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Diebold Inc. (NYSE:DBD)

Q4 2009 Earnings Call

February 3, 2010 10:00 am ET

Executives

Tom Swidarski - President & Chief Executive Officer

Brad Richardson - Executive Vice President & Chief Financial Officer

John Kristoff - Vice President & Chief Communications Officer

Analysts

Matt Summerville - KeyBanc

Reik Read - Robert Baird & Co.

Kartik Mehta - Northcoast Research

Gil Luria - Wedbush Securities

Paul Coster - JP Morgan

Zahid Siddique - Gabelli & Co.

Operator

Good day, everyone. Welcome to the Diebold Inc. fourth quarter financial results conference call. Today’s call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Vice President and Chief Communications Officer, Mr. John Kristoff; please go ahead.

John Kristoff

Thank you, Dannie. Good morning and thank you for joining we for Diebold’s fourth quarter and year end conference call. Joining me today are Tom Swidarski, President and CEO; and Brad Richardson, Executive Vice President and CFO.

Just a few notes before we get started. In addition to the earnings release, we have provided a supplementary presentation on the Investor page of our website. Tom and Brad will be walking through this presentation as part of their opening comments today and we’d encourage you to follow along.

We have also included non-GAAP financial measures throughout our presentation this morning. Specifically, I refer you to slides 29 through 39, which provide GAAP to non-GAAP reconciliations as well as our rational for the use of non-GAAP measures.

A replay of this conference call will be available later today from our website and as a reminder, some of the comments today maybe considered forward-looking statements. Internal and/or external factors could significantly impact actual results, and as a precaution, we refer you to the more detailed risk factors that have previously been filed with the SEC.

So, now with opening remarks, I’d like to turn the call over to Tom.

Tom Swidarski

Thanks, John. Good morning, everyone. As you see in this morning, we are reporting solid operational results for the fourth quarter, despite a number of challenges our industry continues to face in the current economic environment. In addition, we had some tax adjustments from prior years that resulted in a much higher tax rate than expected and Brad will walk you through those in his commentary.

We also announce changes to our organizational structure in North America, which I will cover in a few moments, but first I would like to discuss the progress we made on a number of key fronts during the period. In Brazil, we want a major contract to supply 160,000 election terminals and related equipment to the federal government. The bidding process was very competitive this time around and our team did an outstanding job of developing a cost competitive solution.

As we mentioned in our announcement, this business represents approximately $100 million in revenue for terminals that will deliver primarily during the second and third quarters in 2010. While the contract allows for the purchase of an additional 90,000 units, we remain focused on providing the electoral counsel with everything they need to run an effective election in October 2010 and don’t anticipate receiving any additional orders before that time.

Secondly we continue to generate improved service margins during the period. As the fourth quarter represents our 10, consecutive quarter of year-over-year improved service growing margins. We also made significant progress on improving our working capital, which resulted in year-to-date free cash flow of more than $250 million and debt reduction of $190 million.

Finally I’m encouraged by the significant increase of orders that we’ve experienced if most regions around the world. Dispositions as well for the latter half of 2010 when many orders are installed and recognized as revenue, I’m particularly pleased with our performance in Asia-Pacific in this regard where we continue to generate consistent growth in order and revenue despite difficult comparison.

This performance is indicative of the leadership position we continue to build throughout that region. So considering our major win in Brazil, continued improvement in service profitability and increase in orders, I’m generally pleased with our performance during the quarter.

Finally as I mentioned during our last call we filled the CFO position with Brad Richardson, who join the company in November. Brad has quickly assimilated to our business and has made a number of key assessments. He has already played a critical role in helping us determine the organizational changes, our company needed to be more successful moving forward.

You will be hearing from Brad momentarily, but I wanted to take this opportunity to formally introduce him and say allow glad we are to have him on board. Let’s look at our performance and financial self-service base during the quarter. In EMEA we had a very strong product order entry if the region during the quarter particularly in October in Western Europe.

While the increase in orders is encouraging the comparison is based on weak prior year period and we don’t view this as a sign of a particularly strong turnaround in the overall region. In Eastern Europe our near term outlook has not changed as we continue to experience low levels of order activity. However, the long term prospects in Eastern Europe remain compelling and he plan to put ourselves in a position to capitalize on opportunities in that region as we move forward.

As we look at 2010 in EMEA, we anticipate the demand will remain challenging during the first half of the year. However, we are encouraged by some of the prospects that are presenting themselves in the market for the second half of the year and will spend a good deal of time and resources to capitalize on them.

Looking at Asia-Pacific, revenue is up 27% during the quarter and orders grew more than 50%. We continue to view Asia Pacific as one of our key growth markets. Also, we have improved our competitive position in important countries such as China, India and Thailand. This region has consistently shown strong, measurable performance year-after-year. We will continue to invest in our infrastructures throughout the region, particularly in our services business.

Overall in 2010, we expect moderate growth and a return to more historic seasonality, with more revenue coming in the latter part of the year. In the America segment order activity grew during the quarter. It is important to note, however that this growth was solely driven by activity in Brazil and Latin America.

In North America as expected we saw a double-digit decline in financial self-service order volume during the quarter as capital spend in the region bank segment remains weak. We are seeing the effects of the deposit automation project upgrade with one of our major customers in the U.S. coming to completion. It is important to note however fourth quarter order entry was similar to what we saw in the third quarter on a dollar basis.

Looking at our security business, we have seen little to no change in the market environment that was communicated to you during the last call. The lack of bank branch construction business in North America, which is also adversely affected our financial self-service business continues to hit this segment especially hard.

However the security business did produce its second consecutive quarter of sequential growth and revenue orders. Also the enterprise security portion of the business particularly in government and commercial is growing and holds a great deal of potential for the future. However, due to the smaller size of the enterprise portion of the business this growth is not enough to offset decline in a branch segment of the business in the near term.

We continue to face significant challenges in the North American financial markets, demanding our smaller regional financial institution customer base was beginning to weaken prior to the recession and weaken further during 2009. In addition to the dramatic decrease in branch construction I mentioned earlier this market segment is affected by a number of other factors.

First, the FDIC’s plan requiring banks to prepay on December 30, 2009 assessments for the next three years had a significant impact on the capital available for technology investments. This came on top of the special onetime assessment leveled by the FDIC earlier in the year. Secondly potential federal government fees to recoup the cost of providing TARP benefit may also have an impact on the spending by the largest banks.

Finally some of the major banks have disclosed in recent earnings that credit losses have risen. This along with the other factors as I mentioned could further delay our customer’s appetite for increased capital spending. As a result while we expect slight improvement for financial self-service in the regional bank segment 2010, we don’t anticipate customer purchasing activities to return to historical norms anytime in the near future.

For the security business, we expect to be down again during the coming year, as a result of the factors I just mentioned. However on the services side of the business, we continue to see real growth opportunities for our integrated services solution in North America. In 2009 this business continued to grow well into the double-digits, despite a very difficult environment.

