Diebold Nixdorf - 10-Q quarterly report FY

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SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
		OR
		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from .........to.........
		Commission file number 1-4879

Diebold, Incorporated

Registrant’s telephone number, including area code:       (330) 490-4000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes		No

Indicate the number of shares outstanding of each of the issuer’s classes of Common Shares, as of the latest practicable date.

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DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
INDEX

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See accompanying notes to condensed consolidated financial statements.

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DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

(Dollars in thousands except for per share amounts)

See accompanying notes to condensed consolidated financial statements.

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DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)

See accompanying notes to condensed consolidated financial statements.

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DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except for per share amounts)

1. CONSOLIDATED FINANCIAL STATEMENTS

The financial information included herein is unaudited; 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 thereto together with management’s discussion and analysis of financial condition and results of operations contained in the company’s Annual Report on Form 10-K for the year ended December 31, 2001. In addition, some of the company’s statements in this Form 10-Q report may be considered forward-looking and involve risks and uncertainties that could significantly impact expected results. A discussion of these risks and uncertainties is contained in the management’s discussion and analysis of financial condition and results of operations in this Form 10-Q. The results of operations for the six-month period ended June 30, 2002 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 with the current presentation format.

2. EARNINGS PER SHARE

The basic and diluted earnings per share computations in the condensed consolidated statements of income are based on the weighted-average number of shares outstanding during each period reported. The following data show the amounts used in computing earnings per share and the effect on the weighted-average number of shares of potentially dilutive common stock.

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DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands except for per share amounts)

3. INVENTORIES

Inventories are valued at the lower of cost or market applied on a first-in, first-out basis. Cost is determined on the basis of actual cost.

4. OTHER COMPREHENSIVE LOSS

Accumulated other comprehensive loss is reported separately from retained earnings and additional paid-in-capital in the Consolidated Balance Sheets. Items considered to be other comprehensive 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).

Components of other accumulated comprehensive loss consist of the following:

Components of comprehensive income (loss) consist of the following:

The majority of the translation adjustment losses incurred during 2002 and 2001, respectively, was due to the devaluation of the Brazilian Real.

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DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands except for per share amounts)

5. NEW ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 142 Goodwill and Other Intangible Assets, which for the company, was effective January 1, 2002. SFAS 142 establishes accounting and reporting standards for acquired goodwill and other intangible assets in that goodwill and 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. Included in the first half of 2001 earnings per share of $0.49, which included goodwill amortization of $7,937. Had SFAS 142 been in effect as of January 1, 2001 and goodwill was not amortized, earnings per share would have been $0.15 for the three month period ended March 31, 2001 and $0.57 for the six month period ended June 30, 2001.

Under SFAS 142, the company was required to test all existing goodwill for impairment as of January 1, 2002, on a “reporting unit” basis. A reporting unit is the operating segment. SFAS 142 requires that two or more component-level reporting units with similar economic characteristics be combined into 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 142, which resulted in a non-cash 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.” All of the charge related to the company’s Latin American division. The primary factors that resulted in the impairment charge was the difficult economic environment in the Latin American market. No impairment charge was appropriate under the FASB’s previous goodwill impairment standard, which was based on undiscounted cash flows.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which addresses the accounting and financial reporting for legal obligations and costs associated with the retirement of tangible long-lived assets. The provisions of SFAS No. 143 will be effective for the company’s financial statement for the year beginning January 1, 2003. The company does not expect the adoption of this standard to have a significant impact on its financial position, earnings or cash flows.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and the accounting and reporting provisions of Accounting Principles Board (APB) Opinion No. 30, Reporting Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.

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DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands except for per share amounts)

SFAS No. 144 requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and it broadens the presentation of discontinued operations to include disposal transactions. Although retaining many of the fundamental recognition and measurement provisions of SFAS No. 121, the statement significantly changes the criteria that would have to be met to classify an asset as held-for-sale. This distinction is important because assets held-for-sale are stated at lower of their fair values or carrying amounts and depreciation is no longer recognized. The company has adopted the provisions of SFAS No. 144 as of January 1, 2002 and has determined that SFAS No. 144 has no impact on its financial position and results of operations.

