UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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 þ    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 þ 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 þ		Accelerated Filer o		Non-Accelerated Filer o		Smaller Reporting Company o
				(Do not check if a smaller reporting company)

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 issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $1.25 Par Value — 65,690,461 shares as of July 30, 2010

 

 

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
INDEX

PART I — FINANCIAL INFORMATION			3
ITEM 1: FINANCIAL STATEMENTS			3
CONDENSED CONSOLIDATED BALANCE SHEETS — June 30, 2010 (Unaudited) and December 31, 2009			3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) — Three and Six Months Ended June 30, 2010 and 2009			4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) — Six Months Ended June 30, 2010 and 2009			5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)			6
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			27
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			43
ITEM 4: CONTROLS AND PROCEDURES			44
PART II — OTHER INFORMATION			46
ITEM 1: LEGAL PROCEEDINGS			46
ITEM 1A: RISK FACTORS			48
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			49
ITEM 3: DEFAULTS UPON SENIOR SECURITIES			49
ITEM 4: RESERVED			49
ITEM 5: OTHER INFORMATION			49
ITEM 6: EXHIBITS			50
SIGNATURES			53
EXHIBIT INDEX			54
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

DIEBOLD, INCORPORATED AND SUBSIDIARIES

		June 30,				December 31,
		2010				2009
		(Unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	231,619			$	328,426
Short-term investments			151,482				177,442
Trade receivables, less allowances for doubtful accounts of $26,378 and $26,648, respectively			416,893				330,982
Inventories			466,561				448,243
Deferred income taxes			82,318				84,950
Prepaid expenses			31,102				36,874
Refundable income taxes			21,126				93,907
Other current assets			113,953				87,261
Total current assets			1,515,054				1,588,085
Securities and other investments			73,960				73,989
Property, plant and equipment, at cost			615,898				613,377
Less accumulated depreciation and amortization			417,432				408,557
Property, plant and equipment, net			198,466				204,820
Deferred income tax			32,942				32,834
Goodwill			419,082				450,937
Other assets			202,413				204,200
Total assets		$	2,441,917			$	2,554,865
LIABILITIES AND EQUITY
Current liabilities
Notes payable		$	21,108			$	16,915
Accounts payable			163,608				147,496
Deferred revenue			186,913				198,989
Other current liabilities			302,333				379,691
Total current liabilities			673,962				743,091
Long-term debt			554,925				553,008
Pensions and other benefits			77,452				90,021
Postretirement and other benefits			22,609				29,174
Deferred income taxes			41,533				45,060
Other long-term liabilities			24,618				22,485
Commitments and contingencies			—				—
Equity
Diebold, Incorporated shareholders’ equity
Preferred shares, no par value, 1,000,000 authorized shares, none issued			—				—
Common shares, 125,000,000 authorized shares, 76,261,845 and 76,093,101 issued shares, 65,774,061 and 66,327,627 outstanding shares, respectively			95,327				95,116
Additional capital			301,797				290,689
Retained earnings			1,029,027				1,011,448
Treasury shares, at cost, 10,487,784 and 9,765,474 shares, respectively			(431,281	)			(410,153	)
Accumulated other comprehensive income			25,367				59,279
Total Diebold, Incorporated shareholders’ equity			1,020,237				1,046,379
Noncontrolling interests			26,581				25,647
Total equity			1,046,818				1,072,026
Total liabilities and equity		$	2,441,917			$	2,554,865

See accompanying notes to condensed consolidated financial statements.

DIEBOLD, INCORPORATED AND SUBSIDIARIES

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Net sales
Products		$	298,884			$	324,569			$	556,629			$	623,808
Services			366,296				366,327				727,550				724,339
			665,180				690,896				1,284,179				1,348,147
Cost of sales
Products			221,742				244,906				414,019				469,569
Services			265,294				277,080				534,006				557,341
			487,036				521,986				948,025				1,026,910
Gross profit			178,144				168,910				336,154				321,237
Selling and administrative expense			110,791				105,352				209,768				197,365
Research, development and engineering expense			16,402				16,950				34,850				32,788
Impairment of intangible assets			4,096				—				4,096				—
			131,289				122,302				248,714				230,153
Operating profit			46,855				46,608				87,440				91,084
Other income (expense)
Investment income			6,017				7,004				13,489				12,827
Interest expense			(9,301	)			(7,787	)			(18,356	)			(17,745	)
Foreign exchange loss, net			(553	)			(589	)			(5,194	)			(1,798	)
Miscellaneous, net			1,393				1,085				2,101				(23,386	)
Income from continuing operations before taxes			44,411				46,321				79,480				60,982
Taxes on income			13,338				13,049				23,215				16,872
Income from continuing operations			31,073				33,272				56,265				44,110
Loss from discontinued operations, net of tax			(683	)			(1,558	)			(1,653	)			(8,639	)
Net income			30,390				31,714				54,612				35,471
Net income attributable to noncontrolling interests			659				1,284				957				3,393
Net income attributable to Diebold, Incorporated		$	29,731			$	30,430			$	53,655			$	32,078
Basic weighted-average shares outstanding			65,936				66,252				66,121				66,214
Diluted weighted-average shares outstanding			66,636				66,786				66,678				66,734
Basic earnings per share
Net income from continuing operations		$	0.46			$	0.48			$	0.84			$	0.61
Loss from discontinued operations			(0.01	)			(0.02	)			(0.03	)			(0.13	)
Net income attributable to Diebold, Incorporated		$	0.45			$	0.46			$	0.81			$	0.48
Diluted earnings per share
Net income from continuing operations		$	0.46			$	0.48			$	0.83			$	0.61
Loss from discontinued operations			(0.01	)			(0.02	)			(0.03	)			(0.13	)
Net income attributable to Diebold, Incorporated		$	0.45			$	0.46			$	0.80			$	0.48
Amounts attributable to Diebold, Incorporated
Income from continuing operations, net of tax		$	30,414			$	31,988			$	55,308			$	40,717
Loss from discontinued operations, net of tax			(683	)			(1,558	)			(1,653	)			(8,639	)
Net income attributable to Diebold, Incorporated		$	29,731			$	30,430			$	53,655			$	32,078

See accompanying notes to condensed consolidated financial statements.

