UNITED STATESSECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
OR
DIEBOLD, INCORPORATED
Registrant’s telephone number, including area code: (330) 490-4000
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
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 [ü] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or an endment to this Form 10-K. [ü]
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ü] No [ ]
State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant as of June 30, 2003, the last business day of the Registrant’s most recently completed second fiscal quarter. The aggregate market value was computed by using the closing price on the New York Stock Exchange on June 30, 2003 of $43.25 per share.
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.
TABLE OF CONTENTS
DOCUMENTS INCORPORATED BY REFERENCE
(1) PROXY STATEMENT FOR 2004 ANNUAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 22, 2004
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PART I.
ITEM 1. BUSINESS.(Dollars in thousands)
(a) General Development
The company was incorporated under the laws of the State of Ohio in August, 1876, succeeding a proprietorship established in 1859 and is engaged primarily in the sale, manufacture, installation and service of automated self-service transaction systems, electronic and physical security products, election systems and software. The company specializes in technology that empowers people worldwide to access services when, where and how they may choose. In 2002, the company acquired Diebold Election Systems, Inc. (DESI), a manufacturer and supplier of elections systems and support, to mark its launch into the election systems market. In 2003, the company made several small but strategic acquisitions, mainly in the security systems and services market.
All of the acquisitions are accounted for as purchase business combinations and, accordingly, the purchase price has been allocated to identifiable tangible and intangible assets acquired and liabilities assumed for each acquisition, based upon their respective fair values, with the excess allocated to goodwill.
The company paid a combination of $4,840 in company stock and $10,611, net of cash acquired, in 2003 for the following:
The results of these acquisitions were included in the operating results of the company for the year ended December 31, 2003 and are not material.
(b) Financial Information about Operating Segments
The company’s segments are comprised of its three main sales channels: Diebold North America (DNA), Diebold International (DI) and Election Systems and Other. The DNA segment sells financial and retail systems, and also services financial, retail and medical systems in the United States and Canada. The DI segment sells and services financial and retail systems over the remainder of the globe. The Election Systems and Other segment includes the operating results of DESI beginning in 2002, as well as corporate administrative costs. Also included in this segment are the results of the MedSelect business, which was sold in July 2001 as a part of the company’s realignment plan. A reconciliation of segment customer revenues to Consolidated Net Sales and of segment operating contribution to Consolidated Operating Profit is contained in Note 17 to the Consolidated Financial Statements.
(c) Description of Business
The company develops, manufactures, sells and services self-service transaction systems, electronic and physical security systems, software and various products used to equip bank facilities to global financial and commercial markets and electronic voting terminals and solutions to the government. The company’s primary customers include banks and financial institutions, as well as hospitals, colleges and universities, public libraries, government agencies, utilities and various retail outlets. Sales of systems and equipment are made directly to customers by the company’s sales personnel and by manufacturer’s representatives and distributors. The sales/support organization works closely with customers and their consultants to analyze and fulfill the customers’ needs. In 2003, 2002 and 2001, the
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ITEM 1. BUSINESS. - (continued)
company’s sales and services of financial systems and equipment and security solutions accounted for more than 90 percent of consolidated net sales.
Product Groups
Self-Service Products
The company offers an integrated line of self-service banking products and Automated Teller Machines (ATMs). The company is a leading global supplier of ATMs, and holds the leading market position in many countries around the world.
Physical Security and Facility Products
The company’s Physical Security and Facility Products division designs and manufactures several of the company’s financial service solutions offerings, including the RemoteTeller System™ (RTS). The business unit also develops vaults, safe deposit boxes and safes, drive-up banking equipment and a host of other facilities products.
Election Systems
The company, through its wholly owned subsidiaries DESI and Diebold Procomp, is one of the largest electronic voting system providers in the world.
Integrated Security Solutions
Diebold Integrated Security Solutions provide global sales, service, installation, project management and monitoring of original equipment manufacturer (OEM) electronic security products to financial, retail and commercial customers. These solutions provide the company’s customers a single-source solution to their electronic security needs.
Campus Card Systems
The company’s multi-application campus ID system is a single card system that allows students to use their identification cards for a variety of activities, including purchases at the bookstore, cafeteria, etc.; vending, such as laundry and snack/beverage machines; and access to facilities, which could include dormitories, laboratories and admittance to sporting events. The system has also been installed in corporate campus environments, public libraries and sports stadiums.
Software Solutions and Services
Diebold offers software solutions consisting of multiple applications that process events and transactions. These solutions are delivered on the appropriate platform allowing the company to meet customer requirements while adding new functionality in a cost-effective manner.
The company also provides professional services to assist in the implementation of software solutions. These services include communication network review, systems integration, custom software and project management that encompass all facets of a successful implementation.
The principal raw materials used by the company are steel, copper, brass, lumber and plastics, which are purchased from various major suppliers. Electronic parts and components are also procured from various suppliers. These materials and components are generally available in quantity at this time.
The company had no customers that accounted for more than 10 percent of total net sales in 2003, 2002 and 2001.
The company’s operating results and the amount and timing of revenue are affected by numerous factors including production schedules, customer priorities, sales volume and sales mix. During the past several years, the company has dramatically changed the focus of its self-service business to that of a total solutions approach. The value of unfilled orders is not as meaningful an indicator of future revenues due to the significant portion of revenues derived from the company’s growing service-based business, for which order information is not available. Therefore, the company believes that backlog information is not material to an understanding of its business and does not disclose backlog information.
All phases of the company’s business are highly competitive; some products being in competition directly with similar products and others competing with alternative products having similar uses or producing similar results. The company believes, based upon outside independent industry surveys, that it is a leading manufacturer of self-service systems in the United States and is also a market leader internationally. In the area of automated transaction systems, the company competes primarily with NCR Corporation, Wincor-Nixdorf, Triton, Dassault, Fujitsu, Itautec and Tidel. In serving the security products market for the financial services industry, the company competes primarily with ADT. Of these, some compete in only one or two product lines, while others sell a broader spectrum of products competing with the company. However, the unavailability of comparative sales information and the large variety of individual products make it difficult to give reasonable estimates of the company’s competitive ranking in or share of the market in its security product fields of activity. Many smaller manufacturers of safes, surveillance cameras, alarm systems and remote drive-up equipment are found in the market.
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In the rapidly growing election systems market, DESI is emerging as the leader in providing product solutions and support for the United States. Competition in this market is from smaller, privately held niche companies.
The company owns United States and international patents, trademarks and licenses relating to certain products. While the company regards these as items of importance, it does not deem its business as a whole, or any industry segment, to be materially dependent upon any one item or group of items.
The company charged to expense $60,451 in 2003, $56,693 in 2002, and $58,321 in 2001, respectively, for research, development and engineering costs.
Compliance by the company with federal, state and local environmental protection laws during 2003 had no material effect upon capital expenditures, earnings or the competitive position of the company and its subsidiaries. A number of individuals and groups have raised challenges recently in the media and elsewhere regarding the reliability and security of the automated election tabulation products and services provided by DESI. The parties making these challenges oppose the use of technology in the electoral process generally and, specifically, have taken actions to publicize what they view as significant flaws in DESI’s election management software and firmware. Among other efforts, these parties have established web sites and web logs devoted to disseminating information damaging to DESI’s reputation and its products. They have filed a number of open-records act requests in various states for copies of contracts with DESI and/or DESI’s software. They have also posted on the internet portions of DESI’s software source code and private communications among DESI’s programmers, which were originally obtained by a hacker from an internal FTP site maintained by DESI. These efforts have affected DESI’s customer relations. In 2003, two of DESI’s customers required technical reviews of DESI’s software by third-party consultants and required changes to DESI’s software to remedy issues revealed in the review, which DESI has implemented or is in the process of implementing. Recent changes in the laws under which election-related products must be certified by a number of states have lengthened the certification process and, in some cases, required changes to DESI’s products. In California, questions have been raised as to whether DESI products used in past elections were certified at the time of use. Although the Company cannot predict the ultimate impact the challenges on DESI’s products and services or changes in the law will have on DESI, they are likely to increase DESI’s costs of providing such products and services, which may adversely affect DESI’s sales. However, the company is expecting that election systems net sales will grow significantly in 2004 with a significant contract expected to close internationally as well as several contracts in the U.S. This industry continues to evolve. Funding is being provided by the government and utilized by the states; however, the guidelines and rules governing the tabulation software and hardware have not yet been established. As a result, various states and industry experts interpret the election process differently.
The total number of employees employed by the company at December 31, 2003 was 13,401 compared with 13,072 at the end of the preceding year. Diebold’s service staff is one of the financial industry’s largest, with more than 4,500 professionals in 600 locations worldwide.
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports are available, free of charge, on or through our website, www.diebold.com, as soon as practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. Additionally, these reports can be furnished free of charge to shareholders upon written request to Diebold Global Communication at the corporate address, or call +1 330 490-3790 or [800] 766-5859.
