expected rates of
return based on a geometric averaging over 20 years. The discount rate is determined by analyzing
the average return of high-quality (i.e., AA-rated) fixed-income investments and the
year-over-year comparison of certain widely used benchmark indices as of the measurement date.
The rate of compensation increase assumptions reflects the Companys long-term actual
experience and future and near-term outlook. Pension benefits are funded through deposits with
trustees. The market-related value of plan assets is calculated under an adjusted market value
method. The value is determined by adjusting the fair value of assets to reflect the investment
gains and losses (i.e., the difference between the actual investment return and the expected
investment return on the market-related value of assets) during each of the last five years at
the rate of 20 percent per year. Postretirement benefits are not funded and the Companys policy
is to pay these benefits as they become due.
At the end of 2006, the Company adopted SFAS No. 158, (SFAS No. 158) Employers Accounting for Defined Pension and
Other Postretirement Plans, which changes the accounting requirements for defined benefit pension
and other postretirement plans. SFAS 158 requires that the Company recognize the funded status
of each of its plans in the consolidated balance sheet.
Amortization of unrecognized net gain or loss resulting from experience different from that
assumed and from changes in assumptions (excluding asset gains and losses not yet reflected in
market-related value) is included as a component of net periodic benefit cost for a year if, as
of the beginning of the year, that unrecognized net gain or loss exceeds five percent of the
greater of the projected benefit obligation or the market-related value of plan assets. If
amortization is required, the amortization is that excess divided by the average remaining
service period of participating employees expected to receive benefits under the plan.
RECENT ACCOUNTING PRONOUNCEMENTS
Emerging Issues Task Force Issue No. 06-10 In June 2007, the Financial Accounting Standards Board
(FASB) ratified EITF Issue 06-10 (EITF 06-10), Accounting for Collateral Assignment Split Dollar
Life Insurance, which applies to entities that participate in collateral assignment split-dollar
life insurance arrangement that extend into an employees retirement period (often referred to as
key person life insurance.) The pronouncement requires employers to recognize a liability for
the postretirement obligation associated with a collateral assignment arrangement if, based on an
agreement with an employee, the employer has agreed to maintain a life insurance policy during the
postretirement period or to provide a death benefit. The guidance is effective for fiscal years
beginning after December 15, 2007 including interim periods within those years. The adoption of
EITF 06-10 will not have a material impact on the Companys financial position, results of
operations or liquidity.
Emerging Issues Task Force Issue No. 06-11 In June 2007, the FASB ratified EITF Issue 06-11 (EITF
06-11), Accounting for Income Tax Benefits on Share-Based Payment Awards. EITF 06-11 requires
entities to record the tax benefit associated with dividends or dividend equivalents on certain
share-based payment awards that are charged to retained earnings, as an increase in additional
paid-in capital (APIC). Generally the payment of such dividends can be treated as deductible
compensation for tax purposes. EITF 06-11 is to be applied prospectively for tax benefits on
dividends declared beginning after December 15, 2007. The adoption of EITF 06-11 will not have a
material impact on the Companys financial position, results of operations or liquidity.
Statement of Financial Accounting
Standards No. 159 In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an
amendment of FASB Statement No. 115 (SFAS 115), which permits an entity the option to choose to measure
certain financial assets and financial liabilities at fair value. The fair value option may be
elected on an instrument-by-instrument basis with few exceptions. In addition, SFAS 159 amends
previous accounting guidance to extend the fair value option to available-for-sale and
held-to-maturity securities. SFAS 159 applies to all entities and was effective as of the beginning
of the first fiscal year that begins after November 15, 2007. The Company does not expect the
adoption of SFAS 159 to have a material impact on the Companys financial position, results of
operations or liquidity.
38
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of September 30, 2007
(Unaudited)
(In thousands, except per share amounts)
Statement
of Financial Accounting Standards No. 157 In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157), which was effective for fiscal years beginning after November
15, 2007 and interim periods within those fiscal years. This statement defines fair value,
establishes a fair value hierarchy, and requires separate disclosure of fair value measurements by
level within the fair value hierarchy. The Company does not expect the adoption of SFAS 157 to
have a material impact on the Companys financial position, results of operations or liquidity.
Statement of Financial Accounting Standards No. 158 In September 2006, the FASB
issued SFAS No. 158 (SFAS 158), Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106 and
132(R) (SFAS 158). SFAS 158 requires an entity to recognize the funded status of a defined benefit
postretirement plan in its statement of financial position measured as the difference between the
fair value of plan assets and the benefit obligation. For a pension plan, the benefit obligation
would be the projected benefit obligation; for any other postretirement benefit plan, the benefit
obligation would be the accumulated postretirement benefit obligation. The pronouncement also
requires disclosure of additional information in the Notes to financial statements about certain
effects of net periodic benefit cost in the subsequent fiscal year that arise from delayed
recognition of the actuarial gains and losses and the prior services costs and credits. The Company
adopted these requirements as of December 31, 2006. For fiscal years ending after December 15,
2008, the pronouncement also requires entities to recognize the actuarial gains and losses and the
prior service costs and credits that arise during the period, but which are not recognized as
components of net periodic benefit cost as a component of other comprehensive income. It also
requires entities to measure defined benefit plan assets and obligations as of the date of the
employers statement of financial position. The Company is currently evaluating the impact of the
adoption of these requirements on its financial statements.
FORWARD-LOOKING STATEMENT DISCLOSURE
In this quarterly report on Form 10-Q, statements that are not reported financial results or other
historical information are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements give current expectations or
forecasts of future events and are not guarantees of future performance. The use of the words
will, believes, anticipates, expects, intends and similar expressions is intended to
identify forward-looking statements that have been made and may in the future be made by or on
behalf of the Company.