DIEBOLD, INCORPORATED AND SUBSIDIARIES

		Six Months Ended
		June 30,
		2010				2009
Cash flow from operating activities:
Net income		$	54,612			$	35,471
Adjustments to reconcile net income to cash (used in) provided by operating activities:
Depreciation and amortization			36,261				37,474
Share-based compensation			6,365				6,058
Excess tax benefits from share-based compensation			(202	)			(84	)
Deferred income taxes			107				(970	)
Devaluation of Venezuelan balance sheet			6,390				—
Impairment of intangible assets			4,096				—
Cash provided (used) by changes in certain assets and liabilities:
Trade receivables			(97,317	)			54,122
Inventories			(35,531	)			17,016
Prepaid expenses			1,268				904
Other current assets			(34,929	)			22,956
Accounts payable			22,318				(53,559	)
Deferred revenue			(3,462	)			22,549
Certain other assets and liabilities			23,977				(62,111	)
Net cash (used in) provided by operating activities			(16,047	)			79,826
Cash flow from investing activities:
Proceeds from sale of discontinued operations			1,807				—
Payments for acquisitions, net of cash acquired			—				(5,364	)
Proceeds from maturities of investments			157,630				102,255
Proceeds from sale of investments			9,718				—
Payments for purchases of investments			(147,394	)			(108,635	)
Capital expenditures			(26,916	)			(22,137	)
Increase in certain other assets			(13,194	)			(16,012	)
Net cash used in investing activities			(18,349	)			(49,893	)
Cash flow from financing activities:
Dividends paid			(36,076	)			(34,713	)
Debt borrowings			193,438				197,169
Debt repayments			(186,547	)			(226,028	)
Distribution of affiliates’ earnings to noncontrolling interest holders			(9	)			(539	)
Excess tax benefits from share-based compensation			202				84
Issuance of common shares			772				—
Repurchase of common shares			(19,866	)			—
Withholding taxes paid for employees’ share-based compensation			(1,262	)			(1,838	)
Net cash used in financing activities			(49,348	)			(65,865	)
Effect of exchange rate changes on cash and cash equivalents			(13,063	)			705
Decrease in cash and cash equivalents			(96,807	)			(35,227	)
Cash and cash equivalents at the beginning of the period			328,426				241,436
Cash and cash equivalents at the end of the period		$	231,619			$	206,209

See accompanying notes to condensed consolidated financial statements

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2010

NOTE 1: CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited condensed consolidated financial statements of Diebold, Incorporated and its subsidiaries (collectively, the Company) have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with U.S. generally accepted accounting principles (GAAP); however, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for a fair statement of the results for the interim periods.

The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in the Company’s annual report on Form 10-K for the year ended December 31, 2009. In addition, some of the Company’s statements in this quarterly report on Form 10-Q may involve risks and uncertainties that could significantly impact expected future results. The results of operations for the three and six months ended June 30, 2010 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. As discussed in Note 15, effective in the first quarter of 2010, the Company began management of its businesses on a geographic basis, changing from the previous model of sales channel segments. In order to align the Company’s external reporting of its financial results with this organizational change, the Company has modified its segment reporting and has reclassified prior period segment information to conform to the current period presentation of its segment information.

The Company’s Venezuelan operations consist of a fifty-percent owned subsidiary, which is consolidated. On January 8, 2010, the Venezuelan government announced the devaluation of its currency, the bolivar, and the establishment of a two-tier exchange structure. Subsequently, during May 2010, the Venezuelan government seized control of the parallel market, thereby creating a new government-controlled rate. Transitioning from the parallel rate to the new government-controlled rate did not have a material impact on the Company’s condensed consolidated financial statements. The impact was a decrease of $500 and $7,000 to the Company’s cash balance during the three and six months ended June 30, 2010, respectively. Net losses resulting from the remeasurement of the Venezuelan financial statements were recorded in the condensed consolidated statement of income for approximately $0.04 per share for the six months ended June 30, 2010. In the future, if the Company converts bolivares at a rate other than the new government-controlled rate, the Company may realize gains or losses that would be recorded in the statement of income.

The Company’s significant accounting policies as reported in the Company’s annual report on Form 10-K for the year ended December 31, 2009 were amended in the first quarter of 2010 upon the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2009-13, Multiple-Deliverable Revenue Arrangements (ASU 2009-13), and FASB ASU 2009-14, Certain Arrangements That Include Software Elements (ASU 2009-14). On January 1, 2010, the Company elected to early adopt ASU 2009-13 and ASU 2009-14 and there was no material impact on the Company’s condensed consolidated financial statements. However, the adoption of ASU 2009-13 and ASU 2009-14 modifies the Company’s previously disclosed revenue recognition policy, which is presented below as revised. ASU 2009-14 amends software revenue recognition guidance in FASB Accounting Standards Codification (ASC) 985-605 Software — Revenue Recognition (ASC 985-605) to exclude from its scope the Company’s tangible products that contain both software and non-software components that function together to deliver a product’s essential functionality. ASU 2009-13 modifies the requirements that must be met for the Company to recognize revenue from the sale of a delivered item that is part of a multiple-deliverable arrangement when other items have not yet been delivered. ASU 2009-13 establishes a selling price hierarchy for determining the selling price of a deliverable in a multiple-deliverable arrangement. The selling price must be based on vendor specific objective evidence (VSOE), if available, or third-party evidence (TPE) if VSOE is not available, or estimated selling price if neither VSOE nor TPE is available. Also, the residual method of allocating arrangement consideration has been eliminated. ASU 2009-13 and ASU 2009-14 were applied on a prospective basis for revenue arrangements entered into or materially modified after adoption. There were no changes to the Company’s units of accounting within its multiple-deliverable arrangements, how the Company allocates arrangement consideration or in the pattern or timing of revenue recognition as a result of the adoption of these updates.

