Diebold year-end profits plummet

Net income for the fourth quarter was $14.6 million, compared to net income of $62.8 million in the fourth quarter of 2004. Diluted earnings per share were $.21 compared to $.87 per share in the fourth quarter of 2004.

Included in the fourth quarter 2005 reported results were restructuring charges of $.20 per share resulting from plant restructuring, associate voluntary early retirement and other severance costs. In addition, the company has established a $.10 per share reserve against deferred tax assets primarily associated with its European operations and has reserved $.14 per share related to approximately $32 million in Diebold Election Systems trade receivables from two counties. Excluding the impact of these items, diluted earnings per share in the fourth quarter would have been $.65, within the guidance of $.63 to $.73 per share provided on October 26, 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.

Business Review

"Since taking over as CEO in December, I have met with many customers and employees around the world. Our brand remains strong and we have solid customer relationships on which to build. Further, the passion, dedication and resolve amongst our employees to improve our business is pervasive," said Thomas W. Swidarski, president and chief executive officer. "Over the past six weeks, I have identified several areas within the business that need more focus. My intent is to bolster our investment in these areas as quickly as possible.

"We have devised a multi-year profit improvement plan that encompasses significant cost reduction as well as improved pricing. This plan entails eliminating more than $100 million from our cost structure within three years. Elements of this plan include streamlining our critical processes, significantly improving our order-to-cash cycle, and optimizing our supply chain and manufacturing footprint. We have already made some organizational changes to address these areas. We have combined procurement, manufacturing engineering and production operations in a single group, focused specifically on improving our global supply chain and shortening customer lead times." Also, the planned sale of our Sumter, S.C., manufacturing facility is one more step toward executing our plan and achieving our cost-improvement goals.

Swidarski continued, "We have combined our development organization with our global service operations to bring our product engineering processes closer to our customers, with the goal of providing a complete product and service solution better tailored to customer needs. These organizational changes drive greater accountability across the organization and bring a stronger focus on the customer experience, resulting in a greater value proposition to our customers.

"In 2006, we will streamline our ERP software implementation to provide greater visibility into our operations and help us to better manage our supply chain. We are continuing to evaluate our management structure, current lines of business and planned investments into new businesses to ensure they are strategically aligned with the future direction of our company."

Kevin J. Krakora, vice president and chief financial officer, stated, "While 2005 was very challenging, during the fourth quarter we began taking the steps necessary to bring more stability to the business. We've improved our forecasting processes and have made changes to our finance organization to further strengthen the financial controls and processes we have in place. Despite the progress we've made in addressing our operational issues, significant work remains. Therefore, 2006 will be a transitional year requiring focus and investment in key areas of our operations, as we take the steps necessary to return Diebold to acceptable levels of profitability in 2007 and beyond."

Fourth Quarter Orders (constant currency)

Total orders for financial self-service and security products and services were up in the mid-single digit range from the prior year period. Financial self-service orders were down in the low single-digit range, with solid order growth in EMEA and Asia Pacific offset by a decline in North America in the high-single digit range. Security orders increased in the low double-digit range.

Revenue

Total revenue for the quarter was up 14.9 percent, led by election systems, which was up more than $56 million compared to the fourth quarter of 2004. Financial self-service revenue was up 1.6 percent in the quarter with EMEA providing strong growth offset by lower revenue in the Americas, including decreases in Brazil and the regional bank market in the United States. During the quarter, the net positive currency impact was approximately $11.1 million, or 1.6 percent versus the comparable period in the prior year. The positive currency impact on revenue was due to the year- over-year strengthening of the Brazilian real, partially offset by the weakening of the euro.

The company became aware late last night of a possible adjustment relative to the recognition of certain election systems revenue in the fourth quarter of 2005. The company has not had adequate time to properly review this issue; therefore, the financial results contained in this release do not reflect the effect of any possible adjustment that may be necessary. In the event that an adjustment is necessary, the effect on revenue is preliminarily estimated to be in the range of $2 million to $10 million, which would be recognized in later periods.

Gross Margin

Total gross margin for the quarter was 23.6 percent, compared to 27.9 percent in the fourth quarter 2004. Included in total cost of sales in the fourth quarter 2005 were approximately $3.6 million of restructuring charges, which adversely affected total gross margin comparison.

Product gross margin was 26.4 percent, compared to 29.8 percent in the fourth quarter 2004. Included in product cost of sales in the fourth quarter of 2005 were approximately $2.2 million of restructuring charges, which adversely affected product gross margin by 0.5 percentage points. Unfavorable sales mix, driven by a lower mix of revenue from the higher-margin North America regional bank market and increased security sales, which carry a lower margin, adversely impacted product gross margin. Additionally, manufacturing and supply chain inefficiencies and higher energy costs also contributed to product gross margin erosion.

