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Outerwall Inc. Announces 2016 First Quarter Results

Reported $536 Million in Revenue;

Redbox Delivered Sequential Growth in Revenue, Rentals and Margins;

Repurchased Over $57 Million of Outstanding Senior Notes and Reduced Total Debt by Over 9%;

Raised EPS Guidance for 2016

BELLEVUE, Wash., April 28, 2016 /PRNewswire/ -- Outerwall Inc. (Nasdaq: OUTR) today reported financial results for the first quarter ended March 31, 2016.

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"Outerwall delivered solid results in the first quarter, demonstrating our continued ability to generate sustainable cash flow and profitability," said Erik E. Prusch, chief executive officer and interim Redbox president. "We will continue to leverage our valued and compelling brands, millions of loyal customers, and an unrivaled network of kiosks and retail partners."

Prusch continued, "Outerwall also initiated a process to explore strategic and financial alternatives to maximize value for shareholders that is well underway. The Board is involved in a comprehensive process and is committed to acting in the best interest of all shareholders."


2016


2015


Change

Dollars in millions, except per share data

First Quarter


First Quarter


%

GAAP Results






• Consolidated revenue

$

536.0



$

608.6



(11.9)%


• Income from continuing operations

$

38.5



$

42.2



(8.8)%


• Net income

$

38.5



$

35.6



8.0%


• Diluted earnings from continuing operations per common share

$

2.29



$

2.23



2.7%


• Net cash provided by operating activities

$

67.2



$

106.1



(36.6)%








Core Results*






• Core adjusted EBITDA from continuing operations

$

108.0



$

147.9



(27.0)%


• Core diluted EPS from continuing operations**

$

2.44



$

2.81



(13.2)%


• Free cash flow

$

53.8



$

85.4



(37.0)%



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

**Beginning in the first quarter of 2016, to better align with our GAAP presentation of EPS, we adjusted our non-GAAP financial measure of core diluted EPS from continuing operations to be defined as diluted earnings per share from continuing operations utilizing the two-class method excluding non-core adjustments, net of applicable taxes. Historically we had defined this measure using diluted earnings per share from continuing operations utilizing the treasury stock method excluding non-core adjustments, net of applicable taxes. Prior period results have been updated to reflect this change.

Highlights from the first quarter 2016 include:

  • Delivered $108.0 million in core adjusted EBITDA from continuing operations, down $39.9 million from the first quarter of 2015, despite $72.7 million in lower revenue
  • Produced $2.44 in core adjusted EPS from continuing operations
  • Generated $53.8 million in free cash flow
  • Repurchased $57.1 million in face value of 2021 and 2019 Notes for $45.3 million in cash

"During the quarter, we continued to reduce expenses, create efficiencies and optimize our kiosk networks to improve profitability," said Galen C. Smith, Outerwall's chief financial officer. "We also implemented further organizational changes across the enterprise that will reduce G&A expense going forward. On a sequential basis, Redbox results improved from the fourth quarter, including driving growth in rentals, revenue and margins."

Smith continued, "During the quarter we demonstrated our commitment to delivering shareholder value. We announced the doubling of our dividend to $0.60 per share in the second quarter, underscoring our confidence in the business. In addition, we opportunistically repurchased $57 million in face value of our senior notes for $45 million and paid down our credit facility by $23.3 million, reducing our total outstanding debt by over 9%. We remain committed to returning substantial free cash flow to our investors."

CONSOLIDATED RESULTS

GAAP Results

The company's first quarter 2016 GAAP results include $3.3 million in one-time restructuring and related costs associated with workforce reductions across the enterprise to further align costs with revenue. These costs were allocated to the lines of business and are included in segment operating results. 

In the first quarter of 2016, consolidated revenue was $536.0 million, a decrease of $72.7 million or 11.9%, compared with $608.6 million in the first quarter of 2015, primarily reflecting a $98.0 million decrease in Redbox revenue, partially offset by a $22.3 million increase in revenue from ecoATM.

Income from continuing operations for the first quarter of 2016 was $38.5 million, or $2.29 of diluted earnings from continuing operations per common share, compared with $42.2 million, or $2.23 per common share, in the first quarter of 2015. The first quarter of 2016 benefited from an $11.8 million decrease in net interest expense primarily due to the gain on early extinguishment of debt and lower borrowings, and a $4.7 million decrease in income tax expense.