(d) Financial Information about International and U.S. Operations and Export Sales
Sales to customers outside the United States in relation to total consolidated net sales was $778,608 or 36.9 percent in 2003, $719,231 or 37.1 percent in 2002 and $761,352 or 43.3 percent in 2001.
Property, plant and equipment, at cost, located in the United States totaled $391,104, $358,277 and $317,832 as of December 31, 2003, 2002 and 2001, respectively, and property, plant and equipment, at cost, located outside the United States totaled $156,754, 103,856 and $95,221 as of December 31, 2003, 2002 and 2001, respectively.
The company’s non-U.S. operations are subject to normal international business risks not generally applicable to domestic business. These risks include currency fluctuation, new and different legal and regulatory requirements in local jurisdictions, political and economic changes and disruptions, tariffs or other barriers, potentially adverse tax consequences and difficulties in staffing and managing foreign operations.
ITEM 2. PROPERTIES.
The company’s corporate offices are located in North Canton, Ohio. It owns manufacturing facilities in Canton and Newark, Ohio; Lynchburg and Danville, Virginia; Lexington, North Carolina; and Sumter, South Carolina, and leases a manufacturing facility in Cypress, California. The company also has manufacturing facilities in Argentina, Belgium, Brazil, China, France and India. The company has selling, service and administrative offices in the following locations: throughout the United States, and in Argentina, Australia, Austria, Barbados, Belgium, Brazil, China, Colombia, Ecuador, France, Germany, Hong Kong, Hungary, Indonesia, Italy, Mexico, Paraguay, Peru, Philippines, Portugal, Poland, Romania, Russia, Singapore, South Africa, Spain, Taiwan, Thailand, Turkey, the United Arab Emirates, the
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ITEM 2. PROPERTIES. (concluded)
United Kingdom, and Uruguay. The company leases a majority of the selling, service and administrative offices under operating lease agreements.
The company owns an office facility in Hamilton, Ohio. The company considers that its properties are generally in good condition, are well maintained, and are generally suitable and adequate to carry on the company’s business.
ITEM 3. LEGAL PROCEEDINGS. (Dollars in thousands)
At December 31, 2003, 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, results of operations or cash flow. In management’s opinion, the financial statements would not be materially affected by the outcome of any present legal proceedings, commitments, or asserted claims.
During 2002, the company accepted an offer by the IRS to settle its previously disclosed dispute on a claim concerning the deductibility of interest on corporate-owned life insurance from 1990 to 1998. This resulted in a 2002 after-tax charge of $26,494. As of December 31, 2002, the company paid approximately $34,000 related to this claim and received a refund of approximately $8,300 in 2003. No other years after 1998 are subject to this claim. Of the $26,494, net of tax charge, $14,972 ($10,454, net of tax) was charged to interest expense and $16,040 was charged to taxes on income.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth quarter of 2003.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
The common shares of the company are listed on the New York Stock Exchange with a symbol of DBD. The price ranges of common shares for the company are as follows:
There were 70,765 shareholders at December 31, 2003, which includes an estimated number of shareholders who have shares held for their accounts by banks, brokers, trustees for benefit plans and the agent for the dividend reinvestment plan.
On the basis of amounts paid and declared, the annualized quarterly dividends per share were $0.68, $0.66, and $0.64 in 2003, 2002 and 2001, respectively.
Equity Compensation Plan Information
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ITEM 6. SELECTED FINANCIAL DATA. (Dollars in thousands, except per share amounts)
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.(Dollars in thousands, except share and per share amounts)
OVERVIEW
The table below presents the changes in comparative financial data from 2001 to 2003. Comments on significant year-to-year fluctuations follow the table. The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes that appear elsewhere in this document.
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More than 140 years ago, Diebold went into the business of making strong, reliable safes. Today, Diebold, Incorporated is a global leader in providing integrated self-service delivery systems, security and services to customers within the financial, government, education and retail sectors. In 2003, the company introduced Opteva, a new product line within the financial self-service market that provides a higher level of security, convenience and reliability. The new line is powered by Agilis™, which is a software platform for financial self-service equipment that was developed by the company in 2002. The combination of Opteva and Agilis provides the ability for financial institutions to customize solutions to meet their consumers’ demands and positively affect equipment performance. The Agilis software platform gives customers the ability to run the same software across their entire network, which helps contain costs and improve financial self-service equipment availability. Significant growth in product revenues in 2003 and 2002 was attributable to favorable reaction by the financial sector to this new generation of financial self-service solutions.
The company faces a variety of challenges and opportunities in responding to customer needs, most notably within the election systems market. During 2003, challenges were raised about the reliability and security of the company’s election systems products and services. The company has responded to these challenges by upgrading its election products and services. Orders for election systems in 2003 were comparable with 2002.
The company intends the discussion of its financial condition and results of operations that follows to provide information that will assist in understanding the financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect the financial statements.
The business drivers of the company’s future performance include several factors that include, but are not limited to:
In addition to the business drivers above, as a global operation, the company is exposed to risks which include, but are not limited to:
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The consolidated financial statements of the company are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Management of the company uses historical information and all available information to make these estimates and assumptions. Actual amounts could differ from these estimates and different amounts could be reported using different assumptions and estimates.
The company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements. Management believes that of its significant accounting policies, its policies concerning revenue recognition, allowance for bad debts, inventories, goodwill, and pensions and postretirement benefits are the most critical because they are affected significantly by judgments, assumptions and estimates. Additional information regarding these policies is included below.
Revenue Recognition
The company enters into contracts to sell its products and services. Revenue is recognized on financial self-service and security product sales in accordance with the terms of the contract, contingent upon customer acceptance and transferring risk of loss. Service revenue is recognized when earned, which is defined as when the work is completed or in the case of service contracts, ratably over the contract period. Election systems contracts contain multiple deliverable elements and custom terms and conditions. The company recognizes revenue for delivered elements only when the fair values of undelivered elements are known, uncertainties regarding customer acceptance are resolved and there are no customer-negotiated refund or return rights affecting the revenue recognized for delivered elements. Some contracts may contain discounts
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and, as such, revenue is recognized using the relative fair value method of allocation of revenue to the product and service components of contracts.
Allowance for Bad Debts and Credit Risk
The company evaluates the collectibility of accounts receivable based on a number of criteria. A percentage of sales is reserved for uncollectible accounts as sales occur throughout the year. This percentage is based on historical loss experience and current trends. This estimate is periodically adjusted for known events such as specific customer circumstances and changes in the aging of accounts receivable balances. Since the company’s receivable balance is concentrated primarily in the financial and government sectors, an economic downturn in these sectors could result in higher than expected credit losses.
Inventories
Inventories are valued at lower of cost or market. The company regularly reviews the inventory quantities on hand, identifies any slow-moving or obsolete inventories and writes inventory down to its net realizable value. Historically, inventory adjustments have not been material. However, in 2001, a special charge of $31,404 was recorded to reflect discontinued products written down as a result of a rebalancing of the company’s global manufacturing strategy. The company’s inventories are not highly susceptible to obsolescence given the current product mix; however, new technologies and competition in certain product markets could change future assumptions relating to excess and obsolete inventory.
Goodwill
Effective January 1, 2002, the company tests all existing goodwill at least annually for impairment using the fair value approach on a “reporting unit” basis in accordance with Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets. The company’s reporting units are defined as Domestic and Canada, Brazil, Latin America, Asia Pacific, and Europe, Middle East and Africa (EMEA). Fair values of reporting units and the related implied fair values of their respective goodwill were established using discounted cash flows. When available and as appropriate, comparative market multiples were used to corroborate results of the discounted cash flows. The company’s fair value model uses inputs such as estimated future segment performance and other significant estimates. The company uses the most current information available and performs the annual impairment analysis during the fourth quarter each year. However, actual circumstances could differ significantly from assumptions and estimates made and could result in future goodwill impairment.
Pensions and Postretirement Benefits
The postretirement benefit obligation was determined by application of the terms of medical and life insurance plans together with relevant actuarial assumptions and healthcare cost trend rates. For 2004, medical cost trend rates were projected at 7.85 percent and prescription drug cost trend rates were projected at 12.45 percent, with both cost trend rate assumptions gradually declining to 4.75 percent by 2009 and remaining at that level thereafter.
Annually, the company analyzes its key assumptions related to its pension plans. Key assumptions include the long-term rate of return on plan assets, the discount rate and the compensation levels. Such factors as financial market performance and actual compensation levels are considered when analyzing the key assumptions. The company’s key assumptions related to its pension plans for 2004 are as follows: long-term rate of return on plan assets of 8.50 percent; discount rate of 6.25 percent; and, compensation level increase of 3.00 percent.
Based on the above assumptions, the company expects pension expense to increase by approximately $4,000 in 2004, increasing from approximately $1,000 in 2003 to approximately $5,000 in 2004. Changes in any of the aforementioned assumptions could result in changes in the related retirement benefit cost and obligation.
Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. A one-percentage-point change in assumed healthcare cost trend rates would have the following effects:
The company’s pension plans remain adequately funded and the company is not required to make any additional contributions in 2004. Pension expense excludes retiree medical expense, which is also included in operating expenses and was approximately $2,800 in 2003. Retiree medical expense is expected to be approximately $3,000 in 2004.
