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Outerwall Inc. Announces 2015 Second Quarter Results

Board Names Erik E. Prusch CEO;

Company Reports Solid Execution and Expense Management;

Redbox and Coinstar Deliver Strong Margins and Enhanced Profitability;

ecoATM Non-Cash Goodwill Impairment Charge Impacts GAAP Results

BELLEVUE, Wash., July 30, 2015 /PRNewswire/ -- Outerwall Inc. (Nasdaq: OUTR) today reported financial results for the second quarter ended June 30, 2015.  

(Logo - http://photos.prnewswire.com/prnh/20130701/AQ41388LOGO)

"In the second quarter we continued to execute on our key strategies and delivered core results that were up significantly year-over-year across the board," said Nora M. Denzel, Outerwall's interim chief executive officer. "Although we recognized a goodwill impairment for ecoATM during the quarter, given its unique value proposition, we still expect ecoATM revenue growth and profitability over time as the business scales. Overall, our outlook for the second half of 2015 remains positive, with a strong box office expected in the fourth quarter."

The company also separately announced today that its board of directors has appointed Erik E. Prusch as chief executive officer effective July 31, 2015. Prusch will succeed Denzel, who will remain on the board.

"Erik joins Outerwall with more than 25 years of successful leadership and operations experience in consumer, retail, and technology companies, and I look forward to working with him to ensure a smooth transition," said Denzel.

During the three months ended June 30, 2015, the company recognized a non-cash, non-tax deductible charge for goodwill impairment of $85.9 million related to its ecoATM business segment. The impairment charge reflects the impact of competitive pressures on ecoATM and lowered expectations for future revenue growth. The charge resulted in a GAAP reported loss. Core results exclude the impact of the impairment charge as a non-core adjustment.


2015


2014


Change


Second Quarter


Second Quarter


%

GAAP Results






• Consolidated revenue

$

545.4

million


$

546.5

 million


(0.2)

%

• Income (loss) from continuing operations

$

(47.4)

million


$

23.8

 million


(298.7)

%

• Net income (loss)

$

(45.6)

million


$

21.8

 million


(309.7)

%

• Diluted earnings (loss) from continuing operations per common share*

$

(2.66)



$

1.15



(331.3)

%

• Net cash provided by operating activities

$

75.1

million


$

62.8

 million


19.6

%







Core Results**






• Core adjusted EBITDA from continuing operations

$

121.8

million


$

111.7

 million


9.1

%

• Core diluted EPS from continuing operations*

$

2.19



$

1.52



44.1

%

• Free cash flow

$

55.6

million


$

36.8

 million


51.4

%












*Beginning in the first quarter of 2015, the company applied the two-class method of calculating earnings per share for its GAAP results because the impact of unvested restricted shares as a percentage of total common shares outstanding became more dilutive given the level of stock repurchases over the prior year. Core diluted EPS from continuing operations continues to be reported under the treasury stock method.


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

 

Highlights from the second quarter 2015 include:

  • Delivered 9.1% growth in core adjusted EBITDA from continuing operations to $121.8 million on essentially flat revenue reflecting solid execution and continued expense management
  • Core diluted EPS from continuing operations grew 44.1% to $2.19 driven by higher profitability, a lower tax rate and lower share count
  • Twentieth Century Fox Home Entertainment signed a new two-year, 28-day delay agreement with Redbox and Sony Pictures Home Entertainment recently extended the existing day and date agreement through September 2016
  • Free cash flow grew 51.4% to $55.6 million bringing the year to date total to $141.0 million
  • Repurchased 284,537 shares of common stock for $22.0 million and paid another quarterly dividend of $0.30 per share

"In the second quarter, we delivered solid growth in core adjusted EBITDA, core diluted EPS from continuing operations and free cash flow through solid execution as we continue to align costs and capital expenditures with revenue and optimize the kiosk networks. Our performance allows us to raise expectations for core adjusted EBITDA and core diluted EPS from continuing operations and free cash flow for 2015," said Galen C. Smith, Outerwall's chief financial officer.

"We remain committed to our disciplined approach to capital allocation and returning 75-to-100 percent of annual free cash flow to shareholders," continued Smith. "In addition to paying out the quarterly dividend, we repurchased another $22 million in common stock in the quarter."

