EX-99.1 2 d811365dex991.htm EX-99.1 EX-99.1

Exhibit 99.1

 

LOGO

OUTERWALL INC. ANNOUNCES 2014 THIRD QUARTER RESULTS

Operating Margins Increased Year-over-Year and Sequentially;

Redbox Signed New and Extended Existing Content Agreements;

New ecoATM Retail Agreements Signed; ecoATM Installs Grew to 1,510 at Quarter End

BELLEVUE, Wash.—October 30, 2014—Outerwall Inc. (Nasdaq: OUTR) today reported financial results for the third quarter ended September 30, 2014.

“We made substantial progress on a number of fronts during the third quarter, including the disciplined execution of our initiatives to improve efficiency,” said J. Scott Di Valerio, Outerwall’s chief executive officer. “Our focus on managing Outerwall for profitability is driving tangible results, including solid core adjusted EBITDA from continuing operations and improvement of operating margins. On the content side, our studio relationships remain strong. We signed a new agreement with Lionsgate and extended our existing agreement with Universal Studios. Finally, we are scaling our ecoATM business through significant kiosk installations and several new agreements with our retail partners.”

For purposes of year-over-year comparisons of third quarter 2014 GAAP results, the company noted that it completed the acquisition of ecoATM in the third quarter of 2013. As a result, Outerwall recognized a pretax gain on the re-measurement of its previously held 23% equity interest in ecoATM. This non-core item benefitted third quarter 2013 income from continuing operations by $68.4 million and third quarter 2013 diluted EPS from continuing operations by $2.36.

 

     2014
Third Quarter
     2013
Third Quarter
     Change
%
 

GAAP Results

        

•  Consolidated revenue

   $ 552.9 million       $ 586.5 million         (5.7 )% 

•  Income from continuing operations

   $ 17.9 million       $ 86.8 million         (79.4 )% 

•  Net income

   $ 17.9 million       $ 82.7 million         (78.4 )% 

•  Diluted EPS from continuing operations

   $ 0.93                   $ 3.10                     (70.0 )% 

•  Net cash provided by operating activities

   $ 49.6 million       $ 60.9 million         (18.6 )% 

Core Results*

        

•  Core adjusted EBITDA from continuing operations

   $ 111.6 million       $ 114.3 million         (2.3 )% 

•  Core diluted EPS from continuing operations

   $ 1.44                   $ 1.12                     28.6

•  Free cash flow

   $ 30.3 million       $ 21.8 million         38.9

 

* Refer to Appendix A for a discussion of Non-GAAP Financial Measures and Core and Non-Core Results.


Highlights from the third quarter of 2014 include:

 

    Managed the business for profitability as demonstrated by solid core adjusted EBITDA from continuing operations despite lower revenue that was driven primarily by soft flow-through from the second quarter of 2014 and the unfavorable timing of releases in the third quarter of 2014

 

    General and administrative (G&A) expenses improved 21.6% compared with the third quarter of 2013 as a result of the company’s ongoing focus on expense management initiatives

 

    Segment operating margins in the Redbox and Coinstar businesses increased both year-over-year and sequentially

 

    Extended the existing content agreement with Universal and recently signed a new content agreement with Lionsgate

 

    Installed more than 530 net new ecoATM® kiosks in the quarter and signed several new installation agreements with retail partners

 

    Generated $30.3 million in free cash flow in the quarter, bringing the year-to-date total to $134.7 million

 

    Repurchased $70.6 million, or approximately 1.2 million shares, of common stock in the quarter

 

    Settled all outstanding conversions on the company’s 4.0% Senior Convertible Notes that matured on September 2, 2014

“Our third quarter results reflect our ongoing efforts to align costs and capital expenditures across the business with our revenue growth opportunities,” said Galen C. Smith, chief financial officer of Outerwall. “We are on track to achieve our commitment of $22 million in G&A savings in 2014, with a substantial year-over-year improvement in G&A expense resulting in an increase in operating income margins year-over-year and sequentially. We achieved this improvement despite a weaker content release schedule in the quarter. Importantly, we continue to generate strong cash flow and repurchased more than $70 million of our common stock in the quarter.”

CONSOLIDATED RESULTS

Consolidated revenue for the third quarter of 2014 decreased $33.7 million, or 5.7% to $552.9 million compared with $586.5 million for the third quarter of 2013. The year-over-year decline in consolidated revenue was primarily due to a $53.6 million decrease in revenue from the company’s Redbox segment. The decrease in Redbox revenue was primarily due to soft flow-through from a weak release schedule in the second quarter of 2014 and the unfavorable timing and mix of content released in the third quarter of 2014.

G&A expenses were $47.9 million in the third quarter of 2014, a decrease of 21.6% from $61.0 million in the third quarter of 2013. The improvement was primarily due to the company’s ongoing focus on expense management initiatives and also reflects a shift in the timing of expenses as certain initiatives and new hires moved from the third quarter to the fourth quarter of 2014.

Operating income for the third quarter of 2014 was $56.6 million and operating margin was 10.2% compared with operating income of $55.2 million and operating margin of 9.4% in the third quarter of 2013. The year-over-year increase in operating margin primarily reflects the improvement in G&A and direct operating expenses.