LIQUIDITY AND CAPITAL RESOURCES
Capital resources are obtained from income retained in the business, borrowings under the company’s committed and uncommitted credit facilities, long-term industrial revenue bonds, and operating and capital leasing arrangements. Refer to Notes 7 and 9 to the Consolidated Financial Statements regarding information on outstanding and available credit facilities and bonds. Refer to Note 13 for the company’s future
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commitments relating to operating lease agreements. Management expects that cash provided from operations, available credit, long-term debt and the use of operating leases will be sufficient to finance planned working capital needs, acquisitions, investments in facilities or equipment, and purchase of company stock.
During 2003, the company generated $209,899 in cash from operating activities, an increase of $46,398, or 28.4 percent from 2002. Cash flows from operating activities are generated primarily from operating income and controlling the components of working capital. Along with the increase in operating income, 2003 cash flows from operations were positively affected by the $15,402 increase in accounts payable compared with a decrease of $31,698 in 2002. This change was the result of the timing of purchases and payments with suppliers. In addition, the change in certain other assets and liabilities positively affected cash flows from operations and was primarily the result of an increase in estimated income taxes payable. The significant increase in accounts receivable of $128,929 in 2003 compared with prior year partially offset these increases in operating cash flow. An increase in product sales in December 2003 versus December 2002 of $68,278 and the delay in collecting the Maryland election systems contract of approximately $31,000 contributed to the increase in accounts receivable. Days sales outstanding (DSO) was 73 days at December 31, 2003 compared with 68 days at December 31, 2002. The increase in DSO was due to the Maryland election systems contract. Another negative effect on operating cash flows was a $10,541 increase in inventory in 2003 as the company prepared to meet orders in 2004 compared with a decrease in inventory of $4,688 in 2002.
The company used $82,075 for investing activities in 2003, an increase of $75,225 over 2002. The increase over the prior year was the result of higher capital and rotables expenditures, which increased by $22,482 and an increase in certain other assets. Certain other assets increased primarily due to a reduction in securitization activity versus 2002. The decrease in the level of securitization resulted in a higher lease receivable balance in 2003. In addition, the company paid $10,611 for acquisitions in Asia-Pacific and the United States. Finally, the sale of a long-term investment in 2003 resulted in a net reduction of cash used for investing activities.
The company used $119,934 for financing activities in 2003, an increase of $43,456 or 56.8 percent over 2002. The overall increase in 2003 was primarily due to the increased paydown of notes payable and the increase in required repayments on the securitization facility compared with 2002 activity. During 2003, the company returned $49,242 to shareholders in the form of cash dividends, paid down notes payable by $54,829 and repurchased $12,371 of treasury shares. In addition, the level of securitizations of lease receivables continued to decline in 2003, which resulted in a decrease in the pool of securitized lease receivables, as well as less proceeds and retained interest. The decline in securitizations resulted in net repayments of $23,252 on the related 364-day facility agreement in 2003. Partially offsetting the above were cash inflows of $20,119 for the issuance of common stock pursuant to the company’s equity incentive compensation programs. Stock option exercises were higher in 2003 due to the overall performance of the company’s stock as well as the payout of accelerated and vested shares related to the death of an executive in 2003. In an effort to more directly link associate rewards to corporate performance, the company plans to grant restricted stock units in 2004, which are expensed ratably over their vesting period, in lieu of stock options, which currently do not result in any expense, to a select group of key associates. Granting restricted stock units in 2004 is expected to negatively affect earnings per share by approximately $.01.
The following table summarizes the company’s approximate obligations and commitments to make future payments under contractual obligations as of December 31, 2003:
In 2001, the company entered into a securitization agreement, which involved the sale of a pool of its lease receivables to a wholly owned, unconsolidated, qualified special purpose subsidiary, DCC Funding LLC (DCCF). The securitized pool of lease receivables was $40,619 and $71,076 at December 31, 2003 and 2002, which is not recorded on the company’s Consolidated Balance Sheets. The pool of receivables represents collateral for the 364-day facility agreement that funds the securitization. The balance of the 364-day facility agreement was $37,639 and $60,891 at December 31, 2003 and 2002, respectively.
RESULTS OF OPERATIONS
2003 Comparison with 2002
Net Sales
Net sales for 2003 totaled $2,109,673 and were $169,510 or 8.7 percent higher than net sales for 2002. The company realized increases in 2003 within both the financial self-service and security product and service categories compared to 2002 results. Financial self-service product revenue increased by $63,345 or 9.2 percent over 2002, primarily due to the introduction of the new Opteva financial self-service product line
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and the positive currency effects in EMEA and Brazil. Strong customer acceptance of the new Opteva product line during 2003 helped the company gain global market share during the year. Security product revenue increased by $55,478 or 28.1 percent over 2002, which was primarily attributed to increases in the retail, government and financial security markets as a result of growth in the market, increased market share and the addition of several strategic acquisitions during 2003. Total service revenue for financial self-service and security solutions increased $61,509 or 6.5 percent over 2002 as the company continued to expand its service customer base. For 2004, the company expects the net sales growth trends to continue for both financial self-service and security solutions as a result of continued customer acceptance of the Opteva product line and expansion of security product offerings and presence within the market.
Election systems net sales of $100,182 decreased by $10,822 or 9.7 percent over 2002 and partially offset the increases in financial self-service net sales noted above. Diebold Election Systems, Inc. (DESI) remains the leader in the election systems market despite the fact that 2003 orders were slower than anticipated. The election systems market continues to evolve. Funding is being provided by the federal government and utilized by the states; however, the guidelines and rules governing the election software and hardware have not yet been fully established. As a result, various states and industry experts are interpreting the election requirements differently. Although the company cannot predict what changes in the law could occur, any changes are likely to increase DESI’s costs of providing such products and services and may adversely affect DESI’s sales. However, the company is expecting that election systems net sales will grow significantly in 2004, with an approximately $37,000 contract expected to close in Brazil as well as several domestic contracts totaling approximately $105,000.
Gross Profit
Gross profit for 2003 totaled $627,141, and was $47,521 or 8.2 percent higher than gross profit in 2002. Product gross margin was 32.5 percent in 2003 compared with 31.7 percent in 2002. Improved international financial self-service and election systems gross margins helped drive the improvement in total product gross margins. Service gross margin in 2003 decreased to 26.7 percent compared with 28.0 percent in 2002. Increased pricing pressure in North America and Europe as well as a higher mix of installation revenue, which carries lower margins, has contributed to the decrease in service gross margin.
Operating Expenses
Total operating expenses were 17.3 percent of net sales, down slightly from 17.4 percent in 2002. The improved leveraging of operating expenses was achieved due to aggressive cost controls on personnel costs, despite the adverse impact of $5,324 from higher pension expense.
Other Income (Expense)
Investment income in 2003 increased $2,894 or 37.5 percent compared with 2002 investment income, due to net gains realized from sales and maturities of investments in 2003.
Interest expense in 2003 decreased $17,394 or 65.2 percent compared with 2002. The decrease in interest expense was primarily due to the $14,972 interest expense charge resulting from the 2002 settlement of the IRS dispute regarding the deductibility of interest on debt related to COLI. Refer to Note 14 to the Consolidated Financial Statements for further details of the COLI settlement. In addition, the decrease in overall borrowing levels and interest rates also favorably affected interest expense year over year.
Taxes on Income
The effective tax rate was 32.0 percent in 2003 as compared with 39.5 percent in 2002. The higher tax rate in 2002 was a direct result of the COLI settlement, which represented 7.5 percent of the 2002 effective tax rate. The details of the reconciliation between the U.S. statutory rate and the company’s effective tax rate are included in Note 14 to the Consolidated Financial Statements.
Net Income
Net income for 2003 was $174,776 and increased $75,622 or 76.3 percent over net income for 2002. Included in net income for 2002 were the impact of the goodwill write-off of $33,147, net of tax, which was recorded as a cumulative effect of a change in accounting principle, and the effect of the COLI settlement of $26,494, net of tax. Refer to Note 14 to the Consolidated Financial Statements for further details of the COLI settlement.
Segment Revenue and Operating Profit Summary
Diebold North America (DNA) 2003 net sales of $1,256,679 increased $131,998 or 11.7 percent over 2002 net sales of $1,124,681. The increase in DNA net sales was due to increased product and service revenue from gains in market share and the successful introduction of the Opteva financial self-service product line. Diebold International (DI) 2003 net sales of $752,592 increased by $48,315 or 6.9 percent compared with 2002 net sales of $704,277. The increase in DI net sales was primarily attributed to strong Asia-Pacific revenue growth of $37,262 or 26.5 percent, and higher revenue from EMEA of $37,873 or 13.4 percent (all of which was due to positive currency impact). These gains were partially offset by a decrease in Latin America. Election Systems (ES) & Other 2003 net sales of $100,402 decreased by $10,803 or 9.7 percent compared with 2002 net sales of $111,205 due to election systems orders that were slower than expected.
