Diebold Nixdorf - 10-Q quarterly report FY2011 Q1

 

(Exact name of registrant as specified in its charter)

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 þNo o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesþ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Stock, $1.25 Par Value — 65,290,714 shares as of April 21, 2011

See accompanying notes to condensed consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

See accompanying notes to condensed consolidated financial statements

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

The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in the Company’s annual report on Form 10-K for the year ended December 31, 2010. In addition, some of the Company’s statements in this quarterly report on Form 10-Q may involve risks and uncertainties that could significantly impact expected future results. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of results to be expected for the full year.

The Company has reclassified the presentation of certain prior-year information to conform to the current presentation.

Basic earnings per share is based on the weighted-average number of common shares outstanding. Diluted earnings per share is based on the weighted-average number of common shares outstanding and all potential dilutive common shares. Under the two-class method of computing earnings per share, non-vested share-based payment awards that contain rights to receive non-forfeitable dividends are considered participating securities. The Company’s participating securities include restricted stock units, deferred shares and shares that were vested, but deferred by the employee. The Company calculated basic and diluted earnings per share under both the treasury stock method and the two-class method. For the three months ended March 31, 2011 and 2010, there was no impact in the per share amounts calculated under the two methods, therefore the treasury stock method is disclosed.

The following represents amounts used in computing earnings per share and the effect on the weighted-average number of shares of dilutive common stock for the three months ended March 31:

The following tables present changes in shareholders’ equity attributable to Diebold, Incorporated and the noncontrolling interests for the three months ended March 31:

The Company’s share-based compensation payments to employees are recognized in the statement of income based on their grant-date fair values during the period in which the employee is required to provide services in exchange for the award. Share-based compensation is recognized as a component of selling and administrative expense. Total share-based compensation expense for the three months ended March 31, 2011 and 2010 was $3,435 and $3,226, respectively.

Options outstanding and exercisable as of March 31, 2011 under the Company’s 1991 Equity and Performance Incentive Plan (as Amended and Restated as of April 13, 2009) and changes during the three months ended March 31, 2011, were as follows:

The following tables summarize information on non-vested restricted stock units (RSUs), performance shares and deferred shares for the three months ended March 31, 2011:

The effective tax rate on continuing operations for the three months ended March 31, 2011 was 58.8 percent compared to 28.2 percent for the same period of 2010. The 30.6 percentage point increase is due mainly to operating losses in certain Europe, Middle East and Africa (EMEA) jurisdictions for which no tax benefit is recognized. Because these operating losses are relatively large when compared to income from continuing operations before taxes, the impact on the effective tax rate for the first quarter of 2011 is significant. Foreign income tax assessments and interest on uncertain tax positions also results in an increase to the effective tax rate.

In March 2010, the Patient Protection and Affordable Care Act as well as the Health Care and Education Reconciliation Act of 2010 (the Acts) were signed into law. Beginning in 2013, the Acts eliminate the tax deduction of retiree prescription drug expenses that are reimbursed under Medicare Part D. The resulting deferred tax charge of $339 from enactment of the Acts was recognized in the results for the three months ended March 31, 2010. The charge increased the quarterly rate by approximately one percentage point.

The Company’s investments, primarily in Brazil, consist of certificates of deposit and U.S. dollar indexed bond funds, which are classified as available-for-sale and stated at fair value based upon quoted market prices and net asset values, respectively. Unrealized gains and losses are recorded in other comprehensive income (OCI). Realized gains and losses are recognized in investment income and are determined using the specific identification method. Realized net losses from the sale of securities for the three months ended March 31, 2011 were $164. Proceeds from the sale of available-for-sale securities were $7,117 during the three months ended March 31, 2011.

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

The Company’s investments, excluding cash surrender value of insurance contracts of $64,936 and $67,976 as of March 31, 2011 and December 31, 2010, respectively, consist of the following:

Trade Receivables The Company evaluates the collectability of trade receivables based on (1) a percentage of sales based on historical loss experience and current trends and (2) periodic adjustments for known events such as specific customer circumstances and changes in the aging of accounts receivable balances. After all efforts at collection have been unsuccessful, the account is deemed uncollectible and is written off.

