ITEM 1. FINANCIAL STATEMENTS
OUTERWALL INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
December 31,
2015
|
Assets
|
|
|
|
Current Assets:
|
|
|
|
Cash and cash equivalents
|
$
|
199,048
|
|
|
$
|
222,549
|
|
Accounts receivable, net of allowances of $806 and $1,272
|
25,386
|
|
|
38,464
|
|
Content library
|
147,815
|
|
|
188,490
|
|
Prepaid expenses and other current assets
|
47,122
|
|
|
51,368
|
|
Total current assets
|
419,371
|
|
|
500,871
|
|
Property and equipment, net
|
270,414
|
|
|
316,013
|
|
Deferred income taxes
|
2,456
|
|
|
2,606
|
|
Goodwill and other intangible assets, net
|
532,934
|
|
|
540,514
|
|
Other long-term assets
|
1,489
|
|
|
2,207
|
|
Total assets
|
$
|
1,226,664
|
|
|
$
|
1,362,211
|
|
Liabilities and Stockholders’ Equity (Deficit)
|
|
|
|
Current Liabilities:
|
|
|
|
Accounts payable
|
$
|
126,654
|
|
|
$
|
184,010
|
|
Accrued payable to retailers
|
100,332
|
|
|
115,098
|
|
Other accrued liabilities
|
155,347
|
|
|
141,437
|
|
Current portion of long-term debt and other long-term liabilities
|
18,418
|
|
|
17,131
|
|
Total current liabilities
|
400,751
|
|
|
457,676
|
|
Long-term debt and other long-term liabilities (Note 7)
|
766,570
|
|
|
893,517
|
|
Deferred income taxes
|
13,442
|
|
|
33,092
|
|
Total liabilities
|
1,180,763
|
|
|
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;
|
|
|
|
37,272,647 and 36,720,579 shares issued;
|
|
|
|
17,209,584 and 16,607,516 shares outstanding;
|
489,879
|
|
|
485,163
|
|
Treasury stock
|
(1,149,261
|
)
|
|
(1,151,063
|
)
|
Retained earnings
|
707,138
|
|
|
643,452
|
|
Accumulated other comprehensive income (loss)
|
(1,855
|
)
|
|
374
|
|
Total stockholders’ equity (deficit)
|
45,901
|
|
|
(22,074
|
)
|
Total liabilities and stockholders’ equity (deficit)
|
$
|
1,226,664
|
|
|
$
|
1,362,211
|
|
See accompanying
Notes to Consolidated Financial Statements
3
OUTERWALL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Revenue
|
$
|
518,027
|
|
|
$
|
545,369
|
|
|
$
|
1,053,983
|
|
|
$
|
1,154,005
|
|
Expenses:
|
|
|
|
|
|
|
|
Direct operating
(1)
|
351,581
|
|
|
369,619
|
|
|
727,548
|
|
|
774,803
|
|
Marketing
|
7,422
|
|
|
8,047
|
|
|
16,644
|
|
|
16,467
|
|
Research and development
|
1,317
|
|
|
2,039
|
|
|
2,362
|
|
|
4,123
|
|
General and administrative
|
47,681
|
|
|
48,783
|
|
|
95,451
|
|
|
97,339
|
|
Restructuring and related costs
(Note 9)
|
401
|
|
|
—
|
|
|
3,676
|
|
|
15,851
|
|
Depreciation and other
|
33,988
|
|
|
45,174
|
|
|
70,106
|
|
|
87,860
|
|
Amortization of intangible assets
|
3,790
|
|
|
3,309
|
|
|
7,580
|
|
|
6,618
|
|
Goodwill impairment
|
—
|
|
|
85,890
|
|
|
—
|
|
|
85,890
|
|
Total expenses
|
446,180
|
|
|
562,861
|
|
|
923,367
|
|
|
1,088,951
|
|
Operating income (loss)
|
71,847
|
|
|
(17,492
|
)
|
|
130,616
|
|
|
65,054
|
|
Other income (expense), net:
|
|
|
|
|
|
|
|
Loss from equity method investments, net
|
(208
|
)
|
|
(133
|
)
|
|
(415
|
)
|
|
(265
|
)
|
Interest expense, net
|
(10,301
|
)
|
|
(12,183
|
)
|
|
(10,543
|
)
|
|
(24,254
|
)
|
Other, net
|
223
|
|
|
642
|
|
|
1,452
|
|
|
(1,704
|
)
|
Total other income (expense), net
|
(10,286
|
)
|
|
(11,674
|
)
|
|
(9,506
|
)
|
|
(26,223
|
)
|
Income (loss) from continuing operations before income taxes
|
61,561
|
|
|
(29,166
|
)
|
|
121,110
|
|
|
38,831
|
|
Income tax expense
|
(21,013
|
)
|
|
(18,185
|
)
|
|
(42,111
|
)
|
|
(44,027
|
)
|
Income (loss) from continuing operations
|
40,548
|
|
|
(47,351
|
)
|
|
78,999
|
|
|
(5,196
|
)
|
Income (loss) from discontinued operations, net of tax
|
—
|
|
|
1,735
|
|
|
—
|
|
|
(4,821
|
)
|
Net income (loss)
|
40,548
|
|
|
(45,616
|
)
|
|
78,999
|
|
|
(10,017
|
)
|
Foreign currency translation adjustment
(2)
|
(1,680
|
)
|
|
473
|
|
|
(2,229
|
)
|
|
3,327
|
|
Comprehensive income (loss)
|
$
|
38,868
|
|
|
$
|
(45,143
|
)
|
|
$
|
76,770
|
|
|
$
|
(6,690
|
)
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations attributable to common shares (Note 11):
|
|
|
|
|
|
|
|
Basic
|
$
|
38,615
|
|
|
$
|
(47,472
|
)
|
|
$
|
75,665
|
|
|
$
|
(5,465
|
)
|
Diluted
|
$
|
38,626
|
|
|
$
|
(47,472
|
)
|
|
$
|
75,681
|
|
|
$
|
(5,465
|
)
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share (Note 11):
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
2.39
|
|
|
$
|
(2.66
|
)
|
|
$
|
4.69
|
|
|
$
|
(0.30
|
)
|
Discontinued operations
|
—
|
|
|
0.10
|
|
|
—
|
|
|
(0.27
|
)
|
Basic earnings (loss) per common share
|
$
|
2.39
|
|
|
$
|
(2.56
|
)
|
|
$
|
4.69
|
|
|
$
|
(0.57
|
)
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share (Note 11):
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
2.38
|
|
|
$
|
(2.66
|
)
|
|
$
|
4.67
|
|
|
$
|
(0.30
|
)
|
Discontinued operations
|
—
|
|
|
0.10
|
|
|
—
|
|
|
(0.27
|
)
|
Diluted earnings (loss) per common share
|
$
|
2.38
|
|
|
$
|
(2.56
|
)
|
|
$
|
4.67
|
|
|
$
|
(0.57
|
)
|
|
|
|
|
|
|
|
|
Weighted average common shares used in basic and diluted per share calculations (Note 11):
|
|
|
|
|
|
|
|
Basic
|
16,149
|
|
|
17,848
|
|
|
16,122
|
|
|
18,057
|
|
Diluted
|
16,244
|
|
|
17,848
|
|
|
16,216
|
|
|
18,057
|
|
|
|
|
|
|
|
|
|
Dividends paid per common share
|
$
|
0.60
|
|
|
$
|
0.30
|
|
|
$
|
0.90
|
|
|
$
|
0.60
|
|
|
|
(1)
|
“Direct operating” excludes depreciation and other of
$24.9 million
and
$51.1 million
for the
three and six months ended
June 30, 2016
,
respectively, and
$29.6 million
and
$58.0 million
for the three and six months ended
June 30, 2015
,
respectively.
|
|
|
(2)
|
Foreign currency translation adjustment had
no
tax effect for the three and six months ended
June 30, 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, March 31, 2016
|
17,228,741
|
|
|
$
|
485,171
|
|
|
$
|
(1,149,261
|
)
|
|
$
|
666,465
|
|
|
$
|
(175
|
)
|
|
$
|
2,200
|
|
Adjustments related to tax withholding for share-based compensation
|
(1,174
|
)
|
|
(47
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(47
|
)
|
Share-based payments expense
|
(17,983
|
)
|
|
4,360
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,360
|
|
Tax benefit on share-based compensation expense
|
—
|
|
|
395
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
395
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
40,548
|
|
|
—
|
|
|
40,548
|
|
Dividends
|
—
|
|
|
—
|
|
|
—
|
|
|
125
|
|
|
—
|
|
|
125
|
|
Foreign currency translation adjustment
(1)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,680
|
)
|
|
(1,680
|
)
|
Balance, June 30, 2016
|
17,209,584
|
|
|
$
|
489,879
|
|
|
$
|
(1,149,261
|
)
|
|
$
|
707,138
|
|
|
$
|
(1,855
|
)
|
|
$
|
45,901
|
|
|
|
(1)
|
Foreign currency translation adjustment had
no
tax effect for the
three months ended
June 30, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
(48,483
|
)
|
|
(1,472
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,472
|
)
|
Share-based payments expense
|
650,551
|
|
|
7,876
|
|
|
1,802
|
|
|
—
|
|
|
—
|
|
|
9,678
|
|
Tax deficiency on share-based compensation expense
|
—
|
|
|
(1,688
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,688
|
)
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
78,999
|
|
|
—
|
|
|
78,999
|
|
Dividends
|
—
|
|
|
—
|
|
|
—
|
|
|
(15,313
|
)
|
|
—
|
|
|
(15,313
|
)
|
Foreign currency translation adjustment
(1)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,229
|
)
|
|
(2,229
|
)
|
Balance, June 30, 2016
|
17,209,584
|
|
|
$
|
489,879
|
|
|
$
|
(1,149,261
|
)
|
|
$
|
707,138
|
|
|
$
|
(1,855
|
)
|
|
$
|
45,901
|
|
|
|
(1)
|
Foreign currency translation adjustment had
no
tax effect for the
six months ended
June 30, 2016
.