DNA operating profit in 2003 increased by $16,257 or 8.4 percent compared with 2002. The increase was primarily due to increased sales and efficiencies gained from various internal cost control initiatives. DI operating profit in 2003 increased by $10,264 or 14.6 percent compared with 2002. The increase was primarily due to gains in Asia-Pacific. The $4,842 or 22.3 percent increase in ES & Other operating
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loss was a result of higher pension expense in 2003. In addition to election systems, the ES & Other segment includes corporate administration costs.
Refer to Note 17 to the Consolidated Financial Statements for further details of segment revenue and operating profit.
2002 Comparison with 2001
Net sales for 2002 were $1,940,163, and were $179,866 or 10.2 percent higher than net sales for 2001 of $1,760,297. The increase resulted primarily from growth in the U.S. election systems business resulting from the 2002 DESI acquisition. The remaining increase was due to growth in the security business, which was partially offset by a negative foreign currency exchange impact primarily from the devaluation of the Brazilian real and 2001 nonrecurring revenue related to the InnoVentry and MedSelect businesses. InnoVentry was engaged in the development and deployment of self-service check cashing technology. MedSelect, a wholly owned subsidiary, was a supplier of inventory control solutions to the medical industry. Total financial self-service revenue decreased by $7,814 or 0.1 percent from 2001. Total security revenue increased by $97,535 or 29.2 percent versus 2001 primarily due to strategic growth in the financial market.
Gross profit for 2002 totaled $579,620 and was $61,326 or 11.8 percent higher than gross profit for 2001. Gross profit in 2001 of $518,294, was negatively affected by special charges of $31,404. Product gross margin in 2002 was 31.7 percent compared to 31.1 percent in 2001, which included a $31,404 write-down of inventory. Higher security and election systems sales in 2002, which carry lower product gross margins, negatively affected product gross margin. The change in product mix was partially offset by the $31,404 write down of inventory in 2001, which did not recur in 2002. Service gross margin in 2002 increased to 28.0 percent compared with 27.6 percent in 2001. This improvement in service gross margin was realized on a global basis.
Total operating expenses were 17.4 percent of net sales, down from 21.6 percent in 2001. Operating expenses in 2001 were negatively affected by the realignment, MedSelect and other charges of $58,490. The net decrease in operating expenses as a percentage of net sales was primarily due to efficiencies gained from various internal initiatives.
Realignment, Special and Other Charges
During 2002, the company accepted an offer by the IRS to settle its previously disclosed dispute on a claim concerning the deductibility of interest on corporate-owned life insurance from 1990 to 1998. This resulted in a 2002 after-tax charge of $26,494. In 2002, the company paid approximately $34,000 related to this claim and received a refund of approximately $8,300 in 2003. No other years after 1998 are subject to this claim. Of the $26,494, net of tax charge, $14,972 ($10,454, net of tax) was charged to interest expense and $16,040 was charged to taxes on income in 2002.
During 2001, the company recognized a pretax charge of $109,893 ($73,628 after tax or $1.03 per diluted share) for expenses related to a corporate-wide realignment program, as well as other charges. Components of the charge were as follows: a special charge of $31,404 against cost of sales related to discontinued products that resulted from a rebalancing of the company’s global manufacturing strategy; realignment charges of $42,269 resulting from staff reductions, the closing of various facilities, the exiting of certain product lines, including the sale of MedSelect and actions taken to further integrate the company’s European operations; $29,861 in losses incurred in the write-off of the InnoVentry investment and related receivables; and $6,360 in other charges included in selling and administrative expense.
Investment income in 2002 increased by $15,414 or 200.2 percent compared with 2001. Investment income in 2001 included the effect of the InnoVentry write-off of $20,000. Year over year, investment income was negatively affected by lower interest rates and a lower investment portfolio.
Interest expense in 2002 increased by $14,011 or 110.6 percent compared with 2001. The increase over 2001 was primarily the result of a $14,972 interest expense charge, which resulted from the settlement in 2002 of the dispute with the IRS regarding the deductibility of interest on debt related to COLI. Refer to Note 14 to the Consolidated Financial Statement for further details of the COLI settlement. The decrease in interest rates during 2002 and 2001 favorably affected interest expense year over year.
Miscellaneous, net changed $15,806 or 114.5 percent compared with 2001. The majority of the change was due to goodwill amortization. Goodwill amortization expense was zero for 2002 as the company adopted SFAS No. 142. Goodwill amortization expense was $15,354 in 2001.
The effective tax rate was 39.5 percent in 2002 as compared with 33.0 percent in 2001. The increased tax rate in 2002 was a direct result of the COLI settlement, which represented 7.5 percent of the 2002 effective tax rate. The details of the reconciliation between the U.S. statutory rate and the company’s effective tax rate are included in Note 14 to the Consolidated Financial Statements.
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Net income for 2002 was $99,154 and increased $32,261 or 48.2 percent over net income for 2001. Included in net income for 2002 were the effect of the goodwill write-off of $33,147, net of tax, which was recorded as a cumulative effect of a change in accounting principle, and the effect of the COLI settlement of $26,494, net of tax. Included in net income for 2001 was the effect of the corporate-wide realignment program including other charges of $73,628, net of tax.
DNA 2002 net sales of $1,124,681 increased $116,181 or 11.5 percent over 2001 net sales of $1,008,500. The increase in DNA net sales was due to increased service revenue from gains in market share. DI 2002 net sales of $704,277 decreased by $36,392 or 4.9 percent compared with 2001 net sales of $740,669. The decrease in DI net sales was primarily attributable to nonrecurring 2001 euro conversion revenue of $20,325 in EMEA as well as the devaluation of the Brazilian real year over year, partially offset by strong Asia-Pacific revenue growth of $30,176 or 27.3 percent. ES & Other 2002 net sales of $111,205 increased by $100,077 or 899.3 percent compared wiht 2001 net sales of $11,128. The increase in ES & Other net sales was due to the growth in the U.S. election systems business resulting from the 2002 acquisition of DESI. In addition to election systems, the ES & Other segment includes corporate administration costs.
DNA operating profit in 2002 increased by $36,026 or 23.0 percent compared with 2001. The increase was primarily due to efficiencies gained from various internal initiatives. DI operating profit in 2002 increased by $2,278 or 3.3 percent compared with 2001. The increase was primarily attributable to gains in Asia-Pacific, partially offset due to the devaluation of the Brazilian real and the negative impact to EMEA from a weak economic environment and nonrecurring euro conversion revenues in 2001. The significant 2001 operating loss in the ES & Other segment was due to special charges and realignment expense of $89,893.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, which addresses consolidation by business enterprises of variable interest entities (VIEs) either: (1) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) in which the equity investors lack an essential characteristic of a controlling financial interest. In December 2003, the FASB completed deliberations of proposed modifications to FIN 46 (Revised Interpretations) resulting in multiple effective dates based on the nature as well as the creation date of the VIE. The company has one VIE, which is a qualified special purpose subsidiary, DCC Funding LLC as discussed in Note 2 of the Consolidated Financial Statements. This VIE was created in March of 2001 and as a result, VIE’s created prior to February 1, 2003 may be accounted for under the original or revised interpretation’s provisions. The company is accounting for DCCF under the original interpretation. Therefore, FIN 46 and the Revised Interpretations do not have an effect on the company’s financial position, operations or cashflows.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends and clarifies accounting for derivative instruments and hedging activities under SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities. SFAS No. 149 provides guidance relating to decisions made (a) as part of the Derivatives Implementation Group process, (b) in connection with other FASB projects dealing with financial instruments and (c) regarding implementation issues raised in the application of the definition of a derivative and the characteristics of a derivative that contains financing components. SFAS No. 149 is effective for contracts entered into or modified and for hedging relationships designated after June 30, 2003. The application of this Statement does not have an effect on the company’s financial position, operations or cashflows.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments and Characteristics of both Liabilities and Equity, which requires freestanding financial instruments such as mandatorily redeemable shares, forward purchase contracts and written put options to be reported as liabilities by their issuers as well as related new disclosure requirements. The provisions of SFAS No. 150 are effective for instruments entered into or modified after May 31, 2003 and pre-existing instruments as of the beginning of the first interim period that commences after June 15, 2003. The application of this Statement does not have an effect on the company’s financial position, operations or cashflows.
In November 2002, the EITF issued a final consensus on EITF Issue No. 00-21,Accounting for Revenue Arrangements with Multiple Deliverables, which addresses how to account for arrangements that may involve the delivery or performance of multiple products, services, and/or rights to use assets. EITF Issue No. 00-21 is effective prospectively for arrangements entered into in fiscal periods beginning after June 15, 2003. Companies may also elect to apply the provisions of EITF Issue No. 00-21 to existing arrangements and record the income statement impact as the cumulative effect of a change in accounting principle. The company has adopted EITF Issue No. 00-21 prospectively for contracts beginning after June 30, 2003.