Financing Receivables The Company evaluates the collectability of notes and finance lease receivables (collectively, financing receivables) based on a specific customer circumstances, credit risk changes and payment patterns and historical loss experience. When the collectability is determined to be at risk based on the above criteria, the Company records the allowance for credit losses which represents the Company’s current exposure less estimated reimbursement from insurance claims. After all efforts at collection have been unsuccessful, the account is deemed uncollectible and is written off.

The following table summarizes the Company’s allowance for credit losses and recorded investment in financing receivables:

The Company records interest income and any fees or costs related to financing receivables using the effective interest method over the term of the lease or loan. The Company reviews the aging of its financing receivables to determine past due and delinquent accounts. Credit quality is reviewed at inception and is re-evaluated as needed based on customer specific circumstances. Receivable balances greater than 60 days past due are reviewed and may be placed on nonaccrual status based on customer specific circumstances. Upon receipt of payment on nonaccrual financing receivables, interest income is recognized and accrual of interest is resumed once the account has been made current or the specific circumstances have been resolved.

As of March 31, 2011 and December 31, 2010, the recorded investment in past-due finance lease receivables on nonaccrual status was $278 and $531, respectively. The recorded investment in finance lease receivables past due 90 days or more and still accruing interest was $405 and $560 as of March 31, 2011 and December 31, 2010, respectively. The recorded investment in impaired notes receivable and the related allowance was $7,513 and $1,687, respectively, as of March 31, 2011. The recorded investment in impaired notes receivable and the related allowance was $7,513 and $470, respectively, as of December 31, 2010. The net investment in impaired notes receivable is expected to be recovered from insurance claims. The following table summarizes the Company’s aging of past-due notes receivable balances as of March 31, 2011:

Major classes of inventories are summarized as follows:

Included in other assets are net capitalized software development costs of $55,541 and $55,575 as of March 31, 2011 and December 31, 2010, respectively. Amortization expense on capitalized software of $4,576 and $4,081 was included in product cost of sales for the three months ended March 31, 2011 and 2010, respectively. Other long-term assets also consist of patents, trademarks and other intangible assets. Where applicable, other assets are stated at cost and, if applicable, are amortized ratably over the relevant contract period or the estimated life of the assets. Fees to renew or extend the term of the Company’s intangible assets are expensed when incurred. Impairment of long-lived assets is recognized when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the expected future undiscounted cash flows are less than the carrying amount of the asset group, an impairment loss may be recognized at that time to reduce the asset to the lower of its fair value or its net book value.

Investment in Affiliate Investment in the Company’s non-consolidated affiliate is accounted for under the equity method and consists of a 50 percent ownership in Shanghai Diebold King Safe Company, Ltd. The balance of this investment as of March 31, 2011 and December 31, 2010 was $12,543 and $12,118, respectively, and fluctuated based on equity earnings. Equity earnings from the non-consolidated affiliate are included in miscellaneous, net in the condensed consolidated statements of income and were $425 and $753 for the three months ended March 31, 2011 and 2010, respectively.

Outstanding debt balances were as follows:

As of March 31, 2011, the Company had various international short-term uncommitted lines of credit with borrowing limits of $100,642. The weighted-average interest rate on outstanding borrowings on the short-term uncommitted lines of credit as of March 31, 2011 and December 31, 2010 was 3.80 and 3.01 percent, respectively. Short-term uncommitted lines mature in less than one year. The amount available under the short-term uncommitted lines at March 31, 2011 was $78,862.

In October 2009, the Company entered into a three-year revolving credit facility. As of March 31, 2011, the Company had borrowing limits under this facility totaling $506,275 ($400,000 and €75,000, translated). Under the terms of the credit facility agreement, the Company has the ability, subject to various approvals, to increase the borrowing limits by $200,000 and €37,500, respectively. Up to $30,000 and €15,000 of the revolving credit facility is available under a swing line subfacility. The weighted-average interest rate on outstanding credit facility borrowings as of March 31, 2011 and December 31, 2010 was 2.67 and 2.71 percent, respectively, which is variable based on the London Interbank Offered Rate (LIBOR). The amount available under the revolving credit facility as of March 31, 2011 was $206,275.