Net cash provided by operating activities in the first quarter of 2016 was $67.2 million, compared with $106.1 million in the first quarter of 2015. The $38.9 million decrease was primarily due to lower revenue partially offset by better expense management and an increase in net cash outflows from changes in working capital.

Cash capital expenditures for the first quarter of 2016 were $13.5 million compared with $20.7 million in the first quarter of 2015, with the decrease primarily due to reduced spending on property and equipment for kiosks and corporate infrastructure.

Core Results

Core adjusted EBITDA from continuing operations for the first quarter of 2016 was $108.0 million, compared with $147.9 million in the first quarter of 2015. The year-over-year decrease in the first quarter of 2016 was primarily due to lower segment operating income in the Redbox segment, which generated record quarterly revenue in the first quarter of 2015, primarily due to the price increase in December 2014.

Core diluted earnings per share from continuing operations for the first quarter of 2016 was $2.44, compared with $2.81 in the first quarter of 2015. The decrease was primarily attributable to the results of operations described above, partially offset by a reduction in the number of weighted average shares used in the diluted per share calculations as a result of stock repurchases subsequent to the first quarter of 2015.

Free cash flow for the first quarter of 2016 was $53.8 million, compared with $85.4 million in the first quarter of 2015, primarily driven by lower net operating cash flow in the first quarter of 2016, partially offset by lower capital expenditures.

SEGMENT RESULTS

Redbox

Redbox segment revenue for the first quarter of 2016 was $421.5 million compared with $519.5 million in the first quarter of 2015. Revenue decreased $98.0 million, or 18.9%, primarily due to an $87.8 million decrease in same store sales and $10.2 million attributable to kiosks removed or relocated subsequent to the first quarter of 2015, as the company continued efforts to optimize its network by removing underperforming kiosks.

Redbox generated approximately 137.7 million rentals in the first quarter of 2016, down from approximately 173.0 million rentals in the first quarter of 2015. The decline in rentals in the first quarter of 2016 was driven primarily by an 18.0% decline in total disc rentals related to our same store kiosks primarily driven by the impact of secular decline in the physical market, fewer kiosks and lower demand from price sensitive customers compared with the first quarter of 2015. The impact of these factors was partially offset by a 16.4% higher total box office of movie titles released than the prior year and an increase in video game rentals, primarily due to 2015 holiday sales of new generation platforms that increased demand for new generation content released at the end of 2015.

The company continued to invest in customer-specific promotional offerings in the first quarter of 2016 to drive revenue and profit, but reduced overall promotional spend by driving further efficiency in promotional programs.

Net revenue per rental was $3.06 in the first quarter of 2016, compared with $3.00 in the first quarter of 2015. The $0.06 increase in net revenue per rental was primarily due to higher video game rentals, which have a higher per day rental price, and lower promotional spend as compared with the first quarter of 2015.

Redbox segment operating income in the first quarter of 2016 was $84.2 million, a decrease of $38.6 million or 31.4%, compared with $122.9 million in the first quarter of 2015. The lower segment operating income was primarily due to the decrease in revenue described above, partially offset by a $43.9 million decrease in direct operating expenses attributable to lower product costs due to content mix and fewer locations compared with the first quarter of 2015, and a reduction in other direct operating expenses driven by lower revenue and rental volume.

Ongoing initiatives to lower costs contributed to a $1.7 million decrease in general and administrative expenses and reduced marketing expenses by $1.0 million in the quarter. Segment operating margin was 20.0% in the first quarter of 2016, compared with 23.6% in the first quarter of 2015. Segment results for the first quarter of 2016 included $2.4 million in one-time restructuring and related costs that represented 60 basis points of segment operating margin.

On a sequential basis, Redbox delivered growth in revenue, rentals and margins. Redbox revenue increased $14.5 million, or 3.6%, on a 1.4% increase in rentals in the first quarter of 2016, while segment operating margin improved 460 basis points to 20.0% from 15.4% in the fourth quarter of 2015. Redbox gross margin was 54.4% in the first quarter of 2016, down from 59.5% in the first quarter of 2015, but improved from 52.1% in the fourth quarter of 2015.