In December 2003, the SEC issued Staff Accounting Bulletin No. 104, Revenue Recognition, which clarifies existing SEC guidance regarding revenues for contracts that contain multiple deliverables to make it consistent with EITF Issue No. 00-21. The adoption of SAB 104 did not have a material effect on the company’s company’s financial position, operations or cashflows.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company is exposed to foreign currency exchange rate risk inherent in its international operations denominated in currencies other than the U.S. dollar. A hypothetical 10 percent unfavorable movement in the applicable foreign exchange rates would have resulted in a decrease in 2003 year-to-date operating profit of approximately $7,800. The sensitivity model assumes an instantaneous, parallel shift in the foreign currency exchange rates. Exchange rates rarely move in the same direction. The assumption that exchange rates change in an instantaneous or parallel fashion may overstate the impact of changing exchange rates on amounts denominated in a foreign currency.
The company’s risk management strategy uses derivative financial instruments such as forwards to hedge certain foreign currency exposures. The intent is to offset gains and losses that occur on the underlying exposures, with gains and losses on the derivative contracts hedging these exposures. The company does not enter into derivatives for trading purposes.
The company manages interest rate risk with the use of variable rate borrowings under its committed and uncommitted credit facilities and interest rate swaps. Variable rate borrowings under the credit facilities totaled $190,172 at December 31, 2003. A one percent increase or decrease in interest rates would have resulted in an increase or decrease in interest expense of approximately $1,900. The company had no derivative contracts hedging interest rate risk as of December 31, 2003.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Refer to pages 15 through 39.
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Consolidated Balance SheetsAt December 31,(In thousands, except share and per share amounts)
See accompanying Notes to Consolidated Financial Statements.
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Consolidated Statements of IncomeYears Ended December 31,(In thousands, except per share amounts)
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Consolidated Statements of Shareholders’ Equity(In thousands, except share amounts)
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Consolidated Statements of Cash FlowsYears ended December 31,(In thousands)
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Notes to Consolidated Financial Statements(Dollars in thousands, except per share amounts and as noted)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The Consolidated Financial Statements include the accounts of the company and its wholly and majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Statements of cash flows
For the purpose of the Consolidated Statements of Cash Flows, the company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.
International operations
The financial statements of the company’s international operations are measured using local currencies as their functional currencies, with the exception of Venezuela, Mexico, Argentina and Ecuador, which are measured using the U.S. dollar as their functional currency. The company translates the assets and liabilities of its non-U.S. subsidiaries at the exchange rates in effect at year-end and the results of operations at the average rate throughout the year. The translation adjustments are recorded directly as a separate component of shareholders’ equity, while transaction gains (losses) are included in net income. Sales to customers outside the United States approximated 36.9 percent of net sales in 2003, 37.1 percent of net sales in 2002 and 43.3 percent of net sales in 2001.
Financial instruments
The carrying amount of financial instruments, including cash and cash equivalents, trade receivables and accounts payable, approximated their fair value as of December 31, 2003 and 2002 because of the relatively short maturity of these instruments.
Revenue recognition
The company enters into contracts to sell its products and services.
Product Product revenue consists of financial self-service, security and election equipment sales. The majority of financial self-service and security product sales agreements contain standard terms and conditions. Sales agreements pertaining to election equipment sales contain multiple deliverables and custom terms and conditions. Financial self-service and security product revenue is recognized in accordance with the terms of the contract. If customer acceptance occurs at time of delivery to a customer designated warehouse and the customer has assumed risk of loss, product revenue is recognized at time of delivery. If customer acceptance does not occur until after delivery, product revenue is delayed until customer acceptance is obtained.
Service Service revenue primarily consists of billed work, service contract and product installation revenue related to either one-time or ongoing maintenance of financial self-service, security, and election equipment. Revenue related to billed work is recognized upon completion of the service provided. Revenue on service contracts is recognized ratably over the contract period. The financial self- service installation revenue relative to these contracts is recognized upon customer acceptance of the respective equipment.
Election systems Election systems revenue consists of election equipment, software, training, support, installation and maintenance. The election equipment and software components are included in product revenue. The training, support, installation and maintenance components are included in service revenue. The election systems contracts contain multiple deliverable elements and custom terms and conditions. As a result, significant analysis is required to determine the appropriate revenue recognition for each contract, including whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting for revenue recognition purposes and, if so, how the price should be allocated among the deliverable elements and when to recognize revenue for each element. The company recognizes revenue for delivered elements only when the fair values of undelivered elements are known, uncertainties regarding customer acceptance are resolved and there are no customer-negotiated refund or return rights affecting the revenue recognized for delivered elements. Some contracts may contain discounts and, as such, revenue is recognized using the relative fair value method of allocation of revenue to the product and service components of contracts.
Trade receivables
The concentration of credit risk in the company’s trade receivables with respect to financial and government sectors is substantially mitigated by the company’s credit evaluation process and the geographical dispersion of sales transactions from a large number of individual customers. The company maintains allowances for potential credit losses, and such losses have been minimal and within management’s expectations. The allowance for doubtful accounts is estimated based on various factors including revenue, historical credit losses and current trends.
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Domestic inventories are valued at the lower of cost or market applied on a first-in, first-out basis, and foreign inventories are valued using the average cost method. With the development of new products, the company also rationalizes its product offerings and will write down discontinued product to the lower of cost or net realizable value.
Depreciation and amortization
Depreciation of property, plant and equipment is computed using the straight-line method for financial statement purposes. Accelerated methods of depreciation are used for federal income tax purposes. Amortization of leasehold improvements is based upon the shorter of original terms of the lease or life of the improvement.
Research, development and engineering
Total research, development and engineering costs charged to expense were $60,451, $56,693 and $58,321 in 2003, 2002 and 2001, respectively.
Advertising costs
Advertising costs are expensed as incurred. Total advertising costs charged to expense were $12,086, $12,227 and $12,930 in 2003, 2002 and 2001, respectively.
Other assets
Other assets consist primarily of pension assets, computer software, customer demonstration equipment, deferred tooling, investment in service contracts, retained interest in DCCF, finance receivables and certain other assets. Where applicable, these assets are stated at cost and, if applicable, are amortized ratably over a period of three to five years.
Goodwill is the cost in excess of the net assets of acquired businesses. These assets are stated at cost and, effective January 1, 2002, are no longer amortized, but evaluated at least annually for impairment, in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 establishes accounting and reporting standards for acquired goodwill and other intangible assets in that goodwill and other intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives. The year ended 2001 earnings per share of $0.93 included goodwill amortization of $10,287, net of tax. Amortization expense related to goodwill was $15,354 for the year ended December 31, 2001. Had goodwill amortization not been recorded in the year ended December 31, 2001, net income would have increased to $77,180; and net income per share to $1.08 on a diluted basis.
Under SFAS No. 142, the company is required to test all existing goodwill for impairment on a “reporting unit” basis. The reporting units were determined on a geographical basis that combines two or more component-level reporting units with similar economic characteristics within a single reporting unit. A fair value approach is used to test goodwill for impairment. An impairment charge is recognized for the amount, if any, by which the carrying amount of goodwill exceeds its implied fair value. Fair values of reporting units and the related implied fair values of their respective goodwill were established using discounted cash flows. When available and as appropriate, comparative market multiples were used to corroborate results of the discounted cash flows.
In June 2002, the company completed the transitional goodwill impairment test in accordance with SFAS No. 142, which resulted in a noncash charge of $38,859 ($33,147 after tax, or $0.46 per share) and is reported in the caption “Cumulative effect of a change in accounting principle” for the year ended December 31, 2002. All of the charge related to the company’s businesses in Latin America and Brazil. The primary factor that resulted in the impairment charge was the difficult economic environment in those markets. No impairment charge was appropriate under previous goodwill impairment standards, which were based on undiscounted cash flows. The company performed annual impairment tests as of November 30, 2003 and 2002 resulting in no impairment.
The changes in carrying amount of goodwill for the years ended December 31, 2003 and 2002 are as follows:
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Deferred income
Deferred income is largely related to service contracts and deferred installation revenue. Service contract revenue is recognized for customer service collections in advance of the period in which the service will be performed and is recognized in income on a straight-line basis over the contract period.
Stock-based compensation
Compensation cost is measured on the date of grant only if the current market price of the underlying stock exceeds the exercise price. The company provides pro forma net income and pro forma net earnings per share disclosures for employee stock option grants made in 1995 and subsequent years as if the fair value based method had been applied in accordance with SFAS No. 123, Accounting for Stock Based Compensation.
In the following chart, the company provides net income and basic earnings per share reduced by the pro forma amounts calculating compensation cost for the company’s fixed stock option plan under the fair value method. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions for 2003, 2002 and 2001, respectively: risk-free interest rate of 2.8, 4.2 and 4.9 percent; dividend yield of 1.8, 1.9 and 1.7 percent; volatility of 41, 42 and 41 percent; and average expected lives of six years for management and four years for executive management and nonemployee directors. The company’s stock options are accounted for in accordance with Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees. As a result, no compensation expense has been recognized in the “as reported” amounts listed in the table below.