Revenue Recognition The Company’s revenue recognition policy is consistent with the requirements of FASB ASC 605, Revenue Recognition (ASC 605). 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

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands, except per share amounts)

evidence of an arrangement exists, which is a customer contract; the products or services have been approved 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. Where the Company is contractually responsible for installation, customer acceptance occurs upon completion of the installation of all items at a job site and the Company’s demonstration that the items are in operable condition. Where the Company is not contractually responsible for installation, 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 the earlier of delivery or completion of the installation depending on the terms in the contract with the customer. The Company has the following revenue streams related to sales to its customers:

Financial Self-Service Product & Integrated Services Revenue Financial self-service products pertain to automated teller machines (ATMs). Included with the ATM is a software component and a non-software component that function together to deliver the ATM’s essential functionality. The Company also provides service contracts on ATMs. Service contracts typically cover a 12-month period and can begin at any given month after the warranty period expires. The service provided under warranty is limited as compared to those offered under service contracts. Further, warranty is not considered a separate deliverable of the sale. The Company’s warranty covers only replacement of defective 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. Outsourced and managed services include remote monitoring, trouble-shooting for self-service customers, training, transaction processing, currency management, maintenance services and full support via person to person or online communication.

Revenue is recognized in accordance with ASC 605, the application of which requires judgment including the determination of whether an arrangement includes multiple deliverables. For stand-alone sales of service contracts, revenue is recognized ratably over the life of the contract period. In contracts that involve multiple-deliverable arrangements, product maintenance services are typically accounted for under FASB ASC 605-20, Separately Priced Extended Warranty and Product Maintenance Contracts (ASC 605-20). Amounts deferred for undelivered deliverables are determined based upon the selling price of the deliverables as prescribed in FASB ASC 605-25, Revenue Recognition — Multiple-Element Arrangements (ASC 605-25). The Company determines the selling price of deliverables within a multiple-deliverable arrangement based on VSOE (price when sold on stand-alone basis) or the estimated selling price where VSOE is not established for undelivered deliverables. Total arrangement consideration is allocated at the inception of the arrangement to all deliverables using the relative selling price method, which allocates any discount in the arrangement proportionately to each deliverable on the basis of each deliverable’s selling price. There have been no material changes to these estimates for the periods presented and the Company believes that these estimates generally should not be subject to significant changes in the future. However, changes to deliverables in future arrangements and the ability to establish the selling price could materially impact the amount of earned or deferred revenue.

Electronic Security Products & Integrated Services Revenue The Company provides global product 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 Company’s customers a single-source solution to their electronic security needs. Revenue is recognized in accordance with ASC 605. 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 deliverables, product maintenance services are typically accounted for under ASC 605-20. Amounts deferred for undelivered deliverables are based upon the selling price of the deliverables as prescribed in ASC 605-25. The Company determines the selling price of deliverables within a multiple-deliverable arrangement based on the price charged when each deliverable is sold separately or estimated selling price. Total arrangement consideration is allocated at the inception of the arrangement to all deliverables using the relative selling price method, which allocates any discount in the arrangement proportionately to each deliverable on the basis of each deliverable’s selling price. There have been no material changes to these estimates for the periods presented and the Company believes that these estimates generally should not be subject to significant changes in the future. However, changes to deliverables in future arrangements and the ability to establish the selling price could materially impact the amount of earned or deferred revenue.

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(dollars in thousands, except per share amounts)

Physical Security & Facility Revenue The Company designs and manufactures several of its physical security and facility products. These consist of 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 revenue recognition requirements of ASC 605 have been met.

Election and Lottery Systems Revenue The Company offers election and lottery systems product solutions and support to the government in Brazil. Election systems revenue consists of election equipment, networking, tabulation and diagnostic software development, training, support and maintenance. Lottery systems revenue consists of lottery equipment. The election and lottery equipment components are included in product revenue. The software development, training, support and maintenance components are included in service revenue. The election and lottery systems contracts can contain multiple deliverables and custom terms and conditions. For contracts that do not contain multiple deliverables, revenue is recognized upon customer acceptance. In contracts that involve multiple deliverables, amounts deferred for undelivered deliverables are based upon the selling price of the deliverables as prescribed in ASC 605-25. The Company determines the selling price of deliverables within a multiple-deliverable arrangement based on the estimated selling price. Total arrangement consideration is allocated at the inception of the arrangement to all deliverables using the relative selling price method, which allocates any discount in the arrangement proportionately to each deliverable on the basis of each deliverable’s selling price. There have been no material changes to these estimates for the periods presented and the Company believes that these estimates generally should not be subject to significant changes in the future. However, changes to deliverables in future arrangements and the ability to establish the selling price could materially impact the amount of earned or deferred revenue.

Software Solutions & Service Revenue 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 ASC 985-605. Included within service revenue is revenue from software support agreements, which are typically 12 months in duration and pertain to networking software. For stand-alone sales of software support, revenue is recognized ratably over the life of the contract period. In contracts that involve multiple deliverables, amounts deferred for support are based upon VSOE of the value of the deliverables as prescribed in ASC 985-605, which requires judgment about whether the deliverables can be divided into more than one unit of accounting and whether the separate units of accounting have value to the customer on a stand-alone basis. There have been no material changes to these deliverables for the periods presented. However, changes to deliverables in future arrangements and the ability to establish VSOE could affect the timing of revenue recognition.

Recently Adopted Accounting Guidance

In May 2010, the FASB issued ASU 2010-19, Foreign Currency Issues: Multiple Foreign Currency Exchange Rates (ASU 2010-19). ASU 2010-19 is effective as of the announcement date of March 18, 2010. ASU 2010-19 provides the SEC staff’s views on certain foreign currency issues related to investments in Venezuela. These issues relate to Venezuela’s highly inflationary status. The adoption of the provisions of ASU 2010-19 did not have a material impact on the Company’s condensed consolidated financial statements.