 

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Income from continuing operations for the third quarter of 2014 was $17.9 million, or $0.93 earnings per diluted share from continuing operations, compared with $86.8 million, or $3.10 per diluted share, in the third quarter of 2013. Income from continuing operations in the third quarter of 2013 benefitted from a $68.4 million gain on the company’s previously held equity interest in ecoATM that added $2.36 to earnings per diluted share from continuing operations.

Core adjusted EBITDA from continuing operations for the third quarter of 2014 was $111.6 million compared with $114.3 million in the third quarter of 2013. The year-over-year decline was primarily due to lower segment operating income in the Redbox segment partially offset by an increase in segment operating income in the Coinstar segment and lower segment operating losses in the New Ventures segment.

Core diluted earnings per share from continuing operations in the third quarter of 2014 was $1.44 compared with $1.12 per diluted share in the third quarter of 2013.

Net cash provided by operating activities in the third quarter of 2014 was $49.6 million compared with $60.9 million in the third quarter of 2013. The decrease was primarily due to lower net income in the third quarter of 2014, an increase in net non-cash income and expense primarily related to the one-time gain of $68.4 million in the third quarter of 2013 on the company’s previously held equity interest in ecoATM and changes in working capital.

Cash capital expenditures for the third quarter of 2014 were $19.3 million compared with $39.1 million in the third quarter of 2013. In 2013, the higher level of capital expenditures was due to the vertical merchandising zone retrofit at Redbox and higher corporate expenditures related to enterprise software development initiatives.

Free cash flow for the third quarter of 2014 was $30.3 million, compared with $21.8 million in the third quarter of 2013, primarily driven by lower capital expenditures partially offset by lower operating cash flow.

SEGMENT RESULTS

Redbox

Redbox segment revenue in the third quarter of 2014 was $438.0 million compared with $491.7 million in the third quarter of 2013. The year-over-year decrease in revenues was primarily due to soft flow-through from a weak release schedule in the second quarter of 2014 and the unfavorable timing and mix of content released in the third quarter of 2014. Rentals declined 13.7% compared with the third quarter of 2013 to approximately 172.2 million. Same store sales decreased 11.8% in the third quarter of 2014 compared with an increase of 2.1% in the third quarter of 2013, reflecting lower revenues in the quarter.

Net revenue per rental increased $0.08, or 3.3% to $2.54 from $2.46 in the third quarter of 2013. The increase was primarily the result of a higher percentage of Blu-ray and video game rentals as a percent of total disc rentals and a continued stabilization in single night rentals primarily due to more effective marketing promotions.

 

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Redbox segment operating income in the third quarter of 2014 was $85.7 million compared with $91.0 million in the third quarter of 2013. Segment operating margin was 19.6% in the third quarter of 2014 compared with 18.5% in the third quarter of 2013, as the company continued to focus on managing G&A expenses and direct operating costs.

Coinstar

Coinstar segment revenue was $85.1 million, an increase of 6.9%, compared with $79.6 million in the third quarter of 2013, primarily due to the U.S. price increase that was implemented on October 1, 2013. Additional factors impacting revenue included higher volume in the U.K. due to an increase in the U.K. kiosk base, a price increase in the U.K., and an increase in the number of Coinstar™ Exchange kiosks. Same store sales grew 5.8% in the third quarter of 2014 compared with 0.4% in the third quarter of 2013, reflecting the higher revenue. The average transaction size in the third quarter of 2014 increased $0.67 to $41.92 from the third quarter of 2013.

Effective August 1, 2014, the company implemented a price increase for all U.K. grocery retail locations for the coin voucher product, increasing the fee from 8.9% to 9.9%.

Coinstar segment operating income was $33.4 million in the third quarter of 2014, an increase of 20.9% compared with the third quarter of 2013, and Coinstar segment operating margin was 39.3% in the third quarter of 2014, an increase of 460 basis points compared with 34.7% in the third quarter of 2013. The increases reflect the increase in revenue as well as continued efforts to manage costs and increase productivity in the business.

New Ventures

New Ventures segment revenue was $29.7 million compared with $15.2 million in the third quarter of 2013, primarily due to the inclusion of the ecoATM business that was acquired in July 2013 and an increase in the number of installed ecoATM kiosks and the continued ramping of ecoATM kiosks deployed in the 12 months following the end of the third quarter of 2013. New Ventures segment revenue also increased sequentially from the second quarter of 2014 primarily due to an increase in the number of devices collected in the ecoATM business primarily as a result of competitive pricing, kiosk enhancements, and a higher installed kiosk base.

New Ventures segment operating loss of $4.4 million in the third quarter of 2014 decreased from a loss of $5.4 million in the third quarter of 2013. The operating loss in the third quarter of 2013 included $4.0 million in costs associated with the acquisition of ecoATM. Direct operating costs increased year-over-year as the company continued to invest in the teams and infrastructure needed to scale the ecoATM business and support the ongoing testing of SAMPLEit.

During the quarter, ecoATM signed several new kiosk installation agreements with retail partners, primarily in the grocery channel, and installed approximately 530 net new ecoATM kiosks. At September 30, 2014, New Ventures had approximately 1,550 kiosks installed, including approximately 1,510 ecoATM kiosks.