Coinstar

Coinstar segment revenue was $72.4 million in the first quarter of 2016, an increase of $3.0 million or 4.4%, compared with $69.3 million in the first quarter of 2015, primarily due to higher revenue in the U.S. due to increased volume. Coinstar revenue was negatively impacted by unfavorable exchange rates in the U.K. and Canada related to the continued strengthening of the U.S. dollar versus the British pound and Canadian dollar compared with the prior year. Both the number of transactions and average transaction size increased in the first quarter of 2016 compared with the first quarter of 2015.

Coinstar segment operating income was $24.6 million in the first quarter of 2016, an increase of $2.1 million or 9.3%, compared with $22.5 million in the first quarter of 2015. Coinstar segment operating margin increased 150 basis points to 34.0% for the first quarter of 2016, compared with 32.5% in the first quarter of 2015, as the business continued to actively manage expenses and identify opportunities to reduce costs. Segment results for the first quarter of 2016 included $0.5 million in one-time restructuring and related costs that represented 70 basis points of segment operating margin.

During the first quarter, Coinstar installed its first coin-counting kiosk in Spain to begin testing the service in an additional country and plans to expand the test as well as explore other international opportunities.

ecoATM

Revenue in the ecoATM segment increased $22.3 million, or 113.1%, to $42.1 million in the first quarter of 2016, primarily due to revenue earned from devices acquired and sold through Gazelle. The results of operations for Gazelle have also favorably impacted the mix of value devices and the average selling price of value devices sold, which increased to $65.72 from $60.28 in the first quarter of 2015.

Segment operating loss decreased to $5.7 million in the first quarter of 2016, compared with $8.3 million in the first quarter of 2015, primarily due to the increase in revenue described above, partially offset by a $15.1 million increase in direct operating expenses primarily due to the addition of Gazelle and costs associated with the larger installed ecoATM kiosk base. Segment results for the first quarter of 2016 included $0.4 million in one-time restructuring and related costs that represented 100 basis points of segment operating margin. The business unit continues to be on track to achieve segment operating profitability for 2016.

At the end of the quarter, ecoATM had an installed base of 2,540 kiosks, an increase of 400 compared with the first quarter of 2015 and an increase of 290 from the end of 2015.

CAPITAL ALLOCATION

During the first quarter of 2016, the company repurchased $29.4 million in face value of its 6% Senior Notes due 2019 for $23.4 million, and $27.7 million in face value of its 5.875% Senior Notes due 2021 for $21.9 million in cash. The gain from early extinguishment of these notes was approximately $11.0 million and is included in net interest expense. In addition to the notes repurchased, the company also reduced the outstanding balance on its credit facility by $23.3 million, decreasing its total outstanding debt by over 9%.

On March 14, 2016, the company's board of directors declared a quarterly cash dividend of $0.60 per share to be paid on June 21, 2016, to stockholders of record as of the close of business on June 7, 2016. On March 29, 2016, the company paid a cash dividend of $0.30 per outstanding share of its common stock totaling approximately $5.1 million.

The company did not repurchase any shares of its common stock during the first quarter of 2016. As of March 31, 2016, there was approximately $256.4 million remaining under the company's stock repurchase authorization.

2016 ANNUAL GUIDANCE

The following table presents Outerwall's updated full-year 2016 guidance and reflects changes in the company's expectations based on the company's first quarter results and outlook for the year:

2016 FULL-YEAR GUIDANCE

As of

Dollars in millions, except per share data

April 28, 2016

Consolidated results


Core adjusted EBITDA from continuing operations(1)

$340 — $380

Core diluted EPS from continuing operations(1)(2)(3)

$5.35 — $6.55

Free cash flow(1)

$140 — $190

Weighted average diluted shares outstanding(3)  (in millions)

16.29 — 16.35

Core effective tax rate

34.5% — 35.5%

Capital expenditures


Redbox

$15 — $19

Coinstar

$7 — $9

ecoATM

$5 — $6

Corporate

$18 — $21

Total CAPEX

$45 — $55

Net kiosk installations


Redbox

(1,000) — (2,000)

Coinstar

(150) — (200)

ecoATM

50 — 100


(1)

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

(2)

Defined as diluted earnings per share from continuing operations utilizing the two-class method excluding non-core adjustments, net of adjustments

(3)

Excludes the impact of any potential share repurchases for the remainder of 2016

ADDITIONAL INFORMATION

Additional information regarding the company's 2016 first 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 first quarter 2016 earnings results and 2016 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 May 12, 2016, at 1-855-859-2056 or 1-404-537-3406, using conference ID 75276674.