CONSOLIDATED RESULTS

GAAP Results

Consolidated revenue for the second quarter of 2015 was down slightly to $545.4 million, compared with $546.5 million in the second quarter of 2014, on lower revenue from Redbox nearly offset by higher revenue from ecoATM and Coinstar.

The loss from continuing operations for the second quarter of 2015 was $47.4 million, or $2.66 of diluted loss from continuing operations per common share, compared with income from continuing operations of $23.8 million, or $1.15 of diluted earnings from continuing operations per common share, in the second quarter of 2014, primarily due to the non-cash $85.9 million goodwill impairment charge recognized in the second quarter of 2015.

Net cash provided by operating activities increased 19.6% to $75.1 million in the second quarter of 2015, compared with $62.8 million in the second quarter of 2014. The increase was primarily due to higher Redbox segment operating income and a change in net non-cash income and expense included in net income and a decrease in net cash outflows from changes in working capital.

Cash capital expenditures for the second quarter of 2015 decreased 25.2% to $19.5 million, compared with $26.1 million in the second quarter of 2014, with the decrease primarily related to lower capital expenditures in the company's Redbox and Coinstar segments.

Core Results

Core adjusted EBITDA from continuing operations for the second quarter of 2015 was $121.8 million, which excludes the $85.9 million non-cash goodwill impairment charge and other non-core adjustments, an increase of $10.2 million, or 9.1%, compared with $111.7 million for the second quarter of 2014. The year-over-year increase was primarily due to higher Redbox segment operating income in the second quarter of 2015.

Core diluted EPS from continuing operations for the second quarter of 2015 was $2.19, an increase of 44.1% compared with $1.52 per diluted share in the second quarter of 2014. The increase was primarily attributable to the results of operations described and a reduction in the number of weighted average shares used in the diluted per share calculation due to stock repurchases. Non-core adjustments in the second quarter of 2015 amounted to $4.82 compared with $0.34 in the second quarter of 2014.

Free cash flow for the second quarter of 2015 was $55.6 million, an increase of $18.9 million, or 51.4%, compared with $36.8 million in the second quarter of 2014, primarily driven by higher net operating cash flow and lower capital expenditures.

SEGMENT RESULTS

Redbox

Redbox segment revenue for the second quarter of 2015 was $439.0 million, compared with $442.8 million in the second quarter of 2014, a modest 0.9% year-over-year decline despite a 13.1% decrease in rentals, as the recent price increases largely offset the impact of lower rentals.

Redbox generated approximately 146.0 million rentals in the second quarter of 2015, down from approximately 168.1 million rentals in the second quarter of 2014, primarily driven by a decline in video game rentals from a consumer transition to new generation platforms, lower demand from price-sensitive customers following the price increases, the expected secular decline in the physical market, and the removal of underperforming kiosks. Movie rentals were further impacted by weaker content and the timing of the release slate, as well as an increase in competition for viewing time from several significant theatrical releases during the second quarter of 2015.

Net revenue per rental was $3.00 in the second quarter of 2015, an increase of $0.37, or 14.1%, from $2.63 in the second quarter of 2014. The increase in net revenue per rental was primarily the result of the price increases, partially offset by an expected increase in single night rental activity as a result of the price increases.

Redbox segment operating income in the second quarter of 2015 was $98.9 million, an increase of 14.7%, compared with $86.2 million in the second quarter of 2014. Segment operating margin increased 300 basis points to 22.5% in the second quarter of 2015, compared with segment operating margin of 19.5% in the second quarter of 2014, primarily attributable to a decrease in direct operating expenses, driven by gross margin improvement. Direct operating and marketing expense also improved as the company continued to drive operating efficiencies in the business to align the cost structure with an anticipated gradual decline in physical rental demand.

Coinstar

Coinstar segment revenue was $80.3 million, an increase of $0.4 million, or 0.5%, compared with $79.9 million in the second quarter of 2014, primarily due to the growth in the number of Coinstar Exchange kiosks and transactions partially offset by decreased revenue for Coinstar in the U.S. due to a reduction in volume.