|
See accompanying
Notes to Consolidated Financial Statements
5
OUTERWALL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Operating Activities:
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
40,548
|
|
|
$
|
(45,616
|
)
|
|
$
|
78,999
|
|
|
$
|
(10,017
|
)
|
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
|
|
|
|
|
|
|
|
Depreciation and other
|
33,988
|
|
|
45,174
|
|
|
70,106
|
|
|
93,718
|
|
Amortization of intangible assets
|
3,790
|
|
|
3,309
|
|
|
7,580
|
|
|
6,662
|
|
Share-based payments expense
|
5,174
|
|
|
3,289
|
|
|
9,504
|
|
|
7,192
|
|
Windfall excess tax benefits related to share-based payments
|
—
|
|
|
(160
|
)
|
|
—
|
|
|
(686
|
)
|
Deferred income taxes
|
(10,736
|
)
|
|
(1,392
|
)
|
|
(18,558
|
)
|
|
(3,939
|
)
|
Restructuring, impairment and related costs
(2)
|
—
|
|
|
—
|
|
|
361
|
|
|
1,680
|
|
Loss from equity method investments, net
|
208
|
|
|
133
|
|
|
415
|
|
|
265
|
|
Amortization of deferred financing fees and debt discount
|
613
|
|
|
692
|
|
|
1,251
|
|
|
1,385
|
|
Gain from early extinguishment of debt
|
(418
|
)
|
|
—
|
|
|
(11,446
|
)
|
|
—
|
|
Goodwill impairment
|
—
|
|
|
85,890
|
|
|
—
|
|
|
85,890
|
|
Other
|
(244
|
)
|
|
383
|
|
|
(280
|
)
|
|
(816
|
)
|
Cash flows from changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts receivable, net
|
6,322
|
|
|
3,254
|
|
|
13,185
|
|
|
15,077
|
|
Content library
|
7,723
|
|
|
24,703
|
|
|
40,849
|
|
|
34,659
|
|
Prepaid expenses and other current assets
|
(759
|
)
|
|
(18,976
|
)
|
|
5,263
|
|
|
(22,082
|
)
|
Other assets
|
170
|
|
|
154
|
|
|
333
|
|
|
322
|
|
Accounts payable
|
(17,055
|
)
|
|
(20,617
|
)
|
|
(52,460
|
)
|
|
(17,697
|
)
|
Accrued payable to retailers
|
10,248
|
|
|
6,931
|
|
|
(14,398
|
)
|
|
(11,510
|
)
|
Other accrued liabilities
|
(4,552
|
)
|
|
(12,008
|
)
|
|
11,521
|
|
|
1,112
|
|
Net cash flows from operating activities
(1)
|
75,020
|
|
|
75,143
|
|
|
142,225
|
|
|
181,215
|
|
Investing Activities:
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
(14,921
|
)
|
|
(19,508
|
)
|
|
(28,374
|
)
|
|
(40,217
|
)
|
Proceeds from sale of property and equipment
|
18
|
|
|
2,817
|
|
|
92
|
|
|
2,940
|
|
Net cash flows used in investing activities
(1)
|
(14,903
|
)
|
|
(16,691
|
)
|
|
(28,282
|
)
|
|
(37,277
|
)
|
Financing Activities:
|
|
|
|
|
|
|
|
Proceeds from new borrowing on Credit Facility
|
91,000
|
|
|
77,000
|
|
|
176,000
|
|
|
112,000
|
|
Principal payments on Credit Facility
|
(135,687
|
)
|
|
(68,875
|
)
|
|
(244,000
|
)
|
|
(185,750
|
)
|
Repurchases of notes (Note 7)
|
(2,179
|
)
|
|
—
|
|
|
(47,507
|
)
|
|
—
|
|
Repurchases of common stock
|
—
|
|
|
(22,023
|
)
|
|
—
|
|
|
(62,731
|
)
|
Dividends paid
|
(10,084
|
)
|
|
(5,417
|
)
|
|
(15,122
|
)
|
|
(11,019
|
)
|
Principal payments on capital lease obligations and other debt
|
(1,451
|
)
|
|
(3,033
|
)
|
|
(3,077
|
)
|
|
(6,278
|
)
|
Windfall excess tax benefits related to share-based payments
|
—
|
|
|
160
|
|
|
—
|
|
|
686
|
|
Withholding tax paid on vesting of restricted stock net of proceeds from exercise of stock options
|
(47
|
)
|
|
1,887
|
|
|
(1,472
|
)
|
|
(1,201
|
)
|
Net cash flows used in financing activities
(1)
|
(58,448
|
)
|
|
(20,301
|
)
|
|
(135,178
|
)
|
|
(154,293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Effect of exchange rate changes on cash
|
(1,471
|
)
|
|
1,623
|
|
|
(2,266
|
)
|
|
5,367
|
|
Change in cash and cash equivalents
|
198
|
|
|
39,774
|
|
|
(23,501
|
)
|
|
(4,988
|
)
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
Beginning of period
|
198,850
|
|
|
197,934
|
|
|
222,549
|
|
|
242,696
|
|
End of period
|
$
|
199,048
|
|
|
$
|
237,708
|
|
|
$
|
199,048
|
|
|
$
|
237,708
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
$
|
8,620
|
|
|
$
|
10,933
|
|
|
$
|
20,670
|
|
|
$
|
22,846
|
|
Cash paid during the period for income taxes, net
|
$
|
38,890
|
|
|
$
|
53,905
|
|
|
$
|
40,951
|
|
|
$
|
66,896
|
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
Purchases of property and equipment financed by capital lease obligations
|
$
|
1,146
|
|
|
$
|
257
|
|
|
$
|
2,902
|
|
|
$
|
977
|
|
Purchases of property and equipment included in ending accounts payable
|
$
|
654
|
|
|
$
|
4,436
|
|
|
$
|
654
|
|
|
$
|
4,436
|
|
|
|
(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 the 2015 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
six months ended
June 30, 2015
of
$1.7 million
is composed of
$6.9 million
in impairments of lease related assets partially offset by a
$5.2 million
benefit resulting from the lease termination.
|
See accompanying
Notes to Consolidated Financial Statements
7
INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
. ASU 2014-09 requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 sets forth a new revenue recognition model that requires identifying the contract, identifying the performance obligations, determining the transaction price, allocating the transaction price to performance obligations and recognizing the revenue upon satisfaction of performance obligations. In July 2015, the FASB deferred the effective date for annual reporting periods beginning after December 15, 2017. In May 2016, the FASB issued ASU 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
. The amendments in this ASU do not change the core revenue recognition principles, but provide guidance on certain narrow areas and add practical expedients. Early adoption is permitted to the original effective date of annual reporting periods beginning after December 15, 2016 for ASU 2014-09 and the related amendments and may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. We are currently in the process of evaluating the impact of ASU 2014-09 and the related amendments.
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
June 30, 2016
, are as follows:
|
|
|
|
|
|
|
|
Kiosks
|
|
Locations
|
Redbox
|
39,970
|
|
|
32,710
|
|
Coinstar
|
20,810
|
|
|
19,560
|
|
ecoATM
|
2,460
|
|
|
2,230
|
|
Total
|
63,240
|
|
|
54,500
|
|
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
$199.0 million
and
$222.5 million
at
June 30, 2016
, and
December 31, 2015
, respectively. Of this total, cash equivalents were
$5.1 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
June 30, 2016
, and
December 31, 2015
, were
$74.7 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
June 30, 2016
, and
December 31, 2015
, were
$41.7 million
and
$46.2 million
, respectively in cash and cash equivalents held in financial institutions domestically and
$7.7 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
|
June 30,
2016
|
|
December 31,
2015
|
Spare parts
|
$
|
11,616
|
|
|
$
|
9,780
|
|
Licenses
|
5,744
|
|
|
6,394
|
|
Electronic devices inventory
|
10,427
|
|
|
7,846
|
|
Income taxes receivable
|
1,953
|
|
|
9,517
|
|
Prepaid rent
|
1,365
|
|
|
1,043
|
|
DVD cases and labels
|
1,648
|
|
|
1,371
|
|
Other
|
14,369
|
|
|
15,417
|
|
Total prepaid and other current assets
|
$
|
47,122
|
|
|
$
|
51,368
|
|
Other accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
Dollars in thousands
|
June 30,
2016
|
|
December 31,
2015
|
Payroll related expenses
|
$
|
34,779
|
|
|
$
|
40,676
|
|
Studio revenue share and other content related expenses
|
36,052
|
|
|
28,964
|
|
Business taxes
|
15,591
|
|
|
16,080
|
|
Insurance
|
13,549
|
|
|
13,594
|
|
Deferred revenue
|
12,498
|
|
|
11,201
|
|
Income taxes payable
|
13,372
|
|
|
16
|
|
Accrued interest expense
|
6,192
|
|
|
6,913
|
|
Accrued early lease termination and sublease expenses
|
3,859
|
|
|
4,991
|
|
Service contract provider expenses
|
5,288
|
|
|
4,070
|
|
Deferred rent expense
|
2,044
|
|
|
1,728
|
|
Other
|
12,123
|
|
|
13,204
|
|
Total other accrued liabilities
|
$
|
155,347
|
|
|
$
|
141,437
|
|
Note 5: Property and Equipment
|
|
|
|
|
|
|
|
|
Dollars in thousands
|
June 30,
2016
|
|
December 31,
2015
|
Kiosks and components
|
$
|
1,162,872
|
|
|
$
|
1,163,210
|
|
Computers, servers, and software
|
195,809
|
|
|
193,507
|
|
Leasehold improvements
|
22,497
|
|
|
22,663
|
|
Office furniture and equipment
|
7,248
|
|
|
7,047
|
|
Vehicles
|
4,585
|
|
|
5,118
|
|
Property and equipment, at cost
|
1,393,011
|
|
|
1,391,545
|
|
Accumulated depreciation and amortization
|
(1,122,597
|
)
|
|
(1,075,532
|
)
|
Property and equipment, net
|
$
|
270,414
|
|
|
$
|
316,013
|
|
Note 6: Goodwill and Other Intangible Assets
Goodwill
The carrying amount of goodwill was as follow:
|
|
|
|
|
|
|
|
|
Dollars in thousands
|
June 30,
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 June 30, 2016, 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. As a result of the exploration of strategic and financial alternatives, on July 24, 2016, the company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with affiliates of certain funds (the “Apollo Funds”) managed by affiliates of Apollo Global Management, LLC (together with its consolidated subsidiaries, “Apollo”), a leading global alternative investment manager, pursuant to which the Apollo Funds will acquire all of the outstanding shares of Outerwall common stock for
$52.00 per share
in cash. The transaction will be completed through an all-cash tender offer. See
Note 17: Subsequent Events
for additional information. Through this process we did not obtain any additional information regarding the fair value of our reporting units that would indicate the fair value of any of our reporting units were individually below their carrying amounts.