Taxes on income
Deferred taxes are provided on an asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Earnings per share
Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if common stock equivalents were exercised and then shared in the earnings of the company.
Comprehensive income (loss)
The company displays comprehensive income (loss) in the Consolidated Statements of Shareholders’ Equity and accumulated other comprehensive loss separately from retained earnings and additional capital in the Consolidated Balance Sheets and Statements of Shareholders’ Equity. Items considered to be other comprehensive income (loss) include adjustments made for foreign currency translation (under SFAS No. 52), pensions (under SFAS No. 87) and unrealized holding gains and losses on available-for-sale securities (under SFAS No. 115). Accumulated other comprehensive loss consists of the following:
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Translation adjustments are not booked net of tax. Those adjustments are accounted for under the indefinite reversal criterion of APB Opinion 23,Accounting for Income Taxes—Special Areas.
Use of estimates in preparation of Consolidated Financial Statements
The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
The company has reclassified the presentation of certain prior-year information to conform to the current presentation.
NOTE 2: SECURITIZATIONS
On March 30, 2001, Diebold Credit Corporation (DCC), a wholly owned consolidated subsidiary, entered into an agreement to sell, on an ongoing basis, a pool of its lease receivables to a wholly owned, unconsolidated, qualified special purpose subsidiary, DCC Funding LLC (DCCF). DCC sold $95,610 of lease receivables on March 30, 2001 to DCCF. Under a 364-day facility agreement, DCCF sold and, subject to certain conditions, may from time to time sell an undivided fractional ownership interest in the pool of receivables to a multi-seller receivables securitization company (Conduit). Upon sale of the receivables to the Conduit, DCCF holds a subordinated interest in the receivables and services as well as administers and collects the receivables. DCCF and the Conduit have no recourse to DCC’s other assets for failure of debtors to pay when due.
DCC has a retained interest in the transferred receivables in the form of a note receivable from DCCF to the extent that they exceed advances to DCCF by the Conduit. DCC initially and subsequently measures the fair value of the retained interest at management’s best estimate of the discounted expected future cash collections on the transferred receivables. Actual cash collections may differ from these estimates and would directly affect the fair value of the retained interests. The initial transaction on March 31, 2001 resulted in DCC receiving proceeds from securitization of $71,400. DCC recorded an after-tax gain of $2,300 on the sale of the receivables. Subsequent sales of lease receivables totaling $1,931 and $10,689 resulted in additional cash proceeds of $248 and $8,500 for the years ended December 31, 2003 and 2002, respectively. Gains incurred as a result of the sales were immaterial. The fair value of the retained interest of $2,096 and $8,236 were included in other assets in the Consolidated Balance Sheets as of December 31, 2003 and 2002.
NOTE 3: INVESTMENT SECURITIES
At December 31, 2003 and 2002, the investment portfolio was classified as available-for-sale. The marketable debt and equity securities are stated at fair value. The fair value of securities and other investments is estimated on quoted market prices. The company’s investment securities, excluding the cash surrender value of insurance contracts of $47,386 and $44,691 as of December 31, 2003 and 2002, respectively, are summarized as follows:
Realized gains (losses) from the sale of securities were $220, $(1,033) and $(865) in 2003, 2002 and 2001, respectively. Proceeds from the sale of available-for-sale securities were $31,505, $5,751 and $13,457 in 2003, 2002 and 2001, respectively. Gains and losses are determined using the specific identification method.
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NOTE 4: INVENTORIES
Major classes of inventories at December 31 are summarized as follows:
NOTE 5: PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant and equipment, at cost less accumulated depreciation, at December 31:
The Oracle global information technology platform of $58,867 and $36,025 as of December 31, 2003 and 2002, respectively, was included in construction in progress. During 2003, 2002, and 2001, depreciation expense, computed on a straight-line basis over the estimated useful lives of the related assets, was $49,653, $42,124 and $45,453, respectively.
NOTE 6: FINANCE RECEIVABLES
The components of finance receivables for the net investment in sales-type leases are as follows:
Future minimum lease receivables due from customers under sales-type leases as of December 31, 2003 are as follows:
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NOTE 7: SHORT-TERM FINANCING
The company’s short-term financing is as follows:
1 77,267 euro (€) borrowing translated at the applicable 12/31/2003 spot rate; €106,200 borrowing translated at the applicable 12/31/2002 spot rate.
2 8,000 Australian dollar (AUD) borrowing translated at the applicable 12/31/2003 spot rate; AUD 17,500 borrowing translated at the applicable 12/31/2002 spot rate.
The company has available credit facilities with domestic and foreign banks for various purposes. The amount of committed loans at December 31, 2003 that remained available was $109,008, €72,733 ($91,293 translated) and 27,500 Brazilian real ($9,518 translated). In addition to the committed lines of credit, $50,000 in uncommitted lines of credit was available as of December 31, 2003.
The average short-term rate on the bank credit lines was 2.36 percent, 3.01 percent and 4.90 percent at December 31, 2003, 2002 and 2001, respectively. Interest on short-term financing charged to expense for the year ended December 31 was $6,710, $7,462 and $10,653 for 2003, 2002 and 2001, respectively.
The company’s short-term financing agreements contain various restrictive covenants, including net debt to capitalization and interest coverage ratios. As of December 31, 2003, the company is in compliance with all restrictive covenants.
NOTE 8: REALIGNMENT, SPECIAL AND OTHER CHARGES
During 2001, the company recognized a pretax charge of $109,893 ($73,628 after tax or $1.03 per diluted share) for expenses related to a corporate-wide realignment program as well as other charges. Components of the charge were as follows: a special charge of $31,404 against cost of sales related to discontinued products that resulted from a rebalancing of the company’s global manufacturing strategy; realignment charges of $42,269 resulting from staff reductions, the closing of various facilities, the exiting of certain product lines, including the sale of MedSelect and actions taken to further integrate the company’s European operations; $29,861 in losses incurred in the write-off of the InnoVentry investment and related receivables; and $6,360 in other charges, which are included in selling and administrative expense.
The following are explanations of the realignment, special and other charges described above:
During 2001, staff reductions resulted in 856 involuntary employee terminations and a voluntary early retirement program involving 153 participants. Severance and other employee costs charged to expense in 2001 in connection with the program amounted to $13,987 with an additional $7,546 of expense being recognized for the enhanced early retirement benefits.
The loss incurred in connection with the closing of facilities amounted to $5,346, while the costs associated with the exit of certain product lines including the sale of MedSelect amounted to $10,354 in 2001. MedSelect, a wholly owned subsidiary, was a supplier of inventory control solutions to the medical industry. The assets of the subsidiary were sold in July 2001 and ancillary product lines were sold in September 2001 to Medecorx, Inc.
During 2001, losses incurred due to the write-off of the InnoVentry investment amounted to $20,000, which is reflected in investment expense. InnoVentry engaged in the development and deployment of self-service check cashing technology. Due to a depletion of its capital resources, InnoVentry ceased operations in the third quarter of 2001. This prompted the company to write off its investment as well as certain receivables amounting to $9,861, which were charged to selling and administrative expense. The remainder of the other charges, totaling $6,360, was principally related to costs associated with bad debt write-offs, loss contingencies and other miscellaneous charges and were included in selling and administrative expense.
Approximately $82,769 of the $109,893 realignment, special and other charges incurred in 2001 were noncash items. Realignment expense of $697 remained accrued as of December 31, 2002. The remainder of the realignment accrual was paid out in 2003.
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The following table shows the realignment charge and accrual and related activity:
NOTE 9: OTHER LONG-TERM LIABILITIES
Included in other long-term liabilities are bonds payable and a financing agreement. Bonds payable at December 31 consisted of the following:
In 1997, three 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. Each industrial development revenue bond carries a variable interest rate, which is reset weekly by the remarketing agents. The company is in compliance with the covenants of its loan agreements and believes that the covenants will not restrict its future operations. One of the manufacturing facilities was disposed of in 2002, causing one of the bonds to become due April 1, 2003. As a result, this bond was classified as other current liabilities as of December 31, 2002.
A financing agreement was entered into in July 2002 with Fleet Business Credit, LLC in order to finance the purchase of an Oracle global information technology platform. The financing agreement was for $24,862, payable in quarterly installments of $2,128, which includes interest at 5.75 percent, through May 2007. The outstanding balance of the financing agreement was $15,496 and $21,157 as of December 31, 2003 and 2002, respectively. Interest paid was $1,043 and $550 in 2003 and 2002, respectively.
NOTE 10: SHAREHOLDERS’ EQUITY
On the basis of amounts declared and paid, the annualized quarterly dividends per share were $0.68, $0.66 and $0.64 in 2003, 2002 and 2001, respectively.