The U.K. business continued to benefit from the increased coin voucher product transaction fee implemented in August 2014, however the benefit was offset by the unfavorable exchange rate impact on U.K. revenue in the second quarter of 2015 due to the strengthening of the U.S. dollar versus the British pound as compared with the second quarter of 2014.

The average Coinstar transaction size increased on a year-over-year basis, while the number of transactions declined for the second quarter of 2015, reflecting larger pours and less frequent visits and a slight decrease in the U.S. kiosk base year-over-year as a result of continued optimization efforts.

Coinstar segment operating income was $31.9 million in the second quarter of 2015, an increase of $1.1 million, or 3.6%, compared with $30.8 million in the second quarter of 2014. Coinstar segment operating margin increased 120 basis points to 39.8% for the second quarter of 2015, compared with 38.6% in the second quarter of 2014, as the business continues to identify opportunities to reduce costs and actively manage expenses.

ecoATM

Revenue in the ecoATM segment was $26.1 million in the second quarter of 2015, an increase of $2.3 million, or 9.5%, compared with $23.8 million in the second quarter of 2014, primarily due to the increase in the number of ecoATM installed kiosks, offset by a lower average selling price on value devices due to a lower mix of higher value devices and lower collections per kiosk compared with the second quarter of 2014.

ecoATM installed approximately 120 net new kiosks in the quarter, primarily in the mass merchant channel, and ended the quarter with a total of 2,260 kiosks installed. During the quarter, ecoATM also redeployed approximately 70 underperforming kiosks from the grocery channel to the mall and mass merchant channels to optimize the profitability of the ecoATM kiosk network.

Collections of value devices on a per kiosk basis were lower in the second quarter of 2015 than in the second quarter of 2014 as a result of fewer transactions at the kiosks, primarily due to competition from carriers. Carrier marketing also impacted the number of higher value devices and the mix of overall value devices collected in the second quarter of 2015, which were the primary reasons for the decline in the average selling price of value devices compared with the second quarter of 2014. Compared with the first quarter of 2015, collections of higher value devices, collections per kiosk and the average selling price improved slightly in the second quarter of 2015 but were below our expectations and historical seasonal trends.

The segment operating loss increased $88.4 million in the second quarter of 2015 to $92.8 million, compared with $4.5 million in the second quarter of 2014, primarily due to the $85.9 million goodwill impairment charge recognized in the second quarter of 2015. Excluding the $85.9 million goodwill impairment charge, the segment operating loss increased $2.5 million, primarily due to an increase in direct operating expenses associated with the increase in the installed kiosk base. As the company continues to install additional ecoATM kiosks and existing kiosks continue to ramp, the company expects to leverage the fixed cost portions of direct operating expenses.

CAPITAL ALLOCATION

On July 28, 2015, the company's board of directors declared a quarterly cash dividend of $0.30 per share expected to be paid on September 15, 2015, to all stockholders of record as of the close of business on August 28, 2015.

During the second quarter of 2015, the company repurchased 284,537 shares of common stock at an average price per share of $77.40 for $22.0 million. As of June 30, 2015, there was approximately $353.4 million remaining under the company's stock repurchase authorization.

2015 ANNUAL GUIDANCE

The following table presents the company's updated full-year 2015 guidance and reflects the company's second quarter results and current outlook on the remainder of the year:

2015 FULL-YEAR GUIDANCE

As of

Dollars in millions, except per share data

July 30, 2015

Consolidated results


Revenue

$2,263 — $2,353

Core adjusted EBITDA from continuing operations(1)

$481 — $515

Core diluted EPS from continuing operations(1)(2)

$8.12 — $9.12

Free cash flow(1)

$231 — $271

Weighted average diluted shares outstanding(2)

17.9 — 18.0

Core effective tax rate

35.5% — 37.5%

Segment revenue


Redbox

$1,850 — $1,925

Coinstar

$313 — $318

ecoATM

$100 — $110

Capital expenditures


Redbox

$15 — $20

Coinstar

$16 — $20

ecoATM

$25 — $34

Corporate

$26 — $33

Total CAPEX

$82 — $107

Net kiosk installations


Redbox

(1,000) — (1,900)

Coinstar

0 — (100)

ecoATM

400 — 500



1

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



2

Excludes the impact of any potential share repurchases for the remainder of 2015

 

ADDITIONAL INFORMATION

Additional information regarding the company's 2015 second quarter operating and financial results and guidance is included in the company's prepared remarks, which, as well as this press release, are posted on the Investor Relations section of the corporate website at ir.outerwall.com.

CONFERENCE CALL

The company will host a conference call today at 2:30 p.m. PDT (5:30 p.m. EDT) to discuss second quarter 2015 earnings results and an update to 2015 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 August 13, 2015, at 1-855-859-2056 or 1-404-537-3406, using conference ID 74496002.

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 delivers 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 2015 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 and SAMPLEit,
  • our ability to repurchase stock and the availability of an open trading window,
  • our declaration and payment of dividends, including our board's discretion to change the dividend policy,
  • the termination, non-renewal or renegotiation on materially adverse terms of our contracts with our significant retailers and suppliers,
  • 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,
  • loss of key personnel or the inability of replacements to quickly and successfully perform in those new roles,
  • 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.

(Consolidated Financial Statements, Business Segment Information and Appendix A Follow)

 

 

OUTERWALL INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share data)

(unaudited)



Three Months Ended


Six Months Ended


June 30,


June 30,


2015


2014


2015


2014

Revenue

$

545,369



$

546,527



$

1,154,005



$

1,144,289


Expenses:








Direct operating(1)

369,619



381,734



774,803



801,376


Marketing

8,047



9,136



16,467



16,129


Research and development

2,039



3,412



4,123



6,886


General and administrative

48,783



48,596



97,339



101,204


Restructuring and lease termination costs





15,851



557


Goodwill impairment

85,890





85,890




Depreciation and other

45,174



47,812



87,860



95,754


Amortization of intangible assets

3,309



3,840



6,618



7,682


Total expenses

562,861



494,530



1,088,951



1,029,588


Operating income (loss)

(17,492)



51,997



65,054



114,701


Other income (expense), net:








Loss from equity method investments, net

(133)



(10,541)



(265)



(19,909)


Interest expense, net

(12,183)



(12,932)



(24,254)



(22,580)


Other income (expense), net

642



1,614



(1,704)



966


Total other income (expense), net

(11,674)



(21,859)



(26,223)



(41,523)


Income (loss) from continuing operations before income taxes

(29,166)



30,138



38,831



73,178


Income tax expense

(18,185)



(6,305)



(44,027)



(21,739)


Income (loss) from continuing operations

(47,351)



23,833



(5,196)



51,439


Income (loss) from discontinued operations, net of tax

1,735



(2,080)



(4,821)



(6,511)


Net income (loss)

(45,616)



21,753



(10,017)



44,928


Foreign currency translation adjustment(2)

473



(336)



3,327



539


Comprehensive income (loss)

$

(45,143)



$

21,417



$

(6,690)



$

45,467










Income (loss) from continuing operations attributable to common shares:








Basic

$

(47,472)



$

23,016



$

(5,465)



$

49,880


Diluted

$

(47,472)



$

23,036



$

(5,465)



$

49,918










Basic earnings (loss) per common share:








Continuing operations

$

(2.66)



$

1.18



$

(0.30)



$

2.30


Discontinued operations

0.10



(0.11)



(0.27)



(0.30)


Basic earnings (loss) per common share

$

(2.56)



$

1.07



$

(0.57)



$

2.00










Diluted earnings (loss) per common share:








Continuing operations

$

(2.66)



$

1.15



$

(0.30)



$

2.24


Discontinued operations

0.10



(0.10)



(0.27)



(0.29)


Diluted earnings (loss) per common share

$

(2.56)



$

1.05



$

(0.57)



$

1.95










Weighted average common shares used in basic and diluted per share calculations:








Basic

17,848



19,541



18,057



21,730


Diluted

17,848



20,048



18,057



22,298










Dividends declared per common share

$

0.30



$



$

0.60



$




(1)

"Direct operating" excludes "Depreciation and other" of $29.6 million and $58.0 million for the three and six months ended June 30, 2015, respectively, and $31.4 million and $63.1 million for the three and six months ended June 30, 2014, respectively.



(2)

Foreign currency translation adjustment had no tax effect for the three and six months ended June 30, 2015 and 2014, respectively.

 

OUTERWALL INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)



June 30,
 2015


December 31,
 2014

Assets




Current Assets:




Cash and cash equivalents

$

237,708



$

242,696


Accounts receivable, net of allowances of $979 and $2,223

33,432



48,590


Content library

146,556



180,121


Prepaid expenses and other current assets

60,064



39,837


Total current assets

477,760



511,244


Property and equipment, net

360,445



428,468


Deferred income taxes

2,480



11,378


Goodwill and other intangible assets, net

531,446



623,998


Other long-term assets

7,098



8,231


Total assets

$

1,379,229



$

1,583,319


Liabilities and Stockholders' Equity




Current Liabilities:




Accounts payable

$

147,209



$

168,633


Accrued payable to retailers

114,815



126,290


Other accrued liabilities

134,566



137,126


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

18,490



20,416


Deferred income taxes

25,676



21,432


Total current liabilities

440,756



473,897


Long-term debt and other long-term liabilities

892,075



973,669


Deferred income taxes

22,237



38,375


Total liabilities

1,355,068



1,485,941


Commitments and contingencies




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;




36,695,640 and 36,600,166 shares issued;




18,169,984 and 18,926,242 shares outstanding;

477,259



473,592


Treasury stock

(1,055,447)



(996,293)


Retained earnings

599,332



620,389


Accumulated other comprehensive income (loss)

3,017



(310)


Total stockholders' equity

24,161



97,378


Total liabilities and stockholders' equity

$

1,379,229



$

1,583,319


 

OUTERWALL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



Three Months Ended


Six Months Ended


June 30,


June 30,


2015


2014


2015


2014

Operating Activities:








Net income (loss)

$

(45,616)



$

21,753



$

(10,017)



$

44,928


Adjustments to reconcile net income (loss) to net cash flows from operating activities:








Depreciation and other

45,174



49,154



93,718



98,258


Amortization of intangible assets

3,309



3,847



6,662



7,695


Share-based payments expense

3,289



3,079



7,192



6,844


Windfall excess tax benefits related to share-based payments

(160)



(243)



(686)



(1,953)


Deferred income taxes

(1,392)



(5,440)



(3,939)



(15,004)


Restructuring and lease termination costs(2)





1,680




Loss from equity method investments, net

133



10,541



265



19,909


Amortization of deferred financing fees and debt discount

692



1,216



1,385



2,522


Loss from early extinguishment of debt



1,963





1,963


Goodwill impairment

85,890





85,890




Other

383



(1,040)



(816)



(1,164)


Cash flows from changes in operating assets and liabilities:








Accounts receivable, net

3,254



11,283



15,077



5,331


Content library

24,703



27,505



34,659



47,486


Prepaid expenses and other current assets

(18,976)



(24,952)



(22,082)



22,003


Other assets

154



599



322



1,036


Accounts payable

(20,617)



(43,605)



(17,697)



(70,995)


Accrued payable to retailers

6,931



8,762



(11,510)



(6,723)


Other accrued liabilities

(12,008)



(1,589)



1,112



(4,716)


Net cash flows from operating activities(1)

75,143



62,833



181,215



157,420


Investing Activities:








Purchases of property and equipment

(19,508)



(26,076)



(40,217)



(53,016)


Proceeds from sale of property and equipment

2,817



962



2,940



1,793


Cash paid for equity investments







(10,500)


Net cash flows used in investing activities(1)

(16,691)



(25,114)



(37,277)



(61,723)


Financing Activities:








Proceeds from issuance of senior unsecured notes



295,500





295,500


Proceeds from new borrowing on Credit Facility

77,000



230,000



112,000



505,000


Principal payments on Credit Facility

(68,875)



(505,000)



(185,750)



(534,375)


Financing costs associated with Credit Facility and senior unsecured notes



(2,082)





(2,082)


Settlement and conversion of convertible debt



(17,720)





(17,724)


Repurchases of common stock

(22,023)



(53,413)



(62,731)



(474,480)


Dividends paid

(5,417)





(11,019)




Principal payments on capital lease obligations and other debt

(3,033)



(3,384)



(6,278)



(7,081)


Windfall excess tax benefits related to share-based payments

160



243



686



1,953


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

1,887



563



(1,201)



(1,025)


Net cash flows used in financing activities(1)

(20,301)



(55,293)



(154,293)



(234,314)



























Three Months Ended


Six Months Ended


June 30,


June 30,


2015


2014


2015


2014

Effect of exchange rate changes on cash

1,623



(746)



5,367



406


Change in cash and cash equivalents

39,774



(18,320)



(4,988)



(138,211)


Cash and cash equivalents:








Beginning of period

197,934



251,546



242,696



371,437


End of period

$

237,708



$

233,226



$

237,708



$

233,226


Supplemental disclosure of cash flow information:








Cash paid during the period for interest

$

10,933



$

3,198



$

22,846



$

17,210


Cash paid during the period for income taxes, net

$

53,905



$

32,853



$

66,896



$

9,189


Supplemental disclosure of non-cash investing and financing activities:








Purchases of property and equipment financed by capital lease obligations

$

257



$

2,467



$

977



$

5,513


Purchases of property and equipment included in ending accounts payable

$

2,411



$

1,724



$

4,436



$

1,724


Common stock issued on conversion of callable convertible debt

$



$

12,715



$



$

12,715


Non-cash debt issue costs

$



$

6,069



$



$

6,069




(1)

During the first quarter of 2015, we discontinued our Redbox operations in Canada. 2014 also includes the wind-down process of certain new ventures that were discontinued during 2013. Cash flows from these discontinued operations are not segregated from cash flows from continuing operations in all periods presented.



(2)

The non-cash restructuring and lease termination costs in the six months ended June 30, 2015 of $1.7 million is composed of $6.9 million in impairments of lease related assets partially offset by a $5.2 million benefit resulting from the lease termination.

 

OUTERWALL INC.
BUSINESS SEGMENT AND ENTERPRISEWIDE INFORMATION
(unaudited)

Changes in our Organizational Structure

During the first quarter of 2015, we added ecoATM, our electronic device recycling business, as a separate reportable segment. Previously, the results of ecoATM along with those of other self-service concepts were included in our New Ventures segment. The combined results of the other self-service concepts, which include product sampling kiosk concept SAMPLEit, are now included in the All Other reporting category in the reconciliation below as they do not meet quantitative thresholds to be reported as a separate segment. All goodwill previously allocated to the New Ventures segment has been allocated to the ecoATM segment.

Comparability of Segment Results

We have recast prior period results for the following:

  • Discontinued operations, consisting of our Redbox operations in Canada which we shut down during the first quarter of 2015; and
  • The addition of our ecoATM segment and an All Other reporting category, which we added during the first quarter of 2015.

Our analysis and reconciliation of our segment information to the consolidated financial statements that follows covers our results of operations, which consists of our Redbox, Coinstar and ecoATM segments, Corporate Unallocated expenses and All Other. All Other includes the results of other self-service concepts, which we regularly assess to determine whether continued funding or other alternatives are appropriate.

OUTERWALL INC.

BUSINESS SEGMENT AND ENTERPRISEWIDE INFORMATION

(unaudited)


Dollars in thousands


Three Months Ended June 30, 2015

Redbox


Coinstar


ecoATM


All Other


Corporate Unallocated


Total

Revenue

$

438,976



$

80,279



$

26,062



$

52



$



$

545,369


Expenses:












Direct operating

301,444



39,358



27,227



1,078



512



369,619


Marketing

4,266



1,232



2,149



258



142



8,047


Research and development





1,549



1



489



2,039


General and administrative

34,336



7,768



2,094



2,644



1,941



48,783


Goodwill impairment





85,890







85,890


Segment operating income (loss)

98,930



31,921



(92,847)



(3,929)



(3,084)



30,991


Less: depreciation, amortization and other

(33,063)



(8,437)



(6,305)



(678)





(48,483)


Operating income (loss)

65,867



23,484



(99,152)



(4,607)



(3,084)



(17,492)


Loss from equity method investments, net









(133)



(133)


Interest expense, net









(12,183)



(12,183)


Other, net









642



642


Income (loss) from continuing operations before income taxes

$

65,867



$

23,484



$

(99,152)



$

(4,607)



$

(14,758)



$

(29,166)