On January 1, 2010, the Company adopted ASU 2009-13 and ASU 2009-14 as noted above.

On January 1, 2010, the Company adopted FASB ASU 2010-06, Fair Value Measurements and Disclosures (ASU 2010-06). ASU 2010-06 updates FASB ASC 820, Fair Value Measurements. ASU 2010-06 requires additional disclosures about fair value measurements including transfers in and out of levels 1 and 2 and a higher level of disaggregation for the different types of financial instruments. On January 1, 2010, the Company early adopted ASU 2010-06 related to the reconciliation of level 3 fair value measurements, requiring information about purchases, sales, issuances and settlements to be presented separately. There was no material impact on the Company’s condensed consolidated financial statements related to the adoption of this guidance.

On January 1, 2010, the Company adopted updated guidance included in FASB ASC 860-10, Transfers and Servicing — Overall. This guidance requires additional disclosures about the transfer and de-recognition of financial assets and eliminates the concept of qualifying special-purpose entities. The adoption of this guidance did not have an impact on the Company’s condensed consolidated financial statements.

On January 1, 2010, the Company adopted updated guidance included in FASB ASC 810, Consolidation (ASC 810), related to the consolidation of variable interest entities. This guidance requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. In addition, this updated guidance amends the quantitative approach for determining the primary beneficiary of a variable interest entity. ASC 810 amends certain guidance for determining whether an entity is a variable

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(dollars in thousands, except per share amounts)

interest entity and adds additional reconsideration events for determining whether an entity is a variable interest entity. Further, this guidance requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. The adoption of this guidance did not have an impact on the Company’s condensed consolidated financial statements.

NOTE 2: EARNINGS PER SHARE

Basic and diluted earnings per share are calculated in accordance with FASB ASC 260, Earnings Per Share. Under this guidance, unvested share-based payment awards that contain rights to receive non-forfeitable dividends are considered participating securities and the two-class method of computing earnings per share is required for all periods presented.

The Company’s participating securities include restricted stock units, deferred shares and shares that were vested, but deferred by the employee. The Company has calculated basic and diluted earnings per share under both the treasury stock method and the two-class method. For the three and six months ended June 30, 2010 and 2009, there was no impact in the per share amounts calculated under the two methods, therefore the treasury stock method is disclosed below. The following data show the amounts used in computing earnings per share under the treasury stock method and the effect on the weighted-average number of shares of dilutive potential common stock:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Numerator:
Income used in basic and diluted earnings per share:
Income from continuing operations, net of tax		$	30,414			$	31,988			$	55,308			$	40,717
Loss from discontinued operations, net of tax			(683	)			(1,558	)			(1,653	)			(8,639	)
Net income		$	29,731			$	30,430			$	53,655			$	32,078
Denominator (in thousands):
Weighted-average number of common shares used in basic earnings per share			65,936				66,252				66,121				66,214
Effect of dilutive shares			700				534				557				520
Weighted-average number of shares used in diluted earnings per share			66,636				66,786				66,678				66,734
Basic earnings per share:
Income from continuing operations, net of tax		$	0.46			$	0.48			$	0.84			$	0.61
Loss from discontinued operations, net of tax			(0.01	)			(0.02	)			(0.03	)			(0.13	)
Net income attributable to Diebold, Incorporated		$	0.45			$	0.46			$	0.81			$	0.48
Diluted earnings per share:
Income from continuing operations, net of tax		$	0.46			$	0.48			$	0.83			$	0.61
Loss from discontinued operations, net of tax			(0.01	)			(0.02	)			(0.03	)			(0.13	)
Net income attributable to Diebold, Incorporated		$	0.45			$	0.46			$	0.80			$	0.48
Anti-dilutive shares (in thousands):
Anti-dilutive shares not used in calculating diluted weighted-average shares			2,078				2,360				2,089				2,715

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(dollars in thousands, except per share amounts)

NOTE 3: OTHER COMPREHENSIVE INCOME (LOSS)

The Company displays accumulated other comprehensive income separately from retained earnings and additional capital in the condensed consolidated balance sheets. Items recorded as other comprehensive income (loss) include adjustments made for foreign currency translation under FASB ASC 830, Foreign Currency Matters, pension adjustments, net of tax under FASB ASC 715, Compensation — Retirement Benefits, hedging activities under FASB ASC 815, Derivatives and Hedging and unrealized gains and losses for available-for-sale securities under FASB ASC 320, Investments.

The following table provides a reconciliation of total shareholders’ equity attributable to Diebold, Incorporated and the noncontrolling interests for the three months ended June 30, 2010:

						Total Diebold,
						Incorporated				Noncontrolling
		Total Equity				Shareholders’ Equity				Interests
April 1, 2010		$	1,064,166			$	1,038,358			$	25,808
Net income			30,390				29,731				659
Other comprehensive (loss) income:
Foreign currency hedges and translation			(24,103	)			(24,226	)			123
Interest rate hedges			(633	)			(633	)			—
Pensions and other postretirement benefits			1,335				1,335				—
Unrealized gain on available-for-sale securities			130				130				—
Comprehensive income			7,119				6,337				782
Common shares			44				44				—
Additional capital			3,252				3,252				—
Treasury shares			(9,773	)			(9,773	)			—
Dividends declared			(17,981	)			(17,981	)			—
Distribution to noncontrolling interest holders			(9	)			—				(9	)
June 30, 2010		$	1,046,818			$	1,020,237			$	26,581

The following table provides a reconciliation of total shareholders’ equity attributable to Diebold, Incorporated and the noncontrolling interests for the three months ended June 30, 2009:

						Total Diebold,
						Incorporated				Noncontrolling
		Total Equity				Shareholders’ Equity				Interests
April 1, 2009		$	938,838			$	918,338			$	20,500
Net income			31,714				30,430				1,284
Other comprehensive income:
Foreign currency hedges and translation			67,608				65,858				1,750
Interest rate hedges			1,539				1,539				—
Pensions and other postretirement benefits			940				940				—
Comprehensive income			101,801				98,767				3,034
Common shares			33				33				—
Additional capital			3,181				3,181				—
Treasury shares			(72	)			(72	)			—
Dividends declared			(17,367	)			(17,367	)			—
Distribution to noncontrolling interest holders			(72	)			—				(72	)
June 30, 2009		$	1,026,342			$	1,002,880			$	23,462

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(dollars in thousands, except per share amounts)

The following table provides a reconciliation of total shareholders’ equity attributable to Diebold, Incorporated and the noncontrolling interests for the six months ended June 30, 2010:

						Total Diebold,
						Incorporated				Noncontrolling
		Total Equity				Shareholders’ Equity				Interests
January 1, 2010		$	1,072,026			$	1,046,379			$	25,647
Net income			54,612				53,655				957
Other comprehensive (loss) income:
Foreign currency hedges and translation			(36,459	)			(36,445	)			(14	)
Interest rate hedges			(820	)			(820	)			—
Pensions and other postretirement benefits			2,698				2,698				—
Unrealized gain on available-for-sale securities			655				655				—
Comprehensive income			20,686				19,743				943
Common shares			211				211				—
Additional capital			11,108				11,108				—
Treasury shares			(21,128	)			(21,128	)			—
Dividends declared			(36,076	)			(36,076	)			—
Distribution to noncontrolling interest holders			(9	)			—				(9	)
June 30, 2010		$	1,046,818			$	1,020,237			$	26,581

The following table provides a reconciliation of total shareholders’ equity attributable to Diebold, Incorporated and the noncontrolling interests for the six months ended June 30, 2009:

						Total Diebold,
						Incorporated				Noncontrolling
		Total Equity				Shareholders’ Equity				Interests
January 1, 2009		$	964,258			$	946,601			$	17,657
Net income			35,471				32,078				3,393
Other comprehensive income:
Foreign currency hedges and translation			53,602				50,651				2,951
Interest rate hedges			1,723				1,723				—
Pensions and other postretirement benefits			1,795				1,795				—
Comprehensive income			92,591				86,247				6,344
Common shares			272				272				—
Additional capital			6,311				6,311				—
Treasury shares			(1,838	)			(1,838	)			—
Dividends declared			(34,713	)			(34,713	)			—
Distribution to noncontrolling interest holders			(539)				—				(539	)
June 30, 2009		$	1,026,342			$	1,002,880			$	23,462

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(dollars in thousands, except per share amounts)

NOTE 4: SHARE-BASED COMPENSATION

The Company’s share-based compensation payments to employees are recognized in the statement of income based on their grant-date fair values during the period in which the employee is required to provide services in exchange for the award. Share-based compensation is recognized as a component of selling and administrative expense. Total share-based compensation expense for the three and six months ended June 30, 2010 was $3,139 and $6,365, respectively. Total share-based compensation expense for the three and six months ended June 30, 2009 was $3,133 and $6,058, respectively.

Options outstanding and exercisable under the Company’s 1991 Equity and Performance Incentive Plan (as Amended and Restated as of April 13, 2009) as of June 30, 2010, and changes during the six months ended June 30, 2010, were as follows:

										Weighted-Average
						Weighted-Average				Remaining				Aggregate Intrinsic
		Number of Shares				Exercise Price				Contractual Term				Value (1)
		(in thousands)				(per share)				(in years)
Outstanding at January 1, 2010			3,103			$	37.84
Expired or forfeited			(208	)			41.80
Exercised			(32	)			24.09
Granted			411				27.88
Outstanding at June 30, 2010			3,274			$	36.47				5			$	1,517
Options exercisable at June 30, 2010			2,265			$	40.12				4			$	519

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. The following tables summarize information on unvested restricted stock units (RSUs), performance shares and deferred shares for the six months ended June 30, 2010:

						Weighted-Average Grant-Date Fair
		Number of Shares				Value
		(in thousands)
RSUs:
Unvested at January 1, 2010			470			$	32.64
Forfeited			(32	)			38.67
Vested			(81	)			45.58
Granted			245				27.99
Unvested at June 30, 2010			602			$	29.12
Performance Shares:
Unvested at January 1, 2010			719			$	36.70
Forfeited			(144	)			57.88
Vested			(52	)			58.65
Granted			237				35.89
Unvested at June 30, 2010			760			$	31.10
Director Deferred Shares:
Oustanding at January 1, 2010			65			$	34.15
Granted			25				33.28
Outstanding at June 30, 2010			90			$	33.91

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(dollars in thousands, except per share amounts)

NOTE 5: INCOME TAXES

The effective tax rate on continuing operations for the three months ended June 30, 2010 was 30.0 percent compared to 28.2 percent for the same period of 2009. While comparable, the 1.8 percentage point increase in the effective tax rate was due to a variety of discrete items in the periods.

The effective tax rate on continuing operations for the six months ended June 30, 2010 was 29.2 percent compared to 27.7 percent for the same period of 2009. While comparable, the 1.5 percentage point increase in the effective tax rate was due to a variety of discrete items in the periods.

The tax rates for the three months and six months ended June 30, 2009 included benefits related to the U.S. research and development credit and certain “look-through” rules related to foreign corporations, which expired on December 31, 2009. These benefits will not be incorporated into the Company’s 2010 results unless they are extended by Congress.

Additionally, in March 2010, the Patient Protection and Affordable Care Act as well as the Health Care and Education Reconciliation Act of 2010 (the Acts) were signed into law. Beginning in 2013, the Acts eliminate the tax deduction of retiree prescription drug expenses that are reimbursed under Medicare Part D. The resulting deferred tax charge of $339 from enactment of the Acts was recognized in the results for the six months ended June 30, 2010.