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

In 1997, industrial development revenue bonds were issued on behalf of the Company. The proceeds from the bond issuances were used to construct new manufacturing facilities in the United States. The Company guaranteed the payments of principal and interest on the bonds by obtaining letters of credit. The bonds were issued with a 20-year original term and are scheduled to mature in 2017. Each industrial development revenue bond carries a variable interest rate, which is reset weekly by the remarketing agents. The weighted-average interest rate on the bonds was 0.76 and 0.57 percent as of March 31, 2011 and December 31, 2010, respectively.

The Company’s debt agreements contain various restrictive financial covenants, including net debt to capitalization and net interest coverage ratios. As of March 31, 2011, the Company was in compliance with the financial covenants in its debt agreements.

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

In addition to providing pension benefits, the Company provides healthcare and life insurance benefits (referred to as other benefits) for certain retired employees. Eligible employees may be entitled to these benefits based upon years of service with the Company, age at retirement and collective bargaining agreements. Currently, the Company has made no commitments to increase these benefits for existing retirees or for employees who may become eligible for these benefits in the future. There are no plan assets and the Company funds the benefits as the claims are paid.

The following table sets forth the net periodic benefit cost for the Company’s defined benefit pension plans and other benefits for the three months ended March 31:

There have been no significant changes to the 2011 plan year contribution amounts previously disclosed. For the three months ended March 31, 2011 and 2010, contributions of $20,697 and $12,684, respectively, were made to the qualified and non-qualified pension plans.

In 1997, industrial development revenue bonds were issued on behalf of the Company. The Company guaranteed the payments of principal and interest on the bonds (refer to note 10) by obtaining letters of credit. The carrying value of the bonds was $11,900 as of March 31, 2011 and December 31, 2010.

The Company provides its global operations guarantees and standby letters of credit through various financial institutions to suppliers, customers, regulatory agencies and insurance providers. If the Company is not able to make payment or fulfill contractual obligations, the suppliers, customers, regulatory agencies and insurance providers may draw on the pertinent bank. At March 31, 2011, the maximum future payment obligations related to these various guarantees totaled $76,218, of which $22,848 represented standby letters of credit to insurance providers, and no associated liability was recorded. At December 31, 2010, the maximum future payment obligations relative to these various guarantees totaled $74,629, of which $23,202 represented standby letters of credit to insurance providers, and no associated liability was recorded.

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

The Company uses derivatives to mitigate the economic consequences associated with the fluctuations in currencies and interest rates.

Non-Designated Hedges A substantial portion of the Company’s operations and revenues are international. As a result, changes in foreign exchange rates can create substantial foreign exchange gains and losses from the revaluation of non-functional currency monetary assets and liabilities. The Company’s policy allows the use of foreign exchange forward contracts with maturities of up to 24 months to mitigate the impact of currency fluctuations on those foreign currency asset and liability balances. The Company elected not to apply hedge accounting to its foreign exchange forward contracts. Thus, spot-based gains/losses offset revaluation gains/losses within foreign exchange loss, net and forward-based gains/losses represent interest expense. The fair value of the Company’s non-designated foreign exchange forward contracts was ($359) and ($3,135) as of March 31, 2011 and December 31, 2010, respectively.

Cash Flow Hedges The Company has variable rate debt and is subject to fluctuations in interest related cash flows due to changes in market interest rates. The Company’s policy allows derivative instruments designated as cash flow hedges that fix a portion of future variable-rate interest expense. The Company has a pay-fixed receive-variable interest rate swap, with a total notional amount of $25,000, to hedge against changes in the LIBOR benchmark interest rate on a portion of the Company’s LIBOR-based borrowings. Changes in value that are deemed effective are accumulated in other comprehensive income and reclassified to interest expense when the hedged interest is accrued. To the extent that it becomes probable that the Company’s variable rate borrowings will not occur, the gains or losses on the related cash flow hedges will be reclassified from other comprehensive income to interest expense.

