UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

  FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-22555
  OUTERWALL INC.
(Exact name of registrant as specified in its charter)
Delaware
 
94-3156448
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
 
 
1800 114th Avenue SE, Bellevue, Washington
 
98004
(Address of principal executive offices)
 
(Zip Code)
(425) 943-8000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    ý     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ý     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
 
Accelerated filer
¨
Non-accelerated filer
 
¨   (Do not check if a smaller reporting company)
 
Smaller reporting company
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    Yes   ¨     No   ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at April 22, 2016
Common Stock, $0.001 par value
 
17,215,104




OUTERWALL INC.
FORM 10-Q
TABLE OF CONTENTS
   
Page
PART I - FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
 
 




PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

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 (Note 17)
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 (Note 7)
813,967

 
893,517

Deferred income taxes
24,957

 
33,092

Total liabilities
1,262,940

 
1,384,285

Commitments and contingencies (Note 14)

 

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



See accompanying Notes to Consolidated Financial Statements
3



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   (Note 9)
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 (Note 11):
 
 
 
Basic
$
36,986

 
$
40,775

Diluted
$
36,988

 
$
40,776

 
 
 
 
Basic earnings (loss) per common share (Note 11):
 
 
 
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 (Note 11):
 
 
 
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 (Note 11):
 
 
 
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.

See accompanying Notes to Consolidated Financial Statements
4



OUTERWALL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands, except share data)
(unaudited)
 
 
 
 
 
 
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
Common Stock
 
Treasury
Stock
 
Retained
Earnings
 
 
 
 
Shares
 
Amount
 
 
 
 
Total
Balance, December 31, 2015
16,607,516

 
$
485,163

 
$
(1,151,063
)
 
$
643,452

 
$
374

 
$
(22,074
)
Adjustments related to tax withholding for share-based compensation
(47,309
)
 
(1,425
)
 

 

 

 
(1,425
)
Share-based payments expense
668,534

 
3,516

 
1,802

 

 

 
5,318

Tax deficiency on share-based compensation expense

 
(2,083
)
 

 

 

 
(2,083
)
Net income

 

 

 
38,451

 

 
38,451

Dividends

 

 

 
(15,438
)
 

 
(15,438
)
Foreign currency translation adjustment (1)

 

 

 

 
(549
)
 
(549
)
Balance, March 31, 2016
17,228,741

 
$
485,171

 
$
(1,149,261
)
 
$
666,465

 
$
(175
)
 
$
2,200

(1)
Foreign currency translation adjustment had no tax effect for the three months ended March 31, 2016 .



See accompanying Notes to Consolidated Financial Statements
5



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 (Note 7)
(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
)


6


 
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. See Note 10: Discontinued Operations for cash flow disclosures related to our discontinued Redbox operations in Canada.
(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.


See accompanying Notes to Consolidated Financial Statements
7



INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




8


OUTERWALL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1: Basis of Presentation and Principles of Consolidation
The unaudited consolidated financial information included herein has been prepared by Outerwall Inc., pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited consolidated financial statements of Outerwall Inc. included herein reflect all adjustments, consisting only of normal recurring adjustments that, in the opinion of management, are necessary to present fairly our consolidated financial position, results of operations, and cash flows for the periods presented. The financial information as of December 31, 2015, is derived from our 2015 Annual Report on Form 10-K. The consolidated financial statements included within this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2015 Annual Report on Form 10-K.
The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.
The accompanying consolidated financial statements include the accounts of Outerwall Inc. and our wholly owned subsidiaries. Investments in companies of which we may have significant influence, but not a controlling interest, are accounted for using the equity method of accounting. All significant intercompany balances and transactions have been eliminated in consolidation.
Accounting Pronouncements Adopted During the Current Year
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (Subtopic 835-30) . This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, instead of as a deferred charge. In August 2015, the FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (Subtopic 835-30) . This ASU provides additional guidance to ASU 2015-03, which did not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. ASU 2015-15 noted that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. We adopted this guidance on January 1, 2016, which resulted in the reclassification of $3.8 million of unamortized discount and deferred financing fees as of December 31, 2015, from other non-current assets to long-term debt in our Consolidated Balance Sheets . Other than this reclassification, our adoption of ASU 2015-03 and ASU 2015-15 did not have a material impact to our consolidated financial statements and related disclosures. See Note 7: Debt and Other Long-Term Liabilities for more information.
In April 2015, the FASB issued ASU 2015-05, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement . This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change GAAP for a customer’s accounting for service contracts. We adopted this ASU on January 1, 2016. Our adoption of this ASU did not have a material impact on our consolidated financial statements and related disclosures.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40) : Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern . This ASU describes how an entity’s management should assess whether there are conditions and events that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Management should consider both quantitative and qualitative factors in making its assessment.
If after considering management’s plans, substantial doubt about an entity’s going concern is alleviated, an entity shall disclose information in the footnotes that enables the users of the financial statements to understand the events that raised the going concern and how management’s plan alleviated this concern.
If after considering management’s plans, substantial doubt about an entity’s going concern is not alleviated, the entity shall disclose in the footnotes indicating that a substantial doubt about the entity’s going concern exists within one year of the date of the issued financial statements. Additionally, the entity shall disclose the events that led to this going concern and management’s plans to mitigate them.


9


We adopted this ASU on January 1, 2016. Our adoption of this ASU did not have a material impact on our consolidated financial statements and related disclosures.
Accounting Pronouncements Not Yet Adopted
There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on our consolidated financial statements, from those disclosed in our 2015 Annual Report on Form 10-K, except for the following:
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718) . This ASU changes how companies account for certain aspects of share-based payment awards to employees, including accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. We are currently evaluating the impact of adopting this ASU and expect this standard to not have a significant impact on our consolidated financial statements and related disclosures, which is effective for us in our fiscal year beginning January 1, 2017. Early adoption is permitted.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) . The ASU requires lessees, among other things, to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous authoritative guidance. This update also introduces new disclosure requirements for leasing arrangements. We are currently evaluating the impact of adopting this ASU and expect this standard to have a significant impact on our consolidated financial statements and related disclosures, which is effective for us in our fiscal year beginning January 1, 2019. Early adoption is permitted.
Note 2: Organization and Business
Description of Business
We are a leading provider of automated retail solutions offering convenient products and services that benefit consumers and drive incremental retail traffic and revenue for retailers.
Our core offerings in automated retail include our Redbox, Coinstar and ecoATM segments. Our Redbox segment consists of self-service kiosks where consumers can rent or purchase movies and video games. Our Coinstar segment consists of self-service coin-counting kiosks where consumers can convert their coins to cash or stored value products. We also offer self-service kiosks that exchange gift cards for cash under our Coinstar™ Exchange brand. Our ecoATM segment consists of self-service kiosks and an online solution where consumers can sell electronic devices for cash and generates revenue through the sale of devices collected to third party resellers, through online marketplaces and through the Gazelle direct-to-consumer storefront.
In addition to our three reportable segments, we may also conduct business activities through other self-service concepts, where we identify, evaluate, build or acquire and develop new self-service retail concepts and regularly assess these concepts to determine whether continued funding or other alternatives are appropriate.
Our kiosks are located primarily in supermarkets, drug stores, mass merchants, convenience stores, financial institutions, malls and restaurants. Our kiosk and location counts as of March 31, 2016 , are as follows:
 
Kiosks
 
Locations
Redbox
40,210

 
32,920

Coinstar
20,850

 
19,600

ecoATM
2,540

 
2,320

Total
63,600

 
54,840



10


Note 3: Cash and Cash Equivalents
We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. Our cash and cash equivalents were $198.9 million and $222.5 million at March 31, 2016 , and December 31, 2015 , respectively. Of this total, cash equivalents were $2.1 million and $2.7 million , respectively, and consisted of money market demand accounts and investment grade fixed income securities such as money market funds, certificate of deposits, and commercial paper. Our cash balances with financial institutions may exceed the deposit insurance limits.
Included in our cash and cash equivalents at March 31, 2016 , and December 31, 2015 , were $62.7 million and $83.3 million , respectively that we identified for settling our accrued payables to our retailer partners in relation to our Coinstar kiosks.
Separately included in our cash and cash equivalents at March 31, 2016 , and December 31, 2015 , were $44.9 million and $46.2 million , respectively in cash and cash equivalents held in financial institutions domestically and $11.1 million and $9.0 million , respectively in cash and cash equivalents held in foreign financial institutions.
Note 4: Prepaid Expenses and Other Current Assets and Other Accrued Liabilities
Prepaid expenses and other current assets:
Dollars in thousands
March 31,
2016
 
December 31,
2015
Spare parts
$
12,183

 
$
9,780

Licenses
5,955

 
6,394

Electronic devices inventory
7,419

 
7,846

Income taxes receivable
2,040

 
9,517

Prepaid rent
1,583

 
1,043

DVD cases and labels
1,747

 
1,371

Other
15,462

 
15,417

Total prepaid and other current assets
$
46,389

 
$
51,368

Other accrued liabilities consist of the following:
Dollars in thousands
March 31,
2016
 
December 31,
2015
Payroll related expenses
$
36,828

 
$
40,676

Studio revenue share and other content related expenses
33,397

 
28,964

Business taxes
17,094

 
16,080

Insurance
13,783

 
13,594

Deferred revenue
11,609

 
11,201

Income taxes payable
20,787

 
16

Accrued interest expense
4,774

 
6,913

Accrued early lease termination and sublease expenses
4,728

 
4,991

Service contract provider expenses
3,464

 
4,070

Deferred rent expense
1,983

 
1,728

Other
11,335

 
13,204

Total other accrued liabilities
$
159,782

 
$
141,437



11


Note 5: Property and Equipment
Dollars in thousands
March 31,
2016
 
December 31,
2015
Kiosks and components
$
1,163,590

 
$
1,163,210

Computers, servers, and software
190,773

 
193,507

Leasehold improvements
22,508

 
22,663

Office furniture and equipment
7,227

 
7,047

Vehicles
5,115

 
5,118

Property and equipment, at cost
1,389,213

 
1,391,545

Accumulated depreciation and amortization
(1,098,453
)
 
(1,075,532
)
Property and equipment, net
$
290,760

 
$
316,013

Note 6: Goodwill and Other Intangible Assets
Goodwill
The carrying amount of goodwill was as follow:
Dollars in thousands
March 31,
2016
 
December 31,
2015
Goodwill
$
473,417

 
$
473,417

During the second quarter of 2015, we recognized a goodwill impairment charge of $85.9 million related to ecoATM. The goodwill was originally recognized as part of our acquisition of ecoATM in 2013. During the three months ended June 30, 2015, it became evident that revenue and profitability trends in our ecoATM reporting unit were not being achieved as expected. As a result, we revised our internal expectations for future revenue growth and profitability lower than our previous estimates.
The expected future cash flows of our ecoATM reporting unit include key assumptions with inherent uncertainty which may change in future periods and may have a negative effect on the fair value resulting in potential future impairments, the most significant of which is our estimate of future cash flows predicated on estimated growth in kiosks, revenue and profitability measures. Additionally, fair value may be negatively impacted by changes in our strategy related to the ecoATM reporting unit and factors outside of our control such as increased competition from companies whose primary business consists of the purchase of used electronics and with companies in other businesses who also have buyback programs.
To evaluate whether it is more likely than not that the fair value of each of our reporting units are less than their respective carrying amounts as of the balance sheet date, we considered all relevant events and circumstances including, but not limited to, the performance of our reporting units compared to the estimates used in our most recent quantitative analysis, changes in our average market capitalization, and the excess of fair value for each of our reporting units over the carrying amounts of each of our reporting units as indicated by the first step of the goodwill impairment test completed in the fourth quarter of 2015. There have not been any events or changes in circumstances that we believe would more likely than not reduce the fair value of any of our reporting units below their carrying amounts.
On March 14, 2016, we announced that our Board of Directors has initiated a process to explore strategic and financial alternatives to maximize shareholder value. The exploration of strategic and financial alternatives will not necessarily result in any transaction or particular action being pursued, entered into or consummated, or the timing of any transaction or action. Through this process we expect to obtain additional information regarding the fair value of our reporting units that may impact our conclusions in future periods.