Although the Company believes that these forward-looking statements are based upon reasonable
assumptions, these forward-looking statements involve risks, uncertainties and other factors that
may cause actual results to differ materially from those expressed in or implied by the
forward-looking statements. The Company is not obligated to update forward-looking statements,
whether as a result of new information, future events or otherwise, except as otherwise required by
law.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. Some of the risks, uncertainties and other factors that could cause
actual results to differ materially from those expressed in or implied by the forward-looking
statements include, but are not limited to:
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results of the SEC and DOJ investigations; |
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competitive pressures, including pricing pressures and technological developments; |
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changes in the Companys relationships with customers, suppliers, distributors and/or partners in its business ventures; |
|
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changes in political, economic or other factors such as currency exchange rates, inflation rates, recessionary or
expansive trends, taxes and regulations and laws affecting the worldwide business in each of the Companys operations,
including Brazil, where a significant portion of the Companys revenue is derived; |
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acceptance of the Companys product and technology introductions in the marketplace; |
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unanticipated litigation, claims or assessments; |
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the timely completion of the Companys new manufacturing operation for financial self-service terminals and related
components in the Eastern European region; |
39
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of September 30, 2007
(Unaudited)
(In thousands, except per share amounts)
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costs and benefits associated with the Companys workforce reductions, including any related restructuring charges; |
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costs and benefits associated with the closure of the Companys Cassis production facility, including the timing of
related restructuring charges and any tax benefits associated with such charges; |
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the completion of the Companys implementation of its ERP system and other IT-related functions; |
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the Companys ability to reduce costs and expenses and improve internal operating efficiencies; including the
optimization of the Companys manufacturing capacity; |
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the Companys ability to successfully implement measures to improve pricing; |
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variations in consumer demand for financial self-service technologies, products and services; |
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challenges raised about reliability and security of the Companys election systems products, including the risk that
such products will not be certified for use or will be decertified; |
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changes in laws regarding the Companys election systems products and services; |
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potential security violations to the Companys information technology systems; |
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the Companys ability to successfully execute its strategy related to the elections systems business; and |
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the Companys ability to achieve benefits from its cost-reduction initiatives and other strategic changes. |
40
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
(In thousands)
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to foreign currency exchange rate risk inherent in its international
operations denominated in currencies other than the U.S. dollar. A hypothetical 10 percent
unfavorable movement in the applicable foreign exchange rates would have resulted in a decrease in
2007 year-to-date operating profit of approximately $3,230. The sensitivity model assumes an
instantaneous, parallel shift in the foreign currency exchange rates. Exchange rates rarely move
in the same direction. The assumption that exchange rates change in an instantaneous or parallel
fashion may overstate the impact of changing exchange rates on amounts denominated in a foreign
currency.
The Companys risk-management strategy uses derivative financial instruments such as forwards to
hedge certain foreign currency exposures. The intent is to offset gains and losses that occur on
the underlying exposures, with gains and losses on the derivative contracts hedging these
exposures. The Company does not enter into derivatives for trading purposes. The Companys primary
exposures to foreign exchange risk are movements in the dollar/euro, dollar/yuan, and dollar/real
rates. For the nine months ended September 30 2007, there were no significant changes in the
Companys foreign exchange risks compared with the prior period.
The Company manages interest rate risk with the use of variable rate borrowings under its committed
and uncommitted credit facilities, fixed rate borrowings under its private placement agreement and
interest rate swaps. Variable rate borrowings totaled $315,753 at September 30, 2007, of which
$50,000 was effectively converted to fixed rate using interest rate swaps. A one percentage point
increase or decrease in interest rates would have resulted in an increase or decrease in interest
expense for the three and nine months ended September 30, 2007 of approximately $647 and $1,719,
respectively, on the variable debt including the impact of the swap agreements. The Companys
primary exposure to interest rate risk is movement in the three-month LIBOR rate.
The Company hedged $200,000 of the
fixed rate borrowings under a private placement agreement, which was treated as a cash flow
hedge. This reduced the effective interest rate by 14 basis points from 5.50 to 5.36 percent.
ITEM 4: CONTROLS AND PROCEDURES
This quarterly report includes the certifications of our CEO and CFO required by Rule 13a-14 of the
Exchange Act. See Exhibits 31.1 and 31.2. This Item 4 includes information concerning the controls
and control evaluations referred to in those certifications.
Background of Restatement
In the first quarter of 2006, the Division of Enforcement of the SEC initiated an informal
inquiry into certain of the Companys accounting and financial reporting matters and requested
the Company provide certain documents and information, specifically related to its practice of
recognizing certain revenue on a bill and hold basis.
In the third quarter of 2006, the Company was informed that the SECs previous informal
inquiry related to revenue recognition had been converted to a formal, non-public
investigation.
On July 25, 2007, the Company announced that it would delay the release of its earnings
results for the quarter ended June 30, 2007, as well as the filing of its quarterly report on
Form 10-Q for that quarter, while the Company sought guidance from the OCA as to the Companys
revenue recognition policy. The guidance sought related to the Companys long-standing
practice of recognizing certain revenue on a bill and hold basis within its North America
business segment.
On October 2, 2007, the Company announced it was discontinuing the use of bill and hold as a
method of revenue recognition in both its North America business segment and its International
businesses.
On December 21, 2007, the Company announced that, in consultation with outside advisors, it was
conducting an internal review into certain accounting and financial reporting matters,
including, but not limited to, the review of various balance sheet accounts such as prepaid
expenses, accrued liabilities, capitalized assets, deferred revenue and reserves within both
the Companys North America and International businesses. The review was conducted primarily
by outside counsel of the Company and was done in consultation with and participation by the
Companys internal audit staff and management, as well as outside advisors including forensic
accountants and independent legal counsel to the Audit Committee.
During the course of the review, certain questions were raised as to certain prior accounting
and financial reporting items in addition to bill and hold revenue recognition, including
whether the prepaid expenses, accrued liabilities, capitalized assets, deferred revenue and
reserves had been recorded accurately and timely. Accordingly, the scope of the review was
expanded beyond the initial revenue recognition issues to include these additional items.
This review has been completed as of the date of the filing of this quarterly report.
On January 15, 2008, the Company announced that it had concluded its discussion with the OCA
and, as a result of those discussions, the Company determined that its previous long-standing
method of accounting for bill and hold transactions was in error, representing a misapplication
of GAAP. In addition, the Company disclosed that revenue previously recognized on a bill
41
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
(In thousands)
and hold basis would be recognized upon customer acceptance of products at a customer location.