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

The fair value of the Company’s interest rate contracts was ($2,991) and ($3,371) as of March 31, 2011 and December 31, 2010, respectively.

The gain (loss) recognized on designated derivative instruments for the three months ended March 31, 2011 and 2010 was not material. Gains and losses related to interest rate contracts that are reclassified from accumulated OCI are recorded in interest expense on the statement of income. The Company anticipates reclassifying $768 from other comprehensive income to interest expense within the next 12 months.

The following table summarizes the (loss) gain recognized on non-designated derivative instruments for the three months ended March 31:

The following table summarizes the impact of the Company’s restructuring charges (benefits) on the condensed consolidated statements of income for the three months ended March 31:

The following table summarizes the Company’s restructuring (benefits) charges within continuing operations for its Diebold North America (DNA) and Diebold International (DI) reporting segments for the three months ended March 31:

Restructuring charges of $11,580 for the three months ended March 31, 2011 related to the Company’s plan for the EMEA reorganization which realigns resources and further leverages the existing shared services center. As of March 31, 2011, the Company anticipates additional restructuring costs in the range of $9,000 to $14,000 to be incurred into 2012 related to its EMEA restructuring plan. As management concludes on certain aspects of the EMEA restructuring plan, the anticipated future costs related to this plan are subject to change.

Net restructuring charges of $107 and $1,378 for the three months ended March 31, 2011 and 2010, respectively, related to reductions in the Company’s global workforce, including realignment of the organization and resources to better support opportunities in emerging growth markets and consolidation of certain international facilities in efforts to optimize overall operational performance. This plan resulted in a workforce reduction which primarily affected its Canton, Ohio area facilities. The Company does not expect any material remaining costs related to this workforce reduction.

Net restructuring charges (benefits) of $114 and $(292) for the three months ended March 31, 2011 and 2010, respectively, related to the Company’s strategic global manufacturing realignment plans.

The following table summarizes the Company’s cumulative total restructuring costs for the significant plans:

The following table summarizes the Company’s restructuring accrual balances and related activity:

Other charges and expense reimbursements consist of items that the Company determines are non-routine in nature. Net non-routine expense of $5,771 impacted the three months ended March 31, 2011 compared to net non-routine income of $4,080 in the same period of 2010. Net non-routine expenses for 2011 consisted primarily of legal and compliance costs related to the Foreign Corrupt Practices Act (FCPA) investigation. Net non-routine income for 2010 consisted primarily of reimbursements from the Company’s director and officer (D&O) insurance carriers and was recorded in selling and administrative expense. The Company continues to pursue reimbursement of the remaining legal and other expenditures incurred as a result of the government investigations with its D&O insurance carriers.

The Company measures its financial assets and liabilities using one or more of the following three valuation techniques:

The hierarchy that prioritizes the inputs to valuation techniques used to measure fair value is divided into three levels:

Assets and liabilities subject to fair value measurement are as follows:

Short-Term Investments The Company has investments in certificates of deposit that are recorded at cost, which approximates fair value. Additionally, the Company has investments in U.S. dollar indexed bond funds that are classified as available-for-sale and stated at fair value. U.S. dollar indexed bond funds are reported at net asset value, which is the practical expedient for fair value as determined by banks where funds are held.

Assets Held in a Rabbi Trust / Deferred Compensation The fair value of the assets held in a rabbi trust (refer to note 6) is derived from investments in a mix of money market, fixed income and equity funds managed by Vanguard. The related deferred compensation liability is recorded at fair value.

Foreign Exchange Forward Contracts A substantial portion of the Company’s operations and revenues are international. As a result, changes in foreign exchange rates can create substantial foreign exchange gains and losses from the revaluation of non-functional currency monetary assets and liabilities. The foreign exchange contracts are valued using the market approach based on observable market transactions of forward rates.