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 2016 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 Gazelle,
  • the timing of the release slate and the relative attractiveness of titles in a particular quarter or year,
  • 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 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

(in thousands, except per share data)

(unaudited)



Three Months Ended


March 31,


2016


2015

Revenue

$

535,956



$

608,636


Expenses:




Direct operating(1)

375,967



405,184


Marketing

9,222



8,420


Research and development

1,045



2,084


General and administrative

47,770



48,556


Restructuring and related costs

3,275



15,851


Depreciation and other

36,118



42,686


Amortization of intangible assets

3,790



3,309


Total expenses

477,187



526,090


Operating income

58,769



82,546


Other income (expense), net:




Loss from equity method investments, net

(207)



(132)


Interest expense, net

(242)



(12,071)


Other, net

1,229



(2,346)


Total other income (expense), net

780



(14,549)


Income from continuing operations before income taxes

59,549



67,997


Income tax expense

(21,098)



(25,842)


Income from continuing operations

38,451



42,155


Loss from discontinued operations, net of tax



(6,556)


Net income

38,451



35,599


Foreign currency translation adjustment(2)

(549)



2,854


Comprehensive income

$

37,902



$

38,453






Income from continuing operations attributable to common shares:




Basic

$

36,986



$

40,775


Diluted

$

36,988



$

40,776






Basic earnings (loss) per common share:




Continuing operations

$

2.30



$

2.23


Discontinued operations



(0.36)


Basic earnings per common share

$

2.30



$

1.87






Diluted earnings (loss) per common share:




Continuing operations

$

2.29



$

2.23


Discontinued operations



(0.36)


Diluted earnings per common share

$

2.29



$

1.87






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




Basic

16,094



18,269


Diluted

16,136



18,286






Dividends paid per common share

$

0.30



$

0.30



(1)

"Direct operating" excludes depreciation and other of $26.2 million and $30.2 million for the three months ended March 31, 2016 and 2015, respectively.

(2)

Foreign currency translation adjustment had no tax effect for the three months ended March 31, 2016 and 2015, respectively.

 

OUTERWALL INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)



March 31,
 2016


December 31,
 2015

Assets




Current Assets:




Cash and cash equivalents

$

198,850



$

222,549


Accounts receivable, net of allowances of $1,015 and $1,272

31,683



38,464


Content library

156,352



188,490


Prepaid expenses and other current assets

46,389



51,368


Total current assets

433,274



500,871


Property and equipment, net

290,760



316,013


Deferred income taxes

2,508



2,606


Goodwill and other intangible assets, net

536,724



540,514


Other long-term assets

1,874



2,207


Total assets

$

1,265,140



$

1,362,211


Liabilities and Stockholders' Equity (Deficit)




Current Liabilities:




Accounts payable

$

145,387



$

184,010


Accrued payable to retailers

90,472



115,098


Other accrued liabilities

159,782



141,437


Dividend payable

10,463




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

17,912



17,131


Total current liabilities

424,016



457,676


Long-term debt and other long-term liabilities

813,967



893,517


Deferred income taxes

24,957



33,092


Total liabilities

1,262,940



1,384,285


Commitments and contingencies




Stockholders' Equity (Deficit):




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;




37,291,804 and 36,720,579 shares issued;




17,228,741 and 16,607,516 shares outstanding;

485,171



485,163


Treasury stock

(1,149,261)



(1,151,063)


Retained earnings

666,465



643,452


Accumulated other comprehensive income (loss)

(175)



374


Total stockholders' equity (deficit)

2,200



(22,074)


Total liabilities and stockholders' equity

$

1,265,140



$

1,362,211


 

OUTERWALL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



Three Months Ended


March 31,


2016


2015

Operating Activities:




Net income

$

38,451



$

35,599


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




Depreciation and other

36,118



48,543


Amortization of intangible assets

3,790



3,353


Share-based payments expense

4,330



3,903


Windfall excess tax benefits related to share-based payments



(526)