While this is relatively small portion of our business, we are very excited about its long term growth potential. In 2010, we will increase our investment in this business both in terms of back office infrastructure and in sales and marketing efforts. In addition we’ll support our traditional services business by further improvement product reliability and aligning our emerging technology roadmap with our services strategy.

As a result we will further enhance the service built of our product and make our integrated services offerings even more compelling. At the same time the amount of business we are generating outside the United States has grown considerably over the past several years we continue to see significant long term growth opportunities in emerging markets in EMEA, Asia Pacific and Latin America.

Our challenge is to create an appropriate structure that allows us to continue to invest in these key growth matters while improving our competitive position in the United States. Particularly, in the high priority areas such as deposit automation and integrated services, as such we have reevaluated our solution set, go to market strategies and organization, to successfully and cost effectively support the North American and global market growth segments.

We are he realigning our organization and resources to better support these opportunities. Some of the recent leadership appointments we announce reflect the changes. Chuck Ducey has assumed responsibility for North American operations, which includes integrating our security business with our ATM business in the financial market.

In addition to leveraging synergies in these businesses, Chuck will focus on continuing to grow our successful integrated services business for both financial self-service and security. James Chen was appointed Executive Vice President, International Operations. James is responsible for all operational activities in Asia Pacific, EMEA and Latin America.

It is clear to me that we need to gain more alignment in our international operations to help drive additional growth in these regions, James’ organization will help us gain more synergy in that regard. Frank Natoli has been appointed to the new create a position of Chief Technology Officer. In creating this new position, we are aligning multiple developments functions that were previously part of other organizations in the company.

This new organization encompasses all the teams involved in developing self-service solutions from the initial discovery of new technologies through innovative design, development, quality assurance, manufacturing and reliability in the field.

Finally, John Deignan has been named Chief Marketing Officer is now responsible for all global financial self-service and security marketing as well as sales support and business consulting. This new organization will better align and integrate our global marketing and product management teams and provide strong support for our sales organization as we work to grow our business globally.

As a result of realigning these and other organizations, we’ll become a more flexible, competitive company, better positioned to invest in growth markets, and grow our services business. Unfortunately, these changes will result in the elimination of approximately 350 full time positions from our North American operations and corporate function. As always, these are extremely difficult decisions, but necessary to ensure we are in a position of extremity.

Let me be very clear, the purpose of these changes is not to create short term cost reduction we have been very successful with our smart business 200 efforts and that program will continue. These organization changes are geared toward boosting our investment and resources and key growth markets around the world. We will continue to accelerate our investment in developing new solutions and growing our infrastructure and emerging growth markets, as well as in the services business globally.

At the same time, North America remains our key market especially as customers begin planning deposit automation deployment and investing in services that allow them to focus more on our core business. We will maintain our strong leadership position by leveraging our unmatched services capability to deliver higher value solutions in these areas to our customer base.

Looking at our operations, we continue to make progress on a number of initiatives. As I mentioned previously, our smart business 200 cost reduction efforts continue to yield valuable savings for the company. We exceeded our savings target of $35 million in 2009, and are well positioned to achieve our target in 2010.

Additionally, our continued progress in working capital management as demonstrated by our significant improvement in net debt and year-to-date free cash flow demonstrates we are successfully managing elements of our business within our control. As we look to 2010, our visibility remains limited due to the continuing challenges in our core market in North America.

However, we do anticipate a return to modest top line growth. From an earnings standpoint there are a number of factors we have considered that Brad will review in detail as part of his comments. We anticipate EPS in the range of $1.90 to $2.15. To wrap up my comments this some morning, we have a get opportunity in several areas to capitalize on our technology and services expertise, delivering value to our shareholders.

To take advantage of these opportunities, however, we have to address the fundamental changes occurring in some of our key markets. We expect the new norm in these markets going forward, especially in the United States. Where significant challenge has made the need for innovation especially urge. This has prompted the recent organizational changes we have made.

I strongly believe these changes are necessary to help assure our future success. We’ll be a leaner company, more nimble and better aligned with our markets. We will remove internal barriers to innovation to enable us to quickly adapt to changing market conditions. We’ll continue to strike an appropriate balance between reducing our cost investing in our future growth.

Finally, we’ll continue to differentiate ourselves on our total value proposition, particularly as it relates to deposit automation, enterprise security and services. While we are optimistic 2010 will bring opportunities for growth, visibility continues to be limited. As a result, we are remains somewhat cautious on our near term outside look.

With that, I’ll turn the call over to Brad.

Brad Richardson

Thank you very much, Tom and good morning to everyone. Let me first say that I am excited to be here and believe my financial and operational experiences in the energy and manufacturing sectors are complimentary to Diebold’s strategic priorities. I have known many of you from my years with Modine and look forward to meeting those of you who I have been yet had the opportunity to work with.

Those of you who have worked with me know that I’m committed to align business plans with a specific financial framework and in the case of Diebold, that represents 10% operating profit and 15% return on capital employed. My other areas of focus for the business moving forward will be one, to help drive the strategic transition of the company, two, to drive operational performance improvement, and three, and very importantly, to drive further improvements in our financial controls, processes, and systems.

My pledge to investors is to continue the commitment transparency that Diebold has established during the past few years. I value open communication in dealing with the street, and plan to keep as active of a schedule of face-to-face meetings and phone conferences as possible. Among my initial observations is that we have a very capable leadership team, doing the right things, working to generate growth and making the tough decisions now to help ensure our future success.

This is evident by the realignment actions we are taking today in North America. I’d like to refer to slide 14, which focuses on fourth quarter revenue. Total revenue was $725 million, down 8% from the fourth quarter 2008, including a net positive currency impact of 6% driven by the strength of the Brazilian Reais.

For the full year revenue was down 12% from 2008. Full year revenue includes a net negative currency impact of 2%. For the year, product revenue was down 18% while service revenue was down 6%. These decreases are due to lower product demand and some of our core markets.

Looking at our financial self-service business on slide 15, fourth quarter revenue was $549 million, down 6% from the fourth quarter of 2008. This decrease was attributable to continued weakness in Eastern Europe. However, we did see sequential improvement in revenue and financial self-services from the third quarter.

In addition we saw order entry levels increase substantially. For the full year, financial self-service revenue was down $171 million, or 8%. This includes negative currency impact of 2%. Financial self-service revenue in EMEA had the largest impact on the revenue decrease for the year.

Revenue for financial self-service in the America was down slightly on a year-over-year basis due to continued weakness in the North American market, partially offset by gains in Brazil. Asia Pacific revenue was up for the year, due to continued strong performance in the region. As Tom mentioned, Asia Pacific continues to perform very well for us, and will be a focus area for investment and growth moving forward.