Interest Rate Swaps The Company has variable rate debt and is subject to fluctuations in interest related cash flows due to changes in market interest rates. The Company’s policy allows it to periodically enter into derivative instruments designated as cash flow hedges to fix some portion of future variable rate based interest expense. The Company has a pay-fixed receive-variable interest rate swap to hedge against changes in the LIBOR benchmark interest rate on a portion of the Company’s LIBOR- based borrowings. The fair value of the swap is determined using the income approach and is calculated based on LIBOR rates at the reporting date.

Contingent Consideration on Sale of Business The Company’s sale of its U.S. elections systems business included contingent consideration related to 70 percent of any cash collected over a five-year period on the accounts receivable balance of the sold business as of August 31, 2009. The fair value of the contingent consideration was determined based on recent collections on the accounts receivable as well as the probability of future anticipated collections (level 3 inputs) and was recorded at the net present value of the future anticipated cash flows.

In addition to assets and liabilities that are measured at fair value on a recurring basis, the Company measures certain assets and liabilities at fair value on a non-recurring basis. The Company’s non-financial assets, including goodwill, intangible assets and property, plant and equipment, are measured at fair value when there is an indication of impairment. These assets are recorded at fair value determined using level 3 inputs, only when an impairment charge is recognized.

The fair value of the Company’s cash and cash equivalents, trade receivables and accounts payable, approximates the carrying value due to the relative short maturity of these instruments. The fair value and carrying value of the Company’s debt instruments are summarized as follows:

The fair value of the Company’s industrial development revenue bonds are measured using unadjusted quoted prices in active markets for identical assets categorized as level 1 inputs. The fair value of the Company’s current notes payable and credit facility debt instruments approximates the carrying value due to the relative short maturity of the revolving borrowings under these instruments. The fair values of the Company’s long-term senior notes was estimated using market observable inputs for the Company’s comparable peers with public debt, including quoted prices in active markets, market indices and interest rate measurements, considered level 2 inputs.

The Company’s segments are comprised of two sales channels: DNA and DI. The DNA segment sells and services financial and retail systems in the United States and Canada. The DI segment sells and services financial and retail systems over the remainder of the globe as well as voting and lottery solutions in Brazil. Each segment buys the goods it sells from the Company’s manufacturing plants or through external suppliers. Intercompany sales between legal entities are eliminated in consolidation. Each year, intercompany pricing is agreed upon which drives operating profit contribution.

The reconciliation between segment information and the condensed consolidated financial statements is disclosed. Revenue summaries by geographic area and product and service solutions are also disclosed. Certain information not routinely used in the management of the DNA and DI segments, information not allocated back to the segments or information that is impractical to report is not shown. Items not allocated are as follows: investment income; interest expense; equity in the net income of investees accounted for by the equity method; income tax expense or benefit; foreign exchange gains and losses; miscellaneous, net; and discontinued operations.

The following table presents information regarding the Company’s segment information as of and for the three months ended March 31:

The following table presents information regarding the Company’s revenue by geographic region for the three months ended March 31:

The following table presents information regarding the Company’s revenue by product and service solution for the three months ended March 31:

Included in loss from discontinued operations were costs related to the Company’s U.S.-based elections systems business and the EMEA-based security business which were both previously discontinued.

Management’s discussion and analysis should be read in conjunction with the condensed consolidated financial statements and accompanying notes that appear elsewhere in this quarterly report.

As expected, in the first quarter of 2011, the Company got off to a slow start. As previously communicated, the Company expects an unusually strong second half of 2011. During the first quarter of 2011, the Company saw significant strengthening of orders in the U.S. regional bank space as the North America market continues to rebound. Moving forward, the Company will create shareholder value by leveraging its growing advantage in services, continuing to restructure its operations in Europe, Middle East and Africa (EMEA) and taking advantage of key market opportunities around the world and leveraging opportunities in the security business.