Service gross margin was 19.8 percent, compared to 25.8 percent in the fourth quarter 2004. Included in the service cost of sales in the fourth quarter of 2005 were approximately $1.4 million of restructuring charges, which adversely affected service gross margin by 0.4 percentage points. Lower pricing levels and higher product maintenance, fuel and pension costs adversely affected gross margin.

Income from Continuing Operations

Income from continuing operations was 1.8 percent of revenue compared to 8.7 percent in the fourth quarter 2004. The decline in net income as a percent of revenue was due to lower gross profit margins, increased operating expense and a higher effective tax rate. The increase in operating expense was the result of $14.4 million of restructuring charges and a $15.5 million charge related to approximately $32 million in Diebold Election Systems trade receivables from two counties. The increase in effective tax rate was primarily due to $7.0 million reserved against deferred tax assets.

Balance Sheet, Cash Flow and Share Repurchase Highlights

The company's net debt was $241.9 million at December 31, 2005 compared to $87.3 million at December 31, 2004. The $154.6 million increase in net debt over the last 12 months was principally due to free cash flow of $53.3 million plus the proceeds from the sale of the campus card business for $29.3 million, offset by share repurchases of $138.2 million, dividends of $57.8 million, $27.7 million used for acquisitions, $9.3 million in currency exchange impact, and $4.2 million invested in other assets.

In the fourth quarter, free cash flow decreased by $105.4 million, moving from free cash flow of $167.8 million in the fourth quarter of 2004 to $62.4 million in the fourth quarter of 2005. The decrease in free cash flow was due principally to an increase in accounts receivable, which adversely affected fourth quarter cash flow by $115.3 million. Days sales outstanding (DSO) were 66 days at December 31, 2005, compared to 63 days at December 31, 2004. DSO improved sequentially by 12 days in the fourth quarter in 2005 compared with a 22-day sequential improvement during the same period in 2004. The 10-day difference in DSO improvement benefited the 2004 fourth quarter by $111 million of cash flow. The DSO at December 31, 2005 was adversely affected by three days due to deterioration in accounts receivables collections in EMEA. This deterioration was due in large part to an enterprise resource planning (ERP) software implementation in that division, which delayed the processing and mailing of customer invoices. Inventory turns improved slightly to 5.8 turns at December 31, 2005 from 5.3 turns at December 31, 2004.

In the fourth quarter 2005, Diebold repurchased 1,536,929 shares of the company's common stock under its repurchase plan. For the twelve months ended December 31, 2005, Diebold repurchased 3,271,419 shares of its common stock under its repurchase plan. The company can repurchase an additional 4.5 million shares under previous authorizations by its board of directors.

In addition, the company is in the process of securing fixed-rate long- term financing of $225 million to $275 million to take advantage of attractive rates and provide funding for opportunities such as share repurchases. The company anticipates completing this transaction and receiving the funding before the end of the first quarter 2006, subject to market and other conditions.

Stock Option and Restricted Stock Expense

As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation," the company provides quarterly and annual disclosures of the impact to earnings per share if stock options were expensed. The company estimates that if stock options were expensed in accordance with SFAS No. 123 for the full year 2005, the impact would be approximately $.06 per share.

On December 15, 2004, the Financial Accounting Standards Board (FASB) issued Statement 123R, "Share-Based Payment," which now requires companies to measure compensation costs for all share-based payments (including employee stock options) at fair value. The company will implement this standard in the first quarter 2006. The company is in the process of completing its analysis of the impact of adoption of Statement 123R. Diebold estimates the impact of expensing stock options in 2006 will be approximately $.07 per share.

Restructuring

The company incurred fourth quarter restructuring charges of $.20 per share and full-year 2005 restructuring charges of $.37 per share. These charges included plant restructuring, associate voluntary early retirement and other severance costs.

As part of its multi-year profit improvement plan, the company anticipates further restructuring actions in 2006. While plans for some specific actions have not been finalized, the company has identified an additional $.12 per share in restructuring charges primarily associated with the consolidation of global R&D facilities and other planned service consolidations. In addition, further restructuring actions in 2006, which have yet to be identified, could reach or exceed the total restructuring charges incurred in 2005 of $.37 per share.

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.

Full-year 2006 outlook
Expectations for the full-year 2006 include:

• Revenue growth of 0 to 2 percent
• Financial self-service revenue expected to be flat
• Security revenue growth of 6 to 8 percent
• Election systems revenue is anticipated to be in the range of $100 to $125 million
• Brazilian lottery systems revenue of $30 to $35 million.