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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2001, for Diebold, Incorporated (Diebold). The company manufactures and services financial self-service solutions (ATMs, kiosks) and security systems globally. The report reflects a period of significant restructuring, including a corporate-wide realignment program and the closure of the InnoVentry subsidiary, alongside strategic acquisitions of Global Election Systems and select assets of Mosler, Inc.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 7.4% in Q3 and 1.2% for the nine-month period compared to 2000. However, management notes that excluding non-recurring revenue from voting machines and the divested MedSelect unit, organic sales actually increased by 4.3% (Q3) and 7.1% (9 months).
• Profitability Pressure: Net income dropped significantly (59% in Q3, 51% for 9 months) primarily due to one-time charges. Adjusted net income margins improved to 8.0% in Q3 compared to 7.3% in the prior year.
• Balance Sheet Shifts: Total assets decreased 2.5% to $1.545 billion, driven by the securitization of finance receivables and foreign currency impacts on goodwill. Inventories rose 26.2% due to increased international orders and a shift in manufacturing processes overseas.
• Segment Performance: Diebold North America (DNA) revenues declined 2.7% due to a weak U.S. market. Diebold International (DI) revenues declined 10.3% year-over-year, but excluding non-recurring voting machine revenue from 2000, DI revenue grew 17.2%, driven by strong performance in Europe, Middle East, and Africa (EMEA).

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Q4 2001 Guidance: Management expects fixed-rate sales growth in the high single-digit range. EPS is projected at $0.59 to $0.63, excluding realignment and special charges.
• Full Year 2001 Guidance: Adjusted EPS is expected to be in the range of $1.94 to $1.98.
• 2002 Outlook: Revenue growth is forecast at 6-8% excluding acquisitions, and 12-14% including announced acquisitions (Mosler, Global Election Systems). EPS is expected to range from $2.15 to $2.25, representing 10-16% growth over 2001.
• Realignment Costs: The company expects to incur an additional $25 million to $30 million in realignment charges through the balance of 2001, with estimated annual savings of $25 million.

Risks and Contingencies

• Foreign Exchange: Significant exposure to currency fluctuations, particularly the Brazilian Real, which negatively impacted comprehensive income and shareholders' equity.
• Accounting Changes: Adoption of SFAS 141 and 142 (Goodwill) will discontinue goodwill amortization starting Jan 1, 2002, favorably impacting EPS by approximately $0.13, though impairment testing will be required.
• Acquisition Integration: Risks associated with integrating recently announced acquisitions of Global Election Systems and Mosler assets.

Investor Verification Checklist

• Adjusted Earnings Quality: Verify the sustainability of the "adjusted" EPS figures by monitoring the actual run-rate of the $25-$30 million in remaining realignment charges.
• Inventory Levels: Confirm that the 26% increase in inventory is converting to sales efficiently, given the shift in manufacturing to overseas locations.
• Acquisition Closing: Monitor the closing dates and integration progress for Global Election Systems and Mosler assets to validate 2002 revenue growth assumptions.
• Currency Hedging: Assess the effectiveness of hedging strategies given the material impact of the Brazilian Real on equity and comprehensive income.
• Goodwill Impairment: Watch for potential goodwill impairment charges upon the adoption of SFAS 142 in 2002, as the company currently holds approximately $205 million in unamortized goodwill.