During the first quarter of 2011, the Company saw progress in key markets around the world, especially in North America where orders benefitted from particularly strong financial self-service growth, led by growth in excess of 30 percent in the U.S. regional bank space. Orders in EMEA increased 43.9 percent compared with a relatively weak prior-year period. Latin America orders were down during the quarter, primarily as a result of timing of major bank orders from Brazil. Looking at Asia Pacific, as anticipated, the year started slowly in both revenue and orders. This is largely due to declines in China, where we are anticipating a strong second half. Given the second quarter timing of major, pending orders in China and Brazil as well as the Brazil voting revenue slated for the third and fourth quarters, the Company remains optimistic in its position for the remainder of the year.

Income from continuing operations attributable to Diebold, Incorporated, net of tax, for the three months ended March 31, 2011 was $2,512 or $0.04 per share, a decrease of $22,382 and $0.33 per share, respectively, from the same period in 2010. Total revenue for the three months ended March 31, 2011 was $614,157, a decrease of 0.8 percent from the same period in 2010.

The Company’s vision is to be recognized as the essential partner in creating and implementing ideas that optimize convenience, efficiency and security. This vision is the guiding principle behind the Company’s transformation to becoming a more services-oriented company. Today, service comprises more than 50 percent of the Company’s revenue. The Company expects that this percentage will continue to grow over time as the Company continues to build on its strong base of maintenance and advanced services to deliver world-class integrated services. Financial institutions are eager to reduce costs and optimize the management and productivity of their ATM channels — and they are increasingly exploring new solutions. The Company remains uniquely positioned to provide the infrastructure necessary to manage all aspects of an ATM network. The Company’s newest availability management solution, OpteView^® Resolve (SM), represents an exponential leap forward. This software solution gathers business intelligence and interacts with an array of external systems to manage the entire ATM availability cycle from end to end.

In the first quarter of 2011, the Company brought in an additional $50,000 in integrated services contracts, significantly exceeding the prior-year period. By comparison, in all of 2010, the Company signed about $150,000 in integrated services contracts. One example of the type of customer the Company is signing on is Wichita Falls, Texas-based Union Square Federal Credit Union. As part of its contract, the Company will provide several integrated services, including Advisor ATM status monitoring, OpteView remote services, endpoint protection monitoring, software subscription management and help desk support.

Another area of focus within the financial self-service business is broadening the Company’s deposit automation solutions set, including check imaging, envelope-free currency acceptance, teller automation, and payment and document imaging solutions. The

Company’s ImageWay^® check-imaging solution fulfills an industry-wide demand for cutting-edge technologies that enhance efficiencies and greatly reduce operating costs for customers. For example, in North America the Company is experiencing increasing demand from regional and community financial institutions for deposit automation terminals because these institutions are finding themselves at a competitive disadvantage with larger rivals that have aggressively deployed this technology.

Within the security business, the Company’s solution set for financial customers is comprehensive, including fire and high-end enterprise security solutions. Many of the Company’s opportunities for growth lie within the financial market segment as financial institutions look to improve their security infrastructure, ensure compliance and drive operational efficiencies. The Company has built the capabilities to compete for select niche opportunities in the retail, enterprise and government sectors. During the first quarter of 2011, growth in overall security services was driven by the enterprise security segment, in which revenue increased more than 20 percent compared to the same period of 2010. The Company will leverage its experience to capitalize on the opportunities in this space, particularly as it continues to win major projects such as the new World Trade Center Transportation Hub in New York City. The Company’s integrated system will include the installation of video surveillance, access control and alarm devices throughout the hub.

The focus for 2011 is to continue striking an appropriate balance between reducing costs and investing in future growth. There are many opportunities that lie ahead and the Company will continue to invest in developing new software solutions, services and security solutions, particularly as it relates to growth in emerging markets.

In 2006, the Company launched the SmartBusiness (SB) 100 initiative to deliver $100,000 in cost savings by the end of 2008. In September 2008, the Company announced a new goal to achieve an additional $100,000 in cost savings called SB 200. The SB 200 initiative has led to rationalization of product development, streamlining procurement, realigning the Company’s manufacturing footprint and improving logistics. Building on that success, the Company recently launched SB 300, which will shift the focus from cost of sales to operating expenses and is targeted to achieve an additional $100,000 in efficiencies during the next three years.