12


Other Intangible Assets
The gross amount of our other intangible assets and the related accumulated amortization were as follows:
Dollars in thousands
Amortization
Period
 
March 31,
2016
 
December 31,
2015
Retailer relationships
5 - 10 years
 
$
53,295

 
$
53,295

Accumulated amortization
 
 
(28,215
)
 
(27,212
)
Retailer relationships, net
 
 
25,080

 
26,083

Developed technology
3 - 5 years
 
36,000

 
36,000

Accumulated amortization
 
 
(18,410
)
 
(16,544
)
Developed technology, net
 
 
17,590

 
19,456

Trade names
5 - 10 years
 
20,000

 
20,000

Accumulated amortization
 
 
(3,783
)
 
(3,133
)
Trade names, net
 
 
16,217

 
16,867

Other
1 - 40 years
 
10,800

 
10,800

Accumulated amortization
 
 
(6,380
)
 
(6,109
)
Other, net
 
 
4,420

 
4,691

Total intangible assets, net
 
 
$
63,307

 
$
67,097

Amortization expense was as follows:
 
Three Months Ended
 
March 31,
Dollars in thousands
2016
 
2015
Retailer relationships
$
1,003

 
$
1,003

Developed technology
1,866

 
1,700

Trade names
650

 
300

Other
271

 
350

Total amortization of intangible assets
3,790

 
3,353

Less: amortization included in discontinued operations

 
(44
)
Total amortization of intangible assets from continuing operations
$
3,790

 
$
3,309

Assuming no future impairment, the expected future amortization as of March 31, 2016 , is as follows:
Dollars in thousands
Total
Remainder of 2016
$
11,370

2017
15,160

2018
11,598

2019
6,213

2020
5,819

Thereafter
13,147

Total expected amortization
$
63,307



13


Note 7: Debt and Other Long-Term Liabilities
 
Debt
 
Other Liabilities
 
Total
 
Senior Notes
 
Credit Facility
 
Total Debt
Capital Lease Obligations
 
Asset retirement obligations
 
Other long-term liabilities
Dollars in thousands
 Senior Unsecured Notes due 2019
 
 Senior Unsecured Notes due 2021
Term Loans
 
Revolving Line of Credit
As of March 31, 2016:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal
$
320,614

 
$
231,233

 
$
134,063

 
$
120,000

 
$
805,910

 
 
 
 
 
 
 

Unamortized discount and deferred financing fees (1)
(3,187
)
 
(3,435
)
 
(242
)
 
(2,134
)
 
(8,998
)
 
 
 
 
 
 
 

Total
317,427

 
227,798

 
133,821

 
117,866

 
796,912

 
$
6,011

 
$
9,416

 
$
19,540

 
$
831,879

Less: current portion

 

 
(14,062
)
 

 
(14,062
)
 
(3,850
)
 

 

 
(17,912
)
Total long-term portion
$
317,427

 
$
227,798

 
$
119,759

 
$
117,866

 
$
782,850

 
$
2,161

 
$
9,416

 
$
19,540

 
$
813,967

 
Debt
 
Other Liabilities
 
Total
 
Senior Notes
 
Credit Facility
 
Total Debt
Capital Lease Obligations
 
Asset retirement obligations
 
Other long-term liabilities
Dollars in thousands
 Senior Unsecured Notes due 2019
 
 Senior Unsecured Notes due 2021
Term Loans
 
Revolving Line of Credit
As of December 31, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal
$
350,000

 
$
258,908

 
$
136,875

 
$
140,500

 
$
886,283

 
 
 
 
 
 
 
 
Unamortized discount and deferred financing fees (1)
(3,770
)
 
(4,083
)
 
(260
)
 
(2,300
)
 
(10,413
)
 
 
 
 
 
 
 
 
Total
346,230

 
254,825

 
136,615

 
138,200

 
875,870

 
$
5,889

 
$
9,412

 
$
19,477

 
$
910,648

Less: current portion

 

 
(13,125
)
 

 
(13,125
)
 
(4,006
)
 

 

 
(17,131
)
Total long-term portion
$
346,230

 
$
254,825

 
$
123,490

 
$
138,200

 
$
862,745

 
$
1,883

 
$
9,412

 
$
19,477

 
$
893,517

(1)
As described in Note 1: Basis of Presentation and Principles of Consolidation , we adopted ASU 2015-03 and 2015-15 in the first quarter of 2016 and have applied the guidance to our Senior Notes and Credit Facility. Under this guidance, we are now presenting unamortized deferred financing fees as a direct deduction from the associated debt liability. Historically, unamortized deferred financing fees were included in other non-current assets. This adoption resulted in the reclassification of $3.8 million of unamortized deferred financing fees as of December 31, 2015, from other non-current assets to long-term debt in our Consolidated Balance Sheets. Deferred financing fees are amortized on a straight line basis over the life of the related loan.
Interest Expense
Dollars in thousands
Three Months Ended
March 31,
2016
 
2015
Cash interest expense
$
10,654

 
$
11,395

Amortization of debt discount and deferred financing fees
638

 
693

Total cash and non-cash interest expense
11,292

 
12,088

Gain from early extinguishment of debt
(11,028
)
 

Total interest expense
$
264

 
$
12,088

2019 Notes
On March 12, 2013 , we entered into an indenture pursuant to which we issued $350.0 million principal amount of 6.000% Senior Notes due 2019 (the “2019 Notes”) at par for proceeds, net of expenses, of $343.8 million . Each of our direct and indirect U.S. subsidiaries guarantees the 2019 Notes.
During the first quarter of 2016, we repurchased 29,386 notes, or $29.4 million in face value of notes, for $23.4 million in cash. The gain from early extinguishment of these notes was approximately $5.6 million and is included in interest expense, net on our Consolidated Statements of Comprehensive Income.
As of March 31, 2016 , we were in compliance with the covenants of the related indenture.


14


2021 Notes
On June 9, 2014, we entered into an indenture pursuant to which we issued $300.0 million principal amount of 5.875% Senior Notes due 2021 (the “2021 Notes”) at par for proceeds, net of expenses, of $294.0 million . Each of our direct and indirect U.S. subsidiaries guarantees the 2021 Notes.
During the first quarter of 2016, we repurchased 27,675 notes, or $27.7 million in face value of notes, for $21.9 million in cash. The gain from early extinguishment of these notes was approximately $5.4 million and is included in interest expense, net on our Consolidated Statements of Comprehensive Income.
As of March 31, 2016 , we were in compliance with the covenants of the related indenture.
Revolving Line of Credit and Term Loan
Our senior secured credit facility (the “Credit Facility”) consists of (a) a $150.0 million amortizing term loan (the “Term Loan”) and (b) a $600.0 million revolving line of credit (the “Revolving Line”), which includes (i) a $75.0 million sublimit for the issuance of letters of credit, (ii) a $50.0 million sublimit for swingline loans and (iii) a $75.0 million sublimit for loans in certain foreign currencies available to us and certain wholly owned Company foreign subsidiaries (the “Foreign Borrowers”). We may, subject to applicable conditions and subject to obtaining commitments from lenders, request an increase in the Revolving Line of up to $200.0 million in aggregate (the “Accordion”). As of March 31, 2016 , the interest rate on amounts outstanding under the Credit Facility was 2.18% and we were in compliance with the covenants of the Credit Facility.
Required principal amortization payments under the Term Loan are as follows:
Dollars in thousands
Repayment Amount
Remainder of 2016
$
10,313

2017
15,000

2018
18,750

2019
90,000

Total
$
134,063

 


15


Note 8: Share-Based Payments
We currently grant share-based awards to our executives, non-employee directors and employees under our 2011 Incentive Plan (the “Plan”). The Plan permits the granting of stock options, restricted stock, restricted stock units, and performance-based restricted stock.
Certain information regarding our share-based payments is as follows:
 
Three Months Ended
 
March 31,
Dollars in thousands
2016
 
2015
Share-based payments expense:
 
 
 
Share-based compensation - stock options
$
47

 
$
141

Share-based compensation - restricted stock
3,530

 
2,559

Share-based payments for content arrangements
815

 
1,241

Total share-based payments expense
$
4,392

 
$
3,941

Tax benefit on share-based payments expense
$
1,708

 
$
1,519

 
March 31, 2016
Dollars in thousands
Unrecognized Share-Based Payments Expense
 
Weighted-Average Remaining Life
Unrecognized share-based payments expense:
 
 
 
Share-based compensation - stock options
$
112

 
0.9 years
Share-based compensation - restricted stock
19,880

 
2.6 years
Share-based payments for content arrangements
2,078

 
0.7 years
Total unrecognized share-based payments expense
$
22,070

 
 
Share-Based Compensation
Stock options
No stock options were granted in 2016.
Restricted stock and performance based restricted stock awards
Restricted stock awards are granted to eligible executives, non-employee directors and employees. Awards granted to employees and executives in 2016 vest annually in installments over three years ( 25% of the award vests one year from the grant date, 25% of the award vests two years from the grant date, and the remaining 50% of the award vests three years from the grant date). Non-employee director awards vest one year after the grant date. The fair value of non-performance-based awards is based on the market price on the grant date.
Performance-based restricted stock awards are granted to executives only, with established performance criteria approved by the Compensation Committee of the Board of Directors. Awards of performance-based restricted stock made in 2016, once earned, vest annually in equal installments over three years from the date of grant. The restricted shares require no payment from the grantee. The fair value of performance-based awards is based on achieving specific performance conditions and is recognized over the vesting period.
We estimate forfeitures for restricted stock awards and recognize share-based compensation expense for only those awards expected to vest.


16


The following table presents a summary of restricted stock award activity for 2016 :
Shares in thousands
Restricted Stock Awards
 
Weighted Average Grant Date Fair Value
Non-vested, December 31, 2015
556

 
$
65.86

Granted
695

 
25.85

Vested
(141
)
 
63.92

Forfeited
(79
)
 
63.13

Non-vested, March 31, 2016
1,031

 
39.36

Share-Based Payments for Content Arrangements
We have granted restricted stock as part of content license agreements with certain movie studios. The expense related to these agreements is included within direct operating expenses in our Consolidated Statements of Comprehensive Income and is adjusted based on the number of unvested shares and market price of our common stock each reporting period. During the first quarter of 2016, 50,000 shares of restricted stock were granted and immediately vested pursuant to a revenue sharing agreement with Paramount.
Rights to Receive Cash
As a part of the acquisition of ecoATM, we issued replacement awards for unvested restricted stock and options in ecoATM with rights to receive cash equal to the per share merger consideration for restricted stock and net of the exercise price for options. The replacement awards vest in accordance with the terms of the original replaced award. The replacement awards are considered liability classified as they represent rights to receive cash. Expense associated with the post-combination awards is recognized net of forfeitures, and cash payments are made in accordance with the awards' vesting schedule, generally on a monthly basis. We recognized $0.4 million in expense associated with the issuance of rights to receive cash for the three months ended March 31, 2016 . The expected future recognition of expense associated with the rights to receive cash as of March 31, 2016 is as follows:
Dollars in thousands
Expected Expense
Remainder of 2016
$
944

2017
146

Remaining total expected expense
$
1,090

Note 9: Restructuring
2016 Restructuring
During the first quarter of 2016, we recorded restructuring charges arising from implementing actions to further align costs with revenues in our continuing operations primarily through workforce reductions across the company.
We do not expect significant future restructuring charges related to our first quarter 2016 restructuring activities.
2015 Restructuring
During the first quarter of 2015, we recorded restructuring charges arising from the following activities:
Discontinuing our Redbox operations in Canada. The disposal was completed on March 31, 2015. See Note 10: Discontinued Operations for further information;
Reducing the size of our Redbox headquarters facility in Oakbrook Terrace, Illinois through early termination of operating leases for certain floors. We ceased using the office space on March 31, 2015 and the effective date of the early termination is July 31, 2016. Prior to exercising our early termination option, the leases had been scheduled to expire in July 2021; and
Implementing actions to further align costs with revenues in our continuing operations primarily through workforce reductions across the company and subleasing a floor of a corporate facility.