Other Intangible Assets
The gross amount of our other intangible assets and the related accumulated amortization were as follows:
|
|
|
|
|
|
|
|
|
|
|
Dollars in thousands
|
Amortization
Period
|
|
June 30,
2016
|
|
December 31,
2015
|
Retailer relationships
|
5 - 10 years
|
|
$
|
53,295
|
|
|
$
|
53,295
|
|
Accumulated amortization
|
|
|
(29,217
|
)
|
|
(27,212
|
)
|
Retailer relationships, net
|
|
|
24,078
|
|
|
26,083
|
|
Developed technology
|
3 - 5 years
|
|
36,000
|
|
|
36,000
|
|
Accumulated amortization
|
|
|
(20,277
|
)
|
|
(16,544
|
)
|
Developed technology, net
|
|
|
15,723
|
|
|
19,456
|
|
Trade names
|
5 - 10 years
|
|
20,000
|
|
|
20,000
|
|
Accumulated amortization
|
|
|
(4,433
|
)
|
|
(3,133
|
)
|
Trade names, net
|
|
|
15,567
|
|
|
16,867
|
|
Other
|
1 - 40 years
|
|
10,800
|
|
|
10,800
|
|
Accumulated amortization
|
|
|
(6,651
|
)
|
|
(6,109
|
)
|
Other, net
|
|
|
4,149
|
|
|
4,691
|
|
Total intangible assets, net
|
|
|
$
|
59,517
|
|
|
$
|
67,097
|
|
Amortization expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
Dollars in thousands
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Retailer relationships
|
$
|
1,002
|
|
|
$
|
1,003
|
|
|
$
|
2,005
|
|
|
$
|
2,006
|
|
Developed technology
|
1,867
|
|
|
1,700
|
|
|
3,733
|
|
|
3,400
|
|
Trade names
|
650
|
|
|
300
|
|
|
1,300
|
|
|
600
|
|
Other
|
271
|
|
|
306
|
|
|
542
|
|
|
656
|
|
Total amortization of intangible assets
|
3,790
|
|
|
3,309
|
|
|
7,580
|
|
|
6,662
|
|
Less: amortization included in discontinued operations
|
—
|
|
|
—
|
|
|
—
|
|
|
(44
|
)
|
Total amortization of intangible assets from continuing operations
|
$
|
3,790
|
|
|
$
|
3,309
|
|
|
$
|
7,580
|
|
|
$
|
6,618
|
|
Assuming no future impairment, the expected future amortization as of
June 30, 2016
, is as follows:
|
|
|
|
|
Dollars in thousands
|
Total
|
Remainder of 2016
|
$
|
7,580
|
|
2017
|
15,160
|
|
2018
|
11,598
|
|
2019
|
6,213
|
|
2020
|
5,819
|
|
Thereafter
|
13,147
|
|
Total expected amortization
|
$
|
59,517
|
|
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 June 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
$
|
320,614
|
|
|
$
|
228,598
|
|
|
$
|
129,375
|
|
|
$
|
80,000
|
|
|
$
|
758,587
|
|
|
|
|
|
|
|
|
|
Unamortized discount and deferred financing fees
(1)
|
(2,922
|
)
|
|
(3,234
|
)
|
|
(224
|
)
|
|
(1,968
|
)
|
|
(8,348
|
)
|
|
|
|
|
|
|
|
|
Total
|
317,692
|
|
|
225,364
|
|
|
129,151
|
|
|
78,032
|
|
|
750,239
|
|
|
$
|
5,531
|
|
|
$
|
9,438
|
|
|
$
|
19,780
|
|
|
$
|
784,988
|
|
Less: current portion
|
—
|
|
|
—
|
|
|
(15,000
|
)
|
|
—
|
|
|
(15,000
|
)
|
|
(3,418
|
)
|
|
—
|
|
|
—
|
|
|
(18,418
|
)
|
Total long-term portion
|
$
|
317,692
|
|
|
$
|
225,364
|
|
|
$
|
114,151
|
|
|
$
|
78,032
|
|
|
$
|
735,239
|
|
|
$
|
2,113
|
|
|
$
|
9,438
|
|
|
$
|
19,780
|
|
|
$
|
766,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Six Months Ended
|
June 30,
|
|
June 30,
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Cash interest expense
|
$
|
10,141
|
|
|
$
|
11,499
|
|
|
$
|
20,795
|
|
|
$
|
22,894
|
|
Amortization of debt discount and deferred financing fees
|
613
|
|
|
692
|
|
|
1,251
|
|
|
1,385
|
|
Total cash and non-cash interest expense
|
10,754
|
|
|
12,191
|
|
|
22,046
|
|
|
24,279
|
|
Gain from early extinguishment of debt
|
(418
|
)
|
|
—
|
|
|
(11,446
|
)
|
|
—
|
|
Total interest expense
|
$
|
10,336
|
|
|
$
|
12,191
|
|
|
$
|
10,600
|
|
|
$
|
24,279
|
|
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 second quarter of 2016,
no
notes were repurchased. During the six months ended
June 30, 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
June 30, 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 “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 second quarter of 2016, we repurchased
2,635
notes, or
$2.6 million
in face value of notes, for
$2.2 million
in cash. The gain from early extinguishment of these notes was approximately
$0.4 million
and is included in interest expense, net on our
Consolidated Statements of Comprehensive Income.
During the six months ended
June 30, 2016
, we repurchased
30,310
notes, or
$30.3 million
in face value of notes, for
$24.1 million
in cash. The gain from early extinguishment of these notes was approximately
$5.8 million
and is included in interest expense, net on our
Consolidated Statements of Comprehensive Income.
As of
June 30, 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 swing line 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
June 30, 2016
, the interest rate on amounts outstanding under the Credit Facility was
2.20%
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
|
$
|
7,500
|
|
2017
|
15,000
|
|
2018
|
20,625
|
|
2019
|
86,250
|
|
Total
|
$
|
129,375
|
|
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
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
Dollars in thousands
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Share-based payments expense:
|
|
|
|
|
|
|
|
Share-based compensation - stock options
|
$
|
33
|
|
|
$
|
40
|
|
|
$
|
80
|
|
|
$
|
181
|
|
Share-based compensation - restricted stock
|
4,452
|
|
|
2,039
|
|
|
7,982
|
|
|
4,598
|
|
Share-based payments for content arrangements
|
813
|
|
|
1,241
|
|
|
1,628
|
|
|
2,482
|
|
Total share-based payments expense
|
$
|
5,298
|
|
|
$
|
3,320
|
|
|
$
|
9,690
|
|
|
$
|
7,261
|
|
Tax benefit on share-based payments expense
|
$
|
2,066
|
|
|
$
|
1,289
|
|
|
$
|
3,774
|
|
|
$
|
2,807
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
Dollars in thousands
|
Unrecognized Share-Based Payments Expense
|
|
Weighted-Average Remaining Life
|
Unrecognized share-based payments expense:
|
|
|
|
Share-based compensation - stock options
|
$
|
83
|
|
|
0.7 years
|
Share-based compensation - restricted stock
|
18,349
|
|
|
2.4 years
|
Share-based payments for content arrangements
|
1,264
|
|
|
0.4 years
|
Total unrecognized share-based payments expense
|
$
|
19,696
|
|
|
|
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.
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
|
746
|
|
|
26.86
|
|
Vested
|
(155
|
)
|
|
64.45
|
|
Forfeited
|
(148
|
)
|
|
50.73
|
|
Non-vested, June 30, 2016
|
999
|
|
|
39.21
|
|
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
$0.8 million
in expense associated with the issuance of rights to receive cash for the
six months ended
June 30, 2016
. The expected future recognition of expense associated with the rights to receive cash as of
June 30, 2016
is as follows:
|
|
|
|
|
Dollars in thousands
|
Expected Expense
|
Remainder of 2016
|
$
|
594
|
|
2017
|
146
|
|
Remaining total expected expense
|
$
|
740
|
|
Note 9: Restructuring
2016 Restructuring
During the first half 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 half 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.
|
The total amount incurred for restructuring and related costs from continuing operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
Dollars in thousands
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Redbox
|
|
|
|
|
|
|
|
Severance
|
$
|
14
|
|
|
$
|
—
|
|
|
$
|
2,125
|
|
|
$
|
3,701
|
|
Lease termination and related costs (excluding related asset impairments)
|
—
|
|
|
—
|
|
|
297
|
|
|
4,567
|
|
Total Redbox restructuring costs
|
14
|
|
|
—
|
|
|
2,422
|
|
|
8,268
|
|
Coinstar
|
|
|
|
|
|
|
|
Severance
|
3
|
|
|
—
|
|
|
408
|
|
|
492
|
|
Lease termination and related costs (excluding related asset impairments)
|
—
|
|
|
—
|
|
|
57
|
|
|
24
|
|
Total Coinstar restructuring costs
|
3
|
|
|
—
|
|
|
465
|
|
|
516
|
|
ecoATM
|
|
|
|
|
|
|
|
Severance
|
384
|
|
|
—
|
|
|
782
|
|
|
127
|
|
Lease termination and related costs (excluding related asset impairments)
|
—
|
|
|
—
|
|
|
7
|
|
|
—
|
|
Total ecoATM restructuring costs
|
384
|
|
|
—
|
|
|
789
|
|
|
127
|
|
Total restructuring costs in continuing operations
|
401
|
|
|
—
|
|
|
3,676
|
|
|
8,911
|
|
Impairment of lease related assets
|
—
|
|
|
—
|
|
|
—
|
|
|
6,940
|
|
Total restructuring and related costs from continuing operations
|
$
|
401
|
|
|
$
|
—
|
|
|
$
|
3,676
|
|
|
$
|
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
|
Beginning Balance - January 1, 2016
|
$
|
1,385
|
|
|
$
|
4,991
|
|
Costs charged to expense
|
3,315
|
|
|
361
|
|
Costs paid or otherwise settled
|
(4,629
|
)
|
|
(1,493
|
)
|
Ending Balance - June 30, 2016
|
$
|
71
|
|
|
$
|
3,859
|
|
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
.