Deferred income taxes

(7,822)



(2,547)


Restructuring, impairment and related costs(2)

361



1,680


Loss from equity method investments, net

207



132


Amortization of deferred financing fees and debt discount

638



693


Gain from early extinguishment of debt

(11,028)




Other

(36)



(1,198)


Cash flows from changes in operating assets and liabilities:




Accounts receivable, net

6,863



11,823


Content library

33,126



9,956


Prepaid expenses and other current assets

6,022



(3,106)


Other assets

163



168


Accounts payable

(35,405)



2,920


Accrued payable to retailers

(24,646)



(18,441)


Other accrued liabilities

16,073



13,120


Net cash flows from operating activities(1)

67,205



106,072


Investing Activities:




Purchases of property and equipment

(13,453)



(20,709)


Proceeds from sale of property and equipment

74



123


Net cash flows used in investing activities(1)

(13,379)



(20,586)


Financing Activities:




Proceeds from new borrowing on Credit Facility

85,000



35,000


Principal payments on Credit Facility

(108,313)



(116,875)


Repurchases of notes

(45,328)




Repurchases of common stock



(40,708)


Dividends paid

(5,038)



(5,602)


Principal payments on capital lease obligations and other debt

(1,626)



(3,245)


Windfall excess tax benefits related to share-based payments



526


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

(1,425)



(3,088)


Net cash flows used in financing activities(1)

(76,730)



(133,992)




Three Months Ended


March 31,


2016


2015

Effect of exchange rate changes on cash

(795)


3,744

Change in cash and cash equivalents

(23,699)


(44,762)

Cash and cash equivalents:




Beginning of period

222,549


242,696

End of period

$

198,850


$

197,934

Supplemental disclosure of cash flow information:




Cash paid during the period for interest

$

12,050


$

11,913

Cash paid during the period for income taxes, net

$

2,061


$

12,991

Supplemental disclosure of non-cash investing and financing activities:




Purchases of property and equipment financed by capital lease obligations

$

1,756


$

720

Purchases of property and equipment included in ending accounts payable

$

2,462


$

2,025


(1)

During the first quarter of 2015 we discontinued our Redbox operations in Canada. Cash flows from these discontinued operations are not segregated from cash flows from continuing operations in all periods presented.

(2)

The non-cash restructuring, impairment and related costs in the three months ended March 31, 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)

Comparability of Results

We regularly assess the performance of our concepts to determine whether continued funding or other alternatives are appropriate and as a result, we discontinued operating SAMPLEit in the fourth quarter of 2015. As SAMPLEit did not represent a major component of our operations or financial results, the results of SAMPLEit did not qualify to be reported as a discontinued operation and remain in our All Other reporting category.

On November 10, 2015, we acquired certain assets and liabilities of Gazelle, Inc. ("Gazelle"). Results of operations for Gazelle are included in ecoATM for the three month period ended March 31, 2016.

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 March 31, 2016

Redbox


Coinstar


ecoATM


All Other


Corporate Unallocated


Total

Revenue

$

421,488



$

72,379



$

42,089



$



$



$

535,956


Expenses:












Direct operating

299,001



38,645



37,894



86



341



375,967


Marketing

3,824



775



4,580



5



38



9,222


Research and development





935





110



1,045


General and administrative

32,029



7,864



4,002



347



3,528



47,770


Restructuring and related costs

2,408



462



405







3,275


Segment operating income (loss)

84,226



24,633



(5,727)



(438)



(4,017)



98,677


Less: depreciation, amortization and other

(24,295)



(7,409)



(8,204)







(39,908)


Operating income (loss)

59,931



17,224



(13,931)



(438)



(4,017)



58,769


Loss from equity method investments, net









(207)



(207)


Interest expense, net









(242)



(242)


Other, net









1,229



1,229


Income (loss) from continuing operations before income taxes

$

59,931



$

17,224



$

(13,931)



$

(438)



$

(3,237)



$

59,549


Dollars in thousands


Three Months Ended March 31, 2015

Redbox


Coinstar


ecoATM


All Other


Corporate Unallocated


Total

Revenue

$

519,533



$

69,330



$

19,749



$

24



$



$

608,636


Expenses:












Direct operating

342,935



37,263



22,806



1,191



989



405,184


Marketing

4,825



1,178



1,730



320



367



8,420


Research and development





1,456



(85)