17


The total amount incurred for restructuring and related costs from continuing operations is as follows:
 
Three Months Ended
 
March 31,
Dollars in thousands
2016
 
2015
Redbox
 
 
 
Severance
$
2,111

 
$
3,701

Lease termination and related costs (excluding related asset impairments)
297

 
4,567

Total Redbox restructuring costs
2,408

 
8,268

Coinstar
 
 
 
Severance
405

 
492

Lease termination and related costs (excluding related asset impairments)
57

 
24

Total Coinstar restructuring costs
462

 
516

ecoATM
 
 
 
Severance
398

 
127

Lease termination and related costs (excluding related asset impairments)
7

 

Total ecoATM restructuring costs
405

 
127

Total restructuring costs in continuing operations
3,275

 
8,911

Impairment of lease related assets

 
6,940

Total restructuring and related costs from continuing operations
$
3,275

 
$
15,851

A reconciliation of the beginning and ending liability balance by expense type is as follows:
Dollars in thousands
Severance Expense
 
Lease Termination Costs
 
Other
Beginning Balance - January 1, 2016
$
1,385

 
$
4,991

 
$

Costs charged to expense
2,766

 
361

 
148

Costs paid or otherwise settled
(3,327
)
 
(624
)
 

Ending Balance - March 31, 2016
$
824

 
$
4,728

 
$
148

Note 10: Discontinued Operations
Summary Financial Information
On January 23, 2015, we made the decision to shut down our Redbox Canada operations as the business was not meeting the company's performance expectations. This represents a strategic shift which has a major effect on our operations as it represents a significant geographical area for our Redbox segment and the losses generated were significant to our total operations. On March 31, 2015, we completed the disposal of the Redbox Canada operations. As a result, we updated certain estimates used in the preparation of the financial statements and the remaining value of the content library and certain capitalized property and equipment consisting primarily of installation costs were amortized over the wind-down period ending March 31, 2015. We have reclassified the results of Redbox Canada to discontinued operations for all periods presented in our  Consolidated Statements of Comprehensive Income .


18


The following table sets forth the components of discontinued operations included in our Consolidated Statements of Comprehensive Income:

Three Months Ended
Dollars in thousands
March 31, 2015
Major classes of line items constituting pretax loss of discontinued operations:


Revenue
$
1,557

Direct operating
4,269

Marketing
129

General and administrative
119

Restructuring and related costs
522

Depreciation and other
5,858

Amortization of intangible assets
44

Other expense, net
(4,495
)
Pretax loss of discontinued operations related to major classes of pretax loss
(13,879
)
Income tax benefit (1)
7,323

Net loss on discontinued operations
$
(6,556
)
(1)
The income tax benefit for the three months ended March 31, 2015 includes a benefit on the rate differential between the U.S. and Canada.
Significant operating and investing cash flows of Redbox Canada were as follows:
 
Three Months Ended
Dollars in thousands
March 31, 2015
Loss on discontinued operations
$
(6,556
)
Adjustments to reconcile net loss to net cash flows from operating activities:
 
Depreciation and amortization
5,902

Content library
3,064

Prepaid and other current assets
544

Accounts payable
(1,621
)
Accrued payables to retailers
(155
)
Other accrued liabilities
(32
)
Net cash flows from operating activities
$
1,146

Investing activities:
 
Purchase of property, plant and equipment
(278
)
Total cash flows used in investing activities
$
(278
)



19


Note 11: Earnings Per Share
The Two-Class Method is an earnings allocation formula that treats a participating security, as having rights to earnings that otherwise would have been available to common shareholders and assumes all earnings for the period are distributed. Our unvested restricted stock awards granted are participating securities as they entitle recipients to receive nonforfeitable dividends during the vesting period on a basis equivalent to the dividends paid to holders of common stock.
Our calculation of basic and diluted earnings per share is as follows:
 
Three Months Ended
 
March 31,
In thousands, except per share data
2016
 
2015
Numerator
 
 
 
Income from continuing operations
$
38,451

 
$
42,155

Loss from discontinued operations, net of tax

 
(6,556
)
Net income
$
38,451

 
$
35,599

 
 
 
 
Income from continuing operations
$
38,451

 
$
42,155

Dividends and undistributed income allocated to participating shares
(1,465
)
 
(1,380
)
Income from continuing operations to common shares - basic
36,986

 
40,775

Effect of reallocating undistributed income from continuing operations to participating shares
2

 
1

Income from continuing operations to common shares - diluted
$
36,988

 
$
40,776

 
 
 
 
Denominator
 
 
 
Weighted average common shares - basic
16,094

 
18,269

Dilutive effect of share-based payment awards
42

 
17

Weighted average common shares - diluted (1)
16,136

 
18,286

 
 
 
 
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

 
 
 
 
Stock options and share-based awards not included in diluted EPS calculation because their effect would have be antidilutive
328

 
3

(1)
Participating securities were included in the calculation of diluted earnings per share using the two-class method, as this calculation was more dilutive than the calculation using the treasury stock method.


20


Note 12: Business Segments and Enterprise-Wide Information
Management, including our chief operating decision maker, who is our CEO, evaluates the performances of our business segments primarily on segment revenue and segment operating income (loss) before depreciation, amortization and other, and share-based compensation granted to executives, non-employee directors and employees (“segment operating income (loss)”). Segment operating income (loss) contains internally allocated costs of our shared service support functions, including but not limited to, corporate executive management, business development, sales, finance, legal, human resources, information technology and risk management. We also review depreciation and amortization allocated to each segment. Share-based payments expense related to share-based compensation granted to executives, non-employee directors and employees and expense related to the rights to receive cash issued in connection with our acquisition of ecoATM are not allocated to our segments and are included in the Corporate Unallocated column in the analysis and reconciliation below; however, share-based payments expense related to our content arrangements with certain movie studios has been allocated to our Redbox segment and is included within direct operating expenses. Our performance evaluation does not include segment assets.
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 SAMPLE it in the fourth quarter of 2015. As SAMPLE it did not represent a major component of our operations or financial results, the results of SAMPLE it 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.
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 (Note 9)
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




21


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 (Note 9)
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

Significant Retailer Relationships
Kiosks at the following retailers accounted for 10% or more of our consolidated revenue:
 
Three Months Ended
 
March 31,
 
2016
 
2015
Wal-Mart Stores Inc.
16.2
%
 
16.3
%
Walgreen Co.
13.7
%
 
14.3
%
Note 13: Fair Value
Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, we use a three-tier valuation hierarchy based upon observable and non-observable inputs:
Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; or
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
The factors or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
Assets and Liabilities Measured and Reported at Fair Value on a Recurring Basis
The following table presents our financial assets and liabilities that are measured and reported at fair value in our Consolidated Balance Sheets on a recurring basis, by level within the fair value hierarchy (in thousands):
Fair Value at March 31, 2016
Level 1
 
Level 2
 
Level 3
Money market demand accounts and investment grade fixed income securities
$
2,145

 
$

 
$

 
 
 
 
 
 
Fair Value at December 31, 2015
Level 1
 
Level 2
 
Level 3
Money market demand accounts and investment grade fixed income securities
$
2,743

 
$

 
$



22


Money Market Demand Accounts and Investment Grade Fixed Income Securities
We determine fair value for our money market demand accounts and investment grade fixed income securities based on quoted market prices. The fair value of these assets is included in cash and cash equivalents on our Consolidated Balance Sheets .
Assets and Liabilities Measured and Reported at Fair Value on a Nonrecurring Basis
We recognize or disclose the fair value of certain assets such as non-financial assets, primarily long-lived assets, goodwill, intangible assets and certain other assets in connection with impairment evaluations. All of our nonrecurring valuations use significant unobservable inputs and therefore fall under Level 3 of the fair value hierarchy.
Fair Value of Other Financial Instruments
The carrying value of our term loans approximates their fair value and falls under Level 2 of the fair value hierarchy.
We estimated the fair value of our senior unsecured notes due 2019 and 2021 outstanding using quoted market prices by independent dealers. The estimated fair value of our senior unsecured notes due 2019 and 2021 was approximately $278.0 million and $176.0 million , at March 31, 2016 and $312.0 million and $213.0 million at December 31, 2015 , respectively. The fair value estimate of our senior unsecured notes falls under Level 2 of the fair value hierarchy. We have reported the carrying value, face value less the unamortized debt discount and deferred financing fees, of our senior unsecured notes, issued at par, in our Consolidated Balance Sheets.
Note 14: Commitments and Contingencies
Content License Agreements
We have entered into certain license agreements to obtain content for movie and video game rentals. Total estimated movie content commitments as of March 31, 2016 , is presented in the following table:
Dollars in thousands
 
 
 
 
 
 
 
Total
 
Remaining in 2016
 
2017
 
2018
Total estimated movie content commitments
$
488,689

 
$
314,490

 
$
164,693

 
$
9,506

Legal Matters
In October 2009, an Illinois resident, Laurie Piechur, individually and on behalf of all others similarly situated, filed a putative class action complaint against our Redbox subsidiary in the Circuit Court for the Twentieth Judicial Circuit, St. Clair County, Illinois. The plaintiff alleged that, among other things, Redbox charges consumers illegal and excessive late fees in violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, and that Redbox's rental terms violate the Illinois Rental Purchase Agreement Act or the Illinois Automatic Contract Renewal Act and the plaintiff is seeking monetary damages and other relief. In November 2009, Redbox removed the case to the U.S. District Court for the Southern District of Illinois. In February 2010, the District Court remanded the case to the Circuit Court for the Twentieth Judicial Circuit, St. Clair County, Illinois. In May 2010, the court denied Redbox's motion to dismiss the plaintiff's complaint. In November 2011, the plaintiff moved for class certification, and Redbox moved for summary judgment. The court denied Redbox's motion for summary judgment in February 2012. The plaintiff filed an amended complaint on April 19, 2012, and an amended motion for class certification on June 5, 2012. The court denied Redbox's motion to dismiss the amended complaint. The amended class certification motion was briefed and argued. At the hearing on plaintiff's amended motion for class certification, the plaintiff dismissed all claims but two and is pursuing only her claims under the Illinois Rental Purchase Agreement Act and the Illinois Automatic Contract Renewal Act. On May 21, 2013, the court denied plaintiff's amended class action motion. On January 29, 2014, the Illinois Supreme Court denied plaintiff’s petition for leave to appeal the trial court’s denial of class certification. Redbox moved to dismiss all remaining claims on mootness grounds, and the Court granted Redbox’s motion on December 11, 2014. The plaintiffs appealed on January 7, 2015. Oral argument was held November 10, 2015. The Appellate Court affirmed the trial court’s rulings on January 11, 2016. Plaintiffs filed a petition for review with the Illinois Supreme Court on February 16, 2016, and Redbox filed an answer on March 8, 2016. We continue to believe that the claims against us are without merit and intend to defend ourselves vigorously in this matter should plaintiff seek further appellate review. Currently, no accrual has been established as it was not possible to estimate the possible loss or range of loss because this matter had not advanced to a stage where we could make any such estimate.