In the security business on slide 16, fourth quarter revenue was down $33 million, or 16% from the same period in the previous year. This decrease was due primarily to continued weakness in the U.S. financial market, especially in the physical securities segment of our business, which relies heavily on new bank branch construction.

However, we did see a second consecutive quarter of sequential improvement in our security business during the fourth quarter. For the year security revenue was down 17%, again driven by weakness in the U.S. Banking segment.

Looking at slide 17, total gross margin for the fourth quarter was essentially flat compared with 2008. For the full year, margin was down 1.6 percentage points from 2008. The product gross margin for the quarter was down 1.9 percentage points, primarily due to a decrease in overall product revenue. For the year, product margin was down 4.2 percentage points reflecting the year-over-year change in revenue mix.

The largest declines in product revenue occurred in the regional bank space in North America and in Eastern Europe, both of which carry higher than corporate average margins. Additionally, 2008 revenue included the large Brazilian elections contract, which positively impact margins in the prior year.

In service the gross margin was up 1.9 percentage points for the fourth quarter our 10, consecutive quarter of year-over-year improvement for gross margins. For the full year the service margin was up 0.8 percentage points as we continued productivity gains and benefited from favorable year-over-year fuel costs.

Moving now to non-GAAP operating expense, as highlighted on slide 18 in Q4, 2009, operating expense as a percentage of revenue was 18.8%, up 1.9 percentage points from the comparable period of 2008. Operating expense in the fourth quarter increased by $2.4 million or 2% from the private year. However, excluding a negative currency impact, operating expense spend would have been down $2.6 million.

Full year 2009 operating expense as a percentage of revenue was 18.2% an increase of 1.1 percentage points from 2008. Operating expense in 2009 declined by $33 million or 6%, compared with 2008. While we controlled the dollars spent in operating expense, the drop in revenue period-over-period drove the increase in operating expense as a percentage of revenue. We focused intently during 2009 on managing costs while maintaining our high level of investment in R&D.

Now if you turn to slide 19, non-GAAP operating margin in the fourth quarter 2009 was 6.3% compared to 8.2% in the fourth quarter of 2008. The decrease was due to the unfavorable leveraging of operating expenses as a percent of revenue. Operating profit margins for the full year 2009 was 6.2% compared with 8.9% in 2008.

Despite the challenges we faced in our end markets in 2009, the 6.2% our operating margin falls well below our expectations and what I believe this company is capable of achieving. We will continue to be aggressive in generating global growth and expanding our service offering while continuing to tightly manage operating and SG&A costs. The organizational realignment we announced today in North America will help accelerate our efforts to reach our stated operating margin goal of 10%.

Turning to the EPS reconciliation table on slide 20, GAAP EPS from continuing operations in the fourth quarter 2009 was $0.12 per share, compared with $0.26 per share in the fourth quarter of 2008. The fourth quarter 2009 EPS included restructuring charges of $0.15 per share, and an impairment of $0.02 per share. Excluding these items our fourth quarter non-GAAP EPS was $0.29 per share compared with $0.43 per share in the fourth quarter.

Full year non-GAAP EPS from continuing operations was $1.65 per share compared to $2.71 per share in the full year of 2008. In addition, you can see that there is a negative tax adjustment included in the 2009 GAAP and non-GAAP numbers of $0.13 per share that I will be explaining on the following slide.

Turning to slide 21, our fourth quarter taxes on income were $29.6 million, resulting in a higher than expected fourth quarter non-GAAP tax rate of approximately 60% in a 2009 full year non-GAAP tax rate up 30%. In the third quarter we had estimated our full year tax rate would be approximately 18%. There were three primary factors that led to the higher than anticipated tax rate for the year.

First our results included approximately $9 million or $0.13 per share in estimated tax provision adjustments related to prior year periods. These adjustments involve a few different items, the most significant being U.S. tax on interest income earned abroad. It is important to note the vast majority of this adjustment pertains to years prior to 2006. In addition, our results also included a deferred tax asset evaluation allowance of approximately $6 million, related to one of our legal entities in Brazil.

Finally, changes in mix to income from various tax jurisdictions and other miscellaneous items accounted for the remainder of the change in non-GAAP tax rate from our prior guidance. As we said in today’s release, due to the complex nature of the tax adjustments reflected in our fourth quarter results, we are in the on process of finalizing the tax adjustments described above. We plan to complete our final review of these adjustments prior to filing our 10-K.

Looking at free cash flow on slide 22, it’s important to note that we define flee cash flow as net cash from operating activities, less capital expenditures. Full year free cash flow for 2009 was $257 million, an increase of $30 million from 2008 or 13%. This represents a record level of free cash flow for the company.

When looking at the elements comprising our 2009 full year free cash flow, net income and depreciation and amortization or cash income was $126 million, change in working capital was $95 million, early accounts receivable payments or customer payments received prior to the invoice due date make up an additional $50 million of the total, other items were $30 million, and capital expenditure out lays were $44 million.

When looking ahead to 2010, there are a few major items to consider that will require the use of cash in 2010, as shown on slide 23. First, we are reserving $25 million for payment to the SEC, based upon the agreement and principal we established with the SEC staff in May 2009. We anticipate severance costs of approximately $15 million associated with the North American reorganization.

Finally, we do not anticipate the same level of early accounts receivable payments in 2010, as we had in 2009, given the fact that we received approximately $50 million in early payments in the fourth quarter. We do anticipate 2010 free cash flow will comfortably exceed $100 million.

Looking forward, we will use our cash discriminately, with a priority on pursuing opportunities to grow through smaller, strategic acquisitions. We will also consider buying back our stock situationally. We feel our shares are an excellent value at the current price level. However, there are a number of factors we will consider, including cash flow, liquidity of our business, and the general economic outlook before we reengage in a modest stock buy back program.

Looking at slide 24 and 25 on working capital metrics, the day sales outstanding improved by 11 days, approximately 47 days at December 31, 2008 to 36 days at December 31, 2009. This equates to approximately $83 million in cash flow that has been unlocked from the DSO performance.

DSO of less than 40 days is exceptional, especially when you compare it to our recent history when DSO was routinely higher than 60 days. The improvements realized over the last two years reflect globally coordinated efforts across the number of department and his divisions within the company to streamline our total order to cash process.

Inventory terms improved from 4.3 turns at December 31, 2008 to 4.6 turns at December 31, 2009. We anticipate continued improvement in inventory turns moving forward, with the completion of the global plant realignment and warehouse consolidation efforts. George Mayes and I will be working closely together to drive inventory turns as we move forward.

Turning next to liquidity and the net debt, which is shown on slide 26, the net debt at December 31, 2009 was $62.9 million, representing a decrease of $11.4 million from December 31, 2008. Our net debt to capital ratio was 6% at December 31, 2009 compared to 21% at December 31, 2008. We are committed to maintaining a strong, healthy balance sheet with the liquidity to fund growth and return monies to shareholders as appropriate.