713



2,084


General and administrative

33,735



7,795



1,968



2,507



2,551



48,556


Restructuring and related costs

15,174



550



127







15,851


Segment operating income (loss)

122,864



22,544



(8,338)



(3,909)



(4,620)



128,541


Less: depreciation, amortization and other

(31,607)



(7,818)



(5,902)



(668)





(45,995)


Operating income (loss)

91,257



14,726



(14,240)



(4,577)



(4,620)



82,546


Loss from equity method investments, net









(132)



(132)


Interest expense, net









(12,071)



(12,071)


Other, net









(2,346)



(2,346)


Income (loss) from continuing operations before income taxes

$

91,257



$

14,726



$

(14,240)



$

(4,577)



$

(19,169)



$

67,997


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 may include nonrecurring events or events we do not directly control. Our non-core adjustments for the periods presented include i) restructuring costs (including severance and early lease termination costs, and the related asset impairments) associated with actions to reduce costs in our continuing operations across the company, ii) 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, and iii) loss from equity method investments, which represents our share of loss from entities we do not consolidate or control ("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


March 31,

Dollars in thousands

2016


2015

Net income from continuing operations

$

38,451



$

42,155


Depreciation, amortization and other

39,908



45,995


Interest expense, net

242



12,071


Income taxes

21,098



25,842


Share-based payments expense(1)

4,392



3,941


Adjusted EBITDA from continuing operations

104,091



130,004


Non-Core Adjustments:




Restructuring and related costs

3,275



15,851


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

440



1,920


Loss from equity method investments, net

207



132


Core adjusted EBITDA from continuing operations

$

108,013



$

147,907



(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

Beginning in the first quarter of 2016, to align better with our GAAP presentation of EPS, we adjusted our non-GAAP financial measure of core diluted EPS from continuing operations to be defined as diluted earnings per share from continuing operations utilizing the two class method excluding non-core adjustments, net of applicable taxes. Historically we had defined this measure using diluted earnings per share from continuing operations utilizing the treasury stock method excluding non-core adjustments, net of applicable taxes. Prior period results have been updated to reflect this change.

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

March 31,


2016


2015

Diluted EPS from continuing operations per common share

$

2.29



$

2.23


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




Restructuring and related costs

0.12



0.51


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

0.02



0.07


Loss from equity method investments, net

0.01




Core diluted EPS from continuing operations

$

2.44



$

2.81



(1)

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

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


March 31,

Dollars in thousands

2016


2015

Net cash provided by operating activities

$

67,205



$

106,072


Purchase of property and equipment

(13,453)



(20,709)


Free cash flow

$

53,752



$

85,363


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:


March 31,

 2016


December 31,

 2015

Dollars in thousands


Senior unsecured notes

$

551,847



$

608,908


Term loans

134,063



136,875


Revolving line of credit

120,000



140,500


Capital leases

6,011



5,889


Total principal value of outstanding debt including capital leases

811,921



892,172


Less domestic cash and cash equivalents held in financial institutions

(44,855)



(46,192)


Net debt

767,066



845,980


LTM Core adjusted EBITDA from continuing operations(1)

$

445,391



$

485,285


Net leverage ratio

1.72



1.74



(1)

LTM Core Adjusted EBITDA from continuing operations for the twelve months ended March 31, 2016 and December 31, 2015 was determined as follows:


Dollars in thousands


Core adjusted EBITDA from continuing operations for the three months ended March 31, 2016

$

108,013


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

485,285


Less: Core adjusted EBITDA from continuing operations for the three months ended March  31, 2015

(147,907)


LTM Core adjusted EBITDA from continuing operations for the twelve months ended March 31, 2016

$

445,391



(1)

Core adjusted EBITDA from continuing operations for the twelve months ended December 31, 2015 is obtained from our Annual Report on Form 10-K for the period ended December 31, 2015, 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, 2015. 

 

SOURCE Outerwall Inc.

For further information: Investor Contact: Rosemary Moothart, Director, Investor Relations, 425-943-8140, rosemary.moothart@outerwall.com; or Media Contact: Susan Johnston, Vice President, Corporate Communications & Public Affairs, 425-943-8993, Susan.Johnston@outerwall.com


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