 

4


REDBOX INSTANT BY VERIZON JOINT VENTURE

On October 22, 2014, the company announced that Redbox withdrew as a member of the Redbox Instant by Verizon joint venture. As part of the agreement, Redbox received a cash payment of $16.8 million in the fourth quarter of 2014. Over the life of the joint venture, Outerwall received $70.5 million in cash, including the $16.8 million, from payments for services and kiosk nights and invested $77.0 million in capital contributions, including $14.0 million in the third quarter of 2014. In addition, the company realized approximately $29.9 million in cash tax savings through deductions arising from the recognition of the company’s share of the joint venture’s losses through September 30, 2014. The company will make no further capital contributions related to the joint venture. The company does not expect a material net financial impact in the fourth quarter of 2014.

SHARE REPURCHASES AND CAPITAL STRUCTURE

During the third quarter of 2014, the company repurchased approximately $70.6 million of its common stock, representing approximately 1.2 million shares at an average price of $59.52 per share. At September 30, 2014, there was approximately $162.9 million in authority remaining under the company’s stock repurchase authorization.

On September 2, 2014, the company’s remaining outstanding 4.0% Convertible Senior Notes matured. During the quarter, the company retired or settled upon maturity $33.4 million in face value of convertible notes for $33.4 million in cash and the issuance of 248,944 shares of its common stock.

The company’s net leverage ratio1 was 2.10x at September 30, 2014. The company continues to target a net leverage ratio in the range of 1.75x to 2.25x in 2014.

GUIDANCE

Beginning in 2015, Outerwall will provide annual guidance only. The company believes annual guidance is a more relevant measurement of the business given its stage of growth, and full-year results better capture the varying seasonal patterns of each of its businesses.

The company provided guidance for the fourth quarter of 2014 and narrowed the range for its full-year 2014 guidance to reflect:

 

    a shift in costs related to key initiatives and hiring to the fourth quarter of 2014;

 

    lapping the price increase in the Coinstar business for U.S. retail grocery locations;

 

    a lower average selling price for devices in our ecoATM business due to the iPhone® 6 launch and the timing of ecoATM kiosk installations; and

 

    share repurchases in the third quarter of 2014.

 

1  Refer to Appendix A for a discussion of Non-GAAP Financial Measures and Core and Non-Core Results.

 

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The following table presents the company’s fourth quarter 2014 and full-year 2014 guidance:

OUTERWALL INC.

2014 FOURTH QUARTER AND FULL YEAR GUIDANCE

 

In millions, except per share amounts

2014 FOURTH QUARTER GUIDANCE

   As of
October 30, 2014

Consolidated revenue

   $575 – $605

Core adjusted EBITDA from continuing operations

   $123 – $138

Core diluted EPS from continuing operations(1)

   $1.85 – $2.15

Average diluted shares outstanding(1)

   18.5 – 18.6

 

In millions, except per share amounts

2014 FULL YEAR GUIDANCE

   As of
October 30, 2014

Consolidated results

  

Revenue

   $2,277 – $2,307

Core adjusted EBITDA from continuing operations

   $462 – $477

Core diluted EPS from continuing operations(1)

   $5.98 – $6.28

Free cash flow

   $210 – $240

Average diluted shares outstanding(1)

   20.6 – 20.7

Effective tax rate

   37% – 39%

Segment revenue

  

Redbox

   $1,868 – $1,890

Coinstar

   $312 – $315

New Ventures

   $97 – $102

Capital expenditures

  

Redbox:

  

Kiosk, software and other

   $8 – $9

Maintenance

   $16 – $18
  

 

Total Redbox

   $24 – $27

Coinstar:

  

New

   $13 – $14

Maintenance

   $4 – $5
  

 

Total Coinstar

   $17 – $19

New Ventures

   $41 – $44

Corporate

   $18 – $20
  

 

TOTAL CAPEX

   $100 – $110
  

 

Net kiosk installations:

  

Redbox:

  

U.S.

   (700) – (500)

Canada

   300 – 400
  

 

Redbox total

   (400) – (100)

Coinstar

   300 – 400

New Ventures

   1,000 – 1,200

 

(1) Excludes the impact of any future share repurchases for the remainder of 2014

 

6


ADDITIONAL INFORMATION

Additional information regarding the company’s 2014 third quarter operating and financial results and guidance are included in the company’s prepared remarks. These items, as well as this press release, are posted on the Investor Relations section of the corporate website at ir.outerwall.com. The Segment Supplement, which provides historical data in Excel format, is also posted on the website.

CONFERENCE CALL

The company will host a conference call today at 2:30 p.m. PDT (5:30 p.m. EDT) to discuss third quarter 2014 earnings results and fourth quarter and full-year 2014 guidance. The conference call will be webcast live and archived on the Investor Relations section of Outerwall’s website at ir.outerwall.com. A recording of the call will be available approximately two hours after the call ends through November 14, 2014, at 1-888-843-7419 or 1-630-652-3042, passcode 3815 8258.

ABOUT OUTERWALL INC.

Outerwall Inc. (Nasdaq: OUTR) has more than 20 years of experience creating some of the most profitable spaces for their retail partners. The company mission is to create a better everyday by delivering breakthrough kiosk experiences that delight consumers and generate revenue for retailers. As the company that brought consumers Redbox® entertainment, Coinstar® money services, and ecoATM® electronics recycling kiosks, Outerwall is leading the next generation of automated retail and paving the way for inventive, scalable businesses. Outerwall™ kiosks are in neighborhood grocery stores, drug stores, mass merchants, malls, and other retail locations in the United States, Canada, Puerto Rico, the United Kingdom, and Ireland. Learn more at www.outerwall.com.