The following table sets forth the components of discontinued operations included in our
Consolidated Statements of Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
Dollars in thousands
|
June 30, 2015
|
|
June 30, 2015
|
Major classes of line items constituting pretax loss of discontinued operations:
|
|
|
|
|
Revenue
|
$
|
—
|
|
|
$
|
1,557
|
|
Direct operating
|
35
|
|
|
4,304
|
|
Marketing
|
(17
|
)
|
|
112
|
|
General and administrative
|
35
|
|
|
154
|
|
Restructuring and related costs
|
—
|
|
|
522
|
|
Depreciation and other
|
—
|
|
|
5,858
|
|
Amortization of intangible assets
|
—
|
|
|
44
|
|
Other expense, net
|
166
|
|
|
(4,329
|
)
|
Pretax gain (loss) of discontinued operations related to major classes of pretax loss
|
113
|
|
|
(13,766
|
)
|
Income tax benefit
(1)
|
1,622
|
|
|
8,945
|
|
Net income (loss) on discontinued operations
|
$
|
1,735
|
|
|
$
|
(4,821
|
)
|
|
|
(1)
|
The income tax benefit for the three months and
six months ended
June 30, 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
|
|
Six Months Ended
|
Dollars in thousands
|
June 30, 2015
|
|
June 30, 2015
|
Net income (loss) on discontinued operations
|
$
|
1,735
|
|
|
$
|
(4,821
|
)
|
Adjustments to reconcile net gain (loss) to net cash flows from operating activities:
|
|
|
|
Depreciation and amortization
|
—
|
|
|
5,902
|
|
Content library
|
148
|
|
|
3,212
|
|
Prepaid and other current assets
|
690
|
|
|
1,234
|
|
Accounts payable
|
(1,095
|
)
|
|
(2,716
|
)
|
Accrued payables to retailers
|
—
|
|
|
(155
|
)
|
Other accrued liabilities
|
(585
|
)
|
|
(617
|
)
|
Net cash flows from operating activities
|
$
|
893
|
|
|
$
|
2,039
|
|
Investing activities:
|
|
|
|
Purchase of property, plant and equipment
|
—
|
|
|
(278
|
)
|
Total cash flows used in investing activities
|
$
|
—
|
|
|
$
|
(278
|
)
|
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.
Basic and diluted weighted average shares were the same for the three and six month periods ended June 30, 2015, as the effects of potentially dilutive securities were antidilutive due to our net loss position. Our calculation of basic and diluted earnings per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
In thousands, except per share data
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Numerator
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
40,548
|
|
|
$
|
(47,351
|
)
|
|
$
|
78,999
|
|
|
$
|
(5,196
|
)
|
Income (loss) from discontinued operations, net of tax
|
—
|
|
|
1,735
|
|
|
—
|
|
|
(4,821
|
)
|
Net income (loss)
|
$
|
40,548
|
|
|
$
|
(45,616
|
)
|
|
$
|
78,999
|
|
|
$
|
(10,017
|
)
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
$
|
40,548
|
|
|
$
|
(47,351
|
)
|
|
$
|
78,999
|
|
|
$
|
(5,196
|
)
|
Dividends and undistributed income allocated to participating shares
|
(1,933
|
)
|
|
(121
|
)
|
|
(3,334
|
)
|
|
(269
|
)
|
Income from continuing operations to common shares - basic
|
38,615
|
|
|
(47,472
|
)
|
|
75,665
|
|
|
(5,465
|
)
|
Effect of reallocating undistributed income from continuing operations to participating shares
|
11
|
|
|
—
|
|
|
16
|
|
|
—
|
|
Income from continuing operations to common shares - diluted
|
$
|
38,626
|
|
|
$
|
(47,472
|
)
|
|
$
|
75,681
|
|
|
$
|
(5,465
|
)
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
Weighted average common shares - basic
|
16,149
|
|
|
17,848
|
|
|
16,122
|
|
|
18,057
|
|
Dilutive effect of share-based payment awards
|
95
|
|
|
—
|
|
|
94
|
|
|
—
|
|
Weighted average common shares - diluted
(1)
|
16,244
|
|
|
17,848
|
|
|
16,216
|
|
|
18,057
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
2.39
|
|
|
$
|
(2.66
|
)
|
|
$
|
4.69
|
|
|
$
|
(0.30
|
)
|
Discontinued operations
|
—
|
|
|
0.10
|
|
|
—
|
|
|
(0.27
|
)
|
Basic earnings (loss) per common share
|
$
|
2.39
|
|
|
$
|
(2.56
|
)
|
|
$
|
4.69
|
|
|
$
|
(0.57
|
)
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
2.38
|
|
|
$
|
(2.66
|
)
|
|
$
|
4.67
|
|
|
$
|
(0.30
|
)
|
Discontinued operations
|
—
|
|
|
0.10
|
|
|
—
|
|
|
(0.27
|
)
|
Diluted earnings (loss) per common share
|
$
|
2.38
|
|
|
$
|
(2.56
|
)
|
|
$
|
4.67
|
|
|
$
|
(0.57
|
)
|
|
|
|
|
|
|
|
|
Stock options and share-based awards not included in diluted EPS calculation because their effect would have be antidilutive
|
248
|
|
|
14
|
|
|
121
|
|
|
16
|
|
|
|
(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.
|
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 and six months ended June 30, 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 June 30, 2016
|
Redbox
|
|
Coinstar
|
|
ecoATM
|
|
All Other
|
|
Corporate Unallocated
|
|
Total
|
Revenue
|
$
|
389,059
|
|
|
$
|
84,168
|
|
|
$
|
44,800
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
518,027
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating
|
271,731
|
|
|
42,095
|
|
|
37,291
|
|
|
83
|
|
|
381
|
|
|
351,581
|
|
Marketing
|
3,919
|
|
|
399
|
|
|
3,058
|
|
|
7
|
|
|
39
|
|
|
7,422
|
|
Research and development
|
—
|
|
|
—
|
|
|
1,194
|
|
|
—
|
|
|
123
|
|
|
1,317
|
|
General and administrative
|
31,325
|
|
|
8,494
|
|
|
3,573
|
|
|
2
|
|
|
4,287
|
|
|
47,681
|
|
Restructuring and related costs (Note 9)
|
14
|
|
|
3
|
|
|
384
|
|
|
—
|
|
|
—
|
|
|
401
|
|
Segment operating income (loss)
|
82,070
|
|
|
33,177
|
|
|
(700
|
)
|
|
(92
|
)
|
|
(4,830
|
)
|
|
109,625
|
|
Less: depreciation, amortization and other
|
(21,806
|
)
|
|
(7,595
|
)
|
|
(8,398
|
)
|
|
21
|
|
|
—
|
|
|
(37,778
|
)
|
Operating income (loss)
|
60,264
|
|
|
25,582
|
|
|
(9,098
|
)
|
|
(71
|
)
|
|
(4,830
|
)
|
|
71,847
|
|
Loss from equity method investments, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(208
|
)
|
|
(208
|
)
|
Interest expense, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,301
|
)
|
|
(10,301
|
)
|
Other, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
223
|
|
|
223
|
|
Income (loss) from continuing operations before income taxes
|
$
|
60,264
|
|
|
$
|
25,582
|
|
|
$
|
(9,098
|
)
|
|
$
|
(71
|
)
|
|
$
|
(15,116
|
)
|
|
$
|
61,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in thousands
|
|
Three Months Ended June 30, 2015
|
Redbox
|
|
Coinstar
|
|
ecoATM
|
|
All Other
|
|
Corporate Unallocated
|
|
Total
|
Revenue
|
$
|
438,976
|
|
|
$
|
80,279
|
|
|
$
|
26,062
|
|
|
$
|
52
|
|
|
$
|
—
|
|
|
$
|
545,369
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating
|
301,444
|
|
|
39,358
|
|
|
27,227
|
|
|
1,078
|
|
|
512
|
|
|
369,619
|
|
Marketing
|
4,266
|
|
|
1,232
|
|
|
2,149
|
|
|
258
|
|
|
142
|
|
|
8,047
|
|
Research and development
|
—
|
|
|
—
|
|
|
1,549
|
|
|
1
|
|
|
489
|
|
|
2,039
|
|
General and administrative
|
34,336
|
|
|
7,768
|
|
|
2,094
|
|
|
2,644
|
|
|
1,941
|
|
|
48,783
|
|
Goodwill impairment
|
—
|
|
|
—
|
|
|
85,890
|
|
|
—
|
|
|
—
|
|
|
85,890
|
|
Segment operating income (loss)
|
98,930
|
|
|
31,921
|
|
|
(92,847
|
)
|
|
(3,929
|
)
|
|
(3,084
|
)
|
|
30,991
|
|
Less: depreciation, amortization and other
|
(33,063
|
)
|
|
(8,437
|
)
|
|
(6,305
|
)
|
|
(678
|
)
|
|
—
|
|
|
(48,483
|
)
|
Operating income (loss)
|
65,867
|
|
|
23,484
|
|
|
(99,152
|
)
|
|
(4,607
|
)
|
|
(3,084
|
)
|
|
(17,492
|
)
|
Loss from equity method investments, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(133
|
)
|
|
(133
|
)
|
Interest expense, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12,183
|
)
|
|
(12,183
|
)
|
Other, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
642
|
|
|
642
|
|
Income (loss) from continuing operations before income taxes
|
$
|
65,867
|
|
|
$
|
23,484
|
|
|
$
|
(99,152
|
)
|
|
$
|
(4,607
|
)
|
|
$
|
(14,758
|
)
|
|
$
|
(29,166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in thousands
|
|
Six Months Ended June 30, 2016
|
Redbox
|
|
Coinstar
|
|
ecoATM
|
|
All Other
|
|
Corporate Unallocated
|
|
Total
|
Revenue
|
$
|
810,547
|
|
|
$
|
156,547
|
|
|
$
|
86,889
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,053,983
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating
|
570,732
|
|
|
80,740
|
|
|
75,185
|
|
|
169
|
|
|
722
|
|
|
727,548
|
|
Marketing
|
7,743
|
|
|
1,174
|
|
|
7,638
|
|
|
12
|
|
|
77
|
|
|
16,644
|
|
Research and development
|
—
|
|
|
—
|
|
|
2,129
|
|
|
—
|
|
|
233
|
|
|
2,362
|
|
General and administrative
|
63,354
|
|
|
16,358
|
|
|
7,575
|
|
|
349
|
|
|
7,815
|
|
|
95,451
|
|
Restructuring and related costs (Note 9)
|
2,422
|
|
|
465
|
|
|
789
|
|
|
—
|
|
|
—
|
|
|
3,676
|
|
Segment operating income (loss)
|
166,296
|
|
|
57,810
|
|
|
(6,427
|
)
|
|
(530
|
)
|
|
(8,847
|
)
|
|
208,302
|
|
Less: depreciation, amortization and other
|
(46,101
|
)
|
|
(15,004
|
)
|
|
(16,602
|
)
|
|
21
|
|
|
—
|
|
|
(77,686
|
)
|
Operating income (loss)
|
120,195
|
|
|
42,806
|
|
|
(23,029
|
)
|
|
(509
|
)
|
|
(8,847
|
)
|
|
130,616
|
|
Loss from equity method investments, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(415
|
)
|
|
(415
|
)
|
Interest expense, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,543
|
)
|
|
(10,543
|
)
|
Other, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,452
|
|
|
1,452
|
|
Income (loss) from continuing operations before income taxes
|
$
|
120,195
|
|
|
$
|
42,806
|
|
|
$
|
(23,029
|
)
|
|
$
|
(509
|
)
|
|
$
|
(18,353
|
)
|
|
$
|
121,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in thousands
|
|
Six Months Ended June 30, 2015
|
Redbox
|
|
Coinstar
|
|
ecoATM
|
|
All Other
|
|
Corporate Unallocated
|
|
Total
|
Revenue
|
$
|
958,509
|
|
|
$
|
149,609
|
|
|
$
|
45,811
|
|
|
$
|
76
|
|
|
$
|
—
|
|
|
$
|
1,154,005
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating
|
644,379
|
|
|
76,621
|
|
|
50,033
|
|
|
2,269
|
|
|
1,501
|
|
|
774,803
|
|
Marketing
|
9,091
|
|
|
2,410
|
|
|
3,879
|
|
|
578
|
|
|
509
|
|
|
16,467
|
|
Research and development
|
—
|
|
|
—
|
|
|
3,005
|
|
|
(84
|
)
|
|
1,202
|
|
|
4,123
|
|
General and administrative
|
68,071
|
|
|
15,563
|
|
|
4,062
|
|
|
5,151
|
|
|
4,492
|
|
|
97,339
|
|
Restructuring and related costs (Note 9)
|
15,174
|
|
|
550
|
|
|
127
|
|
|
—
|
|
|
—
|
|
|
15,851
|
|
Goodwill impairment
|
—
|
|
|
—
|
|
|
85,890
|
|
|
—
|
|
|
—
|
|
|
85,890
|
|
Segment operating income (loss)
|
221,794
|
|
|
54,465
|
|
|
(101,185
|
)
|
|
(7,838
|
)
|
|
(7,704
|
)
|
|
159,532
|
|
Less: depreciation, amortization and other
|
(64,670
|
)
|
|
(16,255
|
)
|
|
(12,207
|
)
|
|
(1,346
|
)
|
|
—
|
|
|
(94,478
|
)
|
Operating income (loss)
|
157,124
|
|
|
38,210
|
|
|
(113,392
|
)
|
|
(9,184
|
)
|
|
(7,704
|
)
|
|
65,054
|
|
Loss from equity method investments, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(265
|
)
|
|
(265
|
)
|
Interest expense, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(24,254
|
)
|
|
(24,254
|
)
|
Other, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,704
|
)
|
|
(1,704
|
)
|
Income (loss) from continuing operations before income taxes
|
$
|
157,124
|
|
|
$
|
38,210
|
|
|
$
|
(113,392
|
)
|
|
$
|
(9,184
|
)
|
|
$
|
(33,927
|
)
|
|
$
|
38,831
|
|
Significant Retailer Relationships
Kiosks at the following retailers accounted for
10%
or more of our consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Wal-Mart Stores Inc.
|
16.7
|
%
|
|
16.4
|
%
|
|
16.4
|
%
|
|
16.4
|
%
|
Walgreen Co.
|
12.4
|
%
|
|
13.5
|
%
|
|
13.1
|
%
|
|
14.0
|
%
|
The Kroger Company
|
9.6
|
%
|
|
10.0
|
%
|
|
9.6
|
%
|
|
9.9
|
%
|
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
Money Market Demand Accounts and Investment Grade Fixed Income Securities
The fair value for our money market demand accounts and investment grade fixed income securities falls under Level 1 of the fair value hierarchy based on quoted market prices. The fair value of these assets is included in cash and cash equivalents on our
Consolidated Balance Sheets
on a recurring basis. The following table presents the fair values of our money market demand accounts and investment grade fixed income securities as of the dates specified below:
|
|
|
|
|
|
|
|
|
|
Level 1
|
Dollars in thousands
|
June 30, 2016
|
|
December 31, 2015
|
Money market demand accounts and investment grade fixed income securities
|
$
|
5,056
|
|
|
$
|
2,743
|
|
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. 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.
The following table presents the approximate fair values of the 2019 Notes and 2021 Notes as of the dates specified below:
|
|
|
|
|
|
|
|
|
|
Level 2
|
Dollars in thousands
|
June 30, 2016
|
|
December 31, 2015
|
2019 Notes
|
$
|
293,000
|
|
|
$
|
312,000
|
|
2021 Notes
|
$
|
194,000
|
|
|
$
|
213,000
|
|
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
June 30, 2016
, is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in thousands
|
|
|
|
|
|
|
|
Total
|
|
Remaining in 2016
|
|
2017
|
|
2018
|
Total estimated movie content commitments
|
$
|
460,681
|
|
|
$
|
226,902
|
|
|
$
|
224,136
|
|
|
$
|
9,643
|
|
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. The Illinois Supreme Court denied Plaintiffs petition on May 25, 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.
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 June 30, 2016
|
(in thousands)
|
Outerwall Inc.
|
|
Combined Guarantor Subsidiaries
|
|
Combined Non-Guarantor Subsidiaries
|
|
Eliminations and Consolidation Reclassifications
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
152,729
|
|
|
$
|
17,455
|
|
|
$
|
28,864
|
|
|
$
|
—
|
|
|
$
|
199,048
|
|
Accounts receivable, net of allowances
|
1,640
|
|
|
23,663
|
|
|
83
|
|
|
—
|
|
|
25,386
|
|
Content library
|
—
|
|
|
147,815
|
|
|
—
|
|
|
—
|
|
|
147,815
|
|
Prepaid expenses and other current assets
|
12,501
|
|
|
34,291
|
|
|
330
|
|
|
—
|
|
|
47,122
|
|
Intercompany receivables
|
15,212
|
|
|
636,566
|
|
|
1,207
|
|
|
(652,985
|
)
|
|
—
|
|
Total current assets
|
182,082
|
|
|
859,790
|
|
|
30,484
|
|
|
(652,985
|
)
|
|
419,371
|
|
Property and equipment, net
|
87,236
|
|
|
170,440
|
|
|
12,738
|
|
|
—
|
|
|
270,414
|
|
Deferred income taxes
|
—
|
|
|
—
|
|
|
2,456
|
|
|
—
|
|
|
2,456
|
|
Goodwill and other intangible assets, net
|
249,696
|
|
|
283,238
|
|
|
—
|
|
|
—
|
|
|
532,934
|
|
Other long-term assets
|
377
|
|
|
1,001
|
|
|
111
|
|
|
—
|
|
|
1,489
|
|
Investment in related parties
|
974,379
|
|
|
28,373
|
|
|
—
|
|
|
(1,002,752
|
)
|
|
—
|
|
Total assets
|
$
|
1,493,770
|
|
|
$
|
1,342,842
|
|
|
$
|
45,789
|
|
|
$
|
(1,655,737
|
)
|
|
$
|
1,226,664
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
8,857
|
|
|
$
|
117,574
|
|
|
$
|
223
|
|
|
$
|
—
|
|
|
$
|
126,654
|
|
Accrued payable to retailers
|
68,924
|
|
|
25,048
|
|
|
6,360
|
|
|
—
|
|
|
100,332
|
|
Other accrued liabilities
|
65,424
|
|
|
89,249
|
|
|
674
|
|
|
—
|
|
|
155,347
|
|
Current portion of long-term debt and other long-term liabilities
|
18,193
|
|
|
5
|
|
|
220
|
|
|
—
|
|
|
18,418
|
|
Intercompany payables
|
527,722
|
|
|
115,511
|
|
|
9,752
|
|
|
(652,985
|
)
|
|
—
|
|
Total current liabilities
|
689,120
|
|
|
347,387
|
|
|
17,229
|
|
|
(652,985
|
)
|
|
400,751
|
|
Long-term debt and other long-term liabilities
|
747,114
|
|
|
19,294
|
|
|
162
|
|
|
—
|
|
|
766,570
|
|
Deferred income taxes
|
11,634
|
|
|
1,784
|
|
|
24
|
|
|
—
|
|
|
13,442
|
|
Total liabilities
|
1,447,868
|
|
|
368,465
|
|
|
17,415
|
|
|
(652,985
|
)
|
|
1,180,763
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
—
|
|
|
—
|
|
|
3,000
|
|
|
(3,000
|
)
|
|
—
|
|
Common stock
|
604,392
|
|
|
252,512
|
|
|
4,635
|
|
|
(371,660
|
)
|
|
489,879
|
|
Treasury stock
|
(1,149,261
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,149,261
|
)
|
Retained earnings
|
591,844
|
|
|
721,865
|
|
|
21,521
|
|
|
(628,092
|
)
|
|
707,138
|
|
Accumulated other comprehensive income (loss)
|
(1,073
|
)
|
|
—
|
|
|
(782
|
)
|
|
—
|
|
|
(1,855
|
)
|
Total stockholders’ equity
|
45,902
|
|
|
974,377
|
|
|
28,374
|
|
|
(1,002,752
|
)
|
|
45,901
|
|
Total liabilities and stockholders’ equity
|
$
|
1,493,770
|
|
|
$
|
1,342,842
|
|
|
$
|
45,789
|
|
|
$
|
(1,655,737
|
)
|
|
$
|
1,226,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
|
(unaudited)
|
|
Three Months Ended June 30, 2016
|
(in thousands)
|
Outerwall Inc.
|
|
Combined Guarantor Subsidiaries
|
|
Combined Non-Guarantor Subsidiaries
|
|
Eliminations and Consolidation Reclassifications
|
|
Total
|
Revenue
|
$
|
73,700
|
|
|
$
|
433,859
|
|
|
$
|
10,468
|
|
|
$
|
—
|
|
|
$
|
518,027
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Direct operating
|
37,633
|
|
|
309,105
|
|
|
4,843
|
|
|
—
|
|
|
351,581
|
|
Marketing
|
410
|
|
|
7,010
|
|
|
2
|
|
|
—
|
|
|
7,422
|
|
Research and development
|
—
|
|
|
1,317
|
|
|
—
|
|
|
—
|
|
|
1,317
|
|
General and administrative
|
11,949
|
|
|
35,529
|
|
|
203
|
|
|
—
|
|
|
47,681
|
|
Restructuring and related costs
|
3
|
|
|
398
|
|
|
—
|
|
|
—
|
|
|
401
|
|
Depreciation and other
|
6,547
|
|
|
26,417
|
|
|
1,024
|
|
|
—
|
|
|
33,988
|
|
Amortization of intangible assets
|
4
|
|
|
3,786
|
|
|
—
|
|
|
—
|
|
|
3,790
|
|
Total expenses
|
56,546
|
|
|
383,562
|
|
|
6,072
|
|
|
—
|
|
|
446,180
|
|
Operating income
|
17,154
|
|
|
50,297
|
|
|
4,396
|
|
|
—
|
|
|
71,847
|
|
Other income (expense), net:
|
|
|
|
|
|
|
|
|
|
Loss from equity method investments, net
|
(208
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(208
|
)
|
Interest income (expense), net
|
(2,715
|
)
|
|
(7,539
|
)
|
|
(47
|
)
|
|
—
|
|
|
(10,301
|
)
|
Other, net
|
3,229
|
|
|
122
|
|
|
(3,128
|
)
|
|
—
|
|
|
223
|
|
Total other income (expense), net
|
306
|
|
|
(7,417
|
)
|
|
(3,175
|
)
|
|
—
|
|
|
(10,286
|
)
|
Income from continuing operations before income taxes
|
17,460
|
|
|
42,880
|
|
|
1,221
|
|
|
—
|
|
|
61,561
|
|
Income tax expense
|
(6,850
|
)
|
|
(13,944
|
)
|
|
(219
|
)
|
|
—
|
|
|
(21,013
|
)
|
Income from continuing operations
|
10,610
|
|
|
28,936
|
|
|
1,002
|
|
|
—
|
|
|
40,548
|
|
Equity in income of subsidiaries
|
29,938
|
|
|
1,002
|
|
|
—
|
|
|
(30,940
|
)
|
|
—
|
|
Net income (loss)
|
40,548
|
|
|
29,938
|
|
|
1,002
|
|
|
(30,940
|
)
|
|
40,548
|
|
Foreign currency translation adjustment
(1)
|
(51
|
)
|
|
—
|
|
|
(1,629
|
)
|
|
—
|
|
|
(1,680
|
)
|
Comprehensive income (loss)
|
$
|
40,497
|
|
|
$
|
29,938
|
|
|
$
|
(627
|
)
|
|
$
|
(30,940
|
)
|
|
$
|
38,868
|
|
|
|
(1)
|
Foreign currency translation adjustment had
no
tax effect for the
three months ended
June 30, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
|
(unaudited)
|
|
Three Months Ended June 30, 2015
|
(in thousands)
|
Outerwall Inc.
|
|
Combined Guarantor Subsidiaries
|
|
Combined Non-Guarantor Subsidiaries
|
|
Eliminations and Consolidation Reclassifications
|
|
Total
|
Revenue
|
$
|
68,687
|
|
|
$
|
465,039
|
|
|
$
|
11,643
|
|
|
$
|
—
|
|
|
$
|
545,369
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Direct operating
|
35,397
|
|
|
328,952
|
|
|
5,270
|
|
|
—
|
|
|
369,619
|
|
Marketing
|
1,477
|
|
|
6,543
|
|
|
27
|
|
|
—
|
|
|
8,047
|
|
Research and development
|
1
|
|
|
2,038
|
|
|
—
|
|
|
—
|
|
|
2,039
|
|
General and administrative
|
11,767
|
|
|
36,820
|
|
|
196
|
|
|
—
|
|
|
48,783
|
|
Restructuring and related costs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Depreciation and other
|
8,051
|
|
|
36,063
|
|
|
1,060
|
|
|
—
|
|
|
45,174
|
|
Amortization of intangible assets
|
4
|
|
|
3,305
|
|
|
—
|
|
|
—
|
|
|
3,309
|
|
Goodwill impairment
|
—
|
|
|
85,890
|
|
|
—
|
|
|
—
|
|
|
85,890
|
|
Total expenses
|
56,697
|
|
|
499,611
|
|
|
6,553
|
|
|
—
|
|
|
562,861
|
|
Operating income
|
11,990
|
|
|
(34,572
|
)
|
|
5,090
|
|
|
—
|
|
|
(17,492
|
)
|
Other income (expense), net:
|
|
|
|
|
|
|
|
|
|
Loss from equity method investments, net
|
(133
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(133
|
)
|
Interest income (expense), net
|
(12,485
|
)
|
|
317
|
|
|
(15
|
)
|
|
—
|
|
|
(12,183
|
)
|
Other, net
|
3,142
|
|
|
80
|
|
|
(2,580
|
)
|
|
—
|
|
|
642
|
|
Total other income (expense), net
|
(9,476
|
)
|
|
397
|
|
|
(2,595
|
)
|
|
—
|
|
|
(11,674
|
)
|
Income (loss) from continuing operations before income taxes
|
2,514
|
|
|
(34,175
|
)
|
|
2,495
|
|
|
—
|
|
|
(29,166
|
)
|
Income tax benefit (expense)
|
5,981
|
|
|
(23,736
|
)
|
|
(430
|
)
|
|
—
|
|
|
(18,185
|
)
|
Income (loss) from continuing operations
|
8,495
|
|
|
(57,911
|
)
|
|
2,065
|
|
|
—
|
|
|
(47,351
|
)
|
Income (loss) from discontinued operations, net of tax
|
(856
|
)
|
|
1,221
|
|
|
1,370
|
|
|
—
|
|
|
1,735
|
|
Equity in income of subsidiaries
|
(53,255
|
)
|
|
3,435
|
|
|
—
|
|
|
49,820
|
|
|
—
|
|
Net income (loss)
|
(45,616
|
)
|
|
(53,255
|
)
|
|
3,435
|
|
|
49,820
|
|
|
(45,616
|
)
|
Foreign currency translation adjustment
(1)
|
638
|
|
|
—
|
|
|
(165
|
)
|
|
—
|
|
|
473
|
|
Comprehensive income (loss)
|
$
|
(44,978
|
)
|
|
$
|
(53,255
|
)
|
|
$
|
3,270
|
|
|
$
|
49,820
|
|
|
$
|
(45,143
|
)
|
|
|
(1)
|
Foreign currency translation adjustment had
no
tax effect for the
three months ended
June 30, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
|
(unaudited)
|
|
Six Months Ended June 30, 2016
|
(in thousands)
|
Outerwall Inc.
|
|
Combined Guarantor Subsidiaries
|
|
Combined Non-Guarantor Subsidiaries
|
|
Eliminations and Consolidation Reclassifications
|
|
Total
|
Revenue
|
$
|
135,946
|
|
|
$
|
897,436
|
|
|
$
|
20,601
|
|
|
$
|
—
|
|
|
$
|
1,053,983
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Direct operating
|
71,989
|
|
|
646,046
|
|
|
9,513
|
|
|
—
|
|
|
727,548
|
|
Marketing
|
1,209
|
|
|
15,433
|
|
|
2
|
|
|
—
|
|
|
16,644
|
|
Research and development
|
—
|
|
|
2,362
|
|
|
—
|
|
|
—
|
|
|
2,362
|
|
General and administrative
|
22,863
|
|
|
72,193
|
|
|
395
|
|
|
—
|
|
|
95,451
|
|
Restructuring and related costs
|
465
|
|
|
3,211
|
|
|
—
|
|
|
—
|
|
|
3,676
|
|
Depreciation and other
|
12,961
|
|
|
55,130
|
|
|
2,015
|
|
|
—
|
|
|
70,106
|
|
Amortization of intangible assets
|
7
|
|
|
7,573
|
|
|
—
|
|
|
—
|
|
|
7,580
|
|
Total expenses
|
109,494
|
|
|
801,948
|
|
|
11,925
|
|
|
—
|
|
|
923,367
|
|
Operating income
|
26,452
|
|
|
95,488
|
|
|
8,676
|
|
|
—
|
|
|
130,616
|
|
Other income (expense), net:
|
|
|
|
|
|
|
|
|
|
Loss from equity method investments, net
|
(415
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(415
|
)
|
Interest income (expense), net
|
5,232
|
|
|
(15,681
|
)
|
|
(94
|
)
|
|
—
|
|
|
(10,543
|
)
|
Other, net
|
5,995
|
|
|
509
|
|
|
(5,052
|
)
|
|
—
|
|
|
1,452
|
|
Total other income (expense), net
|
10,812
|
|
|
(15,172
|
)
|
|
(5,146
|
)
|
|
—
|
|
|
(9,506
|
)
|
Income from continuing operations before income taxes
|
37,264
|
|
|
80,316
|
|
|
3,530
|
|
|
—
|
|
|
121,110
|
|
Income tax expense
|
(14,672
|
)
|
|
(26,630
|
)
|
|
(809
|
)
|
|
—
|
|
|
(42,111
|
)
|
Income from continuing operations
|
22,592
|
|
|
53,686
|
|
|
2,721
|
|
|
—
|
|
|
78,999
|
|
Equity in income of subsidiaries
|
56,407
|
|
|
2,721
|
|
|
—
|
|
|
(59,128
|
)
|
|
—
|
|
Net income (loss)
|
78,999
|
|
|
56,407
|
|
|
2,721
|
|
|
(59,128
|
)
|
|
78,999
|
|
Foreign currency translation adjustment
(1)
|
(249
|
)
|
|
—
|
|
|
(1,980
|
)
|
|
—
|
|
|
(2,229
|
)
|
Comprehensive income
|
$
|
78,750
|
|
|
$
|
56,407
|
|
|
$
|
741
|
|
|
$
|
(59,128
|
)
|
|
$
|
76,770
|
|
|
|
(1)
|
Foreign currency translation adjustment had
no
tax effect for the
six months ended
June 30, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
|
(unaudited)
|
|
Six Months Ended June 30, 2015
|
(in thousands)
|
Outerwall Inc.
|
|
Combined Guarantor Subsidiaries
|
|
Combined Non-Guarantor Subsidiaries
|
|
Eliminations and Consolidation Reclassifications
|
|
Total
|
Revenue
|
$
|
127,497
|
|
|
$
|
1,004,320
|
|
|
$
|
22,188
|
|
|
$
|
—
|
|
|
$
|
1,154,005
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Direct operating
|
69,123
|
|
|
695,363
|
|
|
10,317
|
|
|
—
|
|
|
774,803
|
|
Marketing
|
2,991
|
|
|
13,449
|
|
|
27
|
|
|
—
|
|
|
16,467
|
|
Research and development
|
(83
|
)
|
|
4,206
|
|
|
—
|
|
|
—
|
|
|
4,123
|
|
General and administrative
|
23,823
|
|
|
73,115
|
|
|
401
|
|
|
—
|
|
|
97,339
|
|
Restructuring and related costs
|
551
|
|
|
15,300
|
|
|
—
|
|
|
—
|
|
|
15,851
|
|
Depreciation and other
|
12,700
|
|
|
73,046
|
|
|
2,114
|
|
|
—
|
|
|
87,860
|
|
Amortization of intangible assets
|
7
|
|
|
6,611
|
|
|
—
|
|
|
—
|
|
|
6,618
|
|
Goodwill impairment
|
—
|
|
|
85,890
|
|
|
—
|
|
|
—
|
|
|
85,890
|
|
Total expenses
|
109,112
|
|
|
966,980
|
|
|
12,859
|
|
|
—
|
|
|
1,088,951
|
|
Operating income
|
18,385
|
|
|
37,340
|
|
|
9,329
|
|
|
—
|
|
|
65,054
|
|
Other income (expense), net:
|
|
|
|
|
|
|
|
|
|
Loss from equity method investments, net
|
(265
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(265
|
)
|
Interest income (expense), net
|
(24,881
|
)
|
|
692
|
|
|
(65
|
)
|
|
—
|
|
|
(24,254
|
)
|
Other, net
|
5,578
|
|
|
64
|
|
|
(7,346
|
)
|
|
—
|
|
|
(1,704
|
)
|
Total other income (expense), net
|
(19,568
|
)
|
|
756
|
|
|
(7,411
|
)
|
|
—
|
|
|
(26,223
|
)
|
Income (loss) from continuing operations before income taxes
|
(1,183
|
)
|
|
38,096
|
|
|
1,918
|
|
|
—
|
|
|
38,831
|
|
Income tax benefit (expense)
|
5,433
|
|
|
(49,046
|
)
|
|
(414
|
)
|
|
—
|
|
|
(44,027
|
)
|
Income (loss) from continuing operations
|
4,250
|
|
|
(10,950
|
)
|
|
1,504
|
|
|
—
|
|
|
(5,196
|
)
|
Income (loss) from discontinued operations, net of tax
|
668
|
|
|
(27,833
|
)
|
|
22,344
|
|
|
—
|
|
|
(4,821
|
)
|
Equity in income of subsidiaries
|
(14,935
|
)
|
|
23,848
|
|
|
—
|
|
|
(8,913
|
)
|
|
—
|
|
Net income (loss)
|
(10,017
|
)
|
|
(14,935
|
)
|
|
23,848
|
|
|
(8,913
|
)
|
|
(10,017
|
)
|
Foreign currency translation adjustment
(1)
|
574
|
|
|
—
|
|
|
2,753
|
|
|
—
|
|
|
3,327
|
|
Comprehensive income (loss)
|
$
|
(9,443
|
)
|
|
$
|
(14,935
|
)
|
|
$
|
26,601
|
|
|
$
|
(8,913
|
)
|
|
$
|
(6,690
|
)
|
|
|
(1)
|
Foreign currency translation adjustment had
no
tax effect for the
six months ended
June 30, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATING STATEMENTS OF CASH FLOWS
|
(unaudited)
|
|
Six Months Ended June 30, 2016
|
(in thousands)
|
Outerwall Inc.
|
|
Combined Guarantor Subsidiaries
|
|
Combined Non-Guarantor Subsidiaries
|
|
Eliminations and Consolidation Reclassifications
|
|
Total
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
78,999
|
|
|
$
|
56,407
|
|
|
$
|
2,721
|
|
|
$
|
(59,128
|
)
|
|
$
|
78,999
|
|
Adjustments to reconcile net income to net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and other
|
12,961
|
|
|
55,130
|
|
|
2,015
|
|
|
—
|
|
|
70,106
|
|
Amortization of intangible assets
|
7
|
|
|
7,573
|
|
|
—
|
|
|
—
|
|
|
7,580
|
|
Share-based payments expense
|
6,984
|
|
|
2,520
|
|
|
—
|
|
|
—
|
|
|
9,504
|
|
Deferred income taxes
|
(1,559
|
)
|
|
(17,300
|
)
|
|
301
|
|
|
—
|
|
|
(18,558
|
)
|
Restructuring, impairment and related costs
|
57
|
|
|
304
|
|
|
—
|
|
|
—
|
|
|
361
|
|
Loss from equity method investment, net
|
415
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
415
|
|
Amortization of deferred financing fees and debt discount
|
1,251
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,251
|
|
Gain from early extinguishment of debt
|
(11,446
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,446
|
)
|
Other
|
(242
|
)
|
|
(38
|
)
|
|
—
|
|
|
—
|
|
|
(280
|
)
|
Equity in income of subsidiaries
|
(56,407
|
)
|
|
(2,721
|
)
|
|
—
|
|
|
59,128
|
|
|
—
|
|
Cash flows from changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
2,343
|
|
|
9,605
|
|
|
1,237
|
|
|
—
|
|
|
13,185
|
|
Content library
|
—
|
|
|
40,849
|
|
|
—
|
|
|
—
|
|
|
40,849
|
|
Prepaid expenses and other current assets
|
5,229
|
|
|
(207
|
)
|
|
241
|
|
|
—
|
|
|
5,263
|
|
Other assets
|
—
|
|
|
291
|
|
|
42
|
|
|
—
|
|
|
333
|
|
Accounts payable
|
(2,539
|
)
|
|
(49,970
|
)
|
|
49
|
|
|
—
|
|
|
(52,460
|
)
|
Accrued payable to retailers
|
(3,022
|
)
|
|
(5,109
|
)
|
|
(6,267
|
)
|
|
—
|
|
|
(14,398
|
)
|
Other accrued liabilities
|
6,872
|
|
|
5,993
|
|
|
(1,344
|
)
|
|
—
|
|
|
11,521
|
|
Net cash flows from (used in) operating activities
|
39,903
|
|
|
103,327
|
|
|
(1,005
|
)
|
|
—
|
|
|
142,225
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
(16,424
|
)
|
|
(10,989
|
)
|
|
(961
|
)
|
|
—
|
|
|
(28,374
|
)
|
Proceeds from sale of property and equipment
|
—
|
|
|
92
|
|
|
—
|
|
|
—
|
|
|
92
|
|
Investments in and advances to affiliates
|
104,336
|
|
|
(94,347
|
)
|
|
(9,989
|
)
|
|
—
|
|
|
—
|
|
Net cash flows from (used in) investing activities
|
87,912
|
|
|
(105,244
|
)
|
|
(10,950
|
)
|
|
—
|
|
|
(28,282
|
)
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from new borrowing on Credit Facility
|
176,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
176,000
|
|
Principal payments on Credit Facility
|
(244,000
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(244,000
|
)
|
Repurchases of notes
|
(47,507
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(47,507
|
)
|
Dividends paid
|
(15,122
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15,122
|
)
|
Principal payments on capital lease obligations and other debt
|
(2,902
|
)
|
|
—
|
|
|
(175
|
)
|
|
—
|
|
|
(3,077
|
)
|
Withholding tax paid on vesting of restricted stock net of proceeds from exercise of stock options
|
(1,472
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,472
|
)
|
Net cash flows used in financing activities
|
(135,003
|
)
|
|
—
|
|
|
(175
|
)
|
|
—
|
|
|
(135,178
|
)
|
Effect of exchange rate changes on cash
|
(250
|
)
|
|
—
|
|
|
(2,016
|
)
|
|
—
|
|
|
(2,266
|
)
|
Increase (decrease) in cash and cash equivalents
|
(7,438
|
)
|
|
(1,917
|
)
|
|
(14,146
|
)
|
|
—
|
|
|
(23,501
|
)
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
160,167
|
|
|
19,372
|
|
|
43,010
|
|
|
—
|
|
|
222,549
|
|
End of period
|
$
|
152,729
|
|
|
$
|
17,455
|
|
|
$
|
28,864
|
|
|
$
|
—
|
|
|
$
|
199,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATING STATEMENTS OF CASH FLOWS
|
(unaudited)
|
|
Six Months Ended June 30, 2015
|
(in thousands)
|
Outerwall Inc.