Fixed stock options
Under the 1991 Equity and Performance Incentive Plan (1991 Plan) as amended and restated, common shares are available for grant of options at a price not less than 85 percent of the fair market value of the common shares on the date of grant. The exercise prices of options granted since January 1, 1995 have been equal to the market price at the grant date, and, accordingly, no compensation cost has been recognized. In general, options are exercisable in cumulative annual installments over five years, beginning one year from the date of grant. In February 2001, the 1991 Plan was amended to extend the term of the 1991 Plan for ten years beginning April 2, 2001 and increase the numbers of shares available in the Plan by 3,000,000 in addition to other miscellaneous administrative matters. The number of common shares that may be issued or delivered pursuant to the 1991 Plan is 6,611,623, of which 2,920,290 shares were available for issuance at December 31, 2003. The 1991 Plan will expire on April 2, 2011.
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Under the 1997 Milestone Stock Option Plan (Milestone Plan), options for 100 common shares were granted to all eligible salaried and hourly employees. The exercise price of the options granted under the Milestone Plan was equal to the market price at the grant date, and, accordingly, no compensation cost has been recognized. In general, all options were exercisable beginning two years from the date of grant. The number of common shares that could be issued or delivered pursuant to the Milestone Plan was 600,000. The Milestone Plan expired on March 2, 2002.
The following is a summary with respect to options outstanding at December 31, 2003, 2002 and 2001, and activity during the years then ended:
The following table summarizes pertinent information regarding fixed stock options outstanding and options exercisable at December 31, 2003:
Restricted share grants
The 1991 Plan provides for the issuance of restricted shares to certain employees. No restricted shares were issued during the year ended December 31, 2003 and 25,830 restricted shares were outstanding as of December 31, 2003. The shares are subject to forfeiture under certain circumstances. Unearned compensation representing the fair market value of the shares at the date of grant will be charged to income over the three- to seven-year vesting period. During 2003, 2002 and 2001, $5,031, $1,922 and $1,412 was charged to expense relating to the 1991 Plan.
Performance share grants
The 1991 Plan provides for the issuance of common shares to certain employees based on certain management objectives, as determined by the Board of Directors each year. Each performance share that is earned out entitles the holder to the then current value of one common share. All of the management objectives are calculated over a three-year period. No amount is payable unless the management objectives are met. During 2003 and 2002, 258,570 and 203,706 performance shares were granted, respectively, to certain employees. The compensation cost charged against income for the performance-based share plan was $8,677, $1,240 and $3,750 in 2003, 2002 and 2001, respectively.
In addition, the Board of Directors elected to issue a one-time award totaling 24,800 shares in 2002 that will be paid out after seven years of employment, or earlier, if targeted stock performance levels are achieved, or in the event of death, disability or retirement.
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Rights Agreement
On January 28, 1999, the Board of Directors announced the adoption of a new Rights Agreement that provided for Rights to be issued to shareholders of record on February 11, 1999. The description and terms of the Rights are set forth in the Rights Agreement, dated as of February 11, 1999, between the company and the Bank of New York, as Agent. Under the Rights Agreement, the Rights trade together with the common shares and are not exercisable. In the absence of further Board action, the Rights generally will become exercisable and allow the holder to acquire common shares at a discounted price if a person or group acquires 20 percent or more of the outstanding common shares. Rights held by persons who exceed the applicable threshold will be void. Under certain circumstances, the Rights will entitle the holder to buy shares in an acquiring entity at a discounted price. The Rights Agreement also includes an exchange option. In general, after the Rights become exercisable, the Board of Directors may, at its option, effect an exchange of part or all of the Rights (other than Rights that have become void) for common shares. Under this Option, the company would issue one common share for each Right, subject to adjustment in certain circumstances. The Rights are redeemable at any time prior to the Rights becoming exercisable and will expire on February 11, 2009, unless redeemed or exchanged earlier by the company.
NOTE 11: EARNINGS PER SHARE(In thousands, except per share amounts)
The following data show the amounts used in computing earnings per share and the effect on the weighted-average number of shares of dilutive potential common stock.
Fixed stock options on 195, 530 and 1,303 common shares in 2003, 2002 and 2001, respectively, were not included in computing diluted earnings per share, because their effects were antidilutive.
NOTE 12: BENEFIT PLANS
The company has several pension plans covering substantially all United States employees. Plans covering salaried employees provide pension benefits that are based on the employee’s compensation during the 10 years before retirement. The company’s funding policy for salaried plans is to contribute annually if required at an actuarially determined rate. Plans covering hourly employees and union members generally provide benefits of stated amounts for each year of service. The 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. Currently there are no plan assets and the company funds the benefits as the claims are paid.
The postretirement benefit obligation was determined by application of the terms of medical and life insurance plans together with relevant actuarial assumptions and healthcare cost trend rates. The company uses a September 30 measurement date for its pension and other benefits.
The following table sets forth the change in benefit obligation, change in plan assets, funded status, Consolidated Balance Sheet presentation and relevant assumptions for the company’s defined benefit pension plans and other benefits at December 31:
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In 2001, as a part of the corporate realignment plan, the company offered a Voluntary Early Retirement Program (VERP) to qualifying employees, which resulted in a one-time additional charge of $4,507 in pension and $2,495 in other benefits expense.
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Minimum liabilities have been recorded in 2003 and 2002 for the plans whose total accumulated benefit obligation exceeded the fair value of the plan’s assets. The accumulated benefit obligation for all defined benefit pension plans was $308,284 and $267,510 at December 31, 2003 and 2002, respectively.
Additional Information
The discount rate assumptions were determined based on current investment yields on AA-rated corporate long-term bonds. The expected long-term rate of return assumptions were determined, on a weighted basis, based on the expected return of the various asset classes held by the trust. The rate of compensation increase assumptions reflect the company’s long-term actual experience and future and near-term outlook
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Plan Assets
The company’s pension weighted-average asset allocations at December 31, 2003 and 2002, and target allocation for 2004, by asset category are as follows:
Cash Flows
The company expects to contribute $1,513 to its pension plans and $3,313 to its other postretirement benefit plan in 2004.
Retirement Savings Plan
The company offers an employee 401(k) Savings Plan (Savings Plan) to encourage eligible employees to save on a regular basis by payroll deductions, and to provide them with an opportunity to become shareholders of the company. Effective July 1, 2003, a new enhanced benefit to the Savings Plan became effective. All new salaried employees hired on or after July 1, 2003 are provided with an employer basic matching contribution in the amount of 100 percent of the first three percent of eligible pay and 50 percent of the next three percent of eligible pay. This new enhanced benefit is in lieu of participation in the pension plan for salaried employees. For employees hired prior to July 1, 2003, the company matched 60 percent of participating employees’ first 3 percent of contributions and 30 percent of participating employees’ second 3 percent of contributions. Total company match was $7,129, $6,813 and $6,100 in 2003, 2002 and 2001, respectively.
NOTE 13: LEASES
The company’s future minimum lease payments due under operating leases for real and personal property in effect at December 31, 2003 are as follows:
Rental expense under all lease agreements amounted to approximately $47,202, $44,474 and $40,032 for 2003, 2002 and 2001, respectively.
NOTE 14: INCOME TAXES
Income tax expense attributable to income from continuing operations consists of:
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In addition to the 2003 income tax expense of $82,247, certain income tax benefits of $4,657 were allocated directly to shareholders’ equity.
A reconciliation of the difference between the U.S. statutory tax rate and the effective tax rate is as follows:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the company’s deferred tax assets and liabilities are as follows:
At December 31, 2003, the company’s international subsidiaries had deferred tax assets relating to net operating loss carryforwards of $5,634, which expire in years 2005 through 2013. The company recorded a valuation allowance to reflect the estimated amount of deferred tax assets that, more likely than not, will not be realized. The valuation allowance relates to certain international net operating losses and other international deferred tax assets.
During 2002, the company accepted an offer by the IRS to settle its previously disclosed dispute on a claim concerning the deductibility of interest on corporate-owned life insurance from 1990 to 1998. This resulted in an after-tax charge of $26,494. As of December 31, 2002, the company paid approximately $34,000 related to this claim and received a refund of approximately $8,300 in 2003. No other years after 1998 are subject to this claim. Of the $26,494, net of tax charge, $14,972 ($10,454, net of tax) was charged to interest expense and $16,040 was charged to taxes on income.
NOTE 15: COMMITMENTS AND CONTINGENCIES
At December 31, 2003, 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 management’s opinion, the financial statements would not be materially affected by the outcome of any present legal proceedings, commitments, or asserted claims.
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NOTE 16: GUARANTEES AND PRODUCT WARRANTIES
The company has applied the provisions of FASB Interpretation No. 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others, to its agreements that contain guarantees or indemnification clauses. These disclosure requirements expand those required by FASB Statement No. 5, Accounting for Contingencies, by requiring a guarantor to disclose certain types of guarantees, even if the likelihood of requiring the guarantor’s performance is remote. The following is a description of arrangements in effect as of December 31, 2003 in which the company is the guarantor.
In connection with the construction of three of its manufacturing facilities, the company guaranteed repayment of principal and interest on a total of $20,800 variable rate industrial development revenue bonds by obtaining letters of credit. The bonds were issued with a 20-year original term and are scheduled to mature in 2017. However, one of the manufacturing facilities was sold in 2002, which caused the company to repay $7,500 of bonds outstanding on April 1, 2003. Any default, as defined in the agreements, would obligate the company for the full amount of the outstanding bonds through maturity. At December 31, 2003, the carrying value of the liability was $13,300.