The Company is committed to making the strategic decisions that not only streamline operations, but also enhance its ability to serve its customers. The Company remains confident in its ability to continue to execute on cost-reduction initiatives, deliver solutions that help improve customers’ businesses and create shareholder value. During the three months ended March 31, 2011 and 2010, the Company incurred pre-tax net restructuring charges of $11,801 and $1,116, respectively. Restructuring charges in 2011 primarily related to Company’s plan for the EMEA reorganization, which realigns resources and further leverages the existing shared services center. Restructuring charges in 2010 primarily related to reductions in the Company’s global workforce.

Other charges and expense reimbursements consist of items that the Company determines are non-routine in nature. Net non-routine expense of $5,771 impacted the three months ended March 31, 2011 compared to net non-routine income of $4,080 in the same period of 2010. Net non-routine expenses for 2011 consisted primarily of legal and compliance costs related to the Foreign Corrupt Practices Act (FCPA) investigation. Net non-routine income for 2010 consisted primarily of reimbursements from the Company’s director and officer (D&O) insurance carriers. The Company continues to pursue reimbursement of the remaining legal and other expenditures incurred as a result of the government investigations with its D&O insurance carriers.

The business drivers of the Company’s future performance include, but are not limited to:

The following discussion of the Company’s financial condition and results of operations provides information that will assist in understanding the financial statements and the changes in certain key items in those financial statements. Comments on significant fluctuations follow the table. The following discussion should be read in conjunction with the condensed consolidated financial statements and the accompanying notes that appear elsewhere in this quarterly report.

The following table represents information regarding our net sales for the three months ended March 31:

Financial self-service sales in the first quarter of 2011 decreased by $8,412 or 1.8 percent compared to the same period of 2010. The decrease in financial self-service sales included a net favorable currency impact of $13,774, of which approximately 60 percent related to the Brazilian real. North America increased $8,721 or 5.3 percent due to strong growth within the U.S. regional business. International sales decreased by $17,133 or 5.6 percent related to the following: Asia Pacific decreased $11,582 or 12.6 percent, EMEA decreased $3,255 or 4.4 percent, and Latin America including Brazil decreased by $2,296 or 1.6 percent. The decrease in Asia Pacific resulted from lower sales volume in China, Thailand and India, with partially offsetting favorability from strong growth in a few other countries within the region. The decrease in EMEA was due to declines in some Western European countries partially offset by new business growth in the Middle East. The decrease in Latin America including Brazil was mainly driven by the decision of a large outsourcing client to switch to an insourcing model and the impact of some large order in Colombia during the first quarter of 2010, partially offset with a net favorable currency impact and growth in other areas throughout the region.

Security solutions sales in the first quarter of 2011 decreased by $1,560 or 1.1 percent compared to the same period of 2010. North America increased $1,043 or 0.8 percent. International decreased by $2,603 or 18.1 percent. The international decrease resulted primarily from a decline in Asia Pacific by $2,971 or 46.2 percent due to decreases in electronic security revenue for Australia and India.

The Brazilian-based lottery systems sales increased $5,135 in the first quarter of 2011 compared to the same period of 2010.

The following table represents information regarding our gross profit for the three months ended March 31:

The decline in product gross margin in the first quarter 2011 compared to the same period of 2010 was primarily a result of geographic mix influenced by lower volume in Asia Pacific and lower margin performance in EMEA mainly attributable to revenue mix within the region. These decreases to product gross margin were partially offset by favorable revenue mix in Diebold North America (DNA) resulting from a larger concentration of sales in the U.S. regional bank space and Canada. Additionally, product gross margin in the three months ended March 31, 2011 included restructuring costs of $123 compared to a restructuring benefit of $214 in the same period of 2010.

The decrease in service gross margin resulted from higher restructuring charges in the first quarter of 2011 primarily related to the EMEA reorganization. Service gross margin included $6,074 and $314 of restructuring charges in the first quarter of 2011 and 2010, respectively.

The following table represents information regarding our operating expenses for the three months ended March 31: