The company reported third quarter net income of $26.4 million, compared to net income of $48.3 million in the third quarter of 2004. Diluted earnings per share were $.37, compared to $.67 per share in the third quarter of 2004.

Included in the third quarter 2005 reported results are restructuring charges of $.07 per share, manufacturing start-up and other one-time costs of $.04 per share and the gain on the sale of the campus card systems business of $.18 per share. Excluding the impact of these items, diluted earnings per share in the third quarter would have been $.30 per share, at the high end of the most recent guidance of $.25 to $.30 per share provided on September 21, 2005.

As previously announced on July 5, 2005, the company sold its campus card systems division. As a result, the financial results from this business have been classified as a discontinued operation.

Factors Contributing to Lower Third Quarter EPS

On September 21, 2005, the company reduced its third quarter and full-year guidance. A number of factors contributed to lower earnings in the third quarter. Revenue was approximately $67 million lower than the original guidance provided on July 27, 2005. Approximately $50 million of the shortfall occurred in the global financial self-service business. An additional $12 million resulted from delayed deliveries and reduced revenue as a result of Hurricane Katrina, which includes $10 million of election systems equipment that had been scheduled for the Gulf region. The remainder of the revenue shortfall occurred in the security solutions business, resulting from softness in the North America bank market.

Lower-than-expected demand, primarily in the more profitable U.S. regional bank segment, and customer installation delays resulted in lower-than-expected revenue and profits. Also, revenue delays were experienced in the Asia Pacific segment related to a large customer in China.

In addition, operational issues resulted in incremental expense and lower revenue during the quarter. These operational issues include: ineffective supply-chain management; higher-than-expected manufacturing and product costs; continued challenges in achieving efficiencies in European-based manufacturing; higher energy costs; and delays associated with software issues.

"Clearly, this was a challenging quarter, particularly from an operational perspective," said Walden W. O'Dell, Diebold chairman and chief executive officer. "We remain confident in the strength of our brand and in our competitive position in the markets we serve. We have a strong portfolio of businesses in growing markets and continue to generate sales growth, as product orders for Opteva increased significantly from the third quarter 2004.

"However, in order to realize our long-term potential we must correct some fundamental performance issues. We must significantly improve our cost structure by addressing inefficiencies in our manufacturing supply chain and software development processes. In addition, we need to continue diligently instilling pricing discipline throughout the organization."

O'Dell continued, "We've identified and implemented several actions within the organization designed to improve our long-term financial performance. As previously announced, we've made positive changes in key leadership positions within the company, including a new COO and CFO, and have redesigned our organizational alignment to improve our core financial self-service business. We've also taken many steps toward a more strategic and disciplined approach to global pricing management, with more actions to come. Significant work is underway to improve our fundamental performance issues. We remain committed to our previously announced restructuring actions and are evaluating additional potential actions for 2005 and 2006 to improve our competitiveness."

Fixed Exchange-Rate Third Quarter Orders

Total orders for financial self-service and security products and services were essentially flat from the prior year period. Financial self-service orders were essentially flat, with order growth in EMEA well into the double digits offset by a decline in North America. Security orders increased in the low single-digit range. Orders in election systems increased significantly due to equipment orders in Ohio, Utah, Mississippi and Georgia.

Revenue

Total revenue from continuing operations for the quarter was $622.3 million, up $16.1 million, or 2.7 percent, and increased 0.1 percent on a fixed exchange-rate basis. Total financial self-service revenue was down 1.6 percent and 4.9 percent on a fixed exchange-rate basis as a result of a decline in North America, partially offset by gains in Brazil and Latin America. Security solutions revenue was up 9.4 percent and 8.7 percent on a fixed exchange-rate basis*. Election systems revenue was up 15.3 percent over prior year while first-time Brazilian lottery systems revenue was $3.4 million.

During the quarter, the currency impact on revenue was largely due to the year-over-year strengthening of the Brazilian real. The positive currency impact in the quarter was approximately $15.4 million, or 2.6 percent versus the comparable period in the prior year.

Gross Margin

Total gross margin for the quarter was 23.1 percent, compared to 27.9 percent in the third quarter 2004. Included in total cost of sales in the third quarter 2005 was approximately $4.2 million of restructuring costs and $3.1 million of manufacturing start-up and other one-time costs that adversely impacted total gross margins by 1.2 percentage points.

Product gross margin was 24.9 percent, compared to 30.9 percent in the third quarter 2004. Included in product cost of sales in the third quarter of 2005 was approximately $2.2 million in restructuring charges and incremental special items of approximately $0.5 million, which adversely impacted product gross margins by 0.9 percentage points. Lower pricing levels adversely impacted gross margin by 2.8 percentage points. Unfavorable sales mix, driven by a lower mix of revenue from the North America regional bank market, which carries a higher margin, adversely impacted product gross margin by 1.3 percentage points. Additionally, supply chain inefficiencies and higher energy costs also contributed to product gross margin erosion.

Service gross margin was 21.4 percent, compared to 25.0 percent in the third quarter 2004. Included in the service cost of sales in the third quarter of 2005 was approximately $2.0 million in restructuring charges and $1.4 million in special items, which adversely impacted service gross margins by 1.1 percentage points. Lower pricing levels adversely impacted gross margin by approximately 1.9 percentage points, while higher product maintenance, fuel and pension costs adversely affected gross margin by 1.1 percentage points. These items more than offset productivity improvements during the period.

Operating Expenses

Total operating expenses for the quarter as a percentage of revenue was 18.8 percent, versus an unusually low 15.7 percent in third quarter 2004. Included in the quarter's operating expense was $3.4 million in restructuring costs and $0.8 million of incremental special charges. Restructuring and special charges accounted for a 0.7 percentage point increase in operating expense as a percent of revenue. Incrementally higher IT expenses associated with the company's continued implementation of an ERP system and higher professional fees resulted in an increase of 0.6 percentage points. Acquisitions, which carry a higher operating expense as a percentage of revenue, accounted for an additional increase of 0.5 percentage points.

Operating Profit

Operating profit was 4.3 percent of revenue, down from 12.2 percent in the third quarter of 2004. Included in the financial results was $7.6 million of restructuring costs and $5.0 million of special charges, which adversely impacted operating profits by 2.0 percentage points.

Other Expense and Minority Interest, Net

Other expense and minority interest, net increased by $0.5 million compared to the third quarter 2004. This increase was due to higher interest expense, as a result of increased borrowing rates, and higher foreign exchange losses partially offset by a non-recurring $2.6 million settlement of a civil action in the state of California in 2004.

Income from Continuing Operations

Income from continuing operations was 2.2 percent of revenue compared to 7.8 percent in the third quarter 2004. The decline in net income as a percent of revenue was partially the result of pre-tax restructuring charges of $7.6 million and $3.9 million in incremental pre-tax special charges. In addition, income from continuing operations was negatively impacted by an increase in the effective tax rate. The annual effective tax rate is now expected to be approximately 34 percent and resulted in a third quarter effective tax rate of 39.3 percent on income from continuing operations.

Balance Sheet, Cash Flow and Share Repurchase Highlights

The company's net debt was $221.8 million at September 30, 2005 compared to $210.9 million at September 30, 2004. The $10.9 million increase in net debt over the last 12 months was principally due to the positive impact of $158.7 million in free cash flow* plus $29.4 million in proceeds from the sale of the campus systems business. These positive increases in free cash flow* were more than offset by $82.3 million spent to repurchase company stock, $56.8 million in dividend payments, $31.3 million invested in acquisitions, $2.1 million in foreign exchange impact and $26.5 million invested in other assets. Days sales outstanding were 78 days at September 30, 2005, a five-day improvement from 83 days at September 30, 2004. Inventory turns decreased slightly to 4.8 turns at September 30, 2005 from 4.9 turns at September 30, 2004.