Turning to our full year outlook on slide 27, as Tom mentioned in his remarks, visibility is a still a bit difficult due to the economic environment in our end markets. However, we do expect some modest top line growth in 2010. As a consequence, we expect full year revenue to increase 4% to 9%. Our expectation is that financial self-service revenue will increase 2% to 6% while we expect security revenue to be in the range of a negative 6% to a negative 1%.

Finally, as Tom mentioned, we expect Brazilian election systems and lottery revenue of $105 million to $115 million. We expect our full year 2010 GAAP EPS based on these revenue projections to be in the range of $1.87 to $2.10. Also, we anticipate restructuring charges of between 3 and 5 cents per share. Excluding these items, non-GAAP EPS is expected to be in the range of $1.90 to $2.15 per share.

Within this guidance, we have several moving parts and assumption as highlighted on slide 28. Our revenue guidance excluding the Brazil voting contract implies zero to 5% top line growth, which would result in up to $0.15 of EPS contribution. The Brazil voting contract is expected to contribute an additional $0.25 per share.

The organizational realignment we announced today is expected to contribute between $0.12 and $0.15 a share, while we expect our smart business 200 efforts to contribute $0.10 to $0.15 per share. I should note this contribution is net of expected increases and fuel costs, as well as other commodities such as steel and resin.

Our guidance assumes an effective tax rate of approximately 28%, which is lower than 2009, and results from a contribution of $0.5 per share. On the headwind side of the equation, revenue mix is expected to negatively impact us by approximately $0.15. This includes the effect of a negative mix within Asia Pacific, as well as a greater mix of Asia Pacific revenue overall. It also takes into account expected growth in Western Europe and the in sourcing of a large integrated service contract by our customer in Brazil that has been mentioned in previous calls.

Finally it fakes into account the normal rate of price erosion we expect on an annual basis. The other category is expected to be a drag of $0.10 to $0.12 per share. This includes higher pension expense, as well as other employee related expenses.

In conclusion, let me reiterate how very excited I am to be here and I’m confident we will continue to strengthen our organization to effectively compete in this environment. We will maintain a sharp focus on our costs. We will continue to improve our working capital metrics. Finally we will further develop our financial reporting processes to gain greater clarity and visibility into our business. This is a wonderful company with a great history and culture, and I look forward to making a strong contribution.

Let me now turn it back to John.

John Kristoff

Thanks, Brad. Dannie, we’d like to open it up for questions at this time.

Question-and-Answer Session

Operator

Your first question comes from Matt Summerville - KeyBanc.

Matt Summerville - KeyBanc

Tom, you had mentioned in your prepared remarks that orders in EMEA and ATM business were up about 20% in the fourth quarter. It sounded like that was heavily weighted toward the month of October. Did you see a shift in business fundamentals in November and December to the point that was just kind of a flicker in momentum, if you will?

Tom Swidarski

Matt, I would say that year-over-year was heavily skewed from October. It just ended up being timing of several large orders that came in. So I don’t see really any underlying shift in terms of what’s happening in Europe. We see that as an area where we’re going to see modest growth, high single digit next year, but we don’t see a full rebound there, especially as a result of eastern Europe still being very, very weak at this time.

Matt Summerville - KeyBanc

Tom, did I hear you right, where you expect EMEA to grow high single next year?

Tom Swidarski

Yes, I think that would be about right.

Matt Summerville - KeyBanc

With regards to some of your other comments, I’d like to hear more specifically what your customers are saying about their capital budgeting decisions within the small and regional bank market, given the prepayment worth of three years worth of assessments. What are your customers telling you it is doing specifically to their capital budgeting decision around deposit automation?

Tom Swidarski

So, I have spoken to a number recently and have been in several meetings. As you might imagine, when you are talking about the U.S. regional bank space, including community banks in there, you are talking about 10,000 institutions. So I’m having conversations with 20 folks that I respect, but in essence there is still a lot of hesitation in the North American market.

Certainly these assessments, getting the assessment identified, and understood is a very important factor for visibility going forward, but a lot of their issues still revolve around the underlying health of the bank and with the credit situation where it’s at, you know, a lot of people have indicated that much like this year.

While they may have had a bank branch or two on the radar screen, they’re going to be conservative in that regard. So I think they are going to remain conservative in the United States, and that’s what we’re planning for in 2010 with the regional bank space.

Matt Summerville - KeyBanc

How should we think about seasonality in your earnings as we move from quarter-to-quarter in 2010, given the Brazilian elections business and given the dynamic you expect out of China? Historically, the fourth quarter has been Diebold’s best quarter. That wasn’t the case in ‘08, the third quarter was. How should we think about 2010 in that regard?

Tom Swidarski

Yes, Matt, I would say that it’s going to return much more of a traditional trajectory for us. This year our first half comps will be difficult in that we had a lot of Asia Pacific coming in the last of 2009 and so what we’re going to see this year is a significant ramp in the third and fourth quarter that would be more traditional to what Diebold has experienced.

First of all, you have Asia Pacific that’s going back to a more seasonal type of environment. Second, you have a lot of opportunities and Brazil being the biggest. That’s going to be delivered heavily in the third quarter; while there will be some in the second as well. That influences it.

I think third, in terms of the United States, we see the first half of the year being relatively weak in that regard, and that the orders that we’re going to be seeing in the first part of the first quarter really are not going to revenue until the third quarter. So for us, the third and fourth quarter in 2010 will be large, and the first two will be difficult comparisons for us.

Matt Summerville - KeyBanc

Can you give a little more of a sense, a moment ago, Brad walked through a line by line item in terms of how you bridge your EPS, but there were two categories, one was the organizational change. I assume that has to do with the most recent layoff you announced today.

Then other new cost reductions. I assume that relates to SmartBusiness 200. I just want to make sure and understanding those buckets and then in that same context, Tom, I think you indicated some of the savings you’re going to get out of North America you’re reinvesting, and I want to make sure this number is netted out for that.

Tom Swidarski

Yes, so in fact that line, if you look at that slide, it says organizational changes. That is a net number. So obviously, we’re taking 350 full time equivalents out of the North American operations. Some of that will be reinvested back in North America, as I mentioned, with integrated services where we want to do even more because of the momentum we’re gaining there and the reception we’re receiving in the market, but also some of that has to do with funding some additional development and focus outside the United States, where we continue to see growth opportunities.

So yes, in fact, that is a net number. The other number on that slide, the reconciliation slide that is a net number is the cost savings. So in that cost savings, that’s really SmartBusiness 200 netted against the increases of the fuel commodity, and then the pricing impact as well.

So you’ve got those netting out to what’s on the slide and again, I think I’d feel very good in terms of SmartBusiness 200, which will evolve into 300 here in the not too distant future, in terms of the underpinning and the will of the company taking costs and taking waste out of our organization just on an ongoing basis.

Matt Summerville - KeyBanc

Then just two quick follow-ups, Tom, and then I’ll get back in queue. On the 350 FTEs, are any of those folks coming from your sales or core service organization? Then of the restructuring impact, Brad, that was in gross profit $5.8 million, just as a housekeeping item, can you give a more precise split between how much of that was in product versus service? In case I missed that.

Tom Swidarski

So Matt, on the first question, there is no reduction relative to the sales organization or the service organization at this time. Our goal is to actually move some additional resource closer to the customer from a sales standpoint, especially on IF and deposit automation, and put more specialized capabilities within the selling organization. So while I expect the selling organization to change, we’re actually looking to put additional resource there, funded by taking it out at the headquarters.

Brad Richardson

Matt, I look forward to actually meeting you face-to-face, but the pre-tax number that is in for the restructuring that we just announced is about $9.2 million pre-tax. That’s in the operating expense line on our income statement. We have not split that between the product side, if you will, and the service side of the business.

Matt Summerville - KeyBanc

I thought in one of the reconciliation slides in the back, it says and I believe this is 4Q ‘09 that within gross profit there was $5.8 million of restructuring charges?

Brad Richardson

Yes, and that’s also shown up in the front. That was in addition to that there’s $5.8 million that actually comes through the manufacturing side, and that’s the ongoing restructuring that we’ve been doing and the manufacturing side of the business, as well as some service, but again, in addition to the 9.2 that is attributable to the 350 positions being eliminated here.

Matt Summerville - KeyBanc

Correct. I was more looking specifically with the 5.8, how much of that is in product versus service?

John Kristoff

Matt, I don’t want to cut you off, but we have got a really long queue. Can we take this offline?

Matt Summerville - KeyBanc

Yes, no problem. That’s fine.

Operator

Your next question comes from Reik Read - Robert Baird & Co.

Reik Read - Robert Baird & Co.

Just with respect to the U.S. orders, the down double digit, can you give us a breakdown there in terms of product versus services, and talk a little bit about how those orders are looking sequentially? Then Tom, also, with respect to services, could you maybe break that down too and talk a little bit about how things are moving from a traditional services and the integrated services and how those might be moving forward?

Tom Swidarski

Reik, I’ll try and take those. I may not catch them all. Basically, orders in North America sequentially are flat, so third quarter to fourth quarter sequentially flat. In terms of being down double digit, it’s heavily weighted toward product. So product in terms of being down is far greater than the service impact.

As far as traditional service versus services, our contract portfolio of the traditional services in the United States is enormous, and it has been relatively constant. The area that we are hit relative to service has to do with what’s tied to product. So the installation gets tied into the service bucket. That has been down as a result of product being down.

In terms of the new initiative on the services side, we are real happy with the growth we are seeing there. The year-over-year growth is significant, in the high double digit range in terms of growth, but those are five year contracts. So that is spread, and then the individual services components of that will build overtime.

So we like the fundamentals of that. It fits very nicely with our competency relative to service and builds on the trust we built with traditional service and again, because our contract based on service remains very solid and growing ever so slightly, it really gives us a good springboard into services for many of these customers that trust you to handle their operation.

So I like the fundamentals of where that’s headed. That is why we are taking some of the actions we are here, so we can put more resource against that in the field and have more capability of selling that infrastructure that we have now pretty much built.

Reik Read - Robert Baird & Co.

Can you give us a sense, Tom, as to what that integrated service is as a percentage of maybe the overall services and where you’d like that to be down the road?

Tom Swidarski

Yes. It’s a very small percent in the United States. The way we look at it, just like the way I can explain it is we have got two elements of it. One is what I would call total contract value and that means we secure a contract with XYZ bank that’s over five years that’s total contract value.

Our goal for total contract value, last year we did about $50 million in total contract value. This year we came in shooting for, I think somewhere in the range of $65 million to $70 million, which we achieved and slightly surpassed and next year we would look to ramp that up an additional $15 million, $20 million, but that’s spread over the five years.

When you look at it in year one, because these are individual point services, whether it be monitoring or whether it be cash forecasting or software downloads, these are all pretty small items that need mass to really to grow and to leverage and so probably as a percent, I don’t have that at my fingertips, I would imagine it’s probably only 2% or 3% at this point of our total service revenue.

Reik Read - Robert Baird & Co.

Okay, and then just going back to Eastern Europe, you mentioned you were going to do some things to position yourself. Can you talk about what that incremental positioning is and it sounded like back half of the year you might see a little bit more activity there, is that correct?

Tom Swidarski

Yes, that is correct. We certainly think the current course and speed is very difficult and Russia is a big driver in terms of what’s going on in Eastern Europe, and we’re not as well positioned in Russia as I’d like. So we’re looking to see what type of additional service operation we need there, what type of additional resources we need to be in positioned when that takes place.

So we’re thinking our timing is good relative to that and that the activity will pickup probably toward the second half of this year, based on some of the meetings that we’re having with banks there, and really I’d look for 2011 and 2012 for it to return to some level of normalcy compared to what we have done in the past, because it was off dramatically in 2009.

Reik Read - Robert Baird & Co.

Then one question for Brad, in your slides, you talked about 10% operating margin is what the business model supports. What should that look like in terms of in the long run? What product gross margins and service gross margins should be?

Brad Richardson

Well, what I would probably prefer to answer that without giving kind of a specific guidance regarding the split is to say, clearly again, as I said in my remarks, some of the actions that we’re taking today help obviously move the company toward the 10% operating margin, and certainly some of the SB 200 initiatives are moving us that direction.

Having said that, I think we all have to recognize that we need meaningful top line revenue growth in order to get the company up to the 10% operating profit margin and what we have historically said is based upon, again leveraging our revenue base and tightly controlling, if you will, the fixed costs of the company, that we need a revenue base of somewhere around $3.5 billion in order, coupled with again, the cost reduction initiatives that we have ongoing in order to achieve that 10% operating profit.

Operator

Your next question comes from Kartik Mehta - Northcoast Research.

Kartik Mehta - Northcoast Research

I wanted to ask your thoughts on, as you look at 2010, at least as we sit today, what ATM markets you feel the most comfortable with and maybe which ones give you the most concern or pause, and not only on order activity, just the conversations you’ve had with the banks?

Tom Swidarski

So maybe I’ll comment on the largest countries, and if I miss one that you would like me to comment on, I will, but certainly the United States, since it by far, for us is the largest, most key market. The regional bank business for us historically has been such a major driver in terms of the overall profitability of the company.

Given the financial crisis that we have faced and the impact here in banking, specifically in the United States, that would be the area that I would say would be the greatest concern to me, in that it can have the potential earnings generation power that we’ve experienced in the past, but yet right now the outlook and the visibility is really cloudy, but I also feel that we have by far our best capability and skill set sitting here as well

So it’s a matter of remaining focused on this, not knowing exactly when the market is going to rebound, but being there and certainly our service base suggests that customers are very satisfied with our quality of product in our services offering because they keep renewing our service contracts, which to me is the biggest indicator of customer satisfaction.