Management of the Company determined that this corrected method of recognizing revenue would be
adopted retroactively after an in-depth analysis and review with its outside auditors, KPMG, an
independent registered public accounting firm, the Audit Committee of the Companys Board of
Directors and the OCA. Accordingly, management concluded that previously issued financial
statements for the fiscal years ended December 31, 2006, 2005, 2004, and 2003; the quarterly
data in each of the quarters for the years ended December 31, 2006 and 2005; and the quarter
ended March 31, 2007, must be restated and should no longer be relied upon. As a result, the Company has restated its previously issued
financial statements for those periods. Restated financial information is presented in this
quarterly report.
Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated
under the Exchange Act) are designed to ensure that information required to be disclosed in
the reports filed or submitted under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms and that such
information is accumulated and communicated to management, including the CEO and CFO as
appropriate, to allow timely decisions regarding required disclosures.
In connection with the preparation of this quarterly report, Diebolds management, under the
supervision and with the participation of the CEO and CFO, conducted an evaluation of
disclosure controls and procedures as of the end of the period covered by this report. Based
on that evaluation, including restatement of previously issued financial statements described
above and the identification of certain material weaknesses in internal control over financial
reporting, discussed in detail below, the CEO and CFO concluded that the Companys disclosure
controls and procedures were not effective as of September 30, 2007 and through the date of
this filing. Certain material weaknesses described below have not been remediated. The CEO
and CFO continue to conclude that the Companys disclosure controls and procedures are not
effective as of the filing date of this quarterly report.
Nevertheless, based on a number of factors, including the completion of the Companys internal
review, internal procedures that identified revisions to previously issued financial
statements and the performance of additional procedures by management designed to ensure the
reliability of financial reporting, the Companys management believes that the consolidated
financial statements fairly present, in all material respects, the Companys financial
position, results of operations and cash flows as of the dates, and for the periods,
presented, in conformity with GAAP.
Management identified the following control deficiencies as of June 30, 2007 that continued to
exist as of September 30, 2007 that constituted material weaknesses:
42
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
(In thousands)
Description of Material Weaknesses
Control Environment: The Companys control environment was not effective at
establishing sufficient control consciousness or the appropriate culture to promote the
consistent application of accounting policies and procedures, adherence to GAAP, and the
importance of effective internal control over financial reporting. This material weakness
contributed to the material weaknesses noted below.
Selection, Application and Communication of Accounting Policies: The Companys
policies and procedures for the selection of accounting policies and the communication of
those accounting policies to the Companys personnel for consistent application were
ineffective. This material weakness results from insufficient accounting and finance personnel
with skills, knowledge, and training in GAAP in light of the Companys geographic dispersion
of the Companys operations, decentralization of accounting functions, and disparity in
accounting systems. This material weakness resulted in additional material weaknesses in the
accounting for certain revenue transactions under SAB 104 and inventory valuation that arise
from policies and procedures that do not effectively apply GAAP in the Companys financial
statements. These material weaknesses resulted in material errors in the preparation of the
Companys financial statements.
Monitoring: The Company did not maintain monitoring activities that were effective at
ensuring that breakdowns in the operation of controls at the individual business units are
detected and corrected on a timely basis. This material weakness led to the failure to detect
deficiencies in the compliance with the Companys policies and procedures on a timely basis,
including balance sheet account review controls operated by business unit personnel.
Specifically, certain asset and accrual accounts were recorded and reconciled by numerous
individual business units without a review or reconciliation at a higher level on
a total account basis. This material weakness resulted in material errors in the preparation
of the Companys financial statements.
Manual Journal Entries: The Company did not maintain effective policies and
procedures over non-recurring manual journal entries. Specifically, effective policies and
procedures were not in place to ensure that non-recurring manual journal entries were
accompanied by sufficient supporting documentation, that supporting documentation was properly
retained, and that these journal entries were adequately reviewed and approved. This
material weakness resulted in material errors in the Companys financial statements.
Contractual Agreements: The Company did not have appropriate policies and procedures
to ensure that non-routine contractual agreements or supporting information with financial
reporting implications are received completely or in a timely manner by accounting personnel.
This material weakness resulted in material errors in the presentation and disclosure of
certain acquisitions, divestitures, sales arrangements and legal matters.
43
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
(In thousands)
Account Reconciliations: The Companys policies and procedures did not adequately address
the steps necessary for an adequate reconciliation, the supporting documentation that should be
maintained, the timing of the performance or their review and approval. This resulted in material
weaknesses in the Companys policies and procedures with respect to account reconciliations for
accounts receivable, inventory, other assets, accounts payable, accrued expenses, deferred revenue,
and intercompany accounts.
These deficiencies give rise to a reasonable possibility of a material error occurring in each of
these accounts and not being prevented or detected on a timely basis and resulted in material
errors in the Companys financial statements.
These material weaknesses resulted in material errors and in the restatement of Diebolds
historical financial statements and resulted in errors in the Companys preliminary 2007
financial statements.
Changes in Internal Control Over Financial Reporting
Other than disclosed below there are no changes in our internal control over financial
reporting identified in connection with the evaluation required by Rules 13a-15 and 15d-15
that occurred during the quarter ended September 30, 2007 that have materially affected, or
are reasonably likely to materially affect, our internal control over financial reporting.
During the quarter ended September 30, 2007 management continued the process of implementing
certain of the remediation measures described below including (a) development and execution of
portions of a specific and targeted communication plan involving the executive leadership and
the Board of Directors, (b) certain personnel actions, (c) implementation of the revised
revenue recognition policy, (d) the establishment of more rigorous financial reporting
policies, procedures and processes involving the review and approval of account
reconciliations, journal entries, and corresponding supporting documentation, (e) the design
and implementation of training programs, (f) an increased emphasis by the corporate
accounting, internal audit and finance controls compliance groups on reviewing key accounting
controls and process, including documentation requirements, and (g) engaging expert accounting
consultants to assist management with the implementation and optimization of controls, the
documentation of complex accounting transactions and the reconciliation of deferred revenue
accounts. Management continued to implement these remediation measures during the quarter
ended September 30, 2007.
Diebolds management believes the remediation measures described below will remediate the
identified control deficiencies and strengthen the Companys internal control over financial
reporting. As management continues to evaluate and work to improve its internal control over
financial reporting, it may be determined that additional measures must be taken to address
control deficiencies or it may be determined that the Company needs to modify, or in
appropriate circumstances not to complete, certain of the remediation measures described
below.
Remediation Steps to Address Material Weaknesses
In response to the material weaknesses identified above, management, along with the CEO and
CFO, proposed and began the implementation of several key initiatives and remediation efforts
to address the material weaknesses, as well as other areas of identified risk. These
remediation efforts, outlined below, are intended both to address the identified material
weaknesses and to enhance the Companys overall financial control environment.
Control Environment: Commencing in 2006, major efforts have been made by current
senior executives to communicate and establish an effective culture and tone necessary to
support the Companys control environment. Substantial progress has been made in addressing
the remediation of this weakness at all levels within the Company, but ongoing efforts were
still in process as of date of the filing of this quarterly report. In order to reinforce an
environment of strong consciousness and the appropriate culture within the Company to ensure
the consistent application of accounting policies, adherence with GAAP, and the importance of
internal control over financial reporting, management has developed and executed portions of a
specific and targeted communication plan involving the executive leadership and the Board of
Directors. These communications are focused on setting the tone
44
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
(In thousands)
and highlighting the requirements and expectations for all employees related to financial reporting controls
compliance, personnel responsibilities, processes and avenues for reporting suspected
violations of the Code of Conduct, and mechanisms to answer questions and address potential
concerns. In addition, the Companys executives will be required to attend educational
courses that will focus on executive fiduciary responsibilities and duties relating to
financial reporting and controls.
Selection, Application and Communication of Accounting Policies: Management has made
some personnel changes in the accounting and financial reporting functions. Actions have been
taken, related to appropriate remedial actions with respect to certain employees, including
terminations, reassignments, reprimands, increased supervision, and the imposition of
financial penalties in the form of compensation adjustments. In addition, management will
continue to enhance its accounting and finance organization personnel to better align
individuals with job responsibilities commensurate with skills sets, experience, and
capabilities. The Company is also evaluating the structure of the finance department, to
further align and segregate, where necessary, the responsibilities within the accounting,
financial reporting, planning and forecasting responsibilities. In addition, the Company is
continuing to recruit additional qualified senior accounting personnel for the accounting and
finance departments, including certified public accountants with public accounting firm
experience, and designing and implementing retention programs to ensure that personnel with
this background and experience can be retained. Management also is implementing training
programs that are designed to ensure that the Companys personnel have knowledge, experience
and training in the application of GAAP commensurate with the Companys financial reporting
requirements.
In 2007, management began expansion of its existing accounting policies and procedures manual,
and issued several new policies. To date, these policies and procedures address account
reconciliations, manual journal entries, fixed assets, non-routine contractual agreements, and
access to financial information systems. Management will expand, strengthen and distribute a
financial and
accounting policies and procedures manual that will specifically address revenue recognition,
recording of expenses, recording and valuation of assets, accruals and reserves and other
accounting matters. In addition, in 2007, management increased the focus and expanded testing
by internal audit and the financial controls compliance group on the review and monitoring of
key accounting processes, including journal entries, account reconciliations and their
corresponding supporting documentation and the review of complex accounting areas, including
revenue recognition. Management will continue this increased focus and expanded testing of
controls compliance related to these key accounting processes in 2008.
Starting in August 2007, management conducted training courses for numerous accounting and
finance personnel regarding accounting policies, account reconciliations and revenue
recognition. Management will continue to identify, develop and deliver targeted training, as
necessary, to global accounting and finance personnel on current financial accounting issues
and policies, internal controls and GAAP compliance, including specific revenue recognition training. This training will
cover proper capitalization of assets, including inventory and accrual of costs. Finally, the
training will also include the fundamentals of accounting and financial reporting matters,
including accounting policies, financial reporting requirements, account reconciliations,
documentation requirements, and other specific areas of financial reporting.
In January 2008, management formed a multi-discipline project team that has implemented
procedures and proper financial controls related to compliance with the revised revenue
recognition policy to ensure revenue is properly recognized.
Monitoring: Management continues to enhance its accounting and finance processes and
structure to facilitate completion of detailed analytical reviews of the consolidated balance
sheet at a financial statement line item level. This process will include an additional
review separate from the account owner or business unit personnel at a level of precision that
is designed to detect a breakdown in controls which could lead to errors that could be
material. The process includes a review to identify inconsistencies in application of GAAP,
reporting misclassifications of balances, and/or validates that variances in balance sheet
accounts are consistent with fluctuations in related income statement accounts.
Manual Journal Entries: In October 2007, management established a global journal
entry accounting policy governing requirements for support, review and approval of
non-recurring manual journal entries. This policy was established to ensure accuracy and
completeness of non-recurring manual journal entries on a global basis, and implemented
authorization levels for the approval of non-recurring manual journal entries that includes
the review of certain material non-recurring manual journal entries by the Vice President
Corporate Controller and/or CFO. Compliance with this policy will be tested on a regular basis
by the financial controls compliance group. In addition, management is reviewing the
utilization of the systematic application control of journal entry approvals within its ERP
system.
Contractual Agreements: Management continues to evaluate and enhance controls to
develop a more formalized process for monitoring, updating, and disseminating non-routine
contractual agreements to facilitate a complete and timely review by accounting personnel.
Additional controls include the implementation of a global contractual agreement database
related to existence, completeness, approval, and retention of global contractual agreements
amongst the various departments.
45
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
(In thousands)
Account Reconciliations: In 2006, 2007 and 2008, management engaged expert accounting
consultants to assist management with the implementation and optimization of financial
controls in various areas including the administration of existing controls and procedures,
the documentation of complex accounting transactions and the reconciliation of deferred
revenue accounts. In August 2007, management established a global account reconciliation
policy governing account reconciliation content, format, review and approval procedures.
Compliance with this policy will be tested on a regular basis by the financial controls
compliance group. In December 2007, management began implementing a global account
reconciliation compliance monitoring tool related to existence, completeness, accuracy and
retention of account reconciliations. To date, approximately 80% of the total balance sheet
account reconciliations prepared in the United States are monitored utilizing this tool.
Global deployment of this tool is contemplated by the end of 2009. In the meantime,
management utilizes manual monitoring processes to ensure that reconciliations are completed,
reviewed and approved in a timely fashion.
The material weaknesses identified by management and discussed above are not fully remediated
as of the date of the filing of this quarterly report. Substantive procedures have been
performed by the Company in consultation with external accounting advisors to ensure the
underlying transactions within this quarterly report are supported and the financial
statements are fairly stated as of the date of the filing of this quarterly report. The Audit
Committee has directed management to develop a detailed plan and timetable for the
implementation of the above-referenced remedial measures, to the extent not already complete,
and will monitor their implementation. In addition, under the direction of the Audit
Committee, management will continue to review and make necessary changes to the overall design
of the internal control environment, as well as policies and procedures to improve the overall
effectiveness of internal control over financial reporting.
46
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
PART II OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company is a party to several lawsuits that were incurred in the normal course of business,
none of which individually or in the aggregate is considered material by management in relation to
the Companys financial position or results of operations. In managements opinion, the Companys
consolidated financial statements would not be materially affected by the outcome of any present
legal proceedings, commitments, or asserted claims.
In addition to the routine legal proceedings noted above, the Company has been served with various
lawsuits, filed against it and certain current and former officers and directors, by shareholders
and participants in the Companys 401(k) savings plan, alleging violations of the federal
securities laws and breaches of fiduciary duties with respect to the 401(k) plan. These complaints
seek compensatory damages in an unspecific amount, fees and expenses related to such lawsuits and
the granting of extraordinary equitable and/or injunctive relief. For each of these lawsuits, the
date each complaint was filed, the name of the plaintiffs and the federal court in which such
lawsuit is pending are as follows:
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Konkol v. Diebold Inc., et al., No. 5:05CV2873 (N.D. Ohio, filed December 13,
2005). |
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Ziolkowski v. Diebold Inc., et al., No. 5:05CV2912 (N.D. Ohio, filed December
16, 2005). |
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New Jersey Carpenters Pension Fund v. Diebold, Inc., No. 5:06CV40 (N.D. Ohio,
filed January 6, 2006). |
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Rein v. Diebold, Inc., et al., No. 5:06CV296 (N.D. Ohio, filed February 9,
2006). |
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Graham v. Diebold, Inc., et al., No.5:05CV2997 (N.D. Ohio, filed December 30,
2005). |
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McDermott v. Diebold, Inc., et al., No. 5:06CV170 (N.D. Ohio, filed January 24,
2006). |
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Barnett v. Diebold, Inc., et al., No. 5:06CV361 (N.D. Ohio, filed February 15,
2006). |
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Farrell v. Diebold, Inc., et al., No. 5:06CV307 (N.D. Ohio, filed February 8,
2006). |
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Forbes v. Diebold, Inc., et al., No. 5:06CV324 (N.D. Ohio, filed February 10,
2006). |
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Gromek v. Diebold, Inc., et al., No. 5:06CV579 (N.D. Ohio, filed March 14,
2006). |
The Konkol, Ziolkowski, New Jersey Carpenters Pension Fund, Rein and Graham cases, which allege
violations of the federal securities laws, have been consolidated into a single proceeding. The
McDermott, Barnett, Farrell, Forbes and Gromek cases, which allege breaches of fiduciary duties
under the Employee Retirement Income Security Act of 1974 with respect to the 401(k) plan, likewise
have been consolidated into a single proceeding. The Company and the individual defendants deny
the allegations made against them, regard them as without merit, and intend to defend themselves
vigorously. On August 22, 2008, the court dismissed the consolidated amended complaint in the
consolidated securities litigation and entered a judgment in favor of the defendants. On September
16, 2008, the plaintiffs in the consolidated securities litigation filed a notice of appeal with
the U.S. Court of Appeals for the Sixth Circuit.
The Company filed a lawsuit on May 30, 2008 (Premier Election Solutions, Inc., et al. v. Board of
Elections of Cuyahoga County, et al., Case No. 08-CV-05-7841, (Franklin Cty. Ct Common Pleas))
against the Board of Elections of Cuyahoga County, Ohio, the Board of County Commissioners of
Cuyahoga County, Ohio, Cuyahoga County, Ohio (collectively, the County), and Ohio Secretary of
State Jennifer Brunner (Secretary) regarding several Ohio contracts under which the Company
provided electronic voting systems and related services to the State of Ohio and a number of its
counties. The lawsuit was precipitated by the Countys threats to sue the Company for unspecified
damages. The complaint seeks a declaration that the Company met its contractual obligations. In
response, on July 15, 2008, the County filed an answer and counterclaim alleging that the voting
system was defective and seeking declaratory relief and unspecified damages under several theories
of recovery. The Secretary has also filed an answer and counterclaim seeking declaratory relief
and unspecified damages under a number of theories of recovery.
Management is unable to determine the financial statement impact, if any, of the federal securities
class action, the 401(k) class action and the electronic voting systems action.
Additionally, certain current and former officers and directors had been named as defendants in two
shareholder derivative actions filed in federal court, purportedly on behalf of the Company
(Recht v. ODell et al., No. 5:06CV233 (N.D. Ohio, filed January 31, 2006) and
Wietschner v. Diebold, Inc., et al., No. 5:06CV418 (N.D. Ohio, filed February 23, 2006)).
The complaints asserted claims of breach of fiduciary duties against the defendants on behalf of
the Company in connection with alleged violations of the federal securities laws. The derivative
cases were consolidated into a single proceeding. On February 29, 2008, the court dismissed the
consolidated amended derivative complaint.
The Company and certain directors had been named as defendants by an individual purporting to seek
relief on behalf of a putative class of shareholders (Albert Stein v. Diebold Incorporated, et
al., Case No. 2008 CV 01144 (Stark Cty. Ct. Common Pleas, filed March 4, 2008)). The complaint
was voluntarily dismissed by the plaintiff on June 25, 2008. The complaint alleged breaches of
fiduciary duties with respect to the Companys rejection of an unsolicited offer by United
Technologies Corporation to purchase all of the Companys
47
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
outstanding shares. The complaint sought an injunction requiring certain actions and other
equitable relief and attorneys fees and expenses. The Company and the individual defendants had
moved to dismiss the complaint, which motion was pending as of the dismissal.
The Company was informed during the first quarter of 2006 that the staff of the SEC had begun an
informal inquiry relating to the Companys revenue recognition policy. In the second quarter of
2006, the Company was informed that the SECs inquiry had been converted to a formal, non-public
investigation. In the fourth quarter of 2007, the Company also learned that the DOJ had begun a
parallel investigation. The Company is continuing to cooperate with the government in connection
with these investigations. The Company cannot predict the length, scope or results of the
investigations, or the impact, if any, on its results of operations.
48
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
PART II OTHER INFORMATION
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Information concerning the Companys share repurchases made during the third quarter of 2007:
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Total Number of |
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|
|
|
|
|
|
|
|
|
|
Shares Purchased |
|
Maximum Number |
|
|
Total Number |
|
Average Price |
|
as Part of Publicly |
|
of Shares that May |
|
|
of Shares |
|
Paid Per |
|
Announced Plans |
|
Yet Be Purchased |
|
|
Purchased (1) |
|
Share |
|
(2) |
|
Under the Plans (2) |
July |
|
|
7,922 |
|
|
$ |
52.30 |
|
|
|
|
|
|
|
2,926,500 |
|
August |
|
|
13,077 |
|
|
|
53.05 |
|
|
|
|
|
|
|
2,926,500 |
|
September |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,926,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
20,999 |
|
|
$ |
52.75 |
|
|
|
|
|
|
|
2,926,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes 7,922 and 13,077 common shares in October and November, respectively, surrendered
or deemed surrendered to the Company in order to satisfy withholding obligations in connection
with the distribution of common shares under employee share-based compensation plans. |
|
(2) |
|
The total number of shares repurchased as part of the publicly announced the share repurchase
plan was 9,073,500 as of September 30, 2007. The plan was approved by the Board of Directors
in April 1997 and authorized the repurchase of up to two million shares. The plan was amended
in June 2004 to authorize the repurchase of an additional two million shares, and was further
amended in August and December 2005 to authorize the repurchase of an additional six million
shares. On February 14, 2007, the Board of Directors approved an increase in the Companys
share repurchase program by authorizing the repurchase of up to an additional two million of
the Companys outstanding common shares. The plan has no expiration date. |
49
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
ITEM 6: EXHIBITS
|
|
|
|
|
3.1
|
|
(i)
|
|
Amended and Restated Articles of Incorporation of Diebold, Incorporated incorporated by reference to Exhibit
3.1 (i) to Registrants Annual Report on Form 10-K for
the year ended December 31, 1994. (Commission File No.
1-4879) |
|
|
|
|
|
3.1
|
|
(ii)
|
|
Amended and Restated Code of
Regulations of Diebold, Incorporated incorporated by reference to Exhibit 3.1(ii)
to Registrants Form 10-Q for the quarter ended
March 31, 2007. (Commission File No. 1-4879) |
|
|
|
|
|
3.2
|
|
|
|
Certificate of Amendment by Shareholders to Amended Articles of Incorporation of Diebold, Incorporated
incorporated by reference to Exhibit 3.2 to Registrants
Form 10-Q for the quarter ended March 31, 1996. (Commission File No. 1-4879) |
|
|
|
|
|
3.3
|
|
|
|
Certificate of Amendment to Amended Articles of Incorporation of Diebold, Incorporated incorporated by
reference to Exhibit 3.3 to Registrants Annual Report on Form 10-K for
the year ended December 31, 1998. (Commission File No.
1-4879) |
|
|
|
|
|
4.1
|
|
|
|
Rights Agreement dated as of February 11, 1999 between Diebold, Incorporated and The Bank of New York
incorporated by reference to Exhibit 4.1 to Registrants Registration Statement on Form 8-A, filed February 2,
1999. (Commission File No. 1-4879) |
|
|
|
|
|
*10.1
|
|
|
|
Form of Employment Agreement as amended and restated as of September 13, 1990 incorporated by reference to
Exhibit 10.1 to Registrants Annual Report on
Form 10-K for the year ended December 31, 1990. (Commission File No.
1-4879) |
|
|
|
|
|
*10.2
|
|
|
|
Schedule of Certain Officers who are Parties to Employment Agreements incorporated by reference to Exhibit 10.2
to Registrants Annual Report on Form 10-K for the year ended
December 31, 2005. (Commission File No. 1-4879) |
|
|
|
|
|
*10.5
|
|
(i)
|
|
Supplemental Employee Retirement Plan I as amended and restated July 1, 2002 incorporated by reference to
Exhibit 10.5(i) to Registrants Form 10-Q for the
quarter ended September 30, 2002. (Commission File No. 1-4879) |
|
|
|
|
|
*10.5
|
|
(ii)
|
|
Supplemental Employee Retirement Plan II as amended and restated July 1, 2002 incorporated by reference to
Exhibit 10.5(ii) to Registrants Form 10-Q for the
quarter ended September 30, 2002. (Commission File No. 1-4879) |
|
|
|
|
|
*10.7
|
|
(i)
|
|
1985 Deferred Compensation Plan for Directors of Diebold, Incorporated incorporated by reference to Exhibit
10.7 to Registrants Annual Report on Form 10K for the
year ended December 31, 1982. (Commission File No. 1-4879) |
|
|
|
|
|