23


Note 15: Guarantor Subsidiaries
Certain of our wholly owned subsidiaries have, jointly and severally, fully and unconditionally guaranteed the Senior Notes. Pursuant to SEC regulations, we have presented in columnar format the condensed consolidating financial information for Outerwall Inc., the guarantor subsidiaries on a combined basis, and all non-guarantor subsidiaries on a combined basis in the following tables:
CONSOLIDATING BALANCE SHEETS
(unaudited)
 
As of March 31, 2016
(in thousands)
Outerwall Inc.
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Eliminations and Consolidation Reclassifications
 
Total
Assets
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
139,285

 
$
21,445

 
$
38,120

 
$

 
$
198,850

Accounts receivable, net of allowances
2,064

 
28,422

 
1,197

 

 
31,683

Content library

 
156,352

 

 

 
156,352

Prepaid expenses and other current assets
12,397

 
33,619

 
373

 

 
46,389

Intercompany receivables
33,494

 
586,159

 
304

 
(619,957
)
 

Total current assets
187,240

 
825,997

 
39,994

 
(619,957
)
 
433,274

Property and equipment, net
91,542

 
185,369

 
13,849

 

 
290,760

Deferred income taxes

 

 
2,508

 

 
2,508

Goodwill and other intangible assets, net
249,699

 
287,025

 

 

 
536,724

Other long-term assets
583

 
1,150

 
141

 

 
1,874

Investment in related parties
946,069

 
29,001

 

 
(975,070
)
 

Total assets
$
1,475,133

 
$
1,328,542

 
$
56,492

 
$
(1,595,027
)
 
$
1,265,140

Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
11,269

 
$
133,934

 
$
184

 
$

 
$
145,387

Accrued payable to retailers
52,268

 
27,182

 
11,022

 

 
90,472

Other accrued liabilities
74,513

 
83,434

 
1,835

 

 
159,782

Dividend payable
10,463

 

 

 

 
10,463

Current portion of long-term debt and other long-term liabilities
17,651

 
5

 
256

 

 
17,912

Intercompany payables
501,456

 
104,468

 
14,033

 
(619,957
)
 

Total current liabilities
667,620

 
349,023

 
27,330

 
(619,957
)
 
424,016

Long-term debt and other long-term liabilities
794,301

 
19,529

 
137

 

 
813,967

Deferred income taxes
11,011

 
13,922

 
24

 

 
24,957

Total liabilities
1,472,932

 
382,474

 
27,491

 
(619,957
)
 
1,262,940

Commitments and contingencies
 
 
 
 
 
 
 
 
 
Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
Preferred stock

 

 
3,000

 
(3,000
)
 

Common stock
599,684

 
252,512

 
4,635

 
(371,660
)
 
485,171

Treasury stock
(1,149,261
)
 

 

 

 
(1,149,261
)
Retained earnings
552,800

 
693,556

 
20,519

 
(600,410
)
 
666,465

Accumulated other comprehensive income (loss)
(1,022
)
 

 
847

 

 
(175
)
Total stockholders’ equity
2,201

 
946,068

 
29,001

 
(975,070
)
 
2,200

Total liabilities and stockholders’ equity
$
1,475,133

 
$
1,328,542

 
$
56,492

 
$
(1,595,027
)
 
$
1,265,140



24


CONSOLIDATING BALANCE SHEETS
(unaudited)
 
As of December 31, 2015
(in thousands)
Outerwall Inc.
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Eliminations and Consolidation Reclassifications
 
Total
Assets
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
160,167

 
$
19,372

 
$
43,010

 
$

 
$
222,549

Accounts receivable, net of allowances
3,983

 
33,269

 
1,212

 

 
38,464

Content library

 
188,490

 

 

 
188,490

Prepaid expenses and other current assets
17,720

 
33,049

 
599

 

 
51,368

Intercompany receivables
35,654

 
527,996

 
426

 
(564,076
)
 

Total current assets
217,524

 
802,176

 
45,247

 
(564,076
)
 
500,871

Property and equipment, net
97,659

 
204,081

 
14,273

 

 
316,013

Deferred income taxes

 

 
2,606

 

 
2,606

Goodwill and other intangible assets, net
249,703

 
290,811

 

 

 
540,514

Other long-term assets
747

 
1,293

 
167

 

 
2,207

Investment in related parties
921,456

 
27,798

 

 
(949,254
)
 

Total assets
$
1,487,089

 
$
1,326,159

 
$
62,293

 
$
(1,513,330
)
 
$
1,362,211

Liabilities and Stockholders’ Equity (Deficit)
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
16,127

 
$
167,694

 
$
189

 
$

 
$
184,010

Accrued payable to retailers
71,947

 
30,157

 
12,994

 

 
115,098

Other accrued liabilities
57,025

 
82,401

 
2,011

 

 
141,437

Current portion of long-term debt and other long-term liabilities
16,832

 

 
299

 

 
17,131

Intercompany payables
459,789

 
85,487

 
18,800

 
(564,076
)
 

Total current liabilities
621,720

 
365,739

 
34,293

 
(564,076
)
 
457,676

Long-term debt and other long-term liabilities
873,476

 
19,882

 
159

 

 
893,517

Deferred income taxes
13,965

 
19,083

 
44

 

 
33,092

Total liabilities
1,509,161

 
404,704

 
34,496

 
(564,076
)
 
1,384,285

Commitments and contingencies
 
 
 
 
 
 
 
 
 
Stockholders’ Equity (Deficit):
 
 
 
 
 
 
 
 
 
Preferred stock

 

 
3,000

 
(3,000
)
 

Common stock
599,675

 
252,727

 
4,636

 
(371,875
)
 
485,163

Treasury stock
(1,151,063
)
 

 

 

 
(1,151,063
)
Retained earnings
530,140

 
668,728

 
18,963

 
(574,379
)
 
643,452

Accumulated other comprehensive income (loss)
(824
)
 

 
1,198

 

 
374

Total stockholders’ equity (deficit)
(22,072
)
 
921,455

 
27,797

 
(949,254
)
 
(22,074
)
Total liabilities and stockholders’ equity (deficit)
$
1,487,089

 
$
1,326,159

 
$
62,293

 
$
(1,513,330
)
 
$
1,362,211



25


CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
Three Months Ended March 31, 2016
(in thousands)
Outerwall Inc.
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Eliminations and Consolidation Reclassifications
 
Total
Revenue
$
62,246

 
$
463,577

 
$
10,133

 
$

 
$
535,956

Expenses:
 
 
 
 
 
 
 
 
 
Direct operating
34,356

 
336,941

 
4,670

 

 
375,967

Marketing
799

 
8,423

 

 

 
9,222

Research and development

 
1,045

 

 

 
1,045

General and administrative
10,914

 
36,664

 
192

 

 
47,770

Restructuring and related costs
462

 
2,813

 

 

 
3,275

Depreciation and other
6,414

 
28,713

 
991

 

 
36,118

Amortization of intangible assets
3

 
3,787

 

 

 
3,790

Total expenses
52,948

 
418,386

 
5,853

 

 
477,187

Operating income
9,298

 
45,191

 
4,280

 

 
58,769

Other income (expense), net:
 
 
 
 
 
 
 
 
 
Loss from equity method investments, net
(207
)
 

 

 

 
(207
)
Interest income (expense), net
7,947

 
(8,142
)
 
(47
)
 

 
(242
)
Other, net
2,766

 
387

 
(1,924
)
 

 
1,229

Total other income (expense), net
10,506

 
(7,755
)
 
(1,971
)
 

 
780

Income from continuing operations before income taxes
19,804

 
37,436

 
2,309

 

 
59,549

Income tax expense
(7,822
)
 
(12,686
)
 
(590
)
 

 
(21,098
)
Income from continuing operations
11,982

 
24,750

 
1,719

 

 
38,451

Equity in income of subsidiaries
26,469

 
1,719

 

 
(28,188
)
 

Net income
38,451

 
26,469

 
1,719

 
(28,188
)
 
38,451

Foreign currency translation adjustment (1)
(198
)
 

 
(351
)
 

 
(549
)
Comprehensive income
$
38,253

 
$
26,469

 
$
1,368

 
$
(28,188
)
 
$
37,902

(1)
Foreign currency translation adjustment had no tax effect for the three months ended March 31, 2016 .



26


CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
Three Months Ended March 31, 2015
(in thousands)
Outerwall Inc.
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Eliminations and Consolidation Reclassifications
 
Total
Revenue
$
58,810

 
$
539,281

 
$
10,545

 
$

 
$
608,636

Expenses:
 
 
 
 
 
 
 
 
 
Direct operating
33,726

 
366,411

 
5,047

 

 
405,184

Marketing
1,514

 
6,906

 

 

 
8,420

Research and development
(84
)
 
2,168

 

 

 
2,084

General and administrative
12,056

 
36,295

 
205

 

 
48,556

Restructuring and related costs
550

 
15,301

 

 

 
15,851

Depreciation and other
4,649

 
36,983

 
1,054

 

 
42,686

Amortization of intangible assets
3

 
3,306

 

 

 
3,309

Total expenses
52,414

 
467,370

 
6,306

 

 
526,090

Operating income
6,396

 
71,911

 
4,239

 

 
82,546

Other income (expense), net:
 
 
 
 
 
 
 
 
 
Loss from equity method investments, net
(132
)
 

 

 

 
(132
)
Interest income (expense), net
(12,396
)
 
375

 
(50
)
 

 
(12,071
)
Other, net
2,436

 
(16
)
 
(4,766
)
 

 
(2,346
)
Total other income (expense), net
(10,092
)
 
359

 
(4,816
)
 

 
(14,549
)
Income (loss) from continuing operations before income taxes
(3,696
)
 
72,270

 
(577
)
 

 
67,997

Income tax benefit (expense)
(548
)
 
(25,310
)
 
16

 

 
(25,842
)
Income (loss) from continuing operations
(4,244
)
 
46,960

 
(561
)
 

 
42,155

Income (loss) from discontinued operations, net of tax
1,524

 
(29,054
)
 
20,974

 

 
(6,556
)
Equity in income of subsidiaries
38,319

 
20,413

 

 
(58,732
)
 

Net income
35,599

 
38,319

 
20,413

 
(58,732
)
 
35,599

Foreign currency translation adjustment (1)
(64
)
 

 
2,918

 

 
2,854

Comprehensive income
$
35,535

 
$
38,319

 
$
23,331

 
$
(58,732
)
 
$
38,453

(1)
Foreign currency translation adjustment had no tax effect for the three months ended March 31, 2015 .


27


CONSOLIDATING STATEMENTS OF CASH FLOWS
(unaudited)
 
Three Months Ended March 31, 2016
(in thousands)
Outerwall Inc.
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Eliminations and Consolidation Reclassifications
 
Total
Operating Activities:
 
 
 
 
 
 
 
 
 
Net income
$
38,451

 
$
26,469

 
$
1,719

 
$
(28,188
)
 
$
38,451

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Depreciation and other
6,414

 
28,713

 
991

 

 
36,118

Amortization of intangible assets
3

 
3,787

 

 

 
3,790

Share-based payments expense
3,146

 
1,184

 

 

 
4,330

Deferred income taxes
(2,928
)
 
(5,161
)
 
267

 

 
(7,822
)
Restructuring, impairment and related costs
57

 
304

 

 

 
361

Loss from equity method investment, net
207

 

 

 

 
207

Amortization of deferred financing fees and debt discount
638

 

 

 

 
638

Gain from early extinguishment of debt
(11,028
)
 

 

 

 
(11,028
)
Other
(112
)
 
76

 

 

 
(36
)
Equity in income of subsidiaries
(26,469
)
 
(1,719
)
 

 
28,188

 

Cash flows from changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
Accounts receivable, net
1,919

 
4,846

 
98

 

 
6,863

Content library

 
33,126

 

 

 
33,126

Prepaid expenses and other current assets
5,278

 
465

 
279

 

 
6,022

Other assets

 
143

 
20

 

 
163

Accounts payable
(2,121
)
 
(33,280
)
 
(4
)
 

 
(35,405
)
Accrued payable to retailers
(19,678
)
 
(2,975
)
 
(1,993
)
 

 
(24,646
)
Other accrued liabilities
15,994

 
331

 
(252
)
 

 
16,073

Net cash flows from operating activities
9,771

 
56,309

 
1,125

 

 
67,205

Investing Activities:
 
 
 
 
 
 
 
 
 
Purchases of property and equipment
(7,428
)
 
(5,504
)
 
(521
)
 

 
(13,453
)
Proceeds from sale of property and equipment

 
74

 

 

 
74

Investments in and advances to affiliates
53,614

 
(48,806
)
 
(4,808
)
 

 

Net cash flows from (used in) investing activities
46,186

 
(54,236
)
 
(5,329
)
 

 
(13,379
)
Financing Activities:
 
 
 
 
 
 
 
 
 
Proceeds from new borrowing of Credit Facility
85,000

 

 

 

 
85,000

Principal payments on Credit Facility
(108,313
)
 

 

 

 
(108,313
)
Repurchases of notes
(45,328
)
 

 

 

 
(45,328
)
Dividends paid
(5,038
)
 

 

 

 
(5,038
)
Principal payments on capital lease obligations and other debt
(1,537
)
 

 
(89
)
 

