Non-GAAP earnings per share* from continuing operations attributable to Diebold, net of tax, in the second quarter 2011 were $.44 per share, down from $.53 per share in the second quarter 2010.

Business Review

Management commentary

"We had a solid second quarter, with better-than-expected results in several key areas of the company," said Thomas W. Swidarski, Diebold president and chief executive officer. "Growth continues to accelerate in North America, particularly in the U.S. regional bank space, driven by strong demand for advanced deposit automation and new technology needed to meet pending regulatory and industry compliance standards. We also drove operational progress in EMEA during the quarter, and are on track to reach a break-even run rate in the region by year end. In addition, some business closed during the quarter earlier than originally forecasted, which reduces risk to the second half of our forecast for the year."

Swidarski continued, "Given the earlier-than-anticipated business, as well as our growing backlog in financial self-service, we've gained more confidence in our outlook and are reaffirming our non-GAAP earnings guidance of $2.00 to $2.20* per share. Our expanding offerings in services, coupled with innovative, reliable technology and our ability to consistently deliver on our commitments to customers, gives me confidence that we will meet our objectives as we look toward the remainder of 2011 and beyond."

Second Quarter Orders (constant currency)

Total global product and services orders decreased 1% compared with the prior-year period. However, excluding Brazil election systems and lottery, total global orders increased 5%. North America orders benefitted from particularly strong financial self-service growth, led by significant growth in the U.S. regional bank space. Additionally Asia Pacific orders increased 18% led by strong performance in India and Southeast Asia. This was offset by decreases in orders within EMEA anes in orders within EMEA and Latin America of 3% and 30%, respectively, during the quarter. The decrease in Latin America orders was primarily the result of a significant decrease in election orders and the timing of major bank financial self-service orders.

The company's management believes excluding restructuring charges, non-routine expenses/income and impairment charges from operating margins is an indication of the company's baseline performance. The exclusion of these items permits evaluation and comparison of results for the company's core business operations and it is on this basis that the company's management internally assesses the company's performance.

Revenue

Total revenue for the second quarter 2011 was essentially flat, including a net positive currency impact of approximately 5%. Growth in North America was more than offset by a revenue decline in Latin America, where Brazil benefited from $46.2 million in election systems revenue in the second quarter of 2010. Asia Pacific revenue increased 6%, while EMEA revenue increased 36%, primarily due to strong performance in Africa and Eastern Europe.

Gross Margin

Total gross margin for the second quarter 2011 was 25.6%, a decrease of 1.2 percentage points from the second quarter of 2010. Total gross margin in the second quarter of 2011 included restructuring charges of $2.8 million associated with the previously announced restructuring plan for EMEA. There were $0.2 million in restructuring charges in the second quarter of 2010.

Operating Expenses

Total operating expenses as a percentage of revenue for the second quarter 2011 were 21.8%, an increase of 2.1 percentage points from the second quarter of 2010. Operating expenses in the second quarter 2011 included $1.7 million of restructuring charges primarily associated with the previously announced restructuring plan for EMEA. Second quarter 2011 operating expenses also included non-routine expenses of $4.7 million, which includes $4.2 million in legal, consultative, audit and severance costs related to the previously disclosed Foreign Corrupt Practices Act (FCPA) investigation, and $0.5 million for the settlement related to previously disclosed employment class-action lawsuits. In addition, operating expenses included a non-cash intangible asset impairment charge of $3.0 million that is primarily related to a prior acquisition.

Operating expenses in second quarter 2010 included non-routine expenses of $1.1 million related to the FCPA investigation, and $4.1 million in impairment charges and restructuring charges of $1.0 million related to the U.S. workforce reduction.

Operating Profit

Operating margin was 3.8% of net sales in the second quarter 2011, a decrease of 3.2 percentage points from the second quarter 2010. Non-GAAP operating profit* in the second quarter 2011 was $37.3 million, or 5.6% of sales, and $53.2 million, or 8.0% of sales, in the second quarter 2010 excluding restructuring charges and non-routine expenses/income and impairment charges from both periods.

Taxes on Income from Continuing Operations

Second quarter 2011 income taxes on continuing operations were $6.6 million. This resulted in a second quarter income tax rate of 23%, or 25% on a non-GAAP basis*. Full-year, non-GAAP tax rate is still expected to be approximately 28%*.

Income from Continuing Operations, net of tax (attributable to Diebold)

Income from continuing operations, net of tax, was $20.3 million, or 3.1% of revenue in the second quarter 2011, a decrease of 1.5 percentage points from the second quarter 2010. Included in the second quarter 2011 net of tax results are restructuring charges of $3.8 million, $3.0 million in non-routine expenses, and $1.9 million in impairment charges. Income from continuing operations net of tax in the second quarter 2010 included impairment charges of $3.1 million, net non-routine expenses of $0.8 million, and restructuring charges of $0.9 million.

Balance Sheet, Cash Flow and Liquidity

The company's net debt* was $149.7 million at June 30, 2011, an increase in net debt of $184.9 million from the net investment* position at December 31, 2010 and a reduction of $44.4 million from June 30, 2010. The company's net debt to capital ratio was 14% at June 30, 2011, -4% at December 31, 2010 and 16% at June 30, 2010.

Net cash used in operating activities was $100.0 million for the six months ended June 30, 2011, an increase of $82.5 million from the six months ended June 30, 2010. Free cash use* in the second quarter 2011 was $22.6 million, a change of $45.5 million from the second quarter 2010. The company typically generates the majority of its cash flow during the fourth quarter.

In the second quarter 2011, Diebold repurchased 1.1 million of its common shares for about $36 million under its repurchase plan. This leaves 2.4 million shares on the current Board authorization at June 30, 2011.

Restructuring and non-routine expenses and income

The company incurred restructuring charges, net of tax, of $3.8 million, or $0.06 per share in the second quarter of 2011. The majority of these charges were associated with the previously announced restructuring plan in EMEA. In the second quarter 2010, restructuring charges net of tax were $0.9 million, or $0.01 per share. These charges were largely related to an accrual for severance costs associated with the reorganization of the company's North America and corporate functions. For the full year, the company expects its restructuring charges to be in the range of $.31 to $.35 per share.

Foreign Corrupt Practices Act review

As previously disclosed, Diebold continues to conduct a global internal review of its compliance with the FCPA. The company excludes costs related to this review from its non-GAAP operating results as it provides a better overall understanding of the company's historical financial performance and future prospects. Diebold cannot predict the length, scope or results of this review or related government investigations, or the impact, if any, on its results of operations.