So I think we’re well-positioned in the United States, like the capabilities we are bringing to the market, and the regional bank space seems to have been very much like the offering we’ve come out with in integrated services and while that sales cycle is long, I feel good about its ability to really differentiate us and give us five year contracts versus competing for individual ATM orders.

Second, I would say Brazil, Brazil for us still remains, as you can see from the kind of orders we get down there just an overwhelmingly capable organization with significant manufacturing, significant engineering, significant customization capabilities that’s really helping differentiate us in the market and while we have both government banks and private banks there, we are well situated in every bank there and our relationships with those banks is bar none, just outstanding. So we feel very good about that.

Other parts of Latin America for us, Colombia is key, and Mexico is key, and like our resources and capability there, so when you look at the America as a whole and Canada very well situated with our organization and our competency and capability.

EMEA for us is always the most difficult and challenging market. We don’t have quite the infrastructure there, and that is why when I mentioned Eastern Europe, the need to invest further in Eastern Europe is critical for the long term success. Even if short term there is not going to be a major rebound in the first half of the year. We need to be better positioned from with more resources, more automation so we can take costs and do things with that and automate both the way we interface with the customer, but be able to take costs out of the scenario.

Middle East, we go through a distributor there and feel good in terms of our capability within Saudi Arabia, which is the biggest region and then when you get to Western Europe, we certainly have certain countries where we’re much stronger in than others, but we have a pretty good game plan in most of the Western European countries, and then we have strength in Belgium and some of the smaller countries in particular.

When you look at it in its entirety, we don’t have still the mass and we don’t have the all the capabilities we need there. So that’s another area you’re going to see us continue to invest in. Asia Pacific, the big countries, India, China, Thailand, Australia, in China, India and Thailand, Indonesia, I think we’ve invested heavily over the years. We are going to continue to invest there.

We’ve got different approaches in each of those countries. In Thailand, we probably have our best service operation anywhere in the world, and that allows us to generate significant share and relationships with customers that have been successful. China, we feel very good about what we’ve done there, and it certainly is reflected in the results since they’re the biggest driver, but China is still very much product oriented.

We have to penetrate further into the second and third tier banks and we also need to penetrate the service and services side. So we got our first services contract there, but we’ve got a long way to go in terms of building out the capability we need within China to be where we want to be in ten years from now. India is much more oriented toward the services side of the business.

We’ve invested heavily there. We’ve taken a lot of our capabilities from Brazil and leveraged those into India and we’ll continue to do that. So that’s a quick view in terms of how well we’re positioned right now. Again because of the end market being difficult, the two regions of the world that continue to move forward and had been experiencing that’s quite the same impact from the again financial crisis with Asia Pacific and Brazil in particular and those were for us continue to be our biggest growth markets in short term opportunities.

Kartik Mehta - Northcoast Research

I want to go back to a statement you made about 2010 in the seasonality and earnings. Would it be fair to say, if you’re going back to more of a traditional Diebold seasonality, that in 2010, it would be difficult to have year-over-year earnings growth in the first and second quarter compared to 2009?

Tom Swidarski

Yes, no question. Those are exceedingly difficult comps for us given what happened with Asia and some other major orders that came early in the year. So for us, those will be very difficult comparisons, but the second half of the year really is where a lot of the existing contracts we have a backlog coming in the year actually going to be delivered. Third and fourth quarter for us should be very strong, which reflect much more historically how we’ve performed.

Kartik Mehta - Northcoast Research

Brad, just on the Brazilian Elections business, will you try to hedge any of that currency? I know last time there is an election business order that came Diebold benefited from the hedge or movement in currency. So I’m wondering at this time, if you’ll hedge any of it or you’ll just rely on whatever is happening in the currency at that time?

Brad Richardson

In fact, the US dollar components of the raw materials that are going into the voting machines, we’ve already taken action to hedge that in order to protect the margins on the business.

Kartik Mehta - Northcoast Research

Final question for you, Brad, you talked a little bit about working capital on the accounts receivable, there’ll be a negative drag in 2010. As you look at the rest of working capital, especially inventories and maybe payables can the improvement in that offset the drag from the receivables or in 2010 will working capital be more of a drag?

Brad Richardson

I think certainly our focus as an organization will be to drive to offset that. We’ve got aggressive plans that we’re working. Again as I mentioned with George Mayes on the inventory, and certainly if you look at our metrics around the day’s payable outstanding, and look at that relative to how quickly our customers pay us, but also look at it on a benchmark basis. We think there’s opportunity there on the payables and we’re already focused on that particular area. So I think those two areas, the inventory and the payables are designed to kind of help offset this drag from the receivables that you mentioned.

Operator

Your next question comes from Gil Luria - Wedbush Securities.

Gil Luria - Wedbush Securities

You gave one piece of the regional guidance you said that you may expect a high single digit. Could you finish the picture with America’s growth excluding Brazil Elections and Asia growth for 2010?

Tom Swidarski

Asia Pacific, I think in terms of right around 10%, or 11% kind of scenario. So, high single digits to low double digits right in that venue. That’s coming off of difficult comps so I feel pretty good in terms of how we’re situated there for 2010. When you think of the Americas in total, you think of it relatively flat. Again we’re excluding Brazil Elections here. So, you have Brazil and Latin America, which look to be, I think, pretty healthy this year, and both would be single digits kind of growth off of from Brazil’s case not pretty good outstanding 2009.

So that would put us in a position of being, slightly up there, and then in the Americas, we see that being flat to slightly down, given what we look at right now. Then that has a lot to do with where security is. So security really impacts certainly North America that doesn’t impact anywhere else and we’re still pretty cautious there, simply because the bank branch builds side of things.

The number of bank branch builds, was in the range of 3,500 to 4,000. If you went back over the last you know 10, 15 years, this past year it probably came down closer to 2,000, 1,800, somewhere in that range. We’re projecting this year it could slide even further to the 1,500. Thus, we’ve taken our revenue projections down. We might be surprised if some of that active picked up the second half of the year, but again, it doesn’t help us from a revenue standpoint this year. So, that would be my comment relative to kind of a quick view around the world.

Gil Luria - Wedbush Securities

You’ve talked about some of the dynamics of the U.S. Will you mention Bank of America rolling off this year and I think last call, you talked about that being about 15% of that business. Where are you going to make that up? Is it banks four through 20? Or is it the banks below that they’re going to help make up that difference, so you only have a low single digit decline.

Brad Richardson

Yes, I think both of those will help us, I mean historically, our strength has been with the regional bank space throughout the United States integrated services helps us in that regard. Deposit automations and the recent deposit automation has been slow to take in terms of regional bank space has been a number of things, but one of the critical things has been that many of these smaller banks, unlike the biggest banks, are dependent upon networks and processors to handle deposit automation.

Most of the networks and processors were not prepared to handle the deposit automation capabilities. So while you can equip the unit with it, and someone may make a deposit automation transaction, if the processor doesn’t handle it as such, it basically defeats the whole purpose it.

So we’ve spend a lot of time in 2009 helping work with the processors and network to be prepared as more of the smaller banks begin to move. So we see that infrastructure being critical for smaller banks moving and we think we’re in much better shape beginning in 2010 than we were before, relative to infrastructure. Banks still have to make that decision as I mentioned before is somewhat cautious.

The second thing I had mentioned is a lot of our integrated services capabilities and skill sets applied very much to deposit automation. Due to the complexity of installing deposit automation, changes required from an operational standpoint and the process change the bank needs to make in many cases that leads to a discussion of integrated services, which works out to very good, but the discussions take a little bit longer.

So from our standpoint, it’s the regional bank and the middle bank space, we have a lot of opportunities from deposit automation kind of going forward. When I look at the banks 40-20, you would say that we are exceedingly well positioned in several of those banks are 100% Diebold’s kind of accounts, others have a mix of providers, but in all those cases we’ve got, what I’d call meaningful relationships with those players and while many of them are in pilot today and don’t have large plans to rollout.

In the beginning of 2010, we would see probably again the second half of 2010 and into 2011 as maybe some meaningful rollouts. We’re working our way through each one of those accounts. We’ve account teams that work with those and we’re pretty close to those customers, so I feel pretty good about our opportunities as you start moving out to the rest of the environment.

Gil Luria - Wedbush Securities

It seemed like a lot of the variability in your results has to do with the financial line. First of all, on tax, I think last quarter we were talking about 18%, 23%, and now we’re talking about 28% for next year. So first of all, what is the big swing factor there? Is the 28% more what we should expect going forward as a more steady state tax rate?

Brad Richardson

I think, again, in answer to your question, I think the 28% is where we think we’re going to be in 2010, and that’s a good tax rate for planning purposes on a go forward basis. As we mentioned in the presentation, our guidance, as you pointed out, had been 18%, but there was six percentage points associated with the Brazil tax valuation allowance, and we would expect that to continue, so that brings your rate up to 24%. As we look to 2010 and we look at the mix of income, the actions that we’re taking here in North America, higher tax jurisdictions, but it’s designed to improve our overall profitability out on North America.

So that weights towards the higher tax jurisdiction and then as Tom, I has spoken to some of the growth that we have coming out of Europe, again, another higher tax jurisdiction. So it’s those factors, which I think support the 28% tax rate that we’ve provided you in the guidance, as well as for planning purposes.

Gil Luria - Wedbush Securities

Then your other line of the financial line was positive, I think for the first time in a little while. Part of it, I’m sure, that your net debt is lower, although returns on your cash were probably not very good. So what was the big driver of making that a positive number?

Brad Richardson

Yes, there are a couple of factors. Certainly, the currency and the translation of our working capital balances that contributed kind of about $8 million to the swing that you’re pointing out. So that was quite favorable in the quarter. Again as you pointed out, our debt balances are lower. So our overall net debt cost and so basically, again, net interest costs coupled with the higher interest income, call it $6 million or so favorable. So those were the two large items that swung that other line to a positive, as you point out.

Gil Luria - Wedbush Securities

Last question about uses of cash, now that you have a lot of cash on the balance sheet, your net debt is much lower than it has been historically. What’s the baseline level of cash that you feel you need to operate the business? How much cash do you think you have available for the kind of renewed buy back? Although it sounds like you tend to have a cautious buyback, how much cash do you think you have available for that? How much cash do you intend to retire debt early? I imagine those are the two primary uses of cash going forward.

Brad Richardson

Yes, let me just without getting into all the details, certainly as you’re probably aware, some of our cash clearly is outside of North America to support the operations outside of North America. Also, obviously, there are tax consequences of repatriation of cash. So we have to weigh this very, very carefully, and our treasury team does that quite well.

So what I would say again is at this point is, certainly we find ourselves in a position where the net debt is low, our capitalization ratio is low, but we’re going to be quite careful here as we go forward in terms of evaluating stock buybacks, because we have to weigh that also again against tax consequences in some of the repatriation activity, as well as and more importantly that the need to fund the growth of the business through some of the smaller bolt on type of acquisitions.

Gil Luria - Wedbush Securities

So how about retirement of debt? Is that on the table in terms of taking that some of the debt that you have on the books right now?

Brad Richardson

Certainly, again, as we look to repatriate cash and to the extent that cash isn’t used for small bolt on type acquisitions, absolutely we would look to retire debt.

Operator

Your next question comes from Paul Coster - JP Morgan.

Paul Coster - JP Morgan

A couple of quick questions, your visibility into a stronger second half seems to be quite good on the top line. Can you just give us some sense of the margin outlook as well associated with the order book?

Tom Swidarski

Yes, I would say, you take a look at the margin let me comment on service and then product, if I can, as well. On the service side, we’ve been able to walk up the margin relative to service pretty effectively as we mentioned 10 consecutive quarters and our goal this year would be able to increase that modestly again.

So my expectation for 2010 on the service side is to improve our gross margins there. That’s a result of productivity; it’s a result of keeping prices in a relatively stable environment kind of globally, and our ability to manage that very, very closely. So I feel pretty confident in that regard.

On the product side, it’s a little more challenging, because you have more impact of mix. So as we’ve talked, trading off regional banks in the U.S. for growth in Asia and EMEA, it was a difficult trade off in that regard. So I would say that, I’m not as confident in terms of what the gross margins on product, but I do think that expecting it to be with all the actions that we’re taking to be right around the neutral range would be kind of what I would be expecting for what we’ve seen so far.

Paul Coster - JP Morgan

Why is it that you don’t have any range in EPS expectations around the contribution from the Brazil Electoral Systems program? Is $0.25 good or bad?

Tom Swidarski

Well, the contract is pretty locked in terms of the pricing this time was very fixed. I think it ends up being about US $700, for the 160,000 terminals, and everything is very locked down relative to every aspect of that, so and since, Brad mentioned before what we’re doing from a hedging standpoint, there’s not going to be fluctuation that we experienced last time. Last time, it worked in our favor. We were concerned about it. This time we took that risk off the table. So in essence, it is pretty locked.

Paul Coster - JP Morgan

You sound pretty relaxed about the customer acceptance and timing of deliveries there.

Tom Swidarski

Probably relaxed is not in my nature, but I’m glad it came across that way. I can assure you I always on the phone with our folks from Brazil, probably more than they cared to, but I think the good news for us is, we have delivered and this is a different technology this time, which is making it more complicated, but we’ve delivered in this regard.

We’ve got a service organization and capability on there from a project management and engineering standpoint, and our resource and capability there is exceedingly high and very talented, which is what put us in this position. So I have a great deal of confidence of our ability to deliver and deliver a very high quality on time election for them.