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS

Certain statements in this press release are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The words “believe,” “estimate,” “expect,” “intend,” “will,” “anticipate,” “goals,” variations of such words, and similar expressions identify forward-looking statements, but their absence does not mean that the statement is not forward-looking. The forward-looking statements in this release include statements regarding Outerwall Inc.’s anticipated growth and future operating results, including 2014 fourth quarter and full year results. Forward-looking statements are not guarantees of future performance and actual results may vary materially from the results expressed or implied in such statements. Differences may result from actions taken by Outerwall Inc. or its subsidiaries, as well as from risks and uncertainties beyond Outerwall Inc.’s control. Such risks and uncertainties include, but are not limited to,

 

    competition from other entertainment providers,

 

    the ability to achieve the strategic and financial objectives for our entry into new businesses, including ecoATM, SAMPLEit and Redbox Instant™ by Verizon,

 

    our ability to repurchase stock and the availability of an open trading window,

 

    the termination, non-renewal or renegotiation on materially adverse terms of our contracts with our significant retailers and suppliers,

 

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    payment of increased fees to retailers, suppliers and other third-party providers, including financial service providers,

 

    the timing of new DVD releases and the inability to receive delivery of DVDs on the date of their initial release to the general public, or shortly thereafter, or in sufficient quantity, for home entertainment viewing,

 

    the effective management of our content library,

 

    the timing of the release slate and the relative attractiveness of titles in a particular quarter or year,

 

    the ability to attract new retailers, penetrate new markets and distribution channels and react to changing consumer demands,

 

    the ability to generate sufficient cash flow to timely and fully service indebtedness and adhere to certain covenants and restrictions,

 

    the ability to adequately protect our intellectual property, and

 

    the application of substantial federal, state, local and foreign laws and regulations specific to our business.

The foregoing list of risks and uncertainties is illustrative, but by no means exhaustive. For more information on factors that may affect future performance, please review “Risk Factors” described in our most recent Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission. These forward-looking statements reflect Outerwall Inc.’s expectations as of the date of this press release. Outerwall Inc. undertakes no obligation to update the information provided herein.

###

(Financial Statements Follow)

 

8


OUTERWALL INC.

EARNINGS RELEASE SCHEDULES

Three Months and Nine Months Ended September 30, 2014

 

•    Consolidated Statements of Comprehensive Income

  10

•    Consolidated Balance Sheets

  11

•    Consolidated Statements of Cash Flows

  12

•    Business Segment and Enterprisewide Information

  14

•    APPENDIX A

 

•    Non-GAAP Financial Measures

  16

•    Core and Non-Core Results

  16

•    Core Adjusted EBITDA From Continuing Operations

  17

•    Core Diluted EPS From Continuing Operations

  17

•    Free Cash Flow

  18

•    Net Debt and Net Leverage Ratio

  18

 

9


OUTERWALL INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands, except per share data)

(unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  

Revenue

   $ 552,864      $ 586,539      $ 1,702,403      $ 1,712,896   

Expenses:

        

Direct operating(1)

     384,111        405,973        1,194,815        1,174,818   

Marketing

     9,762        8,395        27,142        22,903   

Research and development

     2,999        3,510        9,885        8,171   

General and administrative

     47,864        61,031        149,829        168,786   

Depreciation and other

     47,896        49,245        146,171        143,156   

Amortization of intangible assets

     3,671        3,191        11,366        7,085   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     496,303        531,345        1,539,208        1,524,919   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     56,561        55,194        163,195        187,977   

Other income (expense), net:

        

Income (loss) from equity method investments, net

     (11,352     57,934        (31,261     41,280   

Interest expense, net

     (12,463     (8,402     (35,037     (25,953

Other, net

     (3,015     (2,402     (1,857     (3,323
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     (26,830     47,130        (68,155     12,004   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     29,731        102,324        95,040        199,981   

Income tax expense

     (11,841     (15,529     (31,454     (34,766
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     17,890        86,795        63,586        165,215   

Loss from discontinued operations, net of tax

     —          (4,139     (768     (13,098
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     17,890        82,656        62,818        152,117   

Foreign currency translation adjustment(2)

     (695     1,852        (156     (304
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 17,195      $ 84,508      $ 62,662      $ 151,813   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings (loss) per share:

        

Continuing operations

   $ 0.95      $ 3.19      $ 3.06      $ 6.03   

Discontinued operations

     —          (0.16     (0.04     (0.48
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.95      $ 3.03      $ 3.02      $ 5.55   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings (loss) per share:

        

Continuing operations

   $ 0.93      $ 3.10      $ 2.98      $ 5.78   

Discontinued operations

     —          (0.15     (0.04     (0.46
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 0.93      $ 2.95      $ 2.94      $ 5.32   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares used in basic per share calculations

     18,798        27,244        20,792        27,391   

Weighted average shares used in diluted per share calculations

     19,147        28,016        21,372        28,582   

 

(1) “Direct operating” excludes depreciation and other of $32.0 million and $96.5 million for the three and nine months ended September 30, 2014, respectively, and $33.0 million and $97.3 million for the three and nine months ended September 30, 2013, respectively.
(2) Foreign currency translation adjustment had no tax effect for the three and nine months ended September 30, 2014 and 2013, respectively.