In the third quarter, free cash use increased by $67.0 million, moving from free cash flow of $23.7 million in the third quarter of 2004 to free cash use of $43.3 million in the third quarter of 2005. The increase in free cash use* was due principally to $33.9 million of lower income from continuing operations, with the balance of the increase due to higher net working capital levels. For the nine months ended September 30, 2005, there was a free cash use* of $9.1 million, compared to a free cash flow* of $3.6 million in the same period in 2004. The increase of $12.7 million in free cash use* was due principally to $47.1 million of lower income from continuing operations partially offset by improved working capital levels.

In the third quarter 2005, Diebold repurchased 585,300 shares of the company's common stock under its repurchase plan. For the nine months ended September 30, 2005, Diebold repurchased 1,734,490 shares of its common stock under its repurchase plan.

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, or the effect of expensing stock options under the new accounting standard, SFAS Statement No. 123R "Share-Based Payment".

Restructuring

The company anticipates full-year 2005 restructuring charges of approximately $.30, including the previously disclosed elimination of 300 full-time positions in North America and Western Europe, further global manufacturing realignment and facility consolidation and the consolidation of research and development operations and service functions.

At the end of the third quarter, the company had reported year-to-date restructuring charges of approximately $.17 per share. These charges include realignment of the company's operations in Western Europe and North America. These actions also included:

• Global manufacturing realignment and facility consolidation to speed production and reduce costs;
• Consolidation of research and development efforts to better serve key markets;
• Merging software operations and combining various service functions to better leverage resources and expertise throughout the company;
• Rationalization of international service operations, principally in Western Europe; and
• Reduced management positions in North America and Europe.

Included in the anticipated fourth quarter restructuring actions is a voluntary early retirement program offered to select North America employees between October 21 to December 16, and further restructuring actions principally in Europe. As a result of these and other actions, we anticipate annual cost savings of approximately $20 million.

Fourth quarter 2005 outlook

Expectations for the fourth quarter 2005 include:

• Fourth quarter revenue is expected to increase 10 to 13 percent on a fixed exchange-rate basis.
• Financial self-service revenue to be essentially flat.
• Security revenue growth of 7 to 9 percent.
• Election systems revenue is expected to be $60 to $65 million.
• Brazilian lottery business revenue is expected to be $20 to $22 million.
• The company anticipates restructuring charges of approximately $.13 per share
• Currency exchange is anticipated to impact revenue favorably by approximately 1.3 percent versus prior year.
• Depreciation and amortization to be approximately $18 to $20 million.
• An effective tax rate of approximately 34 percent.
• An increase in pension expense of approximately $.01 per share versus prior year.
• EPS in the range of $.50 to $.60 per share, which includes anticipated restructuring charges of approximately $.13 per share. Excluding these restructuring charges, EPS is expected to be $.63 to $.73 per share.

Full-year 2005 outlook

Expectations for the full-year 2005 include:

• Revenue growth of 6 to 8 percent, on a fixed exchange-rate basis.
• Financial self-service revenue growth of 1 to 2 percent.
• Security revenue growth of 14 to 15 percent.
• Election systems revenue is anticipated to be in the range of $128 to $133 million.
• Brazilian lottery systems revenue of $23 to $25 million.
• Currency expected to impact revenue favorably by approximately 2.0 percent versus prior year.
• Depreciation and amortization in the range of $74 to $76 million.
• An effective tax rate of approximately 34 percent.
• Pension expense is expected to be $.03 per share higher in 2005, moving from $.05 per share in 2004 to $.08 per share in 2005.
• Research and development expense will be approximately 2.5 percent of revenue, consistent with prior year.
• EPS in the range of $1.70 to $1.80, which includes restructuring charges of approximately $.30, manufacturing start-up costs and related issues of approximately $.08 per share, and the one-time gain of approximately $.18 per share on the sale of the campus card systems business. Excluding these items, EPS is expected to be $1.90 to $2.00.
• Free cash flow is expected to be in the range of $135 to $165 million.

2006 outlook

Given recent top-level management changes, the company is not yet providing specific earnings guidance for the 2006 period. The company expects to provide 2006 guidance no later than its fourth quarter earnings release in January 2006.Download the document now 40.1 kb (Adobe Acrobat Document)