6.     ACQUISITIONS

On January 22, 2002, the company announced the acquisition of Global Election Systems Inc. (GES), now known as Diebold Election Systems, Inc., a manufacturer and supplier of electronic voting terminals and solutions. GES was acquired in 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. The acquisition has been accounted for as a purchase business combination and, accordingly, the purchase price has been allocated to identifiable tangible and intangible assets acquired and liabilities assumed, based upon their respective fair values, with the excess allocated to goodwill. Goodwill and other intangibles acquired in the transaction amounted to $32,892.

Subsequent Event

On July 15, 2002, the company announced the acquisition of Sersi Italia, a company specializing in multi-vendor customer service and closed-circuit television monitoring of automated teller machines (ATMs) for banks and post offices throughout Italy. The purchase price was $2,000 and was paid in cash in July 2002. The acquisition will be accounted for as a purchase business combination and, accordingly, the purchase price will be allocated to identifiable tangible and intangible assets acquired and liabilities assumed, based upon their respective fair values, with any excess allocated to goodwill.

7.     CORPORATE OWNED LIFE INSURANCE (COLI) CLAIM

As previously disclosed in prior filings, the company continues to dispute a claim by the IRS concerning the deductibility of interest on corporate owned life insurance (COLI). Since management believes that the company’s facts and circumstances are meritorious and continues to vigorously contest the IRS’ claim, the company has made no provision for any possible earnings impact. However, if unsuccessful, a pre-tax charge of approximately $35,300 or $29,300 after-tax would result. This amount represents tax of approximately $17,700 and interest of approximately $17,600. The company expects the claim to be resolved in 2003. Now that the IRS has completed its audit for years 1990 through 1996, the company was required to pay the taxes from those years and then pursue a refund for this amount. Therefore, the company made payments totaling approximately $31,300 in cash of which approximately $19,400 was paid in July 2002 for taxes and interest related to these years. There are two years remaining (1997 and 1998) under audit, which could result in an additional cash payment of up to $4,000, including interest. No other years after 1998 are subject to this claim.

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DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands except for per share amounts)

8. SEGMENTS

In determining reportable segments, the company considers its operating and management structure and the types of information subject to regular review by its executive management team. Information subject to regular review by the company’s management team is aggregated in three reporting segments consisting of its three main sales channels: Diebold North America (“DNA”), Diebold International (“DI”) and Other, which combines several of the company’s smaller sales channels including Diebold Election Systems Inc. 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 Condensed Consolidated Financial Statements is also disclosed. All income and expense items below operating profit are not allocated to the segments and are not disclosed. Revenue by geography and revenue by product and service solution are also disclosed.

The DNA segment sells financial and retail systems and also services financial, retail and educational customers 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 Other sells voting solutions and miscellaneous parts and products to other customers. Each of the sales channels buys the goods it sells from the company’s manufacturing plants through inter-company sales that are eliminated on consolidation. Each year, inter-company pricing is agreed upon which 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 disclosed are as follows: interest revenue, interest expense, amortization, equity in the net income of investees accounted for by the equity method, income tax expense or benefit, extraordinary items, significant noncash items and total assets.

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DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands except for per share amounts)

Total Revenue by Geography

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DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands except for per share amounts)

         Total Revenue by Product and Service Solutions

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DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As of June 30, 2002
(Unaudited)
(Dollars in thousands except for per share amounts)

Material Changes in Financial Condition

The company’s financial position provides it with sufficient resources to meet projected future capital expenditures, dividend and working capital requirements. However, if the need were to arise, the company’s strong financial position should ensure the availability of adequate additional financial resources.

Total Assets

Total assets for the second quarter ended June 30, 2002 were $1,656,741, representing an increase of $35,658 or 2.2 percent from December 31, 2001.

Short-term Investments

Short-term investments decreased by $24,568 or 47.3 percent due to certain municipal bonds maturing as of quarter end. The proceeds of the bonds were used to pay down notes payable during the quarter.

Trade Receivables

Trade receivables less allowances increased by $71,932 or 18.6 percent primarily due to increased voting solutions revenue and a combination of increased security sales and net service contract billings that occurred at the end of the quarter.

Inventories

Inventories increased $31,439 or 13.3 percent, as the company prepared to fulfill several large orders received near quarter end as well as the large orders associated with Diebold Election Systems Inc.

Finance Receivables

Net short-term and long-term finance receivables decreased by $27,676 or 53.2 percent primarily due to the securitizations of certain finance receivables that occurred during the first quarter of 2002.

Goodwill

Goodwill decreased by a net $4,849 or 1.76 percent. The change in goodwill was due principally to the net result of the January 2002 acquisition of the voting solutions provider, Global Election Systems Inc., now known as Diebold Election Systems Inc. and the impairment charge made in accordance with SFAS 142 of $38,859. The impairment charge was related to the goodwill recorded in the company’s Latin American division. The remaining change in goodwill was due to foreign currency translation.

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DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
As of June 30, 2002
(Unaudited)
(Dollars in thousands except for per share amounts)

Current Liabilities

Total current liabilities were $638,856, representing a decrease of $11,668 or 1.9 percent from December 31, 2001.

Notes Payable

Notes payable decreased by $11,215 or 4.9 percent due to the paydown of the lines of credits through the use of cash generated from the maturities of short-term investments mentioned previously under “Short-term Investments.”

At June 30, 2002, the company had outstanding bank credit lines approximating $127,228, EUR 83,604 (translation $82,858), 11,075 Brazilian Real (translation $3,894) and 8,000 Australian dollars (translation $4,508), with an additional $170,495 available under the credit line agreements.

Deferred Income

Deferred income is largely related to service contracts and is recognized for customer service billings 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. The company typically bills customers annually, semi-annually and quarterly, depending upon the terms of the contract. The majority of the billings occur on an annual basis with the next largest volume occurring on a semi-annual basis. As such, deferred income increased by $45,608 or 56.3 percent primarily due to the combination of semi-annual billings that occurred at the end of the second quarter and an increase in the customer service base.

Bonds Payable

The company has outstanding $20,800 of Industrial Development Revenue Bonds. The proceeds of the bonds issued in 1997 were used to finance the construction of three manufacturing facilities located in the United States.

Minority Interests

Minority interests of $11,952 represented the minority interest in the following entities:

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DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
As of June 30, 2002
(Unaudited)
(Dollars in thousands except for per share amounts)

Shareholders’ Equity

Shareholders’ equity was $921,088, representing an increase of $17,978 or 2.0 percent over December 31, 2001. Shareholders’ equity per Common Share at June 30, 2002 increased to $12.79 from $12.66 at December 31, 2001. The second quarter cash dividend of $0.165 per share was paid on June 7, 2002 to shareholders of record on May 17, 2002. Diebold, Incorporated shares are listed on the New York Stock Exchange under the symbol of DBD. The market price during the first half of 2002 fluctuated within the range of $35.20 and $43.55.

Management’s Analysis of Cash Flows

Operating Activities

During the six month period ended June 30, 2002, the company generated $17,293 in cash from operating activities, compared with $100,062 for the comparable period in 2001. In addition to net income of $33,143 adjusted for $70,989 of non-cash charges related to depreciation, amortization, minority interest and the cumulative effect of an accounting change, net cash provided by operating activities for the quarter was negatively impacted primarily by the increase in trade receivable, inventories and decrease in accounts payable. The increase in certain other assets and liabilities positively impacted cash provided by operating activities primarily due to the increase in deferred income.

The increase in trade receivables was primarily due to increased voting solutions revenue and a combination of increased security sales and net service contract billings that occurred at the end of the quarter. The increase in inventories was primarily driven by several large orders received at quarter end including large orders associated with Diebold Election Systems Inc.

The change in certain other assets and liabilities year over year was primarily the result of the increase in deferred income, the use of the realignment reserve and the positive impact of foreign currency translation. The increase in deferred income was driven by a combination of semi-annual billings that occurred at the end of the second quarter and an increase in the customer service base. The realignment program was completed in 2001, resulting in the use of the reserve established in the first quarter of 2001.

Investing Activities

During the six month period ended June 30, 2002, the company generated $15,393 in cash from investing activities, compared with a use of cash of $75,879 for the comparable period in 2001. The change was primarily due to a decrease in the amount that the company invested in marketable securities during the period, a decrease in capital expenditures and a continuation of the securitization program.

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DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
As of June 30, 2002
(Unaudited)
(Dollars in thousands except for per share amounts)

Results of Operations

Second Quarter 2002 Comparison to Second Quarter 2001

Revenue

Net sales for the second quarter of 2002 totaled $483,489 and were $59,875 or 14.1 percent higher than the comparable period in 2001. The increase in net sales occurred primarily in the security and voting solutions markets within The Americas. Total product revenue increased by $32,292 or 15.0 percent primarily due to growth in the voting solution market. Service revenue increased by $27,583 or 13.2 percent primarily due to an increase in our core service customer base and additional revenue as a result of the Bank of America service contract.