 

10


OUTERWALL INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

 

     September 30,
2014
    December 31,
2013
 

Assets

    

Current Assets:

    

Cash and cash equivalents

   $ 184,901      $ 371,437   

Accounts receivable, net of allowances of $1,700 and $1,826

     32,787        50,296   

Content library

     151,068        199,868   

Prepaid expenses and other current assets

     59,807        84,709   
  

 

 

   

 

 

 

Total current assets

     428,563        706,310   

Property and equipment, net

     451,346        520,865   

Deferred income taxes

     9,290        6,443   

Goodwill and other intangible assets, net

     627,324        638,690   

Other long-term assets

     11,510        19,075   
  

 

 

   

 

 

 

Total assets

   $ 1,528,033      $ 1,891,383   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current Liabilities:

    

Accounts payable

   $ 138,123      $ 236,018   

Accrued payable to retailers

     105,989        134,140   

Other accrued liabilities

     129,873        134,127   

Current portion of long-term debt and other long-term liabilities

     20,595        103,889   

Deferred income taxes

     33,154        23,143   
  

 

 

   

 

 

 

Total current liabilities

     427,734        631,317   

Long-term debt and other long-term liabilities

     1,022,803        681,403   

Deferred income taxes

     29,370        58,528   
  

 

 

   

 

 

 

Total liabilities

     1,479,907        1,371,248   

Commitments and contingencies

    

Debt conversion feature

     —          1,446   

Stockholders’ Equity:

    

Preferred stock, $0.001 par value—5,000,000 shares authorized; no shares issued or outstanding

     —          —     

Common stock, $0.001 par value—60,000,000 authorized; 36,593,850 and 36,356,357 shares issued; 18,894,926 and 26,150,900 shares outstanding;

     470,157        482,481   

Treasury stock

     (997,697     (476,796

Retained earnings

     576,589        513,771   

Accumulated other comprehensive loss

     (923     (767
  

 

 

   

 

 

 

Total stockholders’ equity

     48,126        518,689   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,528,033      $ 1,891,383   
  

 

 

   

 

 

 

 

11


OUTERWALL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  

Operating Activities:

        

Net income

   $ 17,890      $ 82,656      $ 62,818      $ 152,117   

Adjustments to reconcile net income to net cash flows from operating activities:

        

Depreciation and other

     47,898        49,664        146,156        144,173   

Amortization of intangible assets

     3,671        3,191        11,366        7,085   

Share-based payments expense

     3,249        2,774        10,093        11,454   

Windfall excess tax benefits related to share-based payments

     (35     (318     (1,988     (3,347

Deferred income taxes

     (2,404     24,813        (17,408     (12,098

Impairment expense

     —          2,586        —          5,262   

Loss (income) from equity method investments, net

     11,352        (57,934     31,261        (41,280

Amortization of deferred financing fees and debt discount

     901        1,158        3,423        5,205   

Loss from early extinguishment of debt

     55        1        2,018        5,950   

Other

     (313     2,831        (1,477     1,020   

Cash flows from changes in operating assets and liabilities:

        

Accounts receivable, net

     12,133        2,344        17,464        (306

Content library

     1,314        4,534        48,800        9,446   

Prepaid expenses and other current assets

     1,044        (20,845     23,047        (31,456

Other assets

     611        (633     1,647        269   

Accounts payable

     (26,011     (14,722     (97,006     (70,180

Accrued payable to retailers

     (21,099     (9,368     (27,822     (9,641

Other accrued liabilities

     (629     (11,789     (5,345     (26,552
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash flows from operating activities(1)

     49,627        60,943        207,047        147,121   

Investing Activities:

        

Purchases of property and equipment

     (19,295     (39,102     (72,311     (123,346

Proceeds from sale of property and equipment

     42        56        1,835        12,888   

Sales of short term investments

     —          10,000        —          —     

Acquisition of ecoATM, net of cash acquired

     —          (244,036     —          (244,036

Receipt of note receivable principal

     —          —          —          95   

Cash paid for equity investments

     (14,000     (14,000     (24,500     (28,000
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash flows used in investing activities(1)

     (33,253     (287,082     (94,976     (382,399

Financing Activities:

        

Proceeds from issuance of senior unsecured notes

     —          —          295,500        343,769   

Proceeds from new borrowing on Credit Facility

     130,000        150,000        635,000        150,000   

Principal payments on Credit Facility

     (86,875     (54,376     (621,250     (60,938

Financing costs associated with Credit Facility and senior unsecured notes(2)

     (824     —          (2,906     (444

Settlement and conversion of convertible debt

     (33,425     (30     (51,149     (169,664

Repurchases of common stock(3)

     (70,598     (23,616     (545,078     (95,004

Principal payments on capital lease obligations and other debt

     (3,516     (3,373     (10,597     (10,824

Windfall excess tax benefits related to share-based payments

     35        318        1,988        3,347   

Withholding tax paid on vesting of restricted stock net of proceeds from exercise of stock options