NOTE 6: INVESTMENTS

The Company’s investments, primarily in Brazil, consist of certificates of deposit and U.S. dollar indexed bond funds, which are classified as available-for-sale and stated at fair value based upon quoted market prices and net asset values, respectively. Deposits with banks and money market funds classified as short-term investments include accrued interest. Unrealized gains and losses are recorded in other comprehensive income. Realized gains and losses are recognized in investment income. Realized gains from the sale of securities were $33 for the three and six months ended June 30, 2010. Proceeds from the sale of available-for-sale securities were $9,718 during the six months ended June 30, 2010.

The Company has deferred compensation plans that enable certain employees to defer receipt of a portion of their cash or share-based compensation and non-employee directors to defer receipt of director fees at the participants’ discretion. For deferred cash-based compensation, the Company established a rabbi trust which is recorded at fair value of the underlying securities within securities and other investments. The related deferred compensation liability is recorded at fair value within other long-term liabilities. Realized and unrealized gains and losses on marketable securities in the rabbi trust are recognized in investment income.

The Company’s investments, excluding cash surrender value of insurance contracts of $66,432 and $65,489 as of June 30, 2010 and December 31, 2009, respectively, consist of the following:

						Unrealized
		Cost Basis				Gain/(Loss)				Fair Value
As of June 30, 2010
Short-term investments:
Certificates of deposit		$	123,364			$	—			$	123,364
U.S. dollar indexed bond funds			27,463				655				28,118
		$	150,827			$	655			$	151,482
Long-term investments:
Assets held in a rabbi trust		$	8,715			$	(1,187	)		$	7,528
As of December 31, 2009
Short-term investments:
Certificates of deposit		$	157,216			$	—			$	157,216
U.S. dollar indexed bond funds			20,226				—				20,226
		$	177,442			$	—			$	177,442
Long-term investments:
Assets held in a rabbi trust		$	9,400			$	(900	)		$	8,500

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(dollars in thousands, except per share amounts)

NOTE 7: INVENTORIES

Major classes of inventories are summarized as follows:

		June 30, 2010				December 31, 2009
Finished goods		$	200,776			$	196,110
Service parts			137,940				145,719
Work in process			59,666				56,492
Raw materials			68,179				49,922
Total inventories		$	466,561			$	448,243

NOTE 8: OTHER ASSETS

Included in other assets are net capitalized computer software development costs of $57,591 and $57,143 as of June 30, 2010 and December 31, 2009, respectively. Amortization expense on capitalized software of $3,849 and $7,930 was included in product cost of sales for the three and six months ended June 30, 2010, respectively and $4,321 and $8,248 for the three and six months ended June 30, 2009, 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 its fair value in accordance with FASB ASC 360, Property, Plant and Equipment.

In the second quarter of 2010, the Company recorded a $4,096 intangible asset impairment within Diebold North America (DNA) continuing operations related to the 2004 acquisition of TFE Technology Holdings, a maintenance provider of network and hardware service solutions to federal and state government agencies and commercial firms. The impairment was a result of current negative cash flows which are projected to persist related to this business due to non-renewal of certain contracts. Based on an analysis of the discounted and undiscounted future cash flows related to this business, the Company determined these customer contract intangible assets were fully impaired as of June 30, 2010.

Investment in Affiliate Investment in the Company’s non-consolidated affiliate is accounted for under the equity method and consists of a 50 percent ownership in Shanghai Diebold King Safe Company, Ltd. The balance of this investment as of June 30, 2010 and December 31, 2009 was $12,733 and $11,308, respectively, and fluctuated based on equity earnings and receipt of dividends. Equity earnings from the non-consolidated affiliate are included in miscellaneous, net in the condensed consolidated statements of income and were $673 and $1,425 for the three and six months ended June, 2010, respectively, and $755 and $1,273 for the three and six months ended June 30, 2009, respectively.

NOTE 9: DEBT

Outstanding debt balances were as follows:

		June 30, 2010				December 31, 2009
Notes payable — current:
Uncommitted lines of credit		$	21,108			$	16,915
Long-term debt:
Credit facility		$	240,000			$	240,000
Senior notes			300,000				300,000
Industrial development revenue bonds			11,900				11,900
Other			3,025				1,108
		$	554,925			$	553,008

As of June 30, 2010, the Company had various international short-term uncommitted lines of credit with borrowing limits of $63,296. The weighted-average interest rate on outstanding borrowings on these lines of credit as of June 30, 2010 and December 31, 2009 was

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(dollars in thousands, except per share amounts)

4.08 and 9.15 percent, respectively. Short-term uncommitted lines mature in less than one year. The amount available under the short-term uncommitted lines at June 30, 2010 was $42,188.

In October 2009, the Company entered into a three-year credit facility. As of June 30, 2010, the Company had borrowing limits under this facility totaling $491,748 ($400,000 and €75,000, translated). Under the terms of the credit facility agreement, the Company has the ability, subject to various approvals, to increase the borrowing limits by $200,000 and €37,500. Up to $30,000 and €15,000 of the revolving credit facility is available under a swing line subfacility. The weighted-average interest rate on outstanding credit facility borrowings as of June 30, 2010 and December 31, 2009 was 2.71 and 2.63 percent, respectively, which is variable based on the London Interbank Offered Rate (LIBOR). The amount available under the credit facility as of June 30, 2010 was $251,748.

In March 2006, the Company issued senior notes in an aggregate principal amount of $300,000 with a weighted-average fixed interest rate of 5.50 percent. The maturity dates of the senior notes are staggered, with $75,000, $175,000 and $50,000 becoming due in 2013, 2016 and 2018, respectively. Additionally, the Company entered into a derivative transaction to hedge interest rate risk on $200,000 of the senior notes, which was treated as a cash flow hedge. This reduced the effective interest rate by 14 basis points from 5.50 to 5.36 percent.