Gross Margin

The total gross margin was 31.2 percent, down from 32.0 percent in the second quarter 2001. Excluding special charges, total gross margin was 32.1 percent in the second quarter 2001. Product gross margin decreased to 34.5 percent from 36.4 percent in the second quarter 2001 due to geographic and product mix changes, including higher sales of security and voting solutions, which carry a slightly lower gross margin. Service gross margin was 27.8 percent, which was consistent with the comparable period in 2001.

Operating Expenses

Total operating expenses were 18.9 percent, down from 21.1 percent from the second quarter 2001. Excluding realignment and MedSelect, second quarter 2001 operating expenses were 18.9 percent. MedSelect was sold to Medecorx in the third quarter of 2001.

Net Income

Net income was 8.2 percent of revenue compared to 6.6 percent in the second quarter 2001. Excluding realignment, special charges and MedSelect, second quarter 2001 net income was 8.0 percent of revenue.

Second quarter 2001 net income included goodwill amortization of $3,446. Had SFAS 142 been in effect as of January 1, 2001, goodwill would not have been amortized and earnings per share in the second quarter of 2001 would have increased from the $.39 reported to $.42.

First Half 2002 Comparison to First Half 2001

Revenue

Net sales for the first half of 2002 totaled $884,535 and were $77,067 or 9.5 percent higher than the comparable period in 2001. The increase in net sales occurred primarily in the security and voting solutions markets

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DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
As of June 30, 2002
(Unaudited)
(Dollars in thousands except for per share amounts)

within The Americas. Total product revenue increased by $25,133 or 6.2 percent primarily due to growth in the voting business partially offset by lower financial self service product revenue. Service revenue increased by $51,934 or 12.9 percent primarily due to an increase in our core service customer base and additional revenue from the Bank of America service contract.

Gross Margin

The total gross margin was 30.8 percent, down from 31.6 percent in the second half of 2001. Excluding special charges, total gross margin was 32.1 percent in the second half of 2001. Product gross margin decreased to 34.9 percent from 37.9 percent in the second half of 2001 due to geographic and product mix changes, including higher sales of security and voting solutions, which carry a slightly lower gross margin, as well as the loss of the higher margin InnoVentry sales. Service gross margin increased to 26.9 percent from 26.3 percent for the comparable period in 2001.

Operating Expenses

Total operating expenses were 19.5 percent, down from 24.2 percent from the second half of 2001. Excluding realignment and MedSelect, second half 2001 operating expenses were 20.0 percent. This improvement was due to the streamlining of operations undertaken in 2001.

Net Income

Net income before cumulative effect of a change in accounting principle was 7.5 percent of revenue compared to 4.4 percent in the second half of 2001. Excluding realignment, special charges and MedSelect, second half 2001 net income was 7.6 percent of revenue. Net income was 3.7 percent of revenue in the second half of 2002, which includes a cumulative effect of a change in accounting principle of $33,147, net of taxes. The change in accounting principle was the result of adopting Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). The amortization of goodwill was discontinued effective January 1, 2002 and the transitional impairment test of goodwill was completed in June 2002 resulting in the impairment charge.

The second half 2001 net income included goodwill amortization of $7,937. Had SFAS 142 been in effect as of January 1, 2001, goodwill would not have been amortized and earnings per share in the second half of 2001 would have increased from the $.49 reported to $.56.

The company complies with Statement of Financial Accounting Standards No. 123“Accounting for Stock Based Compensation” by providing disclosure in the annual filing of the proforma effects of issuing stock options to employees and directors. The company expects the proforma effect of issued stock options, will approximate $0.05 per share at December 31, 2002.

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DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
As of June 30, 2002
(Unaudited)
(Dollars in thousands except for per share amounts)

Segment Information

Second Quarter Results

Diebold North America (“DNA”) customer revenue of $279,494 for the second quarter ended June 30, 2002 increased by $30,738, or 12.4 percent from the same period in 2001. The higher revenue levels were due to an increase in the security solutions and service markets. DNA operating profits for the same period were $47,860, which represented an increase of $6,557 or 15.9 percent from the same period in 2001.