     (59     1,018        (1,084     7,763   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash flows from (used in) financing activities(1)

     (65,262     69,941        (299,576     168,005   

 

12


     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  

Effect of exchange rate changes on cash

     563        1,183        969        (391
  

 

 

   

 

 

   

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (48,325     (155,015     (186,536     (67,664

Cash and cash equivalents:

        

Beginning of period

     233,226        370,245        371,437        282,894   
  

 

 

   

 

 

   

 

 

   

 

 

 

End of period

   $ 184,901      $ 215,230      $ 184,901      $ 215,230   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) During 2013, we discontinued four ventures previously included in our New Ventures operating segment, Orango, Rubi, Crisp Market, and Star Studio. Cash flows from these discontinued operations are not segregated from cash flows from continuing operations in all periods presented because they were not material.
(2) Total financing costs associated with the Credit Facility and senior unsecured notes issued in the second quarter of 2014 were $8.2 million composed of non-cash debt issue costs of $4.5 million recorded as debt discount associated with our issuance of $300.0 million senior unsecured notes due 2021, $1.5 million in deferred financing fees associated with the senior unsecured notes, and $2.2 million in deferred financing fees associated with the refinancing of our credit facility. The cash payments for financing costs associated with the Credit Facility and senior unsecured notes during the three and nine months ended September 30, 2014 were $0.8 million and $2.9 million, respectively. The remaining accrued balance of the total financing cost as of September 30, 2014 was $0.8 million.
(3) The total cost of repurchases of common stock during the three and nine months ended September 30, 2014 was $70.6 million and $545.2 million, respectively, which includes $3.8 million in fees and expenses relating to the tender offer recorded as part of the cost of treasury stock in our Consolidated Balance Sheets. The cash payments for the tender offer fees during the three and nine months ended September 30, 2014 was $0.01 million and $3.7 million, respectively. The remaining accrued balance of the tender offer fees as of September 30, 2014 is $0.1 million.

 

13


OUTERWALL INC.

BUSINESS SEGMENT AND ENTERPRISEWIDE INFORMATION

(unaudited)

The analysis and reconciliation of the company’s segment information to the consolidated financial statements that follows covers the company’s results of operations, which consists of the Redbox, Coinstar and New Ventures segments. Unallocated general and administrative expenses relate to share-based compensation and expense related to the rights to receive cash issued in connection with our acquisition of ecoATM.

 

Dollars in thousands                               
Three Months Ended September 30, 2014    Redbox     Coinstar     New
Ventures
    Corporate
Unallocated
    Total  

Revenue

   $ 438,048      $ 85,074      $ 29,742      $ —        $ 552,864   

Expenses:

          

Direct operating

     312,792        42,428        26,988        1,903        384,111   

Marketing

     6,038        1,834        1,212        678        9,762   

Research and development

     15        64        2,088        832        2,999   

General and administrative

     33,527        7,313        3,885        3,139        47,864   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income (loss)

     85,676        33,435        (4,431     (6,552     108,128   

Less: depreciation, amortization and other

     (38,207     (8,989     (4,371     —          (51,567
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     47,469        24,446        (8,802     (6,552     56,561   

Loss from equity method investments, net

     —          —          —          (11,352     (11,352

Interest expense, net

     —          —          —          (12,463     (12,463

Other, net

     —          —          —          (3,015     (3,015
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

   $ 47,469      $ 24,446      $ (8,802   $ (33,382   $ 29,731   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Dollars in thousands                               
Three Months Ended September 30, 2013    Redbox     Coinstar     New
Ventures
    Corporate
Unallocated
    Total  

Revenue

   $ 491,694      $ 79,611      $ 15,234      $ —        $ 586,539   

Expenses:

          

Direct operating

     350,759        41,833        12,114        1,267        405,973   

Marketing

     5,883        1,352        421        739        8,395   

Research and development

     69        1,428        1,358        655        3,510   

General and administrative

     44,017        7,349        6,692        2,973        61,031   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income (loss)

     90,966        27,649        (5,351     (5,634     107,630   

Less: depreciation, amortization and other

     (41,478     (8,539     (2,419     —          (52,436
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     49,488        19,110        (7,770     (5,634     55,194   

Income from equity method investments, net

     —          —          —          57,934        57,934   

Interest expense, net

     —          —          —          (8,402     (8,402

Other, net

     —          —          —          (2,402     (2,402
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

   $ 49,488      $ 19,110      $ (7,770   $ 41,496      $ 102,324   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

14


OUTERWALL INC.