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 0.56 and 0.80 percent as of June 30, 2010 and December 31, 2009, respectively.

The Company’s financing agreements contain various restrictive financial covenants, including net debt to capitalization and net interest coverage ratios. As of June 30, 2010, the Company was in compliance with the financial covenants in its debt agreements.

NOTE 10: BENEFIT PLANS

The Company has pension plans covering certain U.S. employees. Plans that cover certain salaried employees provide pension benefits based on the employee’s compensation during the ten years before retirement. The Company’s funding policy for salaried plans is to contribute annually based on actuarial projections and applicable regulations. Plans covering certain hourly employees and union members generally provide benefits of stated amounts for each year of service. The Company’s funding policy for hourly plans is to make at least the minimum annual contributions required by applicable regulations. Employees of the Company’s operations in countries outside of the 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 and life insurance benefits (referred to as other benefits) for certain retired employees. Eligible employees may be entitled to these benefits based upon years of service with the Company, age at retirement and collective bargaining agreements. Currently, the Company has made no commitments to increase these benefits for existing retirees or for employees who may become eligible for these benefits in the future. There are no plan assets and the Company funds the benefits as the claims are paid.

The following table sets forth the net periodic benefit cost for the Company’s defined benefit pension plans and other benefits:

		Three Months Ended
		June 30,
		2010				2009				2010				2009
		Pension Benefits								Other Benefits
Components of net periodic benefit cost
Service cost		$	2,499			$	2,726			$	—			$	—
Interest cost			7,681				7,237				248				282
Expected return on plan assets			(9,603	)			(9,243	)			—				—
Amortization of prior service cost			49				68				(129	)			(129	)
Recognized net actuarial loss			1,344				891				71				110
Net periodic pension benefit cost		$	1,970			$	1,679			$	190			$	263

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(dollars in thousands, except per share amounts)

		Six Months Ended
		June 30,
		2010				2009				2010				2009
		Pension Benefits								Other Benefits
Components of net periodic benefit cost
Service cost		$	4,998			$	5,451			$	—			$	—
Interest cost			15,362				14,474				496				563
Expected return on plan assets			(19,206	)			(18,486	)			—				—
Amortization of prior service cost			97				135				(258	)			(258	)
Recognized net actuarial loss			2,717				1,697				142				221
Net periodic pension benefit cost		$	3,968			$	3,271			$	380			$	526

Cash Flows

There have been no significant changes to the 2010 plan year contribution amounts previously disclosed. For the six months ended June 30, 2010 and 2009, contributions of $13,381 and $13,367, respectively, were made to the qualified and non-qualified pension plans.

In addition to the qualified and non-qualified pension plans, union employees in one of the Company’s U.S. manufacturing facilities participated in the International Union of Electronic, Electrical, Salaried, Machine and Furniture Workers-Communications Workers of America (IUE-CWA) multi-employer pension fund. This facility was closed in 2008 which triggered a withdrawal liability from the pension fund. The withdrawal liability was settled for $5,632 and was paid in the second quarter of 2010.

NOTE 11: GUARANTEES AND PRODUCT WARRANTIES

In September 2009, the Company sold its U.S. election systems business. The related sale agreement contained shared liability clauses pursuant to which the Company agreed to indemnify the purchaser for 70 percent of any adverse consequences to the purchaser arising out of certain defined potential litigation or obligations. As of June 30, 2010, there were no material adverse consequences related to these shared liability indemnifications. The Company’s maximum exposure under the shared liability indemnifications is $8,000.

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 by obtaining letters of credit (refer to note 9). The carrying value of the bonds was $11,900 as of June 30, 2010 and December 31, 2009.

The Company provides its global operations guarantees and standby letters of credit through various financial institutions to suppliers, customers, regulatory agencies and insurance providers. If the Company is not able to make payment or fulfill contractual obligations, the suppliers, customers, regulatory agencies and insurance providers may draw on the pertinent bank. At June 30, 2010, the maximum future payment obligations related to these various guarantees totaled $71,579, of which $22,628 represented standby letters of credit to insurance providers, and no associated liability was recorded. At December 31, 2009, the maximum future payment obligations relative to these various guarantees totaled $53,419, of which $22,628 represented standby letters of credit to insurance providers, and no associated liability was recorded.

The Company provides its customers a manufacturer’s warranty and records, at the time of the sale, a corresponding estimated liability for potential warranty costs. Estimated future obligations due to warranty claims are based upon historical factors such as labor rates, average repair time, travel time, number of service calls per machine and cost of replacement parts. Changes in the Company’s warranty liability balance are illustrated in the following table:

		2010				2009
Balance at January 1		$	62,673			$	43,009
Current period accruals (a)			24,609				32,871
Current period settlements			(23,694	)			(22,208	)
Balance at June 30		$	63,588			$	53,672

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(dollars in thousands, except per share amounts)

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. The Company records all derivative instruments on the balance sheet at fair value and the changes in the fair value are recognized in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows derivative gains and losses to be reflected in the statement of income or other comprehensive income together with the hedged exposure, and requires that the Company formally document, designate and assess the effectiveness of transactions that receive hedge accounting treatment. Gains or losses associated with ineffectiveness must be reported currently in earnings. The Company does not enter into any speculative positions with regard to derivative instruments.

The Company periodically evaluates its monetary asset and liability positions denominated in foreign currencies. The impact of the Company and the counterparties’ credit risk on the fair value of the contracts is considered as well as the ability of each party to execute its obligations under the contract. The Company uses investment grade financial counterparties in these transactions and believes that the resulting credit risk under these hedging strategies is not significant.

FOREIGN EXCHANGE

Non-Designated Hedges A substantial portion of the Company’s operations and revenues are international. As a result, changes in foreign exchange rates can create substantial foreign exchange gains and losses from the revaluation of non-functional currency monetary assets and liabilities. The Company’s policy allows the use of foreign exchange forward contracts with maturities of up to 24 months to mitigate the impact of currency fluctuations on those foreign currency asset and liability balances. The Company elected not to apply hedge accounting to its foreign exchange forward contracts. Thus, spot-based gains/losses offset revaluation gains/losses within foreign exchange loss, net and forward-based gains/losses represent interest expense. For the three and six months ended June 30, 2010, there were 201 and 407 non-designated foreign exchange contracts that settled. As of June 30, 2010, there were 59 non-designated foreign exchange contracts outstanding, primarily euro, British pound, Hungarian forint and Swiss franc, totaling $523,030, which represents the absolute value of notional amounts.

Net Investment Hedges The Company has international subsidiaries with assets in excess of liabilities that generate cumulative translation adjustments within other comprehensive income. During 2009, the Company used derivatives to manage potential adverse changes in value of its net investments in Brazil. The Company used 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 other comprehensive income 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.

INTEREST RATE

Cash Flow Hedges The Company has variable rate debt and is subject to fluctuations in interest related cash flows due to changes in market interest rates. The Company’s policy allows derivative instruments designated as cash flow hedges which fix a portion of future variable-rate interest expense. The Company has executed 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. In October 2009, the Company used borrowings of approximately $205,000 and €50,300 under its new credit facility to repay all amounts outstanding under (and terminated) the prior credit facility. While the LIBOR-based cash flows designated in the original hedge relationships remain probable of occurring, the Company elected to de-designate the original cash flow hedging relationships and designated new hedging relationships in conjunction with entering into its new credit facility.

The Company’s monthly retrospective assessment of hedge effectiveness to determine whether the hedging relationship continues to qualify for hedge accounting is performed using regression analysis. The Company’s monthly prospective assessment of hedge effectiveness to measure the extent to which exact offset is not achieved is performed by comparing the cumulative change in the fair value of the interest rate swaps to the cumulative change in the fair value of the hypothetical interest rate swaps with critical terms that match the LIBOR-based borrowings. When computing cumulative changes in fair values, the Company computes the difference between the current fair value and the sum of all future discounted cash flows projected at designation that are not yet paid or accrued as of the current valuation date in order to isolate changes in fair value primarily attributable to changes in interest rates. Changes in value that are deemed effective are accumulated in other comprehensive income and reclassified to interest expense when the hedged

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(dollars in thousands, except per share amounts)

interest is accrued. For the three and six months ended June 30, 2010, the Company recognized losses of $73 and $79 representing the change in fair value of the interest rate swap that was deemed ineffective. 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 other comprehensive income to interest expense.

In December 2005 and January 2006, the Company executed cash flow hedges by entering into receive-variable and pay-fixed interest rate swaps, with a total notional amount of $200,000, related to the senior notes issuance in March 2006. Amounts previously recorded in other comprehensive income related to the pre-issuance cash flow hedges will continue to be reclassified to income on a straight-line basis through February 2016.

The following table summarizes the fair value of derivative instruments designated and not designated as hedging instruments and their respective balance sheet location:

		June 30, 2010				December 31, 2009				Balance Sheet Location (1)
Derivatives designated as hedging instruments
Liability derivatives:
Interest rate contracts		$	(1,571	)		$	(2,122	)		Other current liabilities
Interest rate contracts			(2,559	)			(1,277	)		Other long-term liabilities
Total liability derivatives		$	(4,130	)		$	(3,399	)
Total derivatives designated		$	(4,130	)		$	(3,399	)
Derivatives not designated as hedging instruments
Asset derivatives:
Foreign exchange contracts		$	5,227			$	1,047			Other current assets
Foreign exchange contracts			71				399			Other current liabilities
Total asset derivatives		$	5,298			$	1,446
Liability derivatives:
Foreign exchange contracts		$	(1,483	)		$	(560	)		Other current assets
Foreign exchange contracts			(738	)			(2,171	)		Other current liabilities
Total liability derivatives		$	(2,221	)		$	(2,731	)
Total derivatives not designated		$	3,077			$	(1,285	)
Total derivatives		$	(1,053	)		$	(4,684	)

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of June 30, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(dollars in thousands, except per share amounts)

The following tables summarize the impact of derivative instruments included in other comprehensive income (loss) (OCI), pre-tax:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Interest rate contracts
Loss recognized in OCI (effective portion)		$	(552	)		$	1,600			$	(651	)		$	1,509
Loss reclassified from accumulated OCI (effective portion)			(81	)			(61	)			(169	)			214
Loss recognized in income (ineffective portion)			(73	)			—				(79	)			—
Foreign exchange contracts
Loss recognized in OCI (effective portion)			—				(2,099	)			—				(2,482	)

Gains and losses related to interest rate contracts that are reclassified from accumulated OCI are recorded in interest expense on the statement of income. The Company anticipates reclassifying $1,242 from other comprehensive income to interest expense within the next 12 months.

The following table summarizes the gain (loss) recognized on non-designated derivative instruments:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009				Income Statement Location
Foreign exchange contracts		$	(1,573	)		$	(1,704	)		$	(3,059	)		$	(5,195	)		Interest expense
Foreign exchange contracts			15,211				(26,781	)			22,155				(17,988	)		Foreign exchange loss, net
Total		$	13,638			$	(28,485	)		$	19,096			$	(23,183	)

NOTE 13: RESTRUCTURING AND OTHER CHARGES

Restructuring Charges

The following table summarizes the impact of the Company’s restructuring charges/(accrual adjustment benefits) on the condensed consolidated statements of income:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Cost of sales — products		$	696			$	869			$	482			$	2,404
Cost of sales — services			(524	)			1,798				(210	)			3,400
Selling and administrative expense			1,079				1,356				2,236				2,675
Research, development and engineering expense			(57	)			(23	)			(198	)			(23	)
Total		$	1,194			$	4,000			$	2,310			$	8,456