Paul Coster - JP Morgan

Changing subjects, you’re seeing some strength in Europe in the second half of the year from your order book. What is it that is actually happening in Europe? Is it a few big accounts? Is it broad-based? Is it specific geographies? Is it deposit automation? Can you give us some color?

Tom Swidarski

Yes, I would say it’s a couple of large accounts. Deposit automation plays a big role there of branch reengineering and reinvigoration that includes deposit automation as part of it. We were fortunate to have done some pretty successful programs in the past in Belgium that we’re now able to leverage into other regions within EMEA, which is a good entry for us, because we don’t want to compete relative to trying to come in with just a cash dispenser.

So we’re talking about a redesigning offices and as part of that, deposit automation is playing a big role. So that’s been good. Relative to the Middle East, we’ve got some good prospects there that we’re working very closely with. So there’s been more activity, and what I would call more meaningful activity, throughout EMEA than we saw through really in the first three quarters of 2009 in EMEA. So that’s kind of the general outlook.

Paul Coster - JP Morgan

Two more questions. Actually, Brad, at what percentage of revenues actually originates in the U.S. in 4Q? While you’re looking that up, can I just ask one more question of Tom? Brazil looks like it’s going to get pretty competitive. NCR has opened up a domestic operation there seems, a domestic supplier of rates seems to be doing pretty well. Are we sort of headed for a really tough environment in Brazil a year out from now?

Tom Swidarski

I would say there are very viable competitors in Brazil, and there always have been. Certainly, there’s NCR and others see a healthy market and want to participate, but the difference in Brazil is, you need a very specific product. So while you may be able to produce a product there that you’re shipping to other parts of the world, you can’t take your product from other parts of the world and bring it go to Brazil and be successful.

So part of our success there is the operations, and what we’ve done from an integrated services and outsourcing standpoint, understands the dimensions of what goes on within that market. So I’m confident in terms of our capabilities there. Will the market get more competitive? I think so, but I don’t really think that from our standpoint, it should materially shift in terms of our experience and our expectations going forward.

Brad Richardson

Just the North American revenue was about 50%, about half of our total revenue.

Tom Swidarski

Donny, I know there are a number of callers still in the queue. Unfortunately, we only have time for one other question. For the others that are in queue, we’ll make an effort to reach out to you at the conclusion of this call.

Operator

Your final question comes from Zahid Siddique - Gabelli & Co.

Zahid Siddique - Gabelli & Co.

I have a couple of questions I’ll try to make it quick. The first one is on net debt. You talked about that on slide 26. From September ‘09 to December ‘09, during that three month period, your net debt has improved by roughly $150 million and your cash has gone up by $120 million in that period. What are the components of that $120 million cash that you generated in Q4?

Brad Richardson

When you say components, are you talking about I mean, basically the components, as we’ve pointed out here, certainly we find ourselves in a very strong position, and some of our customers were accelerated payments to Diebold and that was roughly about $50 million of accelerated payments, so that clearly came through the working capital.

In addition, just the way that our contracts typically work on a certain contracts that we have, our year-end, if you look at it historically, typically the fourth quarter is always strong cash generation quarter.

Zahid Siddique - Gabelli & Co.

So $50 million was the accounts receivables and then the rest was just natural cash generation?

Brad Richardson

Yes, accelerated cash generation, which again is something we typically, if you look at the pattern of the some of the terms and contractual terms we have with our customers, we typically queue to fourth quarter.

Tom Swidarski

Just to clarify, the $50 million were early payments. That’s not total accounts receivables. Those were ones that came in earlier than the due date.

John Kristoff

The other thing, Zahid, I would say that our DSO improvement, yes, we worked very hard on that. Our DSO improvement was significant in almost every region that we touched around the globe this year. So the fourth quarter was outstanding performance, certainly from a finance teams.

Zahid Siddique - Gabelli & Co.

Tom, on the elections business, any strategic review, or what’s your take on that the Brazilian Election business?

Tom Swidarski

Yes, we’re obviously focused on delivering on the current contract that we have, so we’ve got all resources and project management, tightly coupled with them. Our goal is to provide them the technology they need and they take it from there in terms of how they use it and run the elections, but my expectation will be that this will put us in very good stead when they have generally gone out to bid every two years.

So my expectation would be when they go out, if this technology performs as we think it can, it will put us in very good stead kind of going forward. They have somewhere in the neighborhood of 400,000, 425,000 terminals that they use every time they run these elections. So if in fact we’re replacing 160,000 or 170,000 now that gives us a pretty good opportunity if it runs the way they think it is going to run for being in a position to continue to take advantage of that.

As we mentioned before, they have the opportunity, even from this current win, to order an additional 90,000 terminals under the terms of this contract, and they have through the end of 2011 to do that. So again, I think, if they exercise that option that would be a good signal to us that they really like the technology and it’s proving out well.

Zahid Siddique - Gabelli & Co.

So just so I understand, you plan to stay in the business, as far as you can tell?

Tom Swidarski

Yes, in Brazil?

Zahid Siddique - Gabelli & Co.

Yes.

Tom Swidarski

Yes. Absolutely, I’m sorry. I was answering a different question. Absolutely, it’s run by the federal government, it’s one body makes a decision, here’s the spec. You meet the spec, they take responsibility to run the election. So it’s a very different environment than other places in the world we’ve been involved.

Zahid Siddique - Gabelli & Co.

Last question on slide 28, you talked about the revenue mix shift being moved lower. You talked about the U.S. regionals and the international geography. Could you talk about that lower mix aspect?

Tom Swidarski

Yes, so that revenue mix really has to do with a couple of key factors. First of all, as we commented, more of the mix is going to be coming outside the United States than inside the United States. So you’ve got just from a comparable standpoint, a lot of times the margins there are lower than they are within the United States. You also have the phenomena, that continues relative to the bigger banks get bigger inside the United States and there’s fewer smaller banks.

So you’ve got more orders from the largest institutions for us, and then I think the last effect is Asia Pacific. Certain countries within Asia have a different impact in terms of margins. As we continue to grow, certain countries like India and Indonesia don’t carry the same margins as Thailand or China would for us.

The last aspect of that is the Brazil outsourcing contract, which we had enjoyed for many years with one of the major government banks they’ve in-sourced a lot of that. So that also had good margins associated with it. So when you mix all that together, that’s really reflected on that revenue mix slide of $0.15, whatever slide that was a reconciliation slide.

Operator

That does conclude the question-and-answer session. I’ll turn the call back over to Mr. John Kristoff.

John Kristoff

Thanks, Donny, and thank you, everyone, for joining us this morning. Again, my apologies to those in the queue that we were unable to get to from a Q-and-A standpoint, and we will reach out to you following the call. Again, if any of you have follow-up questions, please do not hesitate to reach out to us, and thanks again for joining us today.

Operator

That does conclude today’s call. We thank you for your participation.

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Source: Diebold Inc. Q4 2009 Earnings Call Transcript
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