BUSINESS SEGMENT AND ENTERPRISEWIDE INFORMATION

(unaudited)

 

Dollars in thousands                               
Nine Months Ended September 30, 2014    Redbox     Coinstar     New
Ventures
    Corporate
Unallocated
    Total  

Revenue

   $ 1,399,185      $ 233,707      $ 69,511      $ —        $ 1,702,403   

Expenses:

          

Direct operating

     1,003,097        120,354        66,150        5,214        1,194,815   

Marketing

     17,282        4,397        3,188        2,275        27,142   

Research and development

     41        486        6,570        2,788        9,885   

General and administrative

     106,658        21,502        11,822        9,847        149,829   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income (loss)

     272,107        86,968        (18,219     (20,124     320,732   

Less: depreciation, amortization and other

     (118,928     (26,473     (12,136     —          (157,537
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     153,179        60,495        (30,355     (20,124     163,195   

Loss from equity method investments, net

     —          —          —          (31,261     (31,261

Interest expense, net

     —          —          —          (35,037     (35,037

Other, net

     —          —          —          (1,857     (1,857
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

   $ 153,179      $ 60,495      $ (30,355   $ (88,279   $ 95,040   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Dollars in thousands                               
Nine Months Ended September 30, 2013    Redbox     Coinstar     New
Ventures
    Corporate
Unallocated
    Total  

Revenue

   $ 1,478,132      $ 219,520      $ 15,244      $ —        $ 1,712,896   

Expenses:

          

Direct operating

     1,040,706        119,290        12,848        1,974        1,174,818   

Marketing

     18,057        3,357        596        893        22,903   

Research and development

     73        5,107        2,155        836        8,171   

General and administrative

     128,963        20,077        11,611        8,135        168,786   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income (loss)

     290,333        71,689        (11,966     (11,838     338,218   

Less: depreciation, amortization and other

     (122,219     (25,493     (2,529     —          (150,241
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     168,114        46,196        (14,495     (11,838     187,977   

Income from equity method investments, net

     —          —          —          41,280        41,280   

Interest expense, net

     —          —          —          (25,953     (25,953

Other, net

     —          —          —          (3,323     (3,323
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

   $ 168,114      $ 46,196      $ (14,495   $ 166      $ 199,981   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

15


APPENDIX A

Non-GAAP Financial Measures

Non-GAAP measures may be provided as a complement to results provided in accordance with United States generally accepted accounting principles (“GAAP”).

We use the following non-GAAP financial measures to evaluate our financial results:

 

    Core adjusted EBITDA from continuing operations;

 

    Core diluted earnings per share (“EPS”) from continuing operations;

 

    Free cash flow; and

 

    Net debt and net leverage ratio.

These measures, the definitions of which are presented below, are non-GAAP because they exclude certain amounts which are included in the most directly comparable measure calculated and presented in accordance with GAAP. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for our GAAP financial measures and may not be comparable with similarly titled measures of other companies.

Core and Non-Core Results

We distinguish our core activities, those associated with our primary operations which we directly control, from non-core activities. Non-core activities are primarily nonrecurring events or events we do not directly control. Our non-core adjustments for the periods presented include i) restructuring costs associated with actions to reduce costs in our continuing operations primarily through workforce reductions across the Company, ii) acquisition costs primarily related to the acquisition of ecoATM, iii) compensation expense for rights to receive cash issued in conjunction with our acquisition of ecoATM and attributable to post-combination services as they are fixed amount acquisition related awards and not indicative of the directly controllable future business results, iv) income or loss from equity method investments, which represents our share of income or loss from entities we do not consolidate or control and includes the impacts of the gain on re-measurement of our previously held equity interest in ecoATM upon acquisition, and v) tax benefits related to a net operating loss adjustment and the recognition of a worthless stock deduction in a corporate subsidiary (“Non-Core Adjustments”).

We believe investors should consider our core results because they are more indicative of our ongoing performance and trends, are more consistent with how management evaluates our operational results and trends, provide meaningful supplemental information to investors through the exclusion of certain expenses which are either nonrecurring or may not be indicative of our directly controllable business operating results, allow for greater transparency in assessing our performance, help investors better analyze the results of our business and assist in forecasting future periods.

 

16


Core Adjusted EBITDA from continuing operations

Our non-GAAP financial measure core adjusted EBITDA from continuing operations is defined as earnings from continuing operations before depreciation, amortization and other; interest expense, net; income taxes; share-based payments expense; and Non-Core Adjustments.

A reconciliation of core adjusted EBITDA from continuing operations to net income from continuing operations, the most comparable GAAP financial measure, is presented in the following table:

 

                                                                                   
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
Dollars in thousands    2014      2013     2014      2013  

Net income from continuing operations

   $ 17,890       $ 86,795      $ 63,586       $ 165,215   

Depreciation, amortization and other

     51,567         52,436        157,537         150,241   

Interest expense, net

     12,463         8,402        35,037         25,953   

Income taxes

     11,841         15,529        31,454         34,766   

Share-based payments expense(1)

     3,249         2,774        10,093         11,454   
  

 

 

    

 

 

   

 

 

    

 

 

 

Adjusted EBITDA from continuing operations

     97,010         165,936        297,707         387,629   

Non-Core Adjustments:

          

Restructuring costs

     —           —          469         —     

Acquisition costs

     —           4,003        —           5,669   

Rights to receive cash issued in connection with the acquisition of ecoATM

     3,274         2,300        10,033         2,300   

Loss from equity method investments

     11,352         10,442        31,261         27,096   

Gain on previously held equity interest in ecoATM

     —           (68,376     —           (68,376
  

 

 

    

 

 

   

 

 

    

 

 

 

Core adjusted EBITDA from continuing operations

   $ 111,636       $ 114,305      $ 339,470       $ 354,318   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Includes both non-cash share-based compensation for executives, non-employee directors and employees as well as share-based payments for content arrangements.

Core Diluted EPS from continuing operations

Our non-GAAP financial measure core diluted EPS from continuing operations is defined as diluted earnings per share from continuing operations excluding Non-Core Adjustments, net of applicable taxes.

