Non-GAAP earnings per share* from continuing operations attributable to Diebold, net of tax, in the third quarter 2011 were $.69 per share, down from $.73 per share in the third quarter 2010.

Business Review

Management commentary

"Once again we delivered sound performance during the third quarter, showing significant year-over-year improvement in profit margins -- particularly in our services business. And we are delivering on our commitment to generate the majority of our earnings in the back half of the year," said Thomas W. Swidarski, Diebold president and chief executive officer. "We continue to focus on more profitable business opportunities globally, while effectively driving improvements in our operations and reducing our cost structure. As a result, we are raising our previous earnings guidance range for 2011.

"North America continues to perform very well, with high demand for our financial self-service solutions," continued Swidarski. "In fact, U.S. regional bank product orders once again increased well in excess of 100 percent - and the expected revenue is beginning to materialize as we approach the end of the year. While we also saw substantial revenue growth in Asia during the quarter, overall revenue was negatively impacted by a significant decrease in the cyclical Brazil voting business as well as declines in our overall security business."

Swidarski concluded, "Looking at the remainder of 2011, we are revising our revenue outlook to reflect lower financial self-service revenue expectations in Europe and Brazil largely due to the recent strengthening of the dollar. With so many financial institutions facing a changing economic and regulatory environment, I remain extremely confident in our ability to provide leading-edge technology, software and expanded services that our customers are demanding to help measurably improve their business."

Third Quarter Orders (constant currency)

Total global product and services orders decreased 3% compared with the prior-year period. Excluding Brazil election systems and lottery, total global orders were essentially flat. North America orders benefitted from strong financial self-service growth, led by significant growth in the U.S. regional bank space. Asia Pacific orders decreased 9% mainly due to the timing of orders in China. Orders decreased 31% within EMEA, primarily as the result of a large order in Turkey in the prior-year period, which created a difficult comparison. Excluding Brazil election systems and lottery, Latin America orders were essentially flat. Security orders declined as the U.S. bank branch business continues to be challenged.

Revenue

Total revenue for the third quarter 2011 was down 5.2% compared to the third quarter 2010, including a net positive currency impact of approximately 3%. Growth in North America and Asia Pacific was more than offset by revenue declines in EMEA and in Latin America, where Brazil realized $36.4 million less election systems revenue in the third quarter of 2011, compared with the third quarter 2010.

Gross Margin

Total gross margin for the third quarter 2011 was 27.4%, an increase of 1.5 percentage points from the third quarter of 2010, due to more favorable customer and geographic mix.

Operating Expenses

Total operating expenses as a percentage of revenue for the third quarter 2011 were 19.7%, an increase of 0.8 percentage points from the third quarter of 2010. This increase is a result of lower revenue during the third quarter 2011, as operating expense decreased $1.5 million during the period. Operating expenses in the third quarter 2011 included $2.1 million of net restructuring charges primarily associated with restructuring efforts in EMEA. Third quarter 2011 operating expenses also included non-routine expenses of $2.6 million for legal, consultative, and audit costs related to the previously disclosed Foreign Corrupt Practices Act (FCPA) investigation.

Operating expenses in third quarter 2010 included non-routine expenses of $2.6 million related to the FCPA investigation, and $3.0 million in impairment charges and restructuring charges of $0.1 million.

Operating Profit

Operating margin was 7.7% of net sales in the third quarter 2011, an increase of 0.7 percentage points from the third quarter 2010. Non-GAAP operating profit* in the third quarter 2011 was $58.4 million, or 8.2% of sales, and $58.5 million, or 7.8% of sales, in the third quarter 2010 excluding applicable restructuring charges, non-routine expenses, and impairment charges.

Taxes on Income from Continuing Operations

Third quarter 2011 income taxes on continuing operations were $11.3 million. This resulted in a third quarter income tax rate of 21% on both a GAAP and non-GAAP basis*. Full-year, non-GAAP tax rate is now expected to be approximately 26%*.

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

Income from continuing operations, net of tax, was $41.8 million, or 5.9% of revenue in the third quarter 2011, consistent on a percent of revenue basis with the third quarter 2010. Included in the third quarter 2011 net of tax results are restructuring charges of $1.2 million, and $1.6 million in non-routine expenses. Income from continuing operations net of tax in the third quarter 2010 included impairment charges of $2.3 million, net non-routine expenses of $1.9 million, and restructuring charges of $0.4 million.

Balance Sheet, Cash Flow and Liquidity

The company's net debt* was $232.2 million at September 30, 2011, an increase in net debt of $267.4 million from the net investment* position at December 31, 2010 and an increase of $57.8 million from September 30, 2010. The increase in net debt during the third quarter was primarily the result of share repurchases. Diebold repurchased 1.7 million of its common shares for approximately $47 million under its repurchase plan in the third quarter. This leaves 0.7 million shares on the current Board repurchase authorization at September 30, 2011. The company's net debt to capital ratio was 22% at September 30, 2011, -4% at December 31, 2010 and 14% at September 30, 2010.

Net cash used in operating activities was $54.7 million for the nine months ended September 30, 2011, an increase of $105.7 million from the nine months ended September 30, 2010. Free cash flow* in the third quarter 2011 was $30.5 million, a decrease of $26.9 million from the third quarter 2010. The company expects to generate the majority of its cash flow during the fourth quarter, which will significantly reduce net debt by year end.

Restructuring, non-routine expenses, and impairment charges

The company incurred restructuring charges, net of tax, of $1.2 million, or $.02 per share in the third quarter of 2011. The majority of these charges were associated with restructuring efforts in EMEA. For the full year, the company expects its restructuring charges to be in the range of $.28 to $.30 per share. In addition, in the third quarter 2011, the company incurred non-routine expenses, net of tax, of $1.6 million, or $.02 per share, related to the previously disclosed FCPA investigation.

In the third quarter 2010, restructuring charges net of tax were $0.4 million, or $0.01 per share. The majority of these charges were related to severance costs from the previously announced reorganization of the company's North America and corporate functions, and the continued strategic realignment of the company's global manufacturing. The company incurred an impairment charge in the third quarter 2010 of $2.3 million, or $.03 per share, net of tax, related to a previous cost-basis investment in a security company. During the third quarter 2010, the company also incurred non-routine expenses, net of tax, of $1.9 million, or $.03 per share, related to the previously disclosed FCPA investigation.

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.