*10.7
|
|
(ii)
|
|
Amendment No. 1 to the Amended and Restated 1985 Deferred Compensation Plan for Directors of
Diebold, Incorporated incorporated by reference to Exhibit 10.7 (ii) to Registrants Form 10-Q
for the quarter ended March 31, 1998. (Commission File No. 1-4879) |
|
|
|
|
|
*10.7
|
|
(iii)
|
|
Amendment No. 2 to the Amended and Restated 1985 Deferred Compensation Plan for Directors of
Diebold, Incorporated incorporated by reference to Exhibit 10.7 (ii) to Registrants Form 10-Q
for the quarter ended March 31, 2003. (Commission File No. 1-4879) |
|
|
|
|
|
*10.7
|
|
(iv)
|
|
2005 Deferred Compensation Plan for Directors of Diebold, Incorporated, effective as of January 1,
2005 incorporated by reference to Exhibit 10.7(iv) to
Registrants Annual Report on Form 10-K for the year ended
December 31, 2005. (Commission File No. 1-4879) |
|
|
|
|
|
*10.8
|
|
(i)
|
|
1991 Equity and Performance Incentive Plan as Amended and Restated as of February 7, 2001
incorporated by reference to Exhibit 4(a) to Form S-8 Registration Statement No. 333-60578. |
|
|
|
|
|
50
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
|
|
|
|
|
*10.8
|
|
(ii)
|
|
Amendment No. 1 to the 1991 Equity and Performance Incentive Plan as Amended and Restated as of
February 7, 2001 incorporated by reference to Exhibit 10.8 (ii) to Registrants Form 10-Q for
the quarter ended March 31, 2004. (Commission File No. 1-4879) |
|
|
|
|
|
*10.8
|
|
(iii)
|
|
Amendment No. 2 to the 1991 Equity and Performance Incentive Plan as Amended and Restated as of
February 7, 2001 incorporated by reference to Exhibit 10.8 (iii) to Registrants Form 10-Q for
the quarter ended March 31, 2004. (Commission File No. 1-4879) |
|
|
|
|
|
*10.8
|
|
(iv)
|
|
Amendment No. 3 to the 1991 Equity and Performance Incentive Plan as Amended and Restated as of
February 7, 2001 incorporated by reference to Exhibit 10.8 (iv) to Registrants Form 10-Q for
the quarter ended June 30, 2004. (Commission File No. 1-4879) |
|
|
|
|
|
*10.9
|
|
|
|
Long-Term Executive Incentive Plan incorporated by reference to Exhibit 10.9 to Registrants
Annual Report on Form 10-K for the year ended December 31,
1993. (Commission File No. 1-4879) |
|
|
|
|
|
*10.10
|
|
(i)
|
|
Amended and Restated 1992 Deferred Incentive Compensation Plan incorporated by reference to
Exhibit 10.10 (i) to Registrants Form 10-Q for
the quarter ended September 30, 2002. (Commission
File No. 1-4879) |
|
|
|
|
|
*10.10
|
|
(ii)
|
|
2005 Deferred Incentive Compensation Plan, effective as of January 1, 2005 incorporated by
reference to Exhibit 10.10(ii) to Registrants Annual Report on Form 10-K
for the year ended December 31, 2005.
(Commission File No. 1-4879) |
|
|
|
|
|
*10.11
|
|
|
|
Annual Incentive Plan incorporated by reference to Exhibit 10.11 to Registrants Annual Report
on Form 10-K for the year ended December 31, 2000. (Commission File No. 1-4879) |
|
|
|
|
|
*10.13
|
|
(i)
|
|
Forms of Deferred Compensation Agreement and Amendment No. 1 to Deferred Compensation Agreement
incorporated by reference to Exhibit 10.13 to Registrants Annual Report on Form 10-K for the year
ended December 31, 1996. (Commission File No. 1-4879) |
|
|
|
|
|
*10.13
|
|
(ii)
|
|
Section 162(m) Deferred Compensation Agreement (as amended and restated January 29, 1998)
incorporated by reference to Exhibit 10.13 (ii) to Registrants Form 10-Q for the quarter ended
March 31, 1998. (Commission File No. 1-4879) |
|
|
|
|
|
*10.14
|
|
|
|
Deferral of Stock Option Gains Plan incorporated by reference to Exhibit 10.14 to the
Registrants Annual Report on Form 10-K for the year ended
December 31, 1998. (Commission File No.
1-4879) |
|
|
|
|
|
10.17
|
|
(i)
|
|
Amended and Restated Loan Agreement dated as of April 30, 2003 among Diebold, Incorporated, the
Subsidiary Borrowers, the Lenders and Bank One, N.A. incorporated by reference to Exhibit 10.17
to Registrants Form 10-Q for the quarter ended
June 30, 2003. (Commission File No. 1-4879) |
|
|
|
|
|
10.17
|
|
(ii)
|
|
First Amendment to Loan Agreement, dated as of April 28, 2004 among Diebold, Incorporated, the
Subsidiary Borrowers, the Lenders and Bank One, N.A. incorporated by reference to Exhibit 10.17
(ii) to Registrants Form 10-Q for the quarter ended
June 30, 2004. (Commission File No. 1-4879) |
|
|
|
|
|
10.17
|
|
(iii)
|
|
Second Amendment to Loan Agreement, dated as of April 27, 2005 among Diebold, Incorporated, the
Subsidiary Borrowers, the Lenders and JPMorgan Chase Bank N.A. (successor by merger to Bank One,
N.A.) incorporated by reference to Exhibit 10.1 to
Registrants Form 8-K filed on May 3, 2005.
(Commission File No. 1-4879) |
|
|
|
|
|
51
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
|
|
|
|
|
10.17
|
|
(iv)
|
|
Third Amendment to Loan Agreement, dated as of November 16, 2005 among Diebold, Incorporated, the
Subsidiary Borrowers, the Lenders and JPMorgan Chase Bank N.A. (successor by merger to Bank One,
N.A.) incorporated by reference to Exhibit 10.1 to Registrants Form 8-K filed on November 22,
2005. (Commission File No. 1-4879) |
|
|
|
|
|
10.17
|
|
(v)
|
|
Fourth Amendment to Loan Agreement, dated November 27, 2006 among Diebold, Incorporated, the
Subsidiary Borrowers, the Lenders and JPMorgan Chase Bank N.A.