A reconciliation of core diluted EPS from continuing operations to diluted EPS from continuing operations, the most comparable GAAP financial measure, is presented in the following table:

 

                                                                                   
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014      2013     2014     2013  

Diluted EPS from continuing operations

   $ 0.93       $ 3.10      $ 2.98      $ 5.78   

Non-Core Adjustments, net of tax:(1)

         

Restructuring costs

     —           —          0.01        —     

Acquisition costs

     —           0.09        —          0.14   

Rights to receive cash issued in connection with the acquisition of ecoATM

     0.14         0.06        0.37        0.06   

Loss from equity method investments

     0.36         0.23        0.89        0.58   

Gain on previously held equity interest on ecoATM

     —           (2.36     —          (2.32

Tax benefit from net operating loss adjustment

     —           —          (0.04     —     

Tax (benefit) expense of worthless stock deduction

     0.01         —          (0.10     —     
  

 

 

    

 

 

   

 

 

   

 

 

 

Core diluted EPS from continuing operations

   $ 1.44       $ 1.12      $ 4.11      $ 4.24   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) Non-Core Adjustments are presented after-tax using the applicable effective tax rate for the respective periods.

 

17


Free Cash Flow

Our non-GAAP financial measure free cash flow is defined as net cash provided by operating activities after capital expenditures. We believe free cash flow is an important non-GAAP measure as it provides additional information to users of the financial statements regarding our ability to service, incur or pay down indebtedness and repurchase our securities.

A reconciliation of free cash flow to net cash provided by operating activities, the most comparable GAAP financial measure, is presented in the following table:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
Dollars in thousands    2014     2013     2014     2013  

Net cash provided by operating activities

   $ 49,627      $ 60,943      $ 207,047      $ 147,121   

Purchase of property and equipment

     (19,295     (39,102     (72,311     (123,346
  

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow

   $ 30,332      $ 21,841      $ 134,736      $ 23,775   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Debt and Net Leverage Ratio

Our non-GAAP financial measure net debt is defined as the total face value of outstanding debt, including capital leases, less cash and cash equivalents held in financial institutions domestically. Our non-GAAP financial measure net leverage ratio is defined as net debt divided by core adjusted EBITDA from continuing operations for the last twelve months (LTM). We believe net debt and net leverage ratio are important non-GAAP measures because they:

 

    are used to assess the degree of leverage by management;

 

    provide additional information to users of the financial statements regarding our ability to service, incur or pay down indebtedness and repurchase our securities as well as additional information about our capital structure; and

 

    are reported quarterly to support covenant compliance under our credit agreement.

A reconciliation of net debt to total outstanding debt including capital leases, the most comparable GAAP financial measure, is presented in the following table:

 

Dollars in thousands    September 30,
2014
    December 31,
2013
 

Senior unsecured notes(1)

   $ 650,000      $ 350,000   

Term loans(1)

     148,125        344,375   

Revolving line of credit

     210,000        —     

Convertible debt(2)

     —          51,148   

Capital leases

     18,051        21,361   
  

 

 

   

 

 

 

Total principal value of outstanding debt including capital leases

     1,026,176        766,884   

Less domestic cash and cash equivalents held in financial institutions

     (26,003     (199,027
  

 

 

   

 

 

 

Net debt

     1,000,173        567,857   

LTM Core adjusted EBITDA from continuing operations(3)

   $ 476,804      $ 491,652   
  

 

 

   

 

 

 

Net leverage ratio

     2.10        1.15   

 

(1) The senior unsecured notes on our Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013 included $8.9 million and $5.3 million in associated debt discount, respectively. The Term loan on our Consolidated Balance Sheets as of September 30, 2014 included $0.4 million in associated debt discount. There was no associated debt discount with the Term loans as of December 31, 2013.
(2) The convertible debt balance on our Consolidated Balance Sheet as of December 31, 2013 included $1.4 million in associated debt discount.

 

18


(3) LTM Core Adjusted EBITDA from continuing operations for the twelve months ended September 30, 2014 and December 31, 2013 was determined as follows:

 

Dollars in thousands       

Core adjusted EBITDA from continuing operations for the nine months ended September 30, 2014

   $ 339,470   

Add: Core adjusted EBITDA from continuing operations for the twelve months ended December 31, 2013(A)

     491,652   

Less: Core adjusted EBITDA from continuing operations for the nine months ended September 30, 2013

     (354,318
  

 

 

 

LTM Core adjusted EBITDA from continuing operations for the twelve months ended September 30, 2014

   $ 476,804   
  

 

 

 

 

(A) Core adjusted EBITDA from continuing operations for the twelve months ended December 31, 2013 is obtained from our Annual Report on Form 10-K for the period ended December 31, 2013, where it is reconciled to net income from continuing operations, the most comparable GAAP financial measure, and represents the LTM core adjusted EBITDA from continuing operations we use in our calculation of net leverage ratio as of December 31, 2013.

Investor Contact:

Angie McCabe

Vice President, Investor Relations

425-943-8754

angie.mccabe@outerwall.com

Media Contact:

Debby Wilson

Vice President, Corporate & Public Affairs

425-943-8314

debby.wilson@outerwall.com

 

19