 
(1,626
)
Withholding tax paid on vesting of restricted stock net of proceeds from exercise of stock options
(1,425
)
 

 

 

 
(1,425
)
Net cash flows used in financing activities
(76,641
)
 

 
(89
)
 

 
(76,730
)
Effect of exchange rate changes on cash
(198
)
 

 
(597
)
 

 
(795
)
Increase (decrease) in cash and cash equivalents
(20,882
)
 
2,073

 
(4,890
)
 

 
(23,699
)
Cash and cash equivalents:
 
 
 
 
 
 
 
 
 
Beginning of period
160,167

 
19,372

 
43,010

 

 
222,549

End of period
$
139,285

 
$
21,445

 
$
38,120

 
$

 
$
198,850




28


CONSOLIDATING STATEMENTS OF CASH FLOWS
(unaudited)
 
Three Months Ended March 31, 2015
(in thousands)
Outerwall Inc.
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Eliminations and Consolidation Reclassifications
 
Total
Operating Activities:
 
 
 
 
 
 
 
 
 
Net income
$
35,599

 
$
38,319

 
$
20,413

 
$
(58,732
)
 
$
35,599

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Depreciation and other
4,649

 
38,828

 
5,066

 

 
48,543

Amortization of intangible assets
3

 
3,306

 
44

 

 
3,353

Share-based payments expense
1,916

 
1,987

 

 

 
3,903

Windfall excess tax benefits related to share-based payments
(526
)
 

 

 

 
(526
)
Deferred income taxes
(6,070
)
 
(6,347
)
 
9,870

 

 
(2,547
)
Restructuring, impairment and related costs
136

 
1,544

 

 

 
1,680

Loss from equity method investments, net
132

 

 

 

 
132

Amortization of deferred financing fees and debt discount
693

 

 

 

 
693

Other
(149
)
 
(322
)
 
(727
)
 

 
(1,198
)
Equity in income of subsidiaries
(38,319
)
 
(20,413
)
 

 
58,732

 

Cash flows from changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
Accounts receivable, net
712

 
14,518

 
(3,407
)
 

 
11,823

Content library

 
6,663

 
3,293

 

 
9,956

Prepaid expenses and other current assets
(2,759
)
 
(591
)
 
244

 

 
(3,106
)
Other assets
15

 
122

 
31

 

 
168

Accounts payable
2,895

 
1,202

 
(1,177
)
 

 
2,920

Accrued payable to retailers
(10,800
)
 
(5,730
)
 
(1,911
)
 

 
(18,441
)
Other accrued liabilities
9,718

 
3,994

 
(592
)
 

 
13,120

Net cash flows from (used in) operating activities (1)
(2,155
)
 
77,080

 
31,147

 

 
106,072

Investing Activities:
 
 
 
 
 
 
 
 
 
Purchases of property and equipment
(5,607
)
 
(14,721
)
 
(381
)
 

 
(20,709
)
Proceeds from sale of property and equipment

 
123

 

 

 
123

Investments in and advances to affiliates
106,713

 
(65,229
)
 
(41,484
)
 

 

Net cash flows from (used in) investing activities (1)
101,106

 
(79,827
)
 
(41,865
)
 

 
(20,586
)
Financing Activities:
 
 
 
 
 
 
 
 
 
Proceeds from new borrowing on Credit Facility
35,000

 

 

 

 
35,000

Principal payments on Credit Facility
(116,875
)
 

 

 

 
(116,875
)
Dividends paid
(5,602
)
 

 

 

 
(5,602
)
Repurchases of common stock
(40,708
)
 

 

 

 
(40,708
)
Principal payments on capital lease obligations and other debt
(3,143
)
 

 
(102
)
 

 
(3,245
)
Windfall excess tax benefits related to share-based payments
526

 

 

 

 
526

Withholding tax paid on vesting of restricted stock net of proceeds from exercise of stock options
(3,088
)
 

 

 

 
(3,088
)
Net cash flows used in financing activities (1)
(133,890
)
 

 
(102
)
 

 
(133,992
)
Effect of exchange rate changes on cash
(36
)
 

 
3,780

 

 
3,744

Decrease in cash and cash equivalents
(34,975
)
 
(2,747
)
 
(7,040
)
 

 
(44,762
)
Cash and cash equivalents:
 
 
 
 
 
 
 
 
 
Beginning of period
180,889

 
17,939

 
43,868

 

 
242,696

End of period
$
145,914

 
$
15,192

 
$
36,828

 
$

 
$
197,934

(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. See Note 10: Discontinued Operations for cash flow disclosures related to our discontinued Redbox operations in Canada.



29


Note 16: Income Taxes From Continuing Operations
Our effective tax rate from continuing operations was 35.4% and 38.0% for the three months ended March 31, 2016 and 2015 , respectively. Our effective tax rate for the three months ended March 31, 2016 , was higher than the U.S. Federal statutory rate of 35.0% primarily due to state income taxes, partially offset by the domestic production activities deduction. Our effective tax rate for the three months ended March 31, 2015 , was higher than the U.S. Federal statutory rate of 35.0% primarily due to state income taxes and the recording of valuation allowances related to capital loss carryforwards in Canada, partially offset by the domestic production activities deduction.
Note 17: Dividends Payable
On March 14, 2016 , the Board declared a quarterly dividend of $0.60 per share to be paid on June 21, 2016 to shareholders of record at the close of business on June 7, 2016 .


30


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. Except for the consolidated historical information, the following discussion contains forward-looking statements that involve risks and uncertainties, such as our objectives, expectations and intentions. Our actual results could differ materially from results that may be anticipated by such forward-looking statements and discussed elsewhere herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and those discussed under “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q and in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (our “2015 Form 10-K”). Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made in this report and in our other reports filed with the SEC that attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations.
Overview
We are a leading provider of automated retail solutions offering convenient products and services that benefit consumers and drive incremental retail traffic and revenue for retailers. Our automated retail business model leverages technology advancements that allow delivery of new and innovative consumer products and services in a compact, automated format. We believe this model positions us to address retailers’ increasing need to provide more in less space driven by increased urbanization and consumers’ increasing expectation of instant gratification. We also have a strong consumer base which we communicate with on a regular basis to drive behavior and increase activity within our retail locations. Our products and services can be found at approximately 63,600 kiosks in leading supermarkets, drug stores, mass merchants, financial institutions, convenience stores, malls and restaurants.
Core Offerings
We have three core businesses:
Our Redbox business segment (“Redbox”), where consumers can rent or purchase movies and video games from self-service kiosks, is focused on the entertainment consumer sector.
Our Coinstar business segment (“Coinstar”) is focused on the money consumer sector and provides self-service kiosks where consumers can convert their coins to cash and convert coins and cash to stored value products. We also offer self-service kiosks that exchange gift cards for cash under our Coinstar™ Exchange brand.
Our ecoATM business segment (“ecoATM”) is focused on the consumer electronics sector and provides self-service kiosks and an online solution through Gazelle where consumers can sell certain electronic devices for cash and generates revenue through the sale of devices collected to third party resellers, through online marketplaces and through the Gazelle direct-to-consumer storefront.
Other Concepts and Investments
In addition to our three reportable segments; we may also identify, evaluate, build or acquire, and develop innovative new concepts in the automated retail space. The combined results of the concepts we have operated are included in our All Other reporting category as they do not meet quantitative thresholds to be a separate reportable segment.
Recently, we explored a consumer product sampling kiosk concept called SAMPLE it . 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 SAMPLE it in the fourth quarter of 2015. As SAMPLE it did not represent a major component of our operations or financial results, the results of SAMPLE it did not qualify to be reported as a discontinued operation and remain in our All Other reporting category.
On occasion, we make strategic investments in external companies that provide automated self-service kiosk solutions. For example, in the health sector we have invested in Pursuant Health, Inc.


31


Strategy
On March 14, 2016, we announced that our Board of Directors has initiated a process to explore strategic and financial alternatives to maximize shareholder value. The exploration of strategic and financial alternatives will not necessarily result in any transaction or particular action being pursued, entered into or consummated, or the timing of any transaction or action.
In addition, we reaffirmed our commitment to managing Outerwall's businesses for profitability and cash flow and focusing on expense management, operational efficiencies and network optimization, with the continued goal of returning significant free cash flow to investors with a preference for dividends and opportunistic debt retirement.
Our strategy of managing our business for profitability and cash flow is based upon leveraging our core competencies in the automated retail space to provide the consumer with convenience and value and to help retailers drive incremental traffic and revenue. Our competencies include success in building strong consumer and retailer relationships, and in deploying, scaling and managing kiosk businesses. We build strong retailer relationships by providing retailers with turnkey solutions that complement their businesses without significant expenditures of time and financial resources. We believe we have opportunities to continue to manage our businesses for profitability and cash flow by capitalizing on our strengths through the execution of the following strategies:
Continue to profitably manage our Redbox business. We are focused on profitably managing Redbox through revenue generation and improved kiosk-operations efficiency.
We expect to optimize our business by maintaining our customer base, attracting new customers, testing pricing strategies, leveraging the variable cost structure of the business, optimizing the Blu-ray rental mix, expanding the availability and depth of new generation video game content and utilizing our customer management tools. Blu-ray drives revenue growth by shifting rentals to its higher revenue price point, $2.00 per night, and generates higher margin dollars per rental. Video games drive revenue by providing Redbox users a low cost access point of $3.00 per night, which is a significant discount to the related purchase price of the new release content. Further, our customer management tools enable us to provide personalized recommendations and promotions to our customers, which help us generate incremental revenue.
While we have completed the build out of our Redbox network in the U.S., we believe we can improve financial performance by redeploying underperforming kiosks to areas with lower kiosk density or with higher consumer traffic. We also have retrofitted a significant percentage of our existing kiosks to provide increased capacity, which enables Redbox to retain discs in the kiosks longer without a material increase in product cost, thereby allowing us to provide greater title selection and copy depth to generate incremental rentals. We also continuously improve our proprietary algorithms allowing Redbox to more accurately predict daily title availability and demand at individual kiosk locations. From a financial perspective, we expect these strategies to partially offset the secular decline in the physical market.
Optimize and grow revenues from our Coinstar business . We believe we can improve financial performance in our Coinstar business through kiosk optimization. We continue to focus on finding more attractive locations for our existing kiosks, including through redeployment of underperforming kiosks to areas with lower kiosk density or higher consumer traffic. Further, the Coinstar business continues to develop consumer-oriented products and services, such as Coinstar Exchange, and to expand into other channels, such as financial institutions, where we can leverage our Coinstar platform.
Drive our ecoATM business to profitability . We are focused on achieving segment operating profitability in our ecoATM business. We expect to increase revenue through continued focus on redeploying underperforming kiosks, placing existing kiosks in inventory in attractive locations and driving increased productivity at existing kiosks. We also expect to generate profitable growth by integrating the ecoATM branded kiosk business model with the Gazelle brand, which provides an online solution to buy and sell used electronics, to provide greater leverage, revenue and margin enhancement opportunities for our ecoATM business.
Use our expertise to continue to develop our existing businesses and new innovative retail solutions. Through Redbox and Coinstar, we have demonstrated our ability to profitably scale automated retail solutions. We also leverage those core competencies to identify, evaluate, build or acquire, and develop new automated retail concepts through both organic and inorganic opportunities. For example, in the third quarter of 2013, we acquired ecoATM, one of our previous strategic investments and in November 2015, we acquired Gazelle, Inc. ("Gazelle"). We are committed to addressing the changing needs and preferences of our consumers, including through strategic investments and exploring further international opportunities.