Diebold International (“DI”) customer revenue was $170,166 for the second quarter of 2002, which represented an increase of $1,082 or 0.6 percent from the same period in 2001. The increases in the Latin-American and Asia-Pacific markets were largely offset by the decrease in Europe, Middle East and Africa due to weaker IT spending after the prior year Euro conversion. DI operating profit for the same period was $15,246, a decrease of $2,903 or 16.0 percent from the same period in 2001 due to geographic and product mix changes, including higher sales of security solutions, which carry a slightly lower gross margin.

Other revenue was $33,829 for the second quarter of 2002, which represented an increase of $28,055. This increase was primarily due to the increase in the voting solutions market.

Six Month Period

Diebold North America (“DNA”) customer revenue of $520,705 for the six month period ended June 30, 2002 increased by $42,540, or 8.9 percent from the same period in 2001. The higher revenue levels were due to an increase in the security solutions and service markets. DNA operating profits for the same period were $80,794, which represented an increase of $8,035 or 11.0 percent from the same period in 2001.

Diebold International (“DI”) customer revenue was $315,046 for the six month period ended June 30, 2002 which represented a decrease of $5,121 or 1.6 percent from the same period in 2001. The increases in the Latin-American and Asia-Pacific markets were largely offset by the decrease in Europe, Middle East and Africa due to weaker IT spending after the prior year Euro conversion. DI operating profit for the same period was $23,691, a decrease of $2,020 or 7.9 percent from the same period in 2001 due to geographic and product mix changes, including higher sales of security solutions, which carry a slightly lower gross margin.

Other revenue was $48,784 for the six month period ended June 30, 2002, which represented an increase of $39,648. This increase was primarily due to the increase in the voting solutions market.

Significant Accounting Policies

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 amount could be reported using different assumptions and estimates.

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DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
As of June 30, 2002
(Unaudited)
(Dollars in thousands except for per share amounts)

The company’s significant accounting policies are described in the Notes to Consolidated Financial Statements. Management believes that of its significant accounting policies, its policies concerning trade receivables and revenue recognition, inventory and deferred income are the most critical. Additional information regarding these policies is included below.

Trade Receivables and Revenue Recognition

Revenue is generally recognized based on the terms of the sales contract. The majority of sales contracts for products are written with selling terms “F.O.B. factory.” However, certain sales contracts may have other terms such as “F.O.B. destination” or “upon installation.” The company recognizes revenue on these contracts when the appropriate event has occurred. The equipment that is sold is usually shipped and installed within one year. Installation that extends beyond one year is ordinarily attributable to causes not under the control of the company. Service revenue is recognized in the period service is performed and subject to the individual terms of the service contract.

The concentration of credit risk in the company’s trade receivables with respect to the banking and financial services industries is substantially mitigated by the company’s credit evaluation process, reasonably short collection terms 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.

Inventories

Inventories are valued at the lower of cost or market applied on a first-in, first-out basis. Cost is determined on the basis of actual cost. As the company launches new products and rationalizes its product offerings, inventory related to discontinued product is written down to salvage value.

Deferred Income

Deferred income is largely related to service contracts and is recognized for customer service billings 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.

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DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
As of June 30, 2002
(Unaudited)
(Dollars in thousands except for per share amounts)

Outlook

The following statements are based on current expectations. These statements are forward-looking and actual results may differ materially. These statements do not include the potential impact of any future mergers, acquisitions, disposals or other business combinations.

The global efficiencies that Diebold has experienced by balancing manufacturing, product rationalization, organizational alignment and process improvements will continue to benefit the company into the third quarter and the remainder of 2002.

Taking these factors into consideration, expectations for the third quarter and year include:

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DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
As of June 30, 2002
(Unaudited)
(Dollars in thousands except for per share amounts)

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 impact 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 company’s uncertainties 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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DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
As of June 30, 2002
(Unaudited)

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The company is exposed to foreign currency exchange rate risk inherent in our international operations denominated in currencies other than the U.S. Dollar. 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 performed a sensitivity analysis assuming a hypothetical 10% adverse movement in foreign exchange rates applied to the hedging contracts and underlying exposures described above. As of June 30, 2002, the analysis indicated that these hypothetical market movements would not materially affect the results of operations. Actual gains and losses in the future may differ materially from that analysis based on changes in the timing and amount of foreign currency exchange rate movements and our actual exposures and hedges.

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DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K