DBD 9.30.2014 10Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
__________________________________________________
Form 10-Q
__________________________________________________ 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 1-4879 
_________________________________________________
Diebold, Incorporated
(Exact name of registrant as specified in its charter)
_________________________________________________ 
Ohio
 
34-0183970
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification Number)
 
 
 
5995 Mayfair Road, PO Box 3077, North Canton, Ohio
 
44720-8077
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (330) 490-4000
__________________________________________________ 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x     No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
(Do not check if a smaller reporting company)
o
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
Number of shares of common stock outstanding as of October 24, 2014 was 64,628,979.



DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q

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



PART I – FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS
DIEBOLD, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
 
 
September 30,
2014

December 31,
2013
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents

$
240,433


$
230,709

Short-term investments

133,800


242,988

Trade receivables, less allowances for doubtful accounts of $28,916 and $24,872, respectively
 
597,954

 
447,239

Inventories
 
519,799

 
376,462

Deferred income taxes
 
89,965

 
110,165

Prepaid expenses
 
22,271

 
22,031

Prepaid income taxes
 
13,791

 
21,245

Other current assets
 
169,713

 
104,511

Total current assets
 
1,787,726

 
1,555,350

Securities and other investments
 
81,269

 
82,591

Property, plant and equipment, at cost
 
605,659

 
599,094

Less accumulated depreciation and amortization
 
444,100

 
438,199

Property, plant and equipment, net
 
161,559

 
160,895

Goodwill
 
176,566

 
179,828

Deferred income taxes
 
64,480

 
39,461

Finance lease receivables
 
99,755

 
74,516

Other assets
 
87,067

 
90,850

Total assets
 
$
2,458,422

 
$
2,183,491

LIABILITIES AND EQUITY
 
 
 
 
Current liabilities
 
 
 
 
Notes payable
 
$
83,612

 
$
43,791

Accounts payable
 
295,063

 
210,399

Deferred revenue
 
259,794

 
234,607

Payroll and other benefits liabilities
 
99,050

 
93,845

Other current liabilities
 
339,868

 
311,094

Total current liabilities
 
1,077,387

 
893,736

Long-term debt
 
555,020

 
480,242

Pensions and other benefits
 
109,840

 
118,674

Post-retirement and other benefits
 
19,619

 
19,282

Deferred income taxes
 
8,858

 
9,150

Other long-term liabilities
 
46,396

 
41,592

Commitments and contingencies
 
—

 
—

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

 
—

Common shares, $1.25 par value, 125,000,000 authorized shares, 79,228,957 and 78,618,517 issued shares, 64,624,720 and 64,068,047 outstanding shares, respectively
 
99,036

 
98,273

Additional capital
 
415,144

 
385,321

Retained earnings
 
751,011

 
722,743

Treasury shares, at cost (14,604,237 and 14,550,470 shares, respectively)
 
(557,095
)
 
(555,252
)
Accumulated other comprehensive loss
 
(86,835
)
 
(54,321
)
Total Diebold, Incorporated shareholders' equity
 
621,261

 
596,764

Noncontrolling interests
 
20,041

 
24,051

Total equity
 
641,302

 
620,815

Total liabilities and equity
 
$
2,458,422

 
$
2,183,491

See accompanying notes to condensed consolidated financial statements.

3


DIEBOLD, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
 

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2014
 
2013
 
2014
 
2013
Net sales
 
 
 
 
 
 
 
 
Services
 
$
416,533

 
$
405,238

 
$
1,209,731

 
$
1,200,672

Products
 
351,498

 
300,186

 
980,050

 
845,376

 
 
768,031

 
705,424

 
2,189,781


2,046,048

Cost of sales
 
 
 
 
 
 
 
 
Services
 
290,366

 
290,121

 
849,196

 
904,167

Products
 
277,082

 
242,498

 
789,074

 
681,646

 
 
567,448

 
532,619

 
1,638,270

 
1,585,813

Gross profit
 
200,583

 
172,805

 
551,511

 
460,235

Selling and administrative expense
 
129,938


111,683

 
371,236

 
394,401

Research, development and engineering expense
 
24,466


21,957

 
66,173

 
66,404

Impairment of assets
 
—


70,000

 
—

 
70,642

Gain on sale of assets, net
 
(540
)
 
(582
)
 
(13,098
)
 
(3,421
)
 
 
153,864

 
203,058

 
424,311

 
528,026

Operating profit (loss)
 
46,719

 
(30,253
)
 
127,200


(67,791
)
Other income (expense)
 
 
 
 
 
 
 
 
Investment income
 
7,968

 
6,695

 
26,614

 
21,060

Interest expense
 
(8,384
)
 
(7,918
)
 
(23,142
)
 
(22,027
)
Foreign exchange gain (loss), net
 
988

 
2,977

 
(10,373
)
 
(1,453
)
Miscellaneous, net
 
571

 
355

 
444

 
(434
)
Income (loss) before taxes
 
47,862

 
(28,144
)
 
120,743

 
(70,645
)
Income tax expense
 
12,907

 
(7,940
)
 
37,781

 
67,293

Net income (loss)
 
34,955

 
(20,204
)
 
82,962

 
(137,938
)
Net income (loss) attributable to noncontrolling interests
 
1,935

 
1,486

 
(1,499
)
 
2,233

Net income (loss) attributable to Diebold, Incorporated
 
$
33,020

 
$
(21,690
)
 
$
84,461

 
$
(140,171
)
 
 
 
 
 
 
 
 
 
Basic weighted-average shares outstanding
 
64,615

 
63,825

 
64,494

 
63,648

Diluted weighted-average shares outstanding
 
65,293

 
63,825

 
65,102

 
63,648

 
 
 
 
 
 
 
 
 
Net income (loss) attributable to Diebold, Incorporated
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
 
$
0.51

 
$
(0.34
)
 
$
1.31

 
$
(2.20
)
Diluted earnings (loss) per share
 
$
0.51

 
$
(0.34
)
 
$
1.30

 
$
(2.20
)
See accompanying notes to condensed consolidated financial statements.


4


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

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2014
 
2013
 
2014
 
2013
Net income (loss)
 
$
34,955

 
$
(20,204
)
 
$
82,962

 
$
(137,938
)
Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
 
Translation adjustment
 
(52,560
)
 
(6,269
)
 
(31,754
)
 
(52,771
)
Foreign currency hedges (net of tax $1,313, $(239), $(610) and $1,198, respectively)
 
2,437

 
(445
)
 
(1,135
)
 
2,223

Interest rate hedges:
 


 


 


 


Net gain recognized in other comprehensive income (net of tax $122, $35, $294 and $327, respectively)
 
228

 
66

 
547

 
608

Reclassification adjustment for amounts recognized in net income (net of tax $(28), $(26), $(86) and $(85), respectively)
 
(51
)
 
(48
)
 
(160
)
 
(159
)
 
 
177

 
18

 
387

 
449

Pension and other post-retirement benefits:
 
 
 
 
 
 
 
 
Net actuarial loss amortization (net of tax $280, $922, $844 and $5,054, respectively)
 
526

 
1,940

 
1,575

 
8,875

Net prior service benefit amortization (net of tax $(33), $(90), $(100) and $(167), respectively)
 
(62
)
 
(171
)
 
(186
)
 
(301
)
Net actuarial gain occurring during the period (net of tax $0, $25,469, $0 and $25,469, respectively)
 
—

 
45,539

 
—

 
45,539

Curtailment loss (net of tax $0, $17,992, $0 and $18,452, respectively)
 
—

 
34,558

 
—

 
35,257

 
 
464

 
81,866

 
1,389

 
89,370

Unrealized gain (loss) on securities, net:
 
 
 
 
 
 
 
 
Net income (loss) recognized in other comprehensive income (net of tax $31, $144, $(752) and $1,199, respectively)
 
63

 
277

 
(1,404
)
 
2,327

Reclassification adjustment for amounts recognized in net income (net of tax $67, $(522), $(188) and $(587), respectively)
 
127

 
(1,012
)
 
(350
)
 
(1,139
)
 
 
190

 
(735
)
 
(1,754
)
 
1,188

Other
 
—

 
8

 
—

 
22

Other comprehensive (loss) income, net of tax
 
(49,292
)
 
74,443

 
(32,867
)
 
40,481

Comprehensive (loss) income
 
(14,337
)
 
54,239

 
50,095

 
(97,457
)
Less: comprehensive income (loss) attributable to noncontrolling interests
 
2,136

 
1,507

 
(1,852
)
 
2,588

Comprehensive (loss) income attributable to Diebold, Incorporated
 
$
(16,473
)
 
$
52,732

 
$
51,947

 
$
(100,045
)
See accompanying notes to condensed consolidated financial statements.

5


DIEBOLD, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
 
 
Nine Months Ended
 
 
September 30,
 
 
2014
 
2013
Cash flow from operating activities:
 
 
 
 
Net income (loss)
 
$
82,962

 
$
(137,938
)
Adjustments to reconcile net income (loss) to cash flow used in operating activities:
 
 
 
 
Depreciation and amortization
 
55,405

 
64,085

Share-based compensation
 
15,978

 
14,070

Excess tax benefits from share-based compensation
 
(270
)
 
(378
)
Devaluation of Venezuelan balance sheet
 
12,101

 
1,584

Gain on sale of assets, net
 
(13,098
)
 
(3,421
)
Impairment of assets
 
—

 
70,642

Cash flow from changes in certain assets and liabilities:
 
 
 
 
Trade receivables
 
(164,710
)
 
(41,789
)
Inventories
 
(156,281
)
 
(79,492
)
Prepaid expenses
 
(1,877
)
 
11,481

Prepaid income taxes
 
7,452

 
(20,987
)
Other current assets
 
(46,438
)
 
(42,544
)
Accounts payable
 
87,634

 
(10,660
)
Deferred revenue
 
30,433

 
5,168

Deferred income tax
 
(6,480
)
 
40,164

Finance lease receivables
 
(59,271
)
 
(12,405
)
Certain other assets and liabilities
 
45,725

 
83,378

Net cash used in operating activities
 
(110,735
)
 
(59,042
)
Cash flow from investing activities:
 
 
 
 
Payments for acquisitions, net of cash acquired
 
(11,749
)
 
—

Proceeds from maturities of investments
 
406,623

 
379,889

Proceeds from sale of investments
 
39,586

 
22,711

Payments for purchases of investments
 
(339,772
)
 
(363,710
)
Proceeds from sale of assets
 
17,680

 
4,353

Capital expenditures
 
(33,554
)
 
(25,648
)
Collections on purchased finance receivables
 
—

 
6,105

Increase in certain other assets
 
(13,828
)
 
(10,006
)
Net cash provided by investing activities
 
64,986

 
13,694

Cash flow from financing activities:
 
 
 
 
Dividends paid
 
(56,193
)
 
(55,469
)
Debt issuance costs
 
(1,368
)
 
—

Revolving debt borrowings, net
 
124,012

 
11,007

Other debt borrowings
 
133,848

 
38,591

Other debt repayments
 
(141,581
)
 
(112,140
)
Distributions to noncontrolling interest holders
 
(2,158
)
 
(6,380
)
Excess tax benefits from share-based compensation
 
270

 
378

Issuance of common shares
 
14,440

 
10,264

Repurchase of common shares
 
(1,843
)
 
(3,660
)
Net cash provided by (used in) financing activities
 
69,427

 
(117,409
)
Effect of exchange rate changes on cash and cash equivalents
 
(13,954
)
 
(114
)
Increase (decrease) in cash and cash equivalents
 
9,724

 
(162,871
)
Cash and cash equivalents at the beginning of the period
 
230,709

 
368,792

Cash and cash equivalents at the end of the period
 
$
240,433

 
$
205,921

See accompanying notes to condensed consolidated financial statements.

6
Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)



NOTE 1: CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of Diebold, Incorporated and its subsidiaries (collectively, the Company) have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States (GAAP); however, such information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary for a fair statement of the results for the interim periods.
The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. In addition, some of the Company’s statements in this Quarterly Report on Form 10-Q may involve risks and uncertainties that could significantly impact expected future results. The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of results to be expected for the full year.
The Company has reclassified the presentation of certain prior-year information to conform to the current presentation.

The Company's Venezuelan operations consist of a fifty-percent owned subsidiary, which is consolidated. Venezuela is measured using the U.S. dollar as its functional currency because its economy is considered highly inflationary. On March 24, 2014, the Venezuelan government announced a currency exchange mechanism, SICAD 2, which yielded an exchange rate significantly higher than the rates established through the other regulated exchange mechanisms. Management has determined that it is unlikely that the Company will be able to convert bolivars under a currency exchange other than SICAD 2. On March 31, 2014, the Company remeasured its Venezuelan balance sheet using the SICAD 2 rate of 50.86 compared to the previous official government rate of 6.30, resulting in a decrease of $6,051 to the Company’s cash balance and net losses of $12,101 that were recorded within foreign exchange gain (loss), net in the condensed consolidated statements of operations in the first quarter of 2014. In addition, as a result of the currency devaluation, the Company recorded a $4,073 lower of cost or market adjustment related to its service inventory within service cost of sales in the condensed consolidated statements of operations in the first quarter of 2014. In the future, if the Company converts bolivars at a rate other than the SICAD 2 rate, the Company may realize additional gains or losses that would be recorded in the statements of operations. The Company's Venezuelan operations represented less than one percent of the Company's total assets as of September 30, 2014 and less than one percent of net sales for both the three and nine months ended September 30, 2014. The Company does not expect its Venezuelan operations to be a significant component of its consolidated revenue or operating profit for the remainder of 2014.

In the second quarter of 2014, the Company divested its Diebold Eras, Incorporated (Eras) subsidiary for a sale price of $20,000, including installment payments of $1,000 on the first and second year anniversary dates of the closing. This sale resulted in a gain of $13,709 recognized within gain on sale of assets, net in the condensed consolidated statement of operations. Revenue and operating profit in the nine months ended September 30, 2014 related to this divested subsidiary were $6,011 and $2,970, respectively, and are included within the North America (NA) segment. Net income before taxes related to this divested subsidiary are included in continuing operations and were $0 and $1,138 for the three months ended September 30, 2014 and 2013, respectively, and $2,978 and $3,221 for the nine months ended September 30, 2014 and 2013, respectively.

In the third quarter of 2013, the Company acquired 100 percent of the equity interests of Cryptera A/S (Cryptera), a supplier of the Company's encrypting PIN pad technology and a world leader in the research and development of secure payment technologies. This acquisition is expected to position the Company as a significant original equipment manufacturer of secure payment technologies and is expected to allow the Company to own more of the intellectual property related to its ATMs. The total purchase price was approximately $13,000, including a 10 percent deferred cash payment payable on the first anniversary of the acquisition. The results of operations for Cryptera are included in the Europe, Middle East and Africa (EMEA) segment within the Company's condensed consolidated financial statements from the date of the acquisition.

Recently Adopted Accounting Guidance
In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU 2013-11), which requires entities to present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss (NOL) or tax credit carryforward whenever the NOL or tax credit carryforward would be available to reduce

7
Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


the additional taxable income or tax due if the tax position is disallowed. This accounting standard update requires entities to assess whether to net the unrecognized tax benefit with a deferred tax asset as of the reporting date. The adoption of this update did not have a material impact on the financial statements of the Company.

In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (ASU 2014-08), which includes amendments that change the requirements for reporting discontinued operations and require additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results. Additionally, ASU 2014-08 requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income and expenses of discontinued operations. In the second quarter of 2014, the Company elected to early adopt ASU 2014-08. The adoption of this update did not have a material impact on the financial statements of the Company.

Recently Issued Accounting Guidance
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
























8
Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


NOTE 2: EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is based on the weighted-average number of common shares outstanding. Diluted earnings (loss) per share includes the dilutive effect of potential common shares outstanding. Under the two-class method of computing earnings (loss) per share, non-vested share-based payment awards that contain rights to receive non-forfeitable dividends are considered participating securities. The Company’s participating securities include restricted stock units (RSUs), deferred shares and shares that were vested, but deferred by the employee. The Company calculated basic and diluted earnings (loss) per share under both the treasury stock method and the two-class method. For the three and nine months ended September 30, 2014 and 2013, there was no impact in the per share amounts calculated under the two methods. Accordingly, the treasury stock method is disclosed below.

The following represents amounts used in computing earnings (loss) per share and the effect on the weighted-average number of shares of dilutive potential common shares:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2014
 
2013
 
2014
 
2013
Numerator:
 
 
 
 
 
 
 
 
Income (loss) used in basic and diluted earnings per share:
 
 
 
 
 
 
 
 
Net income (loss) attributable to Diebold, Incorporated
 
$
33,020

 
$
(21,690
)
 
$
84,461

 
$
(140,171
)
Denominator (in thousands):
 
 
 
 
 
 
 
 
Weighted-average number of common shares used in basic earnings per share
 
64,615

 
63,825

 
64,494

 
63,648

Effect of dilutive shares (1)
 
678

 
—

 
608

 
—

Weighted-average number of shares used in diluted earnings per share
 
65,293

 
63,825

 
65,102

 
63,648

Net income (loss) attributable to Diebold, Incorporated:
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
 
$
0.51

 
$
(0.34
)
 
$
1.31

 
$
(2.20
)
Diluted earnings (loss) per share
 
$
0.51

 
$
(0.34
)
 
$
1.30

 
$
(2.20
)
Anti-dilutive shares (in thousands):
 
 
 
 
 
 
 
 
Anti-dilutive shares not used in calculating diluted weighted-average shares
 
917

 
2,846

 
1,163

 
3,057

(1) Incremental shares of 479 thousand and 560 thousand were excluded from the computation of diluted earnings (loss) per share for the three and nine months ended September 30, 2013, respectively, because their effect is anti-dilutive due to the net loss attributable to Diebold, Incorporated.















9
Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


NOTE 3: EQUITY
The following table presents changes in shareholders' equity attributable to Diebold, Incorporated and the noncontrolling interests:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2014
 
2013
 
2014
 
2013
Diebold, Incorporated shareholders' equity
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
650,838

 
$
620,122

 
$
596,764

 
$
791,474

Comprehensive (loss) income attributable to Diebold, Incorporated
 
(16,473
)
 
52,732

 
51,947

 
(100,045
)
Common shares
 
42

 
172

 
763

 
895

Additional capital
 
5,931

 
3,850

 
29,823

 
23,439

Treasury shares
 
(288
)
 
(1,692
)
 
(1,843
)
 
(3,660
)
Dividends paid
 
(18,789
)
 
(18,550
)
 
(56,193
)
 
(55,469
)
Balance at end of period
 
$
621,261

 
$
656,634

 
$
621,261

 
$
656,634

 
 
 
 
 
 
 
 
 
Noncontrolling interests
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
17,905

 
$
32,965

 
$
24,051

 
$
35,348

Comprehensive income (loss) attributable to noncontrolling interests
 
2,136

 
1,507

 
(1,852
)
 
2,588

Distributions to noncontrolling interest holders
 
—

 
(13,448
)
 
(2,158
)
 
(16,912
)
Balance at end of period
 
$
20,041

 
$
21,024

 
$
20,041

 
$
21,024


NOTE 4: ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table summarizes the changes in the Company’s accumulated other comprehensive loss (AOCI), net of tax, by component for the three months ended September 30, 2014:

 
Translation
 
Foreign Currency Hedges
 
Interest Rate Hedges
 
Pension and Other Post-retirement Benefits
 
Unrealized Gain on Securities, Net
 
Other
 
Accumulated Other Comprehensive Loss
Balance at June 30, 2014
 
$
18,951

 
$
(5,456
)
 
$
(750
)
 
$
(51,102
)
 
$
735

 
$
280

 
$
(37,342
)
Other comprehensive (loss) income before reclassifications (1)
 
(52,761
)
 
2,437

 
228

 
—

 
63

 
—

 
(50,033
)
Amounts reclassified from AOCI
 
—

 
—

 
(51
)
 
464

 
127

 
—

 
540

Net current-period other comprehensive (loss) income
 
(52,761
)
 
2,437

 
177

 
464

 
190

 
—

 
(49,493
)
Balance at September 30, 2014
 
$
(33,810
)
 
$
(3,019
)
 
$
(573
)
 
$
(50,638
)
 
$
925

 
$
280

 
$
(86,835
)
(1) Other comprehensive (loss) income before reclassifications within the translation component excludes $201 of translation attributable to noncontrolling interests.
 








10
Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


The following table summarizes the changes in the Company’s AOCI, net of tax, by component for the nine months ended September 30, 2014:

 
Translation
 
Foreign Currency Hedges
 
Interest Rate Hedges
 
Pension and Other Post-retirement Benefits
 
Unrealized Gain (Loss) on Securities, Net
 
Other
 
Accumulated Other Comprehensive Loss
Balance at January 1, 2014
 
$
(2,409
)
 
$
(1,884
)
 
$
(960
)
 
$
(52,027
)
 
$
2,679

 
$
280

 
$
(54,321
)
Other comprehensive (loss) income before reclassifications (1)
 
(31,401
)
 
(1,135
)
 
547

 
—

 
(1,404
)
 
—

 
(33,393
)
Amounts reclassified from AOCI
 
—

 
—

 
(160
)
 
1,389

 
(350
)
 
—

 
879

Net current-period other comprehensive (loss) income
 
(31,401
)
 
(1,135
)
 
387

 
1,389

 
(1,754
)
 
—

 
(32,514
)
Balance at September 30, 2014
 
$
(33,810
)
 
$
(3,019
)
 
$
(573
)
 
$
(50,638
)
 
$
925

 
$
280

 
$
(86,835
)
(1) Other comprehensive (loss) income before reclassifications within the translation component excludes $(353) of translation attributable to noncontrolling interests.
 
The following table summarizes the details about amounts reclassified from AOCI:

 
Three Months Ended
 
Nine Months Ended
 


 
September 30, 2014
 
September 30, 2014
 


 
Amount Reclassified from AOCI
 
Amount Reclassified from AOCI
 
Affected Line Item in the Statement of Operations
Interest rate hedges (net of tax of $(28) and $(86), respectively)
 
(51
)
 
(160
)
 
Interest expense
Pension and post-retirement benefits:
 

 

 

Net actuarial loss amortization (net of tax of $280 and $844, respectively)
 
526

 
1,575

 
(1)
Net prior service benefit amortization (net of tax of $(33) and $(100), respectively)
 
(62
)
 
(186
)
 
(1)
 
 
464

 
1,389

 
 
Unrealized gain (loss) on securities, net (net of tax of $67 and $(188), respectively)
 
127

 
(350
)
 
Investment income
Total reclassifications for the period
 
$
540

 
$
879

 

(1) Pension and other post-retirement benefits AOCI components are included in the computation of net periodic benefit cost (refer to note 12 to the condensed consolidated financial statements).

NOTE 5: SHARE-BASED COMPENSATION
The Company’s share-based compensation payments to employees are recognized based on their grant-date fair values during the period in which the employee is required to provide services in exchange for the award. Share-based compensation is recognized as a component of selling and administrative expense. Total share-based compensation expense was $5,599 and $3,100 for the three months ended September 30, 2014 and 2013, respectively, and $15,978 and $14,070 for the nine months ended September 30, 2014 and 2013, respectively. Share-based compensation expense for the nine months ended September 30, 2013 included accelerated expense of $2,982 related to executive severance.








11
Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


Options outstanding and exercisable as of September 30, 2014 under the Company’s 1991 Equity and Performance Incentive Plan (as Amended and Restated as of April 13, 2009) (the 1991 Plan) and changes during the nine months ended September 30, 2014, were as follows:    
 
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value (1)
 
 
(in thousands)
 
(per share)
 
(in years)
 
 
Outstanding at January 1, 2014
 
1,954

 
$
39.63

 
 
 
 
Expired or forfeited
 
(335
)
 
51.73

 
 
 
 
Exercised
 
(445
)
 
32.89

 

 
 
Granted
 
454

 
34.20

 
 
 
 
Outstanding at September 30, 2014
 
1,628

 
37.23

 
6
 
$
2,981

Options exercisable at September 30, 2014
 
891

 
40.31

 
4
 
1,599

Options vested and expected to vest at September 30, 2014 (2)
 
1,601

 
37.31

 
6
 
2,914

(1)
The aggregate intrinsic value (the difference between the closing price of the Company’s common shares on the last trading day of the third quarter of 2014 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, 2014. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s common shares.
(2)
The options expected to vest are the result of applying the pre-vesting forfeiture rate assumption to total outstanding non-vested options.

The following table summarizes information on non-vested RSUs and performance shares for the nine months ended September 30, 2014:
 
 
Number of
Shares
 
Weighted-Average
Grant-Date Fair
Value
 
 
(in thousands)
 
(per share)
RSUs:
 
 
 
 
Non-vested at January 1, 2014
 
499

 
$
32.28

Forfeited
 
(52
)
 
32.91

Vested
 
(132
)
 
32.73

Granted (1)
 
327

 
35.25

Non-vested at September 30, 2014
 
642

 
33.65

Performance Shares (2):
 
 
 
 
Non-vested at January 1, 2014
 
542

 
$
37.10

Forfeited
 
(172
)
 
39.63

Granted (3)
 
777

 
38.08

Non-vested at September 30, 2014
 
1,147

 
37.38

(1)
The RSUs granted during the nine months ended September 30, 2014 include 35 thousand one-year RSUs to non-employee directors under the 1991 Plan. These RSUs have a weighted-average grant-date fair value of $39.35.
(2)
Non-vested performance shares are based on a maximum potential payout. Actual shares granted at the end of the performance period may be less than the maximum potential payout level depending on achievement of performance share objectives. Performance shares are based on certain annual management objectives, as determined by the Board of Directors.
(3)
The maximum performance shares granted during the nine months ended September 30, 2014 include 482 thousand shares that vest proportionately over a three-year period and have a weighted-average grant-date fair value of $35.49.

As of September 30, 2014, there were 143 thousand non-employee director deferred shares vested and outstanding.





12
Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


NOTE 6: INCOME TAXES
The effective tax rate on income was 27.0 percent for the three months ended September 30, 2014 and the effective tax rate on the loss was 28.2 percent for the three months ended September 30, 2013. The third quarter 2014 rate was lower than the statutory rate because of earnings in lower-tax jurisdictions and tax benefits from discrete items recorded in the quarter. The reduced third quarter 2013 tax rate differed from the statutory rate mainly as a result of the non-deductible portion of the Company's Brazil goodwill impairment recorded during a quarter with overall losses.
The effective tax rate on income was 31.3 percent for the nine months ended September 30, 2014 and the effective tax rate on the loss was (95.3) percent for the nine months ended September 30, 2013. The tax rate for the nine months ended September 30, 2014 includes a benefit from the release of a valuation allowance against excess capital losses offset by the negative impact of tax on foreign entities not permanently reinvested and the December 31, 2013 expiration of the Federal Research and Development Tax Credit and the Look-Thru Rule for Related Controlled Foreign Corporations under Section 954(c)(6) of the Internal Revenue Code of 1986, as amended. The negative tax rate for 2013 resulted from tax expense related to the repatriation of previously undistributed earnings and the establishment of a valuation allowance on deferred tax assets in the Company’s Brazilian manufacturing facility.
During the second quarter of 2014, the Internal Revenue Service (IRS) completed its examination of the Company’s U.S. federal income tax returns for the years 2008-2010 and issued a Revenue Agent’s Report (RAR) that includes various proposed adjustments, including adjustments related to transfer pricing. The net tax deficiency, excluding interest, associated with the RAR is $6,300 after net operating loss utilization. In May 2014, the Company filed a protest challenging proposed adjustments contained in the RAR and will pursue resolution of these issues with the Appeals Division of the IRS. The Company believes it has adequately provided for any related uncertain tax positions.

NOTE 7: INVESTMENTS
The Company’s investments, primarily in Brazil, consist of certificates of deposit and U.S. dollar indexed bond funds, which are classified as available-for-sale and stated at fair value based upon quoted market prices and net asset values, respectively. Unrealized gains and losses are recorded in AOCI. Realized gains and losses are recognized in investment income and are determined using the specific identification method. Realized (losses) gains from the sale of securities were $(194) and $1,533 for the three months ended September 30, 2014 and 2013, respectively, and $538 and $1,726 for the nine months ended September 30, 2014 and 2013, respectively. Proceeds from the sale of available-for-sale securities were $39,586 and $22,711 during the nine months ended September 30, 2014 and 2013, respectively.

The Company’s investments, excluding cash surrender value of insurance contracts of $71,607 and $72,214 as of September 30, 2014 and December 31, 2013, respectively, consisted of the following:
 
 
Cost Basis
 
Unrealized Gain
 
Fair Value
As of September 30, 2014
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
Certificates of deposit
 
$
133,779

 
$
21

 
$
133,800

 
 
 
 
 
 
 
Long-term investments:
 
 
 
 
 
 
Assets held in a rabbi trust
 
$
9,142

 
$
520

 
$
9,662

 
 
 
 
 
 
 
As of December 31, 2013
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
Certificates of deposit
 
$
215,010

 
$
—

 
$
215,010

U.S. dollar indexed bond funds
 
25,263

 
2,715

 
27,978

 
 
$
240,273

 
$
2,715

 
$
242,988

Long-term investments:
 
 
 
 
 
 
Assets held in a rabbi trust
 
$
10,085

 
$
292

 
$
10,377




13
Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


NOTE 8: ALLOWANCE FOR CREDIT LOSSES
Trade Receivables The Company evaluates the collectability of trade receivables based on a percentage of sales related to historical loss experience. The Company will also record periodic adjustments for known events such as specific customer circumstances and changes in the aging of accounts receivable balances. After all efforts at collection have been unsuccessful, the account is deemed uncollectible and is written off.
Financing Receivables The Company evaluates the collectability of notes and finance lease receivables (collectively, financing receivables) on a customer-by-customer basis and evaluates specific customer circumstances, aging of invoices, credit risk changes, payment patterns and historical loss experience. When the collectability is determined to be at risk based on the above criteria, the Company records the allowance for credit losses, which represents the Company’s current exposure less estimated reimbursement from insurance claims. After all efforts at collection have been unsuccessful, the account is deemed uncollectible and is written off.
The following table summarizes the Company’s allowance for credit losses for the nine months ended September 30, 2014 and 2013:

 
 
Finance
Leases
 
Notes
Receivable
 
Total
Allowance for credit losses
 
 
 
 
 
 
Balance at January 1, 2014
 
$
439

 
$
4,134

 
$
4,573

Provision for credit losses
 
162

 
—

 
162

Write-offs
 
(235
)
 
—

 
(235
)
Balance at September 30, 2014
 
$
366

 
$
4,134

 
$
4,500

 
 
 
 
 
 
 
Balance at January 1, 2013

$
525


$
2,047


$
2,572

Provision for credit losses

8


—


8

Recoveries

3


—


3

Write-offs

(90
)

(2,047
)

(2,137
)
Balance at September 30, 2013

$
446


$
—


$
446


The Company's allowance of $4,500 and $446 at September 30, 2014 and 2013, respectively, all resulted from individual impairment evaluation. As of September 30, 2014, finance leases and notes receivable individually evaluated for impairment were $166,572 and $18,053, respectively. As of September 30, 2013, finance leases and notes receivable individually evaluated for impairment were $88,216 and $16,343, respectively. As of September 30, 2014 and December 31, 2013, the Company’s finance lease receivables in Brazil were $111,762 and $33,283, respectively. The increase related to customer financing arrangements within the education ministry.
The Company records interest income and any fees or costs related to financing receivables using the effective interest method over the term of the lease or loan. The Company reviews the aging of its financing receivables to determine past due and delinquent accounts. Credit quality is reviewed at inception and is re-evaluated as needed based on customer-specific circumstances. Receivable balances 60 days to 89 days past due are reviewed and may be placed on nonaccrual status based on customer-specific circumstances. Receivable balances are placed on nonaccrual status upon reaching greater than 89 days past due. Upon receipt of payment on nonaccrual financing receivables, interest income is recognized and accrual of interest is resumed once the account has been made current or the specific circumstances have been resolved.
As of September 30, 2014 and December 31, 2013, the recorded investment in past-due financing receivables on nonaccrual status was $2,960 and $1,670, respectively, and there were no recorded investments in finance receivables past due 90 days or more and still accruing interest. The recorded investment in impaired notes receivable was $4,134 as of September 30, 2014 and December 31, 2013 and was fully reserved.



14
Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


The following table summarizes the Company’s aging of past-due notes receivable balances:
 
 
September 30, 2014
 
December 31, 2013
30-59 days past due
 
$
—

 
$
85

60-89 days past due
 
—

 
—

> 89 days past due (1)
 
1,518

 
—

Total past due
 
$
1,518

 
$
85

(1) Past-due notes receivable balances greater than 89 days as of September 30, 2014 are fully reserved.

NOTE 9: INVENTORIES
Major classes of inventories are summarized as follows:
 
 
September 30, 2014
 
December 31, 2013
Finished goods
 
$
268,767

 
$
167,577

Service parts
 
135,486

 
132,508

Raw materials and work in process
 
115,546

 
76,377

Total inventories
 
$
519,799

 
$
376,462

 
NOTE 10: GOODWILL AND OTHER ASSETS
Goodwill Goodwill is reviewed annually for impairment in the fourth quarter. There have been no impairment indicators identified in any of the reporting units during the nine months ended September 30, 2014. During the third quarter of 2013, the Company performed an other-than-annual assessment for its Brazil reporting unit based on a two-step impairment test as a result of a reduced earnings outlook for the Brazil business unit. The Company concluded that the goodwill within the Brazil reporting unit was partially impaired and recorded a $70,000 pre-tax, non-cash goodwill impairment charge. In connection with the 2013 fourth quarter annual goodwill impairment test, the Company concluded the Asia Pacific (AP) reporting unit had excess fair value of approximately $23,000 or eight percent when compared to its carrying amount. The amount of goodwill in the Company’s AP reporting unit was $41,544 and $41,307 as of September 30, 2014 and December 31, 2013, respectively. As of December 31, 2013, the Domestic and Canada and Latin America (LA) reporting units had excess fair value significantly greater than their carrying amounts.

Other Assets Included in other assets are net capitalized software development costs of $37,244 and $40,235 as of September 30, 2014 and December 31, 2013, respectively. Amortization expense on capitalized software included in product cost of sales was $4,543 and $5,369 for the three months ended September 30, 2014 and 2013, respectively, and $13,467 and $16,620 for the nine months ended September 30, 2014 and 2013, respectively. Other long-term assets also consist of patents, trademarks and other intangible assets. Where applicable, other assets are stated at cost and, if applicable, are amortized ratably over the relevant contract period or the estimated life of the assets. Fees to renew or extend the term of the Company’s intangible assets are expensed when incurred.

Impairment of long-lived assets is recognized when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the expected future undiscounted cash flows are less than the carrying amount of the asset group, an impairment loss may be recognized at that time to reduce the asset to the lower of its fair value or its net book value.


15
Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


NOTE 11: DEBT
Outstanding debt balances were as follows:
 
 
September 30, 2014
 
December 31, 2013
Notes payable:
 
 
 
 
Uncommitted lines of credit
 
$
82,758

 
$
43,062

Other
 
854

 
729

 
 
$
83,612

 
$
43,791

Long-term debt:
 
 
 
 
Credit facility
 
$
315,013

 
$
239,000

Senior notes
 
225,000

 
225,000

Industrial development revenue bonds
 
11,900

 
11,900

Other
 
3,107

 
4,342

 
 
$
555,020

 
$
480,242

As of September 30, 2014, the Company had various international short-term uncommitted lines of credit with borrowing limits of $124,096. The weighted-average interest rate on outstanding borrowings on the short-term uncommitted lines of credit as of September 30, 2014 and December 31, 2013 was 2.91 percent and 3.24 percent, respectively. The decrease in the weighted-average interest rate is attributable to the change in mix of borrowings in foreign entities. Short-term uncommitted lines mature in less than one year. The amount available under the short-term uncommitted lines at September 30, 2014 was $41,337.
In August 2014, the Company amended and extended its credit facility. As of September 30, 2014, the Company has increased its borrowing limits under its new credit facility from $500,000 to $520,000. The amended and extended credit facility expires in August 2019 and did not change any of the covenants related to the previous agreement. Under the terms of the amended and extended credit facility, the Company has the ability, subject to various approvals, to increase the borrowing limits by $250,000. Up to $50,000 of the revolving credit facility is available under a swing line sub-facility. The weighted-average interest rate on outstanding credit facility borrowings as of September 30, 2014 and December 31, 2013 was 1.48 percent and 1.36 percent, respectively, which is variable based on the London Interbank Offered Rate (LIBOR). The amount available under the credit facility as of September 30, 2014 was $204,987.

In March 2006, the Company issued senior notes in an aggregate principal amount of $300,000 with a weighted-average fixed interest rate of 5.50 percent. The Company entered into a derivative transaction to hedge interest rate risk on $200,000 of the senior notes, which was treated as a cash flow hedge. This reduced the effective interest rate from 5.50 percent to 5.36 percent. The Company funded the repayment of $75,000 of the senior notes at maturity in March 2013 using borrowings under its revolving credit facility. The maturity dates of the remaining senior notes are staggered, with $175,000 and $50,000 due in 2016 and 2018, respectively.
In 1997, industrial development revenue bonds were issued on behalf of the Company. The proceeds from the bond issuances were used to construct new manufacturing facilities in the United States. The Company guaranteed the payments of principal and interest on the bonds by obtaining letters of credit. The bonds were issued with a 20-year original term and are scheduled to mature in 2017. Each industrial development revenue bond carries a variable interest rate, which is reset weekly by the remarketing agents. The weighted-average interest rate on the bonds was 0.28 percent and 0.36 percent as of September 30, 2014 and December 31, 2013, respectively.
The Company’s financing agreements contain various restrictive financial covenants, including net debt to capitalization and net interest coverage ratios. As of September 30, 2014, the Company was in compliance with the financial and other covenants in its debt agreements.






16
Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


NOTE 12: BENEFIT PLANS
The Company has qualified pension plans covering certain U.S. employees that have been closed to new participants since 2003. Plans that cover salaried employees provide pension benefits based on the employee’s compensation during the ten years before retirement. The Company’s funding policy for salaried plans is to contribute annually based on actuarial projections and applicable regulations. Plans covering hourly employees and union members generally provide benefits of stated amounts for each year of service. The Company’s funding policy for hourly plans is to make at least the minimum annual contributions required by applicable regulations. Employees of the Company’s operations in countries outside of the United States participate to varying degrees in local pension plans, which in the aggregate are not significant.

The Company has non-qualified pension plans to provide supplemental retirement benefits to certain officers. Benefits are payable at retirement based upon a percentage of the participant’s compensation, as defined.

In July 2013, the Company's board of directors approved freezing certain pension and SERP plan benefits effective as of December 31, 2013 for U.S.-based salaried employees.  The Company recognized the plan freeze in the three months ended September 30, 2013 as a curtailment, since it eliminates for a significant number of participants the accrual of defined benefits for all of their future services.  The impact of the curtailment includes the one-time accelerated recognition of outstanding unamortized pre-tax prior service cost of $809 within general and administrative expense and a pre-tax reduction in AOCI of $52,550, attributable to the decrease in long-term pension liabilities.  This curtailment event triggered a re-measurement for the affected benefit plans as of July 31, 2013 using a discount rate of 5.06 percent.  The process for establishing the discount rate was consistent with the process utilized at our annual plan re-measurement date.  The re-measurement resulted in a further reduction of long-term pension liabilities and AOCI (pre-tax) related to the actuarial gain occurring during the year of $71,008

In addition to providing pension benefits, the Company provides post-retirement healthcare and life insurance benefits (referred to as other benefits) for certain retired employees. Eligible employees may be entitled to these benefits based upon years of service with the Company, age at retirement and collective bargaining agreements. Currently, the Company has made no commitments to increase these benefits for existing retirees or for employees who may become eligible for these benefits in the future. Currently there are no plan assets and the Company funds the benefits as the claims are paid.
The following table sets forth the net periodic benefit cost for the Company’s defined benefit pension plans and other benefits for the three months ended September 30:
 
 
Pension Benefits
 
Other Benefits
 
 
2014
 
2013
 
2014
 
2013
Components of net periodic benefit cost
 
 
 
 
 
 
 
 
Service cost
 
$
732

 
$
2,647

 
$
—

 
$
—

Interest cost
 
5,751

 
6,865

 
157

 
157

Expected return on plan assets
 
(6,450
)
 
(9,017
)
 
—

 
—

Amortization of prior service benefit
 
(39
)
 
(136
)
 
(56
)
 
(122
)
Recognized net actuarial loss
 
756

 
2,529

 
50

 
105

Curtailment loss (1)
 
—

 
809

 
—

 
—

Net periodic pension benefit cost
 
$
750

 
$
3,697

 
$
151

 
$
140


17
Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


The following table sets forth the net periodic benefit cost for the Company’s defined benefit pension plans and other benefits for the nine months ended September 30:
 
 
Pension Benefits
 
Other Benefits
 
 
2014
 
2013
 
2014
 
2013
Components of net periodic benefit cost
 
 
 
 
 
 
 
 
Service cost
 
$
2,196

 
$
9,308

 
$
—

 
$
—

Interest cost
 
17,251

 
20,778

 
471

 
471

Expected return on plan assets
 
(19,348
)
 
(26,622
)
 
—

 
—

Amortization of prior service benefit
 
(117
)
 
(99
)
 
(169
)
 
(366
)
Recognized net actuarial loss
 
2,268

 
13,385

 
151

 
317

Curtailment loss (1)
 
—

 
1,968

 
—

 
—

Net periodic pension benefit cost
 
$
2,250

 
$
18,718

 
$
453

 
$
422

(1) Curtailment loss during the first nine months ended September 30, 2013 resulted from the departure of certain executive officers and was recorded within selling and administrative expense in the condensed consolidated statement of operations.
Contributions
In the third quarter of 2014, the Company made a voluntary contribution to its qualified pension plan of $5,000. For the nine months ended September 30, 2014 and 2013, contributions of $8,674 and $2,662, respectively, were made to the qualified and non-qualified pension plans.

NOTE 13: GUARANTEES AND PRODUCT WARRANTIES
In 1997, industrial development revenue bonds were issued on behalf of the Company. The Company guaranteed the payments of principal and interest on the bonds (refer to note 11) by obtaining letters of credit. The carrying value of the bonds was $11,900 as of September 30, 2014 and December 31, 2013.
The Company provides its global operations guarantees and standby letters of credit through various financial institutions for suppliers, customers, regulatory agencies and insurance providers. If the Company is not able to make payment or fulfill contractual obligations, the suppliers, customers, regulatory agencies and insurance providers may draw on the pertinent bank. At September 30, 2014, the maximum future payment obligations related to these various guarantees totaled $96,534, of which $27,985 represented standby letters of credit to insurance providers, and no associated liability was recorded. At December 31, 2013, the maximum future payment obligations relative to these various guarantees totaled $87,104, of which $26,035 represented standby letters of credit to insurance providers, and no associated liability was recorded.
The Company provides its customers a manufacturer’s warranty and records, at the time of the sale, a corresponding estimated liability for potential warranty costs. Estimated future obligations due to warranty claims are based upon historical factors such as labor rates, average repair time, travel time, number of service calls per machine and cost of replacement parts. As of September 30, 2014 and 2013, the Company’s warranty liability balances were $106,977 and $75,487, respectively. The increase in warranty is largely attributable to sales to the education ministry in our Brazil segment.
Changes in the Company’s warranty liability balance are illustrated in the following table:
 
 
2014
 
2013
Balance at January 1
 
$
83,199

 
$
81,751

Current period accruals (1)
 
62,082

 
34,300

Current period settlements
 
(38,304
)
 
(40,564
)
Balance at September 30
 
$
106,977

 
$
75,487

(1) Includes the impact of foreign exchange rate fluctuations.





18
Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


NOTE 14: COMMITMENTS AND CONTINGENCIES
Contractual Obligations
At September 30, 2014, the Company had purchase commitments due within one year of $4,807 for materials through contract manufacturing agreements at negotiated prices.

Indirect Tax Contingencies
The Company accrues non income-tax liabilities for indirect tax matters when management believes that a loss is probable and
the amounts can be reasonably estimated, while contingent gains are recognized only when realized. In the event any losses are
sustained in excess of accruals, they are charged against income. In evaluating indirect tax matters, management takes into consideration factors such as historical experience with matters of similar nature, specific facts and circumstances, and the likelihood of prevailing. Management evaluates and updates accruals as matters progress over time. It is reasonably possible that some of the matters for which accruals have not been established could be decided unfavorably to the Company and could require recognizing future expenditures. Also, statutes of limitations could expire without the Company paying the taxes for matters for which accruals have been established, which could result in the recognition of future gains upon reversal of these accruals at that time.

At September 30, 2014, the Company was a party to several routine indirect tax claims from various taxing authorities globally that were incurred in the normal course of business, none of which individually or in the aggregate is considered material by management in relation to the Company’s financial position or results of operations. In management’s opinion, the condensed consolidated financial statements would not be materially affected by the outcome of these indirect tax claims and/or proceedings or asserted claims.

In addition to these routine indirect tax matters, the Company was a party to the proceedings described below:

In August 2012, one of the Company's Brazilian subsidiaries was notified of a tax assessment of approximately R$270,000, including penalties and interest, regarding certain Brazilian federal indirect taxes (Industrialized Products Tax, Import Tax, Programa de Integração Social and Contribution to Social Security Financing) for 2008 and 2009. The assessment alleges improper importation of certain components into Brazil's free trade zone that would nullify certain indirect tax incentives. On September 10, 2012, the Company filed its administrative defenses with the tax authorities. This proceeding is currently pending an administrative level decision, which could negatively impact Brazilian federal indirect taxes in other years that remain open under statute. It is reasonably possible that the Company could be required to pay taxes, penalties and interest related to this matter, which could be material to the Company's condensed consolidated financial statements.

In response to an order by the administrative court, the tax inspector provided further analysis with respect to the initial assessment in December 2013, which has now been accepted by the initial administrative court, that indicates a potential exposure that is significantly lower than the initial tax assessment received in August 2012. However, this matter remains subject to ongoing administrative proceedings and appeals. Accordingly, the Company cannot provide any assurance that its exposure pursuant to the initial assessment will be lowered significantly or at all. The Company continues to defend itself in the administrative proceedings.

In connection with the Brazilian indirect tax assessment, in May 2013, the U.S. Securities and Exchange Commission (SEC)requested that the Company retain certain documents and produce certain records relating to the assessment, to which the Company complied. However, in September 2014, the Company was notified by the SEC that it had closed its inquiry relating to the assessment.

In addition, the Company is challenging a customs ruling in Thailand seeking to retroactively collect customs duties on previous imports of Automated Teller Machines (ATM). Management believes that the customs authority’s attempt to retroactively assess customs duties is in contravention of World Trade Organization agreements and, accordingly, is challenging the ruling. In July 2014, the Central Tax Court in Thailand dismissed the Company’s complaint; however, the Company will be appealing this decision, and management continues to believe that the Company has a valid legal position for supporting its challenge. Accordingly, the Company has not accrued any amount for this contingency; however, the Company cannot provide any assurance that it will not ultimately be subject to a retroactive assessment.


19
Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


At September 30, 2014 and December 31, 2013, the Company had an accrual of approximately $26,000 related to the Brazilian indirect tax matter disclosed above.
A loss contingency is reasonably possible if it has a more than remote but less than probable chance of occurring. Although management believes the Company has valid defenses with respect to its indirect tax positions, it is reasonably possible that a loss could occur in excess of the estimated accrual, for which the Company estimated the aggregate risk at September 30, 2014 to be up to approximately $395,000 for its material indirect tax matters, of which approximately $355,000 and $26,000, respectively, relates to the Brazilian indirect tax matter and Thailand customs matter disclosed above. The aggregate risk related to indirect taxes is adjusted as the applicable statutes of limitations expire.

Legal Contingencies
At September 30, 2014, the Company was a party to several lawsuits that were incurred in the normal course of business, none of which individually or in the aggregate is considered material by management in relation to the Company’s financial position or results of operations. In addition, the Company has indemnification obligations with certain former employees, and costs associated with these indemnifications are expensed as incurred. In management’s opinion, the Company's condensed consolidated financial statements would not be materially affected by the outcome of these legal proceedings, commitments or asserted claims.

NOTE 15: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company uses derivatives to mitigate the economic consequences associated with fluctuations in currencies and interest rates.
Foreign Exchange
Net Investment Hedges The Company has international subsidiaries with net balance sheet positions that generate cumulative translation adjustments within AOCI. The Company uses derivatives to manage potential changes in value of its net investments in Brazil. The Company uses the forward-to-forward method for its quarterly retrospective and prospective assessments of hedge effectiveness. No ineffectiveness results if the notional amount of the derivative matches the portion of the net investment designated as being hedged because the Company uses derivative instruments with underlying exchange rates consistent with its functional currency and the functional currency of the hedged net investment. Changes in value that are deemed effective are accumulated in AOCI where they will remain until they are reclassified to income together with the gain or loss on the entire investment upon substantial liquidation of the subsidiary. The fair value of the Company’s net investment hedge contracts was $(3,070) and $313 as of September 30, 2014 and December 31, 2013, respectively. The net (loss) gain recognized in AOCI on net investment hedge derivative instruments was $(3,750) and $684 in the three months ended September 30, 2014 and 2013, respectively, and $1,745 and $(3,421) in the nine months ended September 30, 2014 and 2013, respectively.
Non-Designated Hedges A substantial portion of the Company’s operations and revenues are international. As a result, changes in foreign exchange rates can create substantial foreign exchange gains and losses from the revaluation of non-functional currency monetary assets and liabilities. The Company’s policy allows the use of foreign exchange forward contracts with maturities of up to 24 months to mitigate the impact of currency fluctuations on those foreign currency asset and liability balances. The Company elected not to apply hedge accounting to its foreign exchange forward contracts. Thus, spot-based gains/losses offset revaluation gains/losses within foreign exchange gain (loss), net and forward-based gains/losses represent interest expense. The fair value of the Company’s non-designated foreign exchange forward contracts was $8,041 and $705 as of September 30, 2014 and December 31, 2013, respectively.
The following table summarizes the gain (loss) recognized on non-designated foreign-exchange derivative instruments for the three and nine months ended September 30:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,

 
2014
 
2013
 
2014
 
2013
Interest expense
 
$
(1,415
)
 
$
(2,099
)
 
$
(4,384
)
 
$
(4,726
)
Foreign exchange gain (loss), net
 
9,180

 
(680
)
 
10,706

 
10,275

 
 
$
7,765

 
$
(2,779
)
 
$
6,322

 
$
5,549


20
Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


Interest Rate
Cash Flow Hedges The Company has variable rate debt that is subject to fluctuations in interest related cash flows due to changes in market interest rates. The Company’s policy allows derivative instruments designated as cash flow hedges that fix a portion of future variable-rate interest expense. As of September 30, 2014, the Company had two pay-fixed receive-variable interest rate swaps, with a total notional amount of $50,000, to hedge against changes in the LIBOR benchmark interest rate on a portion of the Company’s LIBOR-based borrowings. Changes in value that are deemed effective are accumulated in AOCI and reclassified to interest expense when the hedged interest is accrued. To the extent that it becomes probable that the Company’s variable rate borrowings will not occur, the gains or losses on the related cash flow hedges will be reclassified from AOCI to interest expense. The fair value of the Company’s interest rate contracts was $(1,478) and $(2,351) as of September 30, 2014 and December 31, 2013, respectively.
In December 2005 and January 2006, the Company executed cash flow hedges by entering into receive-variable and pay-fixed interest rate swaps, with a total notional amount of $200,000, related to the senior notes issuance in March 2006. Amounts previously recorded in AOCI related to the pre-issuance cash flow hedges will continue to be reclassified on a straight-line basis through February 2016.

The gain recognized on designated cash flow hedge derivative instruments was $350 and $101 for the three months ended September 30, 2014 and 2013, respectively, and $841 and $935 for the nine months ended September 30, 2014 and 2013, respectively. Gains and losses related to interest rate contracts that are reclassified from AOCI are recorded in interest expense on the statements of operations. The Company anticipates reclassifying $930 from AOCI to interest expense within the next 12 months.

NOTE 16: RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES
Restructuring Charges
The following table summarizes the impact of the Company’s restructuring charges on the condensed consolidated statements of operations:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2014
 
2013
 
2014
 
2013
Cost of sales – services
 
$
514

 
$
2,124

 
$
1,353

 
$
8,983

Cost of sales – products
 
—

 
212

 
68

 
429

Selling and administrative expense
 
414

 
1,859

 
5,366

 
9,375

Research, development and engineering expense
 
—

 
151

 
(26
)
 
2,617

Total
 
$
928

 
$
4,346

 
$
6,761

 
$
21,404



















21
Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


The following table summarizes the Company’s restructuring charges by reporting segment:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2014
 
2013
 
2014
 
2013
Severance
 
 
 
 
 
 
 
 
North America (NA)
 
$
928

 
$
962

 
$
3,625

 
$
14,373

Asia Pacific (AP)
 
—

 
953

 
307

 
1,557

Europe, Middle East and Africa (EMEA)
 
—

 
505

 
587

 
762

Latin America (LA)
 
—

 
268

 
1,242

 
268

Brazil
 
—

 
1,101

 
937

 
3,747

Total Severance
 
928

 
3,789

 
6,698

 
20,707

 
 
 
 
 
 
 
 
 
Other
 
 
 
 
 
 
 
 
NA
 
—

 
224

 
—

 
224

EMEA
 
—

 
333

 
63

 
473

Total Other
 
—

 
557

 
63

 
697

Total
 
$
928

 
$
4,346

 
$
6,761

 
$
21,404


During the first quarter of 2013, the Company announced a multi-year realignment plan. Certain aspects of this plan were previously disclosed under the Company's global realignment plan and global shared services plan. This multi-year realignment focuses on globalizing the Company's service organization and creating a unified center-led global organization for research and development, as well as transforming the Company's general and administrative cost structure. Restructuring charges of $928 and $4,346 for the three months ended September 30, 2014 and 2013, respectively, and $6,761 and $21,404 for the nine months ended September 30, 2014 and 2013, respectively, related to the Company's multi-year realignment plan. Restructuring charges for the nine months ended September 30, 2014 primarily related to a business process outsourcing initiative. As of September 30, 2014, the Company anticipates additional restructuring costs of $4,000 to $6,000 to be incurred through the end of 2014, primarily within NA and EMEA. The Company anticipates additional cost in the multi-year realignment plan through at least 2015. As management finalizes certain aspects of the realignment plan, the anticipated future costs related to this plan are subject to change. As of September 30, 2014, cumulative total restructuring costs for the multi-year realignment plan were $64,218, $2,425, $5,534, $1,694 and $8,635 in NA, AP, EMEA, LA and Brazil, respectively.


The following table summarizes the Company’s restructuring accrual balances and related activity:
 
 
2014
 
2013
Balance at January 1
 
$
35,289

 
$
11,844

Liabilities incurred
 
6,761

 
21,404

Liabilities paid/settled
 
(35,854
)
 
(27,239
)
Balance at September 30
 
$
6,196

 
$
6,009

Impairment and Other Charges

During the third quarter of 2013, the Company recorded a $70,000 pre-tax, non-cash goodwill impairment charge related to its
Brazil segment (refer to note 10).
Other charges consist of items that the Company has determined are non-routine in nature and are not expected to recur in future operations. Net non-routine expenses of $(3,546) and $(3,953) impacted the three months ended September 30, 2014 and 2013, respectively. Net non-routine income (expenses) of $7,528 and $(57,697) impacted the nine months ended September 30, 2014 and 2013, respectively. Non-routine income for the first nine months of 2014 related primarily to a $13,709 pre-tax gain from the sale of the Eras, recognized in gain on sale of assets, net in the condensed consolidated statements of operations. Non-routine expenses for the first nine months of 2013 included $28,000 of additional pre-tax losses related to the settlement of the global Foreign Corrupt Practices Act (FCPA) investigation, a $17,245 pre-tax charge related to settlement of the securities legal action

22
Table of Contents
DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2014
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share amounts)


and executive severance costs, including accelerated share-based compensation expense of $2,982 (pre-tax) all recognized in selling and administrative expense, partially offset by non-routine income of $2,191 related to a pre-tax gain from the sale of certain U.S. manufacturing operations to a long-time supplier recognized in gain on sale of assets, net in the condensed consolidated statements of operations.

NOTE 17: FAIR VALUE OF ASSETS AND LIABILITIES
The Company measures its financial assets and liabilities using one or more of the following three valuation techniques:
Market approach – Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
Cost approach – Amount that would be required to replace the service capacity of an asset (replacement cost).
Income approach – Techniques to convert future amounts to a single present amount based upon market expectations.
The hierarchy that prioritizes the inputs to valuation techniques used to measure fair value is divided into three levels:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 – Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active or inputs, other than quoted prices in active markets, that are observable either directly or indirectly.
Level 3 – Unobservable inputs for which there is little or no market data.
 
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Assets and Liabilities Recorded at Fair Value
Assets and liabilities subject to fair value measurement are as follows:
 
 
September 30, 2014
 
December 31, 2013
 
 
 
 
Fair Value Measurements Using
 
 
 
Fair Value Measurements Using
 
 
Fair Value
 
Level 1
 
Level 2
 
Fair Value
 
Level 1
 
Level 2
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
 
$
133,800

 
$
133,800

 
$
—

 
$
215,010

 
$
215,010

 
$
—

U.S. dollar indexed bond funds
 
—

 
—

 
—

 
27,978

 
—

 
27,978

Assets held in rabbi trusts
 
9,662

 
9,662

 
—

 
10,377

 
10,377

 
—

Foreign exchange forward contracts
 
5,151

 
—

 
5,151

 
1,382

 
—

 
1,382

Total
 
$
148,613

 
$
143,462

 
$
5,151

 
$
254,747

 
$
225,387


$
29,360

Liabilities
 

 
 
 
 
 
 
 
 
 
 
Deferred compensation
 
$
9,662

 
$
9,662

 
$
—

 
$
10,377

 
$
10,377

 
$
—

Foreign exchange forward contracts
 
180

 
—

 
180

 
364

 
—

 
364