32


Comparability of Results
On November 10, 2015, we acquired certain assets and liabilities of Gazelle. Results of operations for Gazelle are included in ecoATM for the three month period ended March 31, 2016.
Recent Events
Q1 2016 Events
During the first quarter of 2016, we repurchased $57.1 million in face value of our 2021 and 2019 Notes for $45.3 million in cash. The gain from early extinguishment of these notes was approximately $11.0 million and is included in interest expense, net on our Consolidated Statements of Comprehensive Income. See Note 7: Debt and Other Long-Term Liabilities in our Notes to Consolidated Financial Statements .
On March 14, 2016 , the Board declared a quarterly dividend of $0.60 per share to be paid on June 21, 2016 to shareholders of record at the close of business on June 7, 2016 .
On March 29, 2016, we paid a cash dividend of $0.30 per outstanding share of our common stock totaling approximately $5.1 million .
Consolidated Results
The discussion and analysis that follows covers our results from continuing operations:
 
Three Months Ended
 
 
 
 
 
March 31,
 
Change
Dollars in thousands, except per share amounts
2016
 
2015
 
$
 
%
Revenue
$
535,956

 
$
608,636

 
$
(72,680
)
 
(11.9
)%
Operating income
$
58,769

 
$
82,546

 
$
(23,777
)
 
(28.8
)%
Income from continuing operations
$
38,451

 
$
42,155

 
$
(3,704
)
 
(8.8
)%
Diluted earnings from continuing operations per common share
$
2.29

 
$
2.23

 
$
0.06

 
2.7
 %
Comparing three months ended March 31, 2016 to three months ended March 31, 2015
Revenue decreased $72.7 million , or 11.9% , primarily due to:
$98.0 million decrease from our Redbox segment primarily due to a 17.3% decrease in same store sales driven by a decline in movie rentals and the removal of underperforming kiosks. Movie rentals were impacted primarily by accelerated secular decline in the physical market in the first quarter of 2016 as compared to the first quarter of 2015, partially offset by higher total box office (representing titles with North American box office receipts of at least $5.0 million per title) of movie titles released which was 16.4% higher than the prior year with seven more titles. This was partially offset by;
$22.3 million increase from our ecoATM segment primarily due to revenue included in 2016 from devices acquired and sold through Gazelle.
Operating income decreased $23.8 million , or 28.8% , primarily due to:
$31.3 million decrease in operating income within our Redbox segment primarily due to:
$98.0 million decrease in revenue as described above; partially offset by
$43.9 million decrease in direct operating expenses driven primarily by lower product costs due to lower spending on movie content, lower contractual fees paid to our retail partners due to lower revenue and lower credit card fees driven by lower rental volume;
$12.8 million decrease in restructuring and related costs; and
$7.3 million decrease in depreciation and amortization primarily from lower kiosk related depreciation. This was partially offset by
$4.1 million decrease in operating loss within our All Other reporting category primarily due to our decision to discontinue operating SAMPLE it in the fourth quarter of 2015; and


33


$2.5 million increase in operating income within our Coinstar segment primarily due to higher revenue and lower operating expenses including direct operating, depreciation and amortization, and marketing expenses.
Income from continuing operations decreased $3.7 million , or 8.8% , primarily due to:
$23.8 million decrease in operating income as described above; partially offset by
$11.8 million decrease in interest expense, net primarily due to gain from early extinguishment of debt, as we recognized a gain of $11.0 million in 2016, and lower borrowings;
$4.7 million decrease in income tax expense primarily due to lower pre-tax income and reduced discrete tax expenses; and
$3.6 million increase in other income, net primarily due to the impact of the Canadian dollar exchange rates on our Coinstar operations.
Share-Based Payments and Rights to Receive Cash
Our share-based payments consist of share-based compensation granted to executives, non-employee directors and employees and share-based payments granted to movie studios as part of content agreements. We grant stock options, restricted stock and performance-based restricted stock to executives and non-employee directors and restricted stock to our employees. In connection with our acquisition of ecoATM, we also granted certain rights to receive cash. The expense associated with the grants to movie studios is allocated to our Redbox segment and included within direct operating expenses. The expenses associated with share-based compensation to our executives, non-employee directors, employees and related to the rights to receive cash issued in connection with our acquisition of ecoATM are part of our shared services support function and are not allocated to our segments. The components of our unallocated share-based compensation expense are presented in the following table.
Unallocated Share-Based Compensation and Rights to Receive Cash Expense
 
Three Months Ended
 
 
 
 
 
March 31,
 
Change
Dollars in thousands
2016
 
2015
 
$
 
%
Direct operating
$
341

 
$
989

 
$
(648
)
 
(65.5
)%
Marketing
38

 
367

 
(329
)
 
(89.6
)%
Research and development
110

 
713

 
(603
)
 
(84.6
)%
General and administrative
3,528

 
2,551

 
977

 
38.3
 %
Total
$
4,017

 
$
4,620

 
$
(603
)
 
(13.1
)%
Unallocated share-based compensation expense  decreased $0.6 million , or 13.1% during the three months ended March 31, 2016 , primarily due to the continued vesting of rights to receive cash we issued as replacement awards for unvested restricted stock as part of our acquisition of ecoATM in the third quarter of 2013, partially offset by increased compensation expense related to restricted stock awards. See Note 8: Share-Based Payments in our Notes to Consolidated Financial Statements for more information.


34


Segment Results
Our discussion and analysis that follows covers results of operations for our Redbox, Coinstar and ecoATM segments.
We manage our business by evaluating the financial results of our segments, focusing primarily on segment revenue and segment operating income before depreciation, amortization and other and share-based compensation granted to executives, non-employee directors and employees (“segment operating income”). Segment operating income contains internally allocated costs of our shared services support functions, including but not limited to, corporate executive management, business development, sales, customer service, finance, legal, human resources, information technology, and risk management. We also review depreciation and amortization allocated to each segment.
Management utilizes segment revenue and segment operating income to evaluate the health of our business segments and in consideration of allocating resources among our business segments. Specifically, our CEO evaluates segment revenue and segment operating income, and assesses the performance of each business segment based on these measures, as well as, among other things, the prospects of each of the segments and how they fit into our overall strategy. Our CEO then decides how resources should be allocated among our business segments. For example, if a segment’s revenue increases more than expected, our CEO may consider allocating more financial or other resources to that segment in the future. We periodically evaluate our shared services support function’s allocation methods used for segment reporting purposes, which may result in changes to segment allocations in future periods.
We also review same store sales for our Redbox and Coinstar segments, which we calculate on a location basis. Most of our locations have a single kiosk, but in locations with a high-performing kiosk, we may add additional kiosks to drive incremental revenue and provide a broader product offering. Same store sales reflects the change in revenue from locations that have been operating for more than 13 months by the end of the reporting period compared with the same locations in the same period of the prior year. We use the average selling price of value devices (non-scrap) sold, number of value devices sold and number of overall devices sold rather than same store sales for our ecoATM business because transactions at the kiosk or purchased by our online solution are for product acquisition, not revenue.
Detailed financial information about our business segments and significant customer relationships is provided in  Note 12: Business Segments and Enterprise-Wide Information   in our  Notes to Consolidated Financial Statements.


35


Redbox
 
Three Months Ended
 
 
 
 
Dollars in thousands, except net revenue per rental amounts
March 31,
 
Change
2016
 
2015
 
$
 
%
Revenue
$
421,488

 
$
519,533

 
$
(98,045
)
 
(18.9
)%
Expenses:
 
 
 
 
 
 
 
Direct operating
299,001

 
342,935

 
(43,934
)
 
(12.8
)%
Marketing
3,824

 
4,825

 
(1,001
)
 
(20.7
)%
General and administrative
32,029

 
33,735

 
(1,706
)
 
(5.1
)%
Restructuring and related costs (Note 9)
2,408

 
15,174

 
(12,766
)
 
(84.1
)%
Segment operating income
84,226

 
122,864

 
(38,638
)
 
(31.4
)%
Less: depreciation and amortization
(24,295
)
 
(31,607
)
 
7,312

 
(23.1
)%
Operating income
$
59,931

 
$
91,257

 
$
(31,326
)
 
(34.3
)%
Operating income as a percentage of revenue
14.2
 %
 
17.6
%
 
 
 
 
Same store sales growth (decline)
(17.3
)%
 
1.4
%
 
 
 
 
Effect on change in revenue from same store sales growth (decline)
$
(87,808
)
 
$
7,236

 


 


Ending number of kiosks
40,210

 
41,960

 
(1,750
)
 
(4.2
)%
Total rentals (in thousands)
137,701

 
173,047

 
(35,346
)
 
(20.4
)%
Net revenue per rental
$
3.06

 
$
3.00

 
$
0.06

 
2.0
 %
The comparable performance of our content library is continually affected by the ongoing secular decline in the physical market, seasonality, the actual release slate, the relative attractiveness of movie titles, and the total box office in a particular quarter or year, which may have lingering effects in subsequent periods. As we expect our Redbox business to continue to decline over time as a result of the ongoing secular decline, optimizing our Redbox business will depend substantially upon minimizing the decline in same store sales through the removal or relocation of underperforming kiosks and effective expense management.
Q1 2016 Events
On January 21, 2016, Redbox entered into an amendment to the existing agreement with Universal Home Entertainment LLC, extending the agreement through December 31, 2017.
Comparing three months ended March 31, 2016 to three months ended March 31, 2015
Revenue decreased $98.0 million , or 18.9% , primarily due to the following:
$87.8 million decrease from a 17.3% decrease in same store sales primarily due to:
18.0% decline in total disc rentals related to our same store kiosks primarily driven by:
a higher impact from the accelerated secular decline in the physical market on movie rentals in the first quarter of 2016 as compared to the first quarter of 2015;
a higher negative impact on movie rentals from the price increase implemented for movies in December of 2014. As we observed sequentially higher negative impacts on rentals for price sensitive customers each quarter throughout 2015, we believe the price increase contributed to the decline in rentals in the first quarter of 2016 as consumer behavior under the new price points settled in at lower levels of demand; partially offset by
higher total box office of movie titles released, which was 16.4% higher than the prior year with seven more titles, 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.
$10.2 million decrease in revenue primarily from kiosks removed or relocated subsequent to the first quarter of 2015, due to continued efforts to optimize our network by removing underperforming kiosks.
Net revenue per rental increased $0.06 to $3.06 primarily due to higher video game rentals, which have a higher per day rental price, and lower promotional spend as compared to the first quarter of 2015. While we continue to invest in customer-specific promotional offerings to lessen the negative impact on demand driven by the secular decline in the physical market, we have reduced overall promotional spend by driving further efficiency in promotional programs.


36


Video game revenue represented 4.8% of total revenue and 1.9% of total disc rentals in the first quarter of 2016 as compared with 2.9% and 1.1% , respectively, during the first quarter of 2015, primarily due to consumer transition to new generation platforms as discussed above and underperformance of titles released in the fourth quarter of 2014 that led to comparably lower revenue in the first quarter of 2015. Blu-ray revenue represented 17.2% of total rental revenue and 14.0% of total disc rentals during the first quarter of 2016 as compared with 18.2% and 14.5% , respectively, during the first quarter of 2015.
Operating income decreased $31.3 million , or 34.3% , primarily due to the following:
$98.0 million decrease in revenue as described above; partially offset by
$43.9 million decrease in direct operating expenses, which were 70.9% of revenue during the first quarter of 2016 as compared with 66.0% during the first quarter of 2015 as a result of:
$18.2 million decrease in product costs to $192.2 million due to lower spend on movie content primarily due to content mix and fewer locations as compared to the first quarter of 2015. When combined with the revenue impacts discussed above, the impact from higher amortization in the first quarter of 2016 from the content overbuy in the fourth quarter of 2015 and higher average cost per disc in the first quarter of 2016 as compared to the first quarter of 2015, gross margin decreased 5.1% to 54.4% for the first quarter of 2016; and
$25.7 million decrease in other direct operating expenses primarily due to lower contractual fees paid to our retail partners due to lower revenue and lower credit card fees driven by lower rental volume.
$12.8 million decrease in restructuring and related costs;
$7.3 million decrease in depreciation and amortization expenses primarily due to an increase in our fully depreciated asset base, partially offset by higher depreciation expense as a result of continued investment in our corporate technology infrastructure and additional depreciation for newly installed or replaced kiosks;
$1.7 million decrease in general and administrative expenses primarily as a result of ongoing cost reduction initiatives; and
$1.0 million decrease in marketing expenses due to ongoing cost containment measures.
Coinstar
 
Three Months Ended
 
 
 
 
Dollars in thousands, except average transaction size
March 31,
 
Change
2016
 
2015
 
$
 
%
Revenue
$
72,379

 
$
69,330

 
$
3,049

 
4.4
 %
Expenses:
 
 
 
 
 
 
 
Direct operating
38,645

 
37,263

 
1,382

 
3.7
 %
Marketing
775

 
1,178

 
(403
)
 
(34.2
)%
General and administrative
7,864

 
7,795

 
69

 
0.9
 %
Restructuring and related costs (Note 9)
462

 
550

 
(88
)
 
(16.0
)%
Segment operating income
24,633

 
22,544

 
2,089

 
9.3
 %
Less: Depreciation and amortization
(7,409
)
 
(7,818
)
 
409

 
(5.2
)%
Operating income
$
17,224

 
$
14,726

 
$
2,498

 
17.0
 %
Operating income as a percentage of revenue
23.8
%
 
21.2
%
 
 
 
 
Same store sales growth
9.2
%
 
0.8
%
 
 
 
 
Ending number of kiosks
20,850

 
21,220

 
(370
)
 
(1.7
)%
Total transactions (in thousands)
16,063

 
15,916

 
147

 
0.9
 %
Average transaction size
$
43.95

 
$
42.49

 
$
1.46

 
3.4
 %
Comparing three months ended March 31, 2016 to three months ended March 31, 2015
Revenue increased $3.0 million , or 4.4% , primarily due to higher revenue for Coinstar in the U.S. due to increased volume. Coinstar revenue in the U.K. and Canada was negatively impacted by unfavorable exchange rates due to the continued strengthening of the U.S. dollar versus the British pound and Canadian dollar compared to the prior year. Overall same store sales increased 9.2% as a result of these offsetting factors.
The average Coinstar transaction size increased on a year over year basis and the number of transactions also increased slightly.


37


Operating income increased $2.5 million , or 17.0% , primarily due to the following:
$3.0 million increase in revenue as described above;
$ 0.4 million decrease in marketing expenses due to an expected shift in timing of spend to later in 2016; and
$0.4 million decrease in depreciation and amortization expenses primarily due to an increase in our fully depreciated asset base; partially offset by
$1.4 million increase in direct operating expenses primarily due to increased revenue sharing from the higher revenue discussed above. This increase was partially offset by lower fleet vehicle expenses including fuel cost savings from reduced gas prices and lower wireless charges on a portion of our kiosks due to a new contract transition which started in the first quarter of 2015, with 2016 reflecting contract savings on the entire network.
ecoATM
 
Three Months Ended
 
 
 
 
Dollars in thousands, except average selling price of value devices sold
March 31,
 
Change
2016
 
2015
 
$
 
%
Revenue
$
42,089

 
$
19,749

 
$
22,340

 
113.1
 %
Expenses:
 
 
 
 
 
 
 
Direct operating
37,894

 
22,806

 
15,088

 
66.2
 %
Marketing
4,580

 
1,730

 
2,850

 
164.7
 %
Research and development
935

 
1,456

 
(521
)
 
(35.8
)%
General and administrative
4,002

 
1,968

 
2,034

 
103.4
 %
Restructuring and related costs (Note 9)
405

 
127

 
278

 
218.9
 %
Segment operating loss
(5,727
)
 
(8,338
)
 
2,611

 
(31.3
)%
Less: depreciation and amortization
(8,204
)
 
(5,902
)
 
(2,302
)
 
39.0
 %
Operating loss
$
(13,931
)
 
$
(14,240
)
 
$
309

 
(2.2
)%
Ending number of kiosks
2,540

 
2,140

 
400

 
18.7
 %
Average selling price of value devices sold
$
65.72

 
$
60.28

 
$
5.44

 
9.0
 %
Number of value devices sold
570,822

 
317,134

 
253,688

 
80.0
 %
Number of overall devices sold
729,436

 
518,633

 
210,803

 
40.6
 %
On November 10, 2015, we acquired certain assets and liabilities of Gazelle. Results of operations for Gazelle are included in ecoATM for the three month period ended March 31, 2016.
Comparing three months ended March 31, 2016 to three months ended March 31, 2015
Our key revenue drivers are the total devices collected, the number of those devices that are value devices, the mix of those value devices, as well as the average selling price that we receive when reselling the devices. Revenue includes shipping fees collected related to the sale of devices. Shipping costs related to acquiring devices are included in direct operating costs.
Revenue increased $22.3 million , or 113.1% , primarily due to revenue included in 2016 from devices acquired and sold through Gazelle. The results of Gazelle have also favorably impacted our mix of value devices and our average selling price of value devices sold.
Operating loss decreased $0.3 million primarily due to the following;
$22.3 million increase in revenue described above; and
$0.5 million decrease in research and development expense primarily due to a reduction in ecoATM kiosk design costs and payroll savings through workforce reduction, partially offset by increased software engineering costs from the addition of Gazelle; partially offset by
$15.1 million increase in direct operating expenses primarily due to increased acquisition, transportation and processing costs from the addition of Gazelle and costs associated with our increased installed ecoATM kiosk base, partially offset by lower transportation costs due to a reduction of trips to ecoATM machines as a result of operating efficiencies;


38


$2.9 million increase in marketing expense primarily due to the addition of Gazelle, partially offset by lower integrated marketing and promotion costs for the ecoATM business as compared to the prior year period and synergies recognized as a result of the Gazelle acquisition;
$2.3 million increase in depreciation and amortization expense primarily from depreciation on our increased installed ecoATM kiosk base, and to a lesser extent, the addition of amortization expense from intangibles recognized from the acquisition of Gazelle; and
$2.0 million increase in general and administrative expenses primarily due to the addition of Gazelle and increased corporate allocations to better align with direct costs related to operating ecoATM, partially offset by ongoing cost reduction initiatives.
Interest Expense, Net
Dollars in thousands
Three Months Ended
 
 
 
 
March 31,
 
Change
2016
 
2015
 
$
 
%
Cash interest expense
$
10,654

 
$
11,395

 
$
(741
)
 
(6.5
)%
Amortization of debt discount and deferred financing fees
638

 
693

 
(55
)
 
(7.9
)%
Total cash and non-cash interest expense
11,292

 
12,088

 
(796
)
 
(6.6
)%
Gain from early extinguishment of debt
(11,028
)
 

 
(11,028
)
 
NM*

Total interest expense
264

 
12,088

 
(11,824
)
 
(97.8
)%
Interest income
(22
)
 
(17
)
 
(5
)
 
29.4
 %
Interest expense, net
$
242

 
$
12,071

 
$
(11,829
)
 
(98.0
)%
*
Not Meaningful
Comparing three months ended March 31, 2016 to three months ended March 31, 2015
Interest expense, net decreased $11.8 million , or 98.0% , primarily due to:
$11.0 million gain from early extinguishment of debt recognized in 2016. See Note 7: Debt and Other Long-Term Liabilities in our Notes to Consolidated Financial Statements for more information; and
$0.8 million lower interest expense due to lower borrowings.
Other Income (Expense), Net
Dollars in thousands
Three Months Ended
 
 
 
 
March 31,
 
Change
2016
 
2015
 
$
 
%
Other, net
$
1,229

 
$
(2,346
)
 
$
3,575

 
(152.4
)%
Comparing three months ended March 31, 2016 to three months ended March 31, 2015
Other income (expense), net increased by $3.6 million , primarily due to the impact of the Canadian dollar exchange rates on our Coinstar operations.
Income Tax Expense
Comparing three months ended March 31, 2016 to three months ended March 31, 2015
Our effective tax rate from continuing operations was 35.4% and 38.0% for the three months ended March 31, 2016 and 2015 , respectively. Our effective tax rate for the three months ended March 31, 2016 , was higher than the U.S. Federal statutory rate of 35.0% primarily due to state income taxes, partially offset by the domestic production activities deduction. Our effective tax rate for the three months ended March 31, 2015 , was higher than the U.S. Federal statutory rate of 35.0% primarily due to state income taxes and the recording of valuation allowances related to capital loss carryforwards in Canada, partially offset by the domestic production activities deduction.


39


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.


40


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,
 
Change
Dollars in thousands
2016
 
2015
 
$
 
%
Net income from continuing operations
$
38,451

 
$
42,155

 
$
(3,704
)
 
(8.8
)%
Depreciation, amortization and other
39,908

 
45,995

 
(6,087
)
 
(13.2
)%
Interest expense, net
242

 
12,071

 
(11,829
)
 
(98.0
)%
Income taxes
21,098

 
25,842

 
(4,744
)
 
(18.4
)%
Share-based payments expense (1)
4,392

 
3,941

 
451

 
11.4
 %
Adjusted EBITDA from continuing operations
104,091

 
130,004

 
(25,913
)
 
(19.9
)%
Non-Core Adjustments:
 
 
 
 

 

Restructuring and related costs
3,275

 
15,851

 
(12,576
)
 
(79.3
)%
Rights to receive cash issued in connection with the acquisition of ecoATM
440

 
1,920

 
(1,480
)
 
(77.1
)%
Loss from equity method investments, net
207

 
132

 
75

 
56.8
 %
Core adjusted EBITDA from continuing operations
$
108,013

 
$
147,907

 
$
(39,894
)
 
(27.0
)%
(1)
Includes both non-cash share-based compensation for executives, non-employee directors and employees as well as share-based payments for content arrangements.
Comparing three months ended March 31, 2016 to three months ended March 31, 2015
The decrease in our core adjusted EBITDA from continuing operations was primarily due to decreased segment operating income in our Redbox segment. The other significant components of core adjusted EBITDA from continuing operations have been discussed previously in the Results of Operations section above.



41


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,
 
Change
 
2016
 
2015
 
$
 
%
Diluted EPS from continuing operations per common share
$
2.29

 
$
2.23

 
$
0.06

 
2.7
 %
Non-Core Adjustments, net of tax: (1)
 
 
 
 
 
 
 
Restructuring and related costs
0.12

 
0.51

 
(0.39
)
 
(76.5
)%
Rights to receive cash issued in connection with the acquisition of ecoATM
0.02

 
0.07

 
(0.05
)
 
(71.4
)%
Loss from equity method investments, net
0.01

 

 
0.01

 
NM*

Core diluted EPS from continuing operations
$
2.44

 
$
2.81

 
$
(0.37
)
 
(13.2
)%
 *
Not Meaningful
(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,
 
Change
Dollars in thousands
2016
 
2015
 
$
 
%
Net cash provided by operating activities
$
67,205

 
$
106,072

 
$
(38,867
)
 
(36.6
)%
Purchase of property and equipment
(13,453
)
 
(20,709
)
 
7,256

 
(35.0
)%
Free cash flow
$
53,752

 
$
85,363

 
$
(31,611
)
 
(37.0
)%
An analysis of our net cash from operating activities and used in investing and financing activities is provided below.


42


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
 
Change
Dollars in thousands
 
 
$
 
%
Senior unsecured notes (1)
$
551,847

 
$
608,908

 
$
(57,061
)
 
(9.4
)%
Term loans (1)
134,063

 
136,875

 
(2,812
)
 
(2.1
)%
Revolving line of credit
120,000

 
140,500

 
(20,500
)
 
(14.6
)%
Capital leases
6,011

 
5,889

 
122

 
2.1
 %
Total principal value of outstanding debt including capital leases
811,921

 
892,172

 
(80,251
)
 
(9.0
)%
Less domestic cash and cash equivalents held in financial institutions
(44,855
)
 
(46,192
)
 
1,337

 
(2.9
)%
Net debt
767,066

 
845,980

 
(78,914
)
 
(9.3
)%
LTM Core adjusted EBITDA from continuing operations (2)
$
445,391

 
$
485,285

 
$
(39,894
)
 
(8.2
)%
Net leverage ratio
1.72

 
1.74

 


 


(1)
See debt section of Liquidity and Capital Resources below and Note 7: Debt and Other Long-Term Liabilities in our Notes to Consolidated Financial Statements for detail of associated debt discount.
(2)     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, 2015.
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.