Dollars in thousands


Three Months Ended June 30, 2014

Redbox


Coinstar


ecoATM


All Other


Corporate Unallocated


Total

Revenue

$

442,838



$

79,880



$

23,799



$

10



$



$

546,527


Expenses:












Direct operating

317,376



40,203



22,387



436



1,332



381,734


Marketing

5,533



1,557



927



220



899



9,136


Research and development

18



153



1,391



675



1,175



3,412


General and administrative

33,692



7,169



3,564



573



3,598



48,596


Segment operating income (loss)

86,219



30,798



(4,470)



(1,894)



(7,004)



103,649


Less: depreciation, amortization and other

(38,783)



(8,921)



(3,812)



(136)





(51,652)


Operating income (loss)

47,436



21,877



(8,282)



(2,030)



(7,004)



51,997


Loss from equity method investments, net









(10,541)



(10,541)


Interest expense, net









(12,932)



(12,932)


Other, net









1,614



1,614


Income (loss) from continuing operations before income taxes

$

47,436



$

21,877



$

(8,282)



$

(2,030)



$

(28,863)



$

30,138


 


OUTERWALL INC.

BUSINESS SEGMENT AND ENTERPRISEWIDE INFORMATION

(unaudited)


Dollars in thousands


Six Months Ended June 30, 2015

Redbox


Coinstar


ecoATM


All Other


Corporate Unallocated


Total

Revenue

$

958,509



$

149,609



$

45,811



$

76



$



$

1,154,005


Expenses:












Direct operating

644,379



76,621



50,033



2,269



1,501



774,803


Marketing

9,091



2,410



3,879



578



509



16,467


Research and development





3,005



(84)



1,202



4,123


General and administrative

68,071



15,563



4,062



5,151



4,492



97,339


Restructuring and lease termination costs

15,174



550



127







15,851


Goodwill impairment





85,890







85,890


Segment operating income (loss)

221,794



54,465



(101,185)



(7,838)



(7,704)



159,532


Less: depreciation, amortization and other

(64,670)



(16,255)



(12,207)



(1,346)





(94,478)


Operating income (loss)

157,124



38,210



(113,392)



(9,184)



(7,704)



65,054


Loss from equity method investments, net









(265)



(265)


Interest expense, net









(24,254)



(24,254)


Other, net









(1,704)



(1,704)


Income (loss) from continuing operations before income taxes

$

157,124



$

38,210



$

(113,392)



$

(9,184)



$

(33,927)



$

38,831








Dollars in thousands


Six Months Ended June 30, 2014

Redbox


Coinstar


ecoATM


All Other


Corporate Unallocated


Total

Revenue

$

955,887



$

148,633



$

39,745



$

24



$



$

1,144,289


Expenses:












Direct operating

680,977



77,926



38,318



844



3,311



801,376


Marketing

9,993



2,563



1,595



381



1,597



16,129


Research and development

26



422



3,175



1,307



1,956



6,886


General and administrative

72,393



14,166



6,443



1,494



6,708



101,204


Restructuring and lease termination costs

534



23









557


Segment operating income (loss)

191,964



53,533



(9,786)



(4,002)



(13,572)



218,137


Less: depreciation, amortization and other

(78,187)



(17,484)



(7,524)



(241)





(103,436)


Operating income (loss)

113,777



36,049



(17,310)



(4,243)



(13,572)



114,701


Loss from equity method investments, net









(19,909)



(19,909)


Interest expense, net









(22,580)



(22,580)


Other, net









966



966


Income (loss) from continuing operations before income taxes

$

113,777



$

36,049



$

(17,310)



$

(4,243)



$

(55,095)



$

73,178


 

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) goodwill impairment, ii) restructuring costs (including severance and early lease termination costs and related impairment of assets) associated with actions to reduce costs in our continuing operations across the Company, 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, v) tax benefits related to a net operating loss adjustment, and vi) tax benefit related to worthless stock deduction ("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.