The company provides its global operations guarantees and standby letters of credit through various financial institutions to suppliers, regulatory agencies and insurance providers. If the company is not able to make payment, the suppliers, regulatory agencies and insurance providers may draw on the pertinent bank. At December 31, 2003, the maximum future payment obligations relative to these various guarantees totaled $25,724, of which $15,141 represented standby letters of credit to insurance providers, and no associated liability was recorded.
The company provides its customers a standard 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:
NOTE 17: SEGMENT INFORMATION
The company’s segments are comprised of its three main sales channels: Diebold North America (DNA), Diebold International (DI) and Election Systems and Other (ES & Other). These sales channels are evaluated based on revenue from customers and operating profit contribution to the total corporation. A reconciliation between segment information and the Consolidated Financial Statements is disclosed. Revenue by geography and revenue by product and service solutions are also disclosed. All income and expense items below operating profit are not allocated to the segments and are not disclosed.
The DNA segment sells financial and retail systems and also services financial, retail and medical systems in the United States and Canada. The DI segment sells and services financial and retail systems over the remainder of the globe. The segment called ES & Other includes the operating results of DESI as well as corporate administrative costs. Each of the sales channels buys the goods it sells from the company’s manufacturing plants through intercompany sales that are eliminated in consolidation, and intersegment revenue is not significant. Each year, intercompany pricing is agreed upon that drives sales channel operating profit contribution. As permitted under SFAS 131, certain information not routinely used in the management of these segments, information not allocated back to the segments or information that is impractical to report is not shown. Items not allocated are as follows: interest income, interest expense, equity in the net income of investees accounted for by the equity method, income tax expense or benefit, extraordinary items, significant noncash items and other noncurrent assets.
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NOTE 18: ACQUISITIONS
The company paid a combination of $4,840 of company stock and $10,611, net of cash acquired, in 2003 for the following:
In January 2002, the company announced the acquisition of Global Election Systems, Inc. (GES), now known as Diebold Election Systems, Inc. (DESI), a manufacturer and supplier of electronic voting terminals and solutions. GES was acquired with a combination of cash and stock for a total purchase price of $24,667. A cash payment of $4,845 was made in January 2002 with the remaining purchase price being paid with company stock valued at $19,822. Goodwill and other intangibles acquired in the transaction amounted to $41,029. DESI reported revenue of $111,004 for the year ended December 31, 2002. The acquisition was accretive to earnings per share and operating profit.
NOTE 19: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which for the company was effective January 1, 2001. SFAS No. 133 established accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recognized on the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 required that changes in the derivative instrument’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative instrument’s gains and losses to partially or wholly offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting treatment. The cumulative effect of adopting SFAS No. 133 as of January 1, 2001 was not material to the company’s consolidated financial statements.
Since a substantial portion of the company’s operations and revenue arise outside of the United States, financial results can be significantly affected by changes in foreign exchange rate movements. The company’s financial risk management strategy uses forward contracts to hedge certain foreign currency exposures. Such contracts are designated at inception to the related foreign currency exposures being hedged. The company’s intent is to offset gains and losses that occur on the underlying exposures, with gains and losses on the derivative contracts hedging these exposures. The company does not enter into any speculative positions with regard to derivative instruments. The company’s forward contracts generally mature within six months.
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The company records all derivatives on the balance sheet at fair value. For derivative instruments not designated as hedging instruments, changes in their fair values are recognized in earnings in the current period. Results from settling the company’s forward contracts were not material to the financial statements as of December 31, 2003 and 2002, respectively.
NOTE 20: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
See “Comparison of Selected Quarterly Financial Data (Unaudited)” on page 37 of this Annual Report on form 10-K.
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Independent Auditors’ Report
The Board of Directors and ShareholdersDiebold, Incorporated
We have audited the accompanying consolidated balance sheets of Diebold, Incorporated and subsidiaries (Company) as of December 31, 2003 and 2002 and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Diebold, Incorporated and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.
/s/ KPMG LLP
KPMG LLPCleveland, OhioJanuary 28, 2004
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Comparison of Selected Quarterly Financial Data (Unaudited)(In thousands, except per share amounts)
* The sums of the quarterly figures do not equal annual figures due to rounding or differences in the weighted-average number of shares outstanding during the respective periods.
See Note 20 to Consolidated Financial Statements and 5-Year Summary 2003-1999.
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Report of Management
The management of Diebold, Incorporated is responsible for the contents of the consolidated financial statements, which are prepared in conformity with accounting principles generally accepted in the United States of America. The consolidated financial statements necessarily include amounts based on judgments and estimates. Financial information elsewhere in the annual report is consistent with that in the consolidated financial statements.
The company maintains a comprehensive accounting system which includes controls designed to provide reasonable assurance as to the integrity and reliability of the financial records and the protection of assets. An internal audit staff is employed to regularly test and evaluate both internal accounting controls and operating procedures, including compliance with the company’s statement of policy regarding ethical and lawful conduct. The role of KPMG LLP, the independent auditors, is to provide an objective examination of the consolidated financial statements and the underlying transactions in accordance with auditing standards generally accepted in the United States of America. The report of KPMG LLP accompanies the consolidated financial statements.
The Audit Committee of the Board of Directors, composed of directors who are not members of management, meets regularly with management, the independent auditors and the internal auditors to ensure that their respective responsibilities are properly discharged. KPMG LLP and the Managing Director of Internal Audit have full and free independent access to the Audit Committee.
/s/ Gregory T. Geswein
Gregory T. GesweinSenior Vice President and Chief Financial Officer
Forward-Looking Statement Disclosure
In the company’s written or oral statements, the use of the words “believes,” “anticipates,” “expects” and similar expressions is intended to identify forward-looking statements that have been made and may in the future be made by or on behalf of the company, including statements concerning future operating performance, the company’s share of new and existing markets, and the company’s short- and long-term revenue and earnings growth rates. Although the company believes that its outlook is based upon reasonable assumptions regarding the economy, its knowledge of its business, and on key performance indicators, which affect the company, there can be no assurance that the company’s goals will be realized. The company is not obligated to report changes to its outlook. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The uncertainties faced by the company could cause actual results to differ materially from those anticipated in forward-looking statements. These include, but are not limited to:
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5-Year Summary 2003-1999Diebold, Incorporated and SubsidiariesSelected Financial Data(In thousands, except per share amounts and ratios)
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
There have been no changes in accountants or disagreements with accountants on accounting and financial disclosures.
ITEM 9A. DISCLOSURE CONTROLS AND PROCEDURES.
Management, under the supervision and with the participation of the chief executive officer and the chief financial officer, has evaluated the company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based on that evaluation, the principal executive officer and the principal financial officer have concluded that the disclosure controls and procedures are effective in timely alerting them to material information about the company required to be included in its Exchange Act reports.
Management has not identified any change in internal control over financial reporting occurring during the fourth quarter that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to directors, including the designated audit committee financial experts, of the company is included on pages 3 through 8 of the company’s proxy statement for the 2004 Annual Meeting of Shareholders (“2004 Annual Meeting”) and is incorporated herein by reference. The following table summarizes information regarding executive officers of the company:Executive Officers of the Registrant
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Execuitve Officers of the Registrant - (continued)
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There is no family relationship, either by blood, marriage or adoption, between any of the executive officers of the Registrant.
Code of Ethics
The company has adopted a Business Ethics Policy that applies to its directors and officers (including its principal executive officer, principal financial officer and principal accounting officer) and employees. The Business Ethics Policy is available on the company’s website at www.diebold.com.
Section 16(a) Beneficial Ownership Reporting Compliance
Information with respect to Section 16(a) Beneficial Ownership Reporting Compliance is included on page 7 of the company’s proxy statement for the 2004 Annual Meeting and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to executive compensation is included on pages 9 through 18 of the company’s proxy statement for the 2004 Annual Meeting and is incorporated herein by reference.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Information with respect to security ownership of certain beneficial owners and management is included on pages 4 through 6 of the company’s proxy statement for the 2004 Annual Meeting and is incorporated herein by reference. Information required by Item 201(d) can be found on page 6 under Item 5 of this Annual Report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to certain relationships and related transactions is included under the caption “Compensation Committee Interlocks and Insider Participation” on page 9 of the company’s proxy statement for the 2004 Annual Meeting and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Information with respect to principal accounting fees and services is included under “Ratification of Appointment of Auditors by the Board of Directors” on page 21 of the company’s proxy statement for the 2004 Annual Meeting and is incorporated herein by reference.
PART IV.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
SCHEDULE II. Valuation and Qualifying Accounts
All other schedules are omitted, as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes.
3. (a) Exhibits
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K (continued)
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* Reflects management contract or other compensatory arrangement required to be filed as an exhibit pursuant to Item 15(c) of this report.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
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SIGNATURES (continued)
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DIEBOLD, INCORPORATED AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
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EXHIBIT INDEX
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