43


Liquidity and Capital Resources
We believe our existing cash, cash equivalents and amounts available to us under our Credit Facility will be sufficient to fund our cash requirements and capital expenditure needs for at least the next 12 months. After that time, the extent of additional financing needed, if any, will depend on the success of our business. If we significantly increase kiosk installations beyond planned levels or if our Redbox, Coinstar or ecoATM kiosks generate lower than anticipated revenue or operating results, then our cash needs may increase. Furthermore, our future capital requirements will depend on a number of factors, including consumer use of our products and services, the timing and number of machine installations, the number of available installable kiosks, the type and scope of product and service enhancements, the cost of developing potential new product and service offerings, and enhancements, and cash required to fund potential future acquisitions, investment or capital returns to security holders such as through share or debt repurchases.
The following is an analysis of our year-to-date cash flows:
Net Cash from Operating Activities
Our net cash from operating activities decreased by $38.9 million primarily due to the following:
$27.5 million change in net non-cash income and expense included in net income primarily due to changes in depreciation and other, gain from early extinguishment of debt and deferred income taxes; and
$14.2 million increase in net cash outflows from changes in working capital primarily due to changes in accounts payable, content library, prepaid expenses and other current assets, accrued payable to retailers, accounts receivable, and other accrued liabilities; partially offset by
$2.9 million increase in net income.
Net Cash used in Investing Activities
We used $13.4 million of net cash in our investing activities primarily due to purchases of property and equipment for kiosks and corporate infrastructure.
Net Cash used in Financing Activities
We used $76.7 million of net cash from financing activities primarily due to:
$45.3 million used to repurchase a portion of our 2021 and 2019 Notes;
$23.3 million in net payments for borrowings from our Credit Facility; and
$5.0 million for dividends paid.
Cash and Cash Equivalents
A portion of our business involves collecting and processing large volumes of cash, most of it in the form of coins. As of March 31, 2016 , our cash and cash equivalent balance was $198.9 million , of which $62.7 million was identified for settling our accrued payable to our retailer partners in relation to our Coinstar kiosks. The remaining balance of our cash and cash equivalents was available for use to support our liquidity needs.
Debt
Debt comprises the following:
 
Senior Notes
 
Credit Facility
 
Total Debt
Dollars in thousands
 Senior Unsecured Notes due 2019
 
 Senior Unsecured Notes due 2021
 
Term Loans
 
Revolving Line of Credit
 
As of March 31, 2016
 
 
 
 
 
 
 
 
 
Principal
$
320,614

 
$
231,233

 
$
134,063

 
$
120,000

 
$
805,910

Unamortized discount and deferred financing fees
(3,187
)
 
(3,435
)
 
(242
)
 
(2,134
)
 
(8,998
)
Total
317,427

 
227,798

 
133,821

 
117,866

 
796,912

Less: current portion

 

 
(14,062
)
 

 
(14,062
)
Total long-term portion
$
317,427

 
$
227,798

 
$
119,759

 
$
117,866

 
$
782,850



44


2019 Notes
On March 12, 2013 , we entered into an indenture pursuant to which we issued $350.0 million principal amount of 6.000% Senior Notes due 2019 (the "2019 Notes") at par for proceeds, net of expenses, of $343.8 million . Each of our direct and indirect U.S. subsidiaries guarantees the 2019 Notes.
During the first quarter of 2016, we repurchased 29,386 notes, or $29.4 million in face value of notes, for $23.4 million in cash. The gain from early extinguishment of these notes was approximately $5.6 million and is included in interest expense, net on our Consolidated Statements of Comprehensive Income.
As of March 31, 2016 , we were in compliance with the covenants of the related indenture.
2021 Notes
On June 9, 2014, we entered into an indenture pursuant to which we issued $300.0 million principal amount of 5.875% Senior Notes due 2021 (the “Senior Notes due 2021”) at par for proceeds, net of expenses, of $294.0 million . Each of our direct and indirect U.S. subsidiaries guarantees the 2021 Notes.
During the first quarter of 2016, we repurchased 27,675 notes, or $27.7 million in face value of notes, for $21.9 million in cash. The gain from early extinguishment of these notes was approximately $5.4 million and is included in interest expense, net on our Consolidated Statements of Comprehensive Income.
As of March 31, 2016 , we were in compliance with the covenants of the related indenture.
Revolving Line of Credit and Term Loan
Our senior secured credit facility (the “Credit Facility”) consists of (a) a $150.0 million amortizing term loan (the “Term Loan”) and (b) a $600.0 million revolving line of credit (the “Revolving Line”), which includes (i) a $75.0 million sublimit for the issuance of letters of credit, (ii) a $50.0 million sublimit for swingline loans and (iii) a $75.0 million sublimit for loans in certain foreign currencies available to us and certain wholly owned Company foreign subsidiaries (the “Foreign Borrowers”). We may, subject to applicable conditions and subject to obtaining commitments from lenders, request an increase in the Revolving Line of up to $200.0 million in aggregate (the “Accordion”). As of March 31, 2016 , the interest rate on amounts outstanding under the Credit Facility was 2.18% and we were in compliance with the covenants of the Credit Facility.
Required principal amortization payments under the Term Loan are as follows:
Dollars in thousands
Repayment Amount
Remainder of 2016
$
10,313

2017
15,000

2018
18,750

2019
90,000

Total
$
134,063

 
Credit Ratings
On February 9, 2016, Standards and Poor's revised their credit outlook for our debt from stable to negative and downgraded the ratings assigned to our debt as follows:
Corporate Credit Rating, to BB- from BB+; and
Issue-level Ratings on Unsecured Notes, to B from BB-.
On February 19, 2016, Moody's Investor Services revised their credit outlook for our debt from stable to negative and downgraded the ratings assigned to our debt as follows:
Corporate Family Rating, to Ba3 from Ba2; and
Senior Unsecured Regular Bond/Debenture, to B1 (LGD5) from Ba3 (LGD5).



45


Our credit rating may change periodically due to current events related to our business, industry or other exogenous factors that have an impact on our rating agencies’ expectations of, or confidence in, the future performance of our business relative to their determination of our ability to satisfy the balance of our debt obligations and may be more susceptible to changing during periods of greater uncertainty. Notwithstanding recent actions by the rating agencies, we believe that our existing cash and cash equivalents and amounts available to us under the Credit Facility, provide sufficient funds to meet the cash and capital requirements of our business. We believe the impact of the downgrades would result in a higher cost of debt but would not severely limit our ability to access debt markets if we felt it was necessary to do so.
Other Contingencies
Contractual Payment Obligations
Significant changes to our contractual payment obligations as disclosed in our 2015 Form 10-K, as of March 31, 2016 , are as follows:
Dollars in thousands
Total
 
Remaining in 2016
 
2017 &
2018
 
2019 &
2020
 
2021 &
Beyond
Long-term debt and other (1)
$
805,910

 
$
130,313

 
$
33,750

 
$
410,614

 
$
231,233

Contractual interest on long-term debt
$
129,031

 
$
24,616

 
$
65,644

 
$
31,979

 
$
6,792

Total estimated movie content commitments (2)
$
488,689

 
$
314,490

 
$
174,199

 
$

 
$

(1)
See Note 7: Debt and Other Long-Term Liabilities in our Notes to Consolidated Financial Statements .
(2)
See Note 14: Commitments and Contingencies in our Notes to Consolidated Financial Statements .
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements have been prepared in accordance with US GAAP. Preparation of these statements requires management to make judgments and estimates. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the present circumstances. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our 2015 Form 10-K at Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
There have been no material changes to the critical accounting policies previously disclosed in our 2015 Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our reported market risks and risk management policies since the filing of our 2015 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report and has determined that such disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
We also maintain a system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). No changes in our internal control over financial reporting occurred during the year-to-date period ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


46


PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In October 2009, an Illinois resident, Laurie Piechur, individually and on behalf of all others similarly situated, filed a putative class action complaint against our Redbox subsidiary in the Circuit Court for the Twentieth Judicial Circuit, St. Clair County, Illinois. The plaintiff alleged that, among other things, Redbox charges consumers illegal and excessive late fees in violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, and that Redbox's rental terms violate the Illinois Rental Purchase Agreement Act or the Illinois Automatic Contract Renewal Act and the plaintiff is seeking monetary damages and other relief. In November 2009, Redbox removed the case to the U.S. District Court for the Southern District of Illinois. In February 2010, the District Court remanded the case to the Circuit Court for the Twentieth Judicial Circuit, St. Clair County, Illinois. In May 2010, the court denied Redbox's motion to dismiss the plaintiff's complaint. In November 2011, the plaintiff moved for class certification, and Redbox moved for summary judgment. The court denied Redbox's motion for summary judgment in February 2012. The plaintiff filed an amended complaint on April 19, 2012, and an amended motion for class certification on June 5, 2012. The court denied Redbox's motion to dismiss the amended complaint. The amended class certification motion was briefed and argued. At the hearing on plaintiff's amended motion for class certification, the plaintiff dismissed all claims but two and is pursuing only her claims under the Illinois Rental Purchase Agreement Act and the Illinois Automatic Contract Renewal Act. On May 21, 2013, the court denied plaintiff's amended class action motion. On January 29, 2014, the Illinois Supreme Court denied plaintiff’s petition for leave to appeal the trial court’s denial of class certification. Redbox moved to dismiss all remaining claims on mootness grounds, and the Court granted Redbox’s motion on December 11, 2014. The plaintiffs appealed on January 7, 2015. Oral argument was held November 10, 2015. The Appellate Court affirmed the trial court’s rulings on January 11, 2016. Plaintiffs filed a petition for review with the Illinois Supreme Court on February 16, 2016, and Redbox filed an answer on March 8, 2016. We continue to believe that the claims against us are without merit and intend to defend ourselves vigorously in this matter should plaintiff seek further appellate review. Currently, no accrual has been established as it was not possible to estimate the possible loss or range of loss because this matter had not advanced to a stage where we could make any such estimate.
ITEM 1A. RISK FACTORS
There have been no material changes from risk factors previously disclosed in our 2015 Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY, SECURITIES, AND USE OF PROCEEDS
The following table summarizes information regarding shares repurchased during the quarter ended March 31, 2016 :
 
Total Number of
Shares
Repurchased (1)
 
Average Price
Paid per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Repurchase Plans or
Programs
 
Maximum Approximate
Dollar Value (in thousands) of Shares that May Yet be
Purchased Under the Plans or Programs
1/1/16 - 1/31/16
804

 
$
35.41

 

 
$
256,407

2/1/16 - 2/29/16
46,154

 
$
29.98

 

 
$
256,407

3/1/16 - 3/31/16
351

 
$
34.67

 

 
$
256,407

 
47,309

 
 
 

 
 
(1)
Represents shares tendered for tax withholding on vesting of restricted stock awards, none of which are included against the dollar value of shares that may be purchased under programs approved by our Board of Directors.
On January 4, 2016, we issued 50,000 shares of unregistered restricted common stock to Paramount Home Entertainment Inc. (Paramount") as partial consideration for the extension of our existing revenue sharing license agreement with Paramount. The issuance of the common stock was exempt from registration pursuant to the Securities Act of 1933, as amended (the “Securities Act”) by virtue of Section 4(a)(2) and/or Regulation D promulgated thereunder as a transaction not involving a public offering. We believe that the issuance is exempt from the registration requirements of the Securities Act on the basis that: (1) Paramount represented it was an accredited investor as defined under the Securities Act; (2) there was no general solicitation; and (3) Paramount represented that it was purchasing such shares for its own account and not with a view towards distribution. The shares of common stock carry a legend stating that the shares are not registered under the Securities Act and therefore cannot be resold unless they are registered under the Securities Act or unless an exemption to registration is available.


47


ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The following exhibits are filed herewith and this list is intended to constitute the exhibit index.
Exhibit Number
  
Description of Document
 
 
 
4.1
 
First Amendment to Third Amended and Restated Credit Agreement.
 
 
 
31.1
  
Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2
  
Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1
  
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.2
  
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.INS
  
XBRL Instance Document.
 
 
 
101.SCH
  
XBRL Taxonomy Extension Schema.
 
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase.
 
 
 
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase.
 
 
 
101.LAB
  
XBRL Taxonomy Extension Label Linkbase.
 
 
 
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase.




48


SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
OUTERWALL INC.
 
 
 
 
By:
 
/s/ Galen C. Smith
 
 
 
Galen C. Smith
 
 
 
Chief Financial Officer
 
 
 
April 28, 2016




49
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