(successor by merger to Bank One, N.A.) incorporated by reference to
Exhibit 10.17(v) to Registrants Annual Report on Form 10-K for the year ended December 31, 2006. (Commission File No. 1-4879) |
|
|
|
|
|
*10.18
|
|
(i)
|
|
Retirement and Consulting Agreement with Robert W. Mahoney incorporated by reference to Exhibit 10.18
to Registrants Annual Report on Form 10-K for the year
ended December 31, 2000. (Commission File No. 1-4879) |
|
|
|
|
|
*10.18
|
|
(ii)
|
|
Extension of Retirement and Consulting Agreement with Robert W. Mahoney incorporated by
reference to Exhibit 10.18 (ii) to Registrants Form 10-Q for the quarter
ended September 30, 2002. (Commission File No. 1-4879). |
|
|
|
|
|
*10.18
|
|
(iii)
|
|
Extension of Retirement and Consulting Agreement with Robert W. Mahoney incorporated by
reference to Exhibit 10.18 (iii) to Registrants Form 10-Q for the quarter
ended June 30, 2003. (Commission File No. 1-4879). |
|
|
|
|
|
*10.18
|
|
(iv)
|
|
Extension of Retirement and Consulting Agreement with Robert W. Mahoney incorporated by
reference to Exhibit 10.18 (iv) to Registrants Form 10-Q for the quarter
ended March 31, 2004. (Commission File No. 1-4879). |
|
|
|
|
|
*10.18
|
|
(v)
|
|
Extension of Retirement and
Consulting Agreement with Robert W. Mahoney incorporated by
reference to Exhibit 10.18(v) to Registrants Form 10-Q for the
quarter ended March 31, 2005. (Commission File No. 1-4879) |
|
|
|
|
|
*10.18
|
|
(vi)
|
|
Extension of Retirement and Consulting Agreement with Robert W. Mahoney dated March 7, 2006
incorporated by reference to Exhibit 10.18 (vi) to Registrants Annual Report on Form 10-K for the
year ended December 31, 2005. (Commission File No. 1-4879). |
|
|
|
|
|
10.20
|
|
(i)
|
|
Transfer and Administration Agreement, dated as of March 31, 2001 by and among DCC Funding LLC,
Diebold Credit Corporation , Diebold, Incorporated, Receivables Capital Corporation and Bank of
America, National Association and the financial institutions from time to time parties thereto.
incorporated by reference to Exhibit 10.20 (i) to Registrants Form 10-Q for
the quarter ended March 31, 2001 (Commission File No. 1-4879) |
|
|
|
|
|
10.20
|
|
(ii)
|
|
Amendment No. 1 to the Transfer and Administration Agreement by and among DCC Funding LLC, Diebold
Credit Corporation, Diebold, Incorporated, Receivables Capital Corporation and Bank of America,
National Association incorporated by reference to
Exhibit 10.20 (ii) to Registrants Form 10-Q for the quarter ended March 31, 2001. (Commission File No. 1-4879). |
|
|
|
|
|
*10.21
|
|
|
|
Separation Agreement with Eric C.
Evans incorporated by reference to Exhibit 10.1 to
Registrants Form 8-K filed on October 18, 2005. (Commission File No. 1-4879) |
|
|
|
|
|
*10.22
|
|
|
|
Form of non-Qualified Stock Option
Agreement incorporated by reference to Exhibit 10.22 to
Registrants Form 10-Q for the quarter ended March 31, 2007.
(Commission File No. 1-4879) |
|
|
|
|
|
*10.23
|
|
|
|
Form of Restricted Share Agreement
incorporated by reference to Exhibit 10.2 to
Registrants Form 8-K filed on February 16, 2005. (Commission File No. 1-4879). |
|
|
|
|
|
*10.24
|
|
|
|
Form of RSU Agreement incorporated by reference to Exhibit 10.24 to
Registrants Form 10-Q for the quarter ended March 31, 2007. (Commission File No. 1-4879). |
|
|
|
|
|
*10.25
|
|
|
|
Form of Performance Share Agreement incorporated by reference to
Exhibit 10.25 to Registrants Form 10-Q for the quarter ended March 31, 2007. (Commission File No. 1-4879). |
52
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
|
|
|
|
|
|
|
|
|
|
*10.26
|
|
|
|
Diebold, Incorporated Annual Cash
Bonus Plan incorporated by reference to Exhibit A to
Registrants Proxy Statement on Schedule 14A filed on March 16, 2005. (Commission File No.
1-4879). |
|
|
|
|
|
10.27
|
|
|
|
Form of Note Purchase Agreement
incorporated by reference to Exhibit 10.1 to Registrants
Form 8-K filed on March 8, 2006. (Commission File No. 1-4879). |
|
|
|
|
|
*10.28
|
|
|
|
Employment Agreement between Diebold, Incorporated and Thomas W. Swidarski incorporated by
reference to Exhibit 10.1 to Registrants Form 8-K filed on May 1, 2006.
(Commission File No. 1-4879). |
|
|
|
|
|
*10.29
|
|
|
|
Employment [Change in Control] Agreement between Diebold, Incorporated and Thomas W. Swidarski
incorporated by reference to Exhibit 10.2 to Registrants Form 8-K filed on May
1, 2006. (Commission File No. 1-4879) |
|
|
|
|
|
*10.30
|
|
|
|
Compromise Agreement between Diebold International Limited, Diebold, Incorporated and Daniel J.
OBrien incorporated by reference to Exhibit 10.3 to
Registrants Form 8-K filed on May 1, 2006. (Commission
File No. 1-4879) |
|
|
|
|
|
*10.31
|
|
|
|
Separation Agreement between Diebold, Incorporated and Michael J. Hillock, effective June 12, 2006
incorporated by reference to Exhibit 10.1 to Registrants Form 8-K filed on
June 16, 2006. (Commission File No. 1-4879). |
|
|
|
|
|
10.32
|
|
|
|
Letter Agreement (including Term
Note) dated as of November 27, 2006, between Diebold, Incorporated
and PNC Bank, N.A, incorporated by reference to Exhibit 10.31
to Registrants Annual Report on Form 10-K for the year ended
December 31, 2006. (Commission File No. 1-4879) |
|
|
|
|
|
31.1
|
|
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
31.2
|
|
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
32.1
|
|
|
|
Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C Section 1350. |
|
|
|
|
|
32.2
|
|
|
|
Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C Section 1350. |
|
|
|
* |
|
Reflects management contract or other compensatory arrangement. |
53
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
|
|
|
DIEBOLD, INCORPORATED
(Registrant)
|
|
|
|
|
|
|
|
|
|
|
Date : September 30, 2008 |
By: |
/s/ Thomas W. Swidarski
|
|
|
|
Thomas W. Swidarski |
|
|
|
President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
Date : September 30, 2008 |
By: |
/s/ Kevin J. Krakora
|
|
|
|
Kevin J. Krakora |
|
|
|
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer) |
|
|
54
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2007
EXHIBIT INDEX
|
|
|
EXHIBIT NO. |
|
DOCUMENT DESCRIPTION |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350. |
|
|
|
32.2
|
|
Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350. |
55