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


Six Months Ended


June 30,


June 30,

Dollars in thousands

2015


2014


2015


2014

Net income (loss) from continuing operations

$

(47,351)



$

23,833



$

(5,196)



$

51,439


Depreciation, amortization and other

48,483



51,652



94,478



103,436


Interest expense, net

12,183



12,932



24,254



22,580


Income taxes

18,185



6,305



44,027



21,739


Share-based payments expense(1)

3,320



3,079



7,261



6,844


Adjusted EBITDA from continuing operations

34,820



97,801



164,824



206,038


Non-Core Adjustments:








Goodwill impairment

85,890





85,890




Restructuring costs





15,851



469


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

1,005



3,338



2,925



6,759


Loss from equity method investments, net

133



10,541



265



19,909


Core adjusted EBITDA from continuing operations

$

121,848



$

111,680



$

269,755



$

233,175




(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 utilizing the treasury stock method 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


Six Months Ended

June 30,


June 30,


2015


2014


2015


2014

Diluted EPS from continuing operations per common share (two-class method)

$

(2.66)



$

1.15



$

(0.30)



$

2.24


Adjustment from participating securities allocation and share differential to treasury stock method(1)

0.03



0.03



0.01



0.05


Diluted EPS from continuing operations (treasury stock method)

(2.63)



1.18



(0.29)



2.29


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








Goodwill impairment

4.77





4.71





Restructuring costs





0.53



0.01


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

0.04



0.13



0.11



0.23


Loss from equity method investments, net

0.01



0.32



0.01



0.53


Tax benefit from net operating loss adjustment







(0.04)


Tax benefit of worthless stock deduction



(0.11)





(0.10)


Core diluted EPS from continuing operations

$

2.19



$

1.52



$

5.07



$

2.92



















(1)

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

 

A reconciliation of amounts used in calculating core diluted EPS from continuing operations in the table above is presented in the following table:


Three Months Ended


Six Months Ended

June 30,


June 30,

In thousands

2015


2014


2015


2014

Income (loss) from continuing operations attributable to common shares

$

(47,472)



$

23,036



$

(5,465)



$

49,918


Add: income from continuing operations allocated to participating securities

121



797



269



1,521


Income (loss) from continuing operations

$

(47,351)



$

23,833



$

(5,196)



$

51,439










Weighted average diluted common shares

17,848



20,048



18,057



22,298


Add: diluted common equivalent shares of participating securities

127



133



181



190


Add: dilutive securities under treasury stock method

14





16




Weighted average diluted shares (treasury stock method)

17,989



20,181



18,254



22,488


 

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


Six Months Ended


June 30,


June 30,

Dollars in thousands

2015


2014


2015


2014

Net cash provided by operating activities

$

75,143



$

62,833



$

181,215



$

157,420


Purchase of property and equipment

(19,508)



(26,076)



(40,217)



(53,016)


Free cash flow

$

55,635



$

36,757



$

140,998



$

104,404


 

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:


June 30,
 2015


December 31,
 2014

Dollars in thousands


Senior unsecured notes

$

650,000



$

650,000


Term loans

142,500



146,250


Revolving line of credit

90,000



160,000


Capital leases

9,876



15,391


Total principal value of outstanding debt including capital leases

892,376



971,641


Less domestic cash and cash equivalents held in financial institutions

(62,609)



(66,546)


Net debt

829,767



905,095


LTM Core adjusted EBITDA from continuing operations(1)

$

533,400



$

496,820


Net leverage ratio

1.56



1.82




(1)

LTM Core Adjusted EBITDA from continuing operations for the twelve months ended June 30, 2015 and December 31, 2014 was determined as follows:



Dollars in thousands


Core adjusted EBITDA from continuing operations for the six months ended June 30, 2015

$

269,755


Add: Core adjusted EBITDA from continuing operations for the twelve months ended December 31, 2014 (1)

496,820


Less: Core adjusted EBITDA from continuing operations for the six months ended June 30, 2014

(233,175)


LTM Core adjusted EBITDA from continuing operations for the twelve months ended June 30, 2015

$

533,400




(1)

Core adjusted EBITDA from continuing operations for the twelve months ended December 31, 2014 is obtained from our Form 8-K filed on May 8, 2015 for the period ended December 31, 2014, 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, 2014. 

 

SOURCE Outerwall Inc.

For further information: Investor Contact: Rosemary Moothart, Director of Investor Relations, 425-943-8140, rosemary.moothart@outerwall.com; or Media Contact: Art Pettigrue, Senior Director Communications, 425-943-8576, art.pettigrue@outerwall.com


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