|
|
Combined Guarantor Subsidiaries
|
|
Combined Non-Guarantor Subsidiaries
|
|
Eliminations and Consolidation Reclassifications
|
|
Total
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
(10,017
|
)
|
|
$
|
(14,935
|
)
|
|
$
|
23,848
|
|
|
$
|
(8,913
|
)
|
|
$
|
(10,017
|
)
|
Adjustments to reconcile net income to net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and other
|
12,700
|
|
|
74,892
|
|
|
6,126
|
|
|
—
|
|
|
93,718
|
|
Amortization of intangible assets
|
7
|
|
|
6,611
|
|
|
44
|
|
|
—
|
|
|
6,662
|
|
Share-based payments expense
|
3,681
|
|
|
3,511
|
|
|
—
|
|
|
—
|
|
|
7,192
|
|
Windfall excess tax benefits related to share-based payments
|
(686
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(686
|
)
|
Deferred income taxes
|
(8,029
|
)
|
|
(3,903
|
)
|
|
7,993
|
|
|
—
|
|
|
(3,939
|
)
|
Restructuring, impairment and related costs
|
136
|
|
|
1,544
|
|
|
—
|
|
|
—
|
|
|
1,680
|
|
Loss from equity method investments, net
|
265
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
265
|
|
Amortization of deferred financing fees and debt discount
|
1,385
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,385
|
|
Goodwill impairment
|
—
|
|
|
85,890
|
|
|
—
|
|
|
—
|
|
|
85,890
|
|
Other
|
(265
|
)
|
|
176
|
|
|
(727
|
)
|
|
—
|
|
|
(816
|
)
|
Equity in income of subsidiaries
|
14,935
|
|
|
(23,848
|
)
|
|
—
|
|
|
8,913
|
|
|
—
|
|
Cash flows from changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
(357
|
)
|
|
14,773
|
|
|
661
|
|
|
—
|
|
|
15,077
|
|
Content library
|
—
|
|
|
31,236
|
|
|
3,423
|
|
|
—
|
|
|
34,659
|
|
Prepaid expenses and other current assets
|
(17,957
|
)
|
|
(4,455
|
)
|
|
330
|
|
|
—
|
|
|
(22,082
|
)
|
Other assets
|
47
|
|
|
245
|
|
|
30
|
|
|
—
|
|
|
322
|
|
Accounts payable
|
(2,022
|
)
|
|
(13,438
|
)
|
|
(2,237
|
)
|
|
—
|
|
|
(17,697
|
)
|
Accrued payable to retailers
|
479
|
|
|
(10,682
|
)
|
|
(1,307
|
)
|
|
—
|
|
|
(11,510
|
)
|
Other accrued liabilities
|
1,674
|
|
|
426
|
|
|
(988
|
)
|
|
—
|
|
|
1,112
|
|
Net cash flows from (used in) operating activities
(1)
|
(4,024
|
)
|
|
148,043
|
|
|
37,196
|
|
|
—
|
|
|
181,215
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
(13,869
|
)
|
|
(25,818
|
)
|
|
(530
|
)
|
|
—
|
|
|
(40,217
|
)
|
Proceeds from sale of property and equipment
|
17
|
|
|
2,923
|
|
|
—
|
|
|
—
|
|
|
2,940
|
|
Investments in and advances to affiliates
|
161,753
|
|
|
(119,126
|
)
|
|
(42,627
|
)
|
|
—
|
|
|
—
|
|
Net cash flows from (used in) investing activities
(1)
|
147,901
|
|
|
(142,021
|
)
|
|
(43,157
|
)
|
|
—
|
|
|
(37,277
|
)
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from new borrowing on Credit Facility
|
112,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
112,000
|
|
Principal payments on Credit Facility
|
(185,750
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(185,750
|
)
|
Dividends paid
|
(11,019
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,019
|
)
|
Repurchases of common stock
|
(62,731
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(62,731
|
)
|
Principal payments on capital lease obligations and other debt
|
(6,080
|
)
|
|
—
|
|
|
(198
|
)
|
|
—
|
|
|
(6,278
|
)
|
Windfall excess tax benefits related to share-based payments
|
686
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
686
|
|
Withholding tax paid on vesting of restricted stock net of proceeds from exercise of stock options
|
(1,201
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,201
|
)
|
Net cash flows used in financing activities
(1)
|
(154,095
|
)
|
|
—
|
|
|
(198
|
)
|
|
—
|
|
|
(154,293
|
)
|
Effect of exchange rate changes on cash
|
574
|
|
|
—
|
|
|
4,793
|
|
|
—
|
|
|
5,367
|
|
Decrease in cash and cash equivalents
|
(9,644
|
)
|
|
6,022
|
|
|
(1,366
|
)
|
|
—
|
|
|
(4,988
|
)
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
180,889
|
|
|
17,939
|
|
|
43,868
|
|
|
—
|
|
|
242,696
|
|
End of period
|
$
|
171,245
|
|
|
$
|
23,961
|
|
|
$
|
42,502
|
|
|
$
|
—
|
|
|
$
|
237,708
|
|
|
|
(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.
|
Note 16: Income Taxes From Continuing Operations
Our effective tax rate from continuing operations was
34.1%
and
(62.4)%
for the
three months ended
June 30, 2016
and
2015
, respectively, and
34.8%
and
113.4%
for the
six months ended
June 30, 2016
and
2015
, respectively.
Our effective tax rate for the
three months ended
June 30, 2016
, was lower than the U.S. Federal statutory rate of
35.0%
primarily due to the domestic production activities deduction, partially offset by state income taxes.
Our effective tax rate for the
three months ended
June 30, 2015
, was lower than the U.S. Federal statutory rate of
35.0%
primarily due to an
$85.9 million
non-tax deductible goodwill impairment charge that was recorded in the second quarter of 2015 and state income taxes, partially offset by the domestic production activities deduction and a net decrease in valuation allowances related to capital loss carryforwards and state tax credit carryforwards.
Our effective tax rate for the
six months ended
June 30, 2016
, was lower than the U.S. Federal statutory rate of
35.0%
primarily due to the domestic production activities deduction, partially offset by state income taxes.
Our effective tax rate for the
six months ended
June 30, 2015
, was higher than the U.S. Federal statutory rate of
35.0%
primarily due to an
$85.9 million
non-tax deductible goodwill impairment charge that was recorded in the second quarter of 2015 and state income taxes, partially offset by the domestic production activities deduction.
Note 17: Subsequent Events
On
July 24, 2016
, the Board declared a quarterly cash dividend of
$0.60
per share to be paid on
September 6, 2016
, to all stockholders of record as of the close of business on
August 23, 2016
.
Merger Agreement
On July 24, 2016, the company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Aspen Parent, Inc., a Delaware corporation (“Parent”), Aspen Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Outerwall Merger Sub”), Redwood Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Redbox Merger Sub”), and Redbox Automated Retail, LLC, a Delaware limited liability company and wholly-owned subsidiary of the company (“Redbox”), providing for the acquisition of the company by Parent in an all cash transaction, consisting of a tender offer, followed by a subsequent back-end merger of Outerwall Merger Sub with and into the company (the “Outerwall Merger”), followed by the merger of Redbox Merger Sub with and into Redbox (the “Redbox Merger” and, together with the Outerwall Merger, the “Mergers”). Parent and Merger Sub are affiliates of certain funds (the “Apollo Funds”) managed by affiliates of Apollo Global Management, LLC (together with its consolidated subsidiaries, “Apollo”).
Under the terms of the Merger Agreement, Parent will cause Outerwall Merger Sub to commence a cash tender offer (the “Offer”) for all of the company’s outstanding shares of common stock at a purchase price of
$52.00 per share
net to the seller in cash (the “Offer Price”), without interest and subject to any withholding taxes. The consummation of the Offer is conditioned on, among other things, (1) shares of common stock having been validly tendered and not properly withdrawn that represent, together with the shares of common stock then owned by Outerwall Merger Sub, at least a majority of the then outstanding shares, (2) the expiration or early termination of the Hart-Scott-Rodino antitrust waiting period, (3) the accuracy of the company’s representations and warranties in the Merger Agreement, (4) compliance by the company with its obligations, agreements and covenants in the Merger Agreement, (5) other than the company’s regular quarterly cash dividend for the third quarter of 2016, the absence of any declaration or payment of any dividend or distribution on shares of capital stock of the company following the date of the Merger Agreement, (6) the absence of any authorization or making of any purchases of capital stock of the company, and (7) other customary conditions.
Following the consummation of the Offer, subject to the satisfaction or waiver of certain customary conditions set forth in the Merger Agreement, the Outerwall Merger will be effected under Delaware law without a meeting or vote of the Company’s stockholders (the “Effective Time”). At the Effective Time, each share of common stock issued and outstanding immediately prior to the Effective Time (other than shares (1) owned by the company or any of its subsidiaries, (2) owned by Parent or Outerwall Merger Sub or (3) owned by any stockholder who is entitled to demand and properly demands the appraisal of such shares) will be automatically cancelled and converted into the right to receive the Offer Price, without interest and subject to any withholding taxes. After the closing of the Outerwall Merger, the company will be a wholly owned subsidiary of Parent and will cease to be a publicly-traded company.
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
63,240
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.
Strategy
On March 14, 2016, we announced that our Board of Directors had initiated a process to explore strategic and financial alternatives to maximize shareholder value. As a result of the exploration of strategic and financial alternatives, on July 24, 2016, the company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Aspen Parent, Inc., a Delaware corporation (“Parent”), Aspen Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Outerwall Merger Sub”), Redwood Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Redbox Merger Sub”), and Redbox Automated Retail, LLC, a Delaware limited liability company and wholly-owned subsidiary of the company (“Redbox”), providing for the acquisition of the company by Parent in an all cash transaction, consisting of a tender offer, followed by a subsequent back-end merger of Outerwall Merger Sub with and into the company (the “Outerwall Merger”), followed by the merger of Redbox Merger Sub with and into Redbox (the “Redbox Merger” and, together with the Outerwall Merger, the “Mergers”). Parent and Merger Sub are affiliates of certain funds (the “Apollo Funds”) managed by affiliates of Apollo Global Management, LLC (together with its consolidated subsidiaries, “Apollo”).
Under the terms of the Merger Agreement, Parent will cause Outerwall Merger Sub to commence a cash tender offer (the “Offer”) for all of the company’s outstanding shares of common stock at a purchase price of $52.00 per share, net to the seller in cash (the “Offer Price”), without interest and subject to any withholding taxes. The consummation of the Offer is conditioned on, among other things, (1) shares of common stock having been validly tendered and not properly withdrawn that represent, together with the shares of common stock then owned by Outerwall Merger Sub, at least a majority of the then outstanding shares, (2) the expiration or early termination of the Hart-Scott-Rodino antitrust waiting period, (3) the accuracy of the company’s representations and warranties in the Merger Agreement, (4) compliance by the company with its obligations, agreements and covenants in the Merger Agreement, (5) other than the company’s regular quarterly cash dividend for the third quarter of 2016, the absence of any declaration or payment of any dividend or distribution on shares of capital stock of the company following the date of the Merger Agreement, (6) the absence of any authorization or making of any purchases of capital stock of the company, and (7) other customary conditions.
Following the consummation of the Offer, subject to the satisfaction or waiver of certain customary conditions set forth in the Merger Agreement, the Outerwall Merger will be effected under Delaware law without a meeting or vote of the Company’s stockholders (the “Effective Time”). At the Effective Time, each share of common stock issued and outstanding immediately prior to the Effective Time (other than shares (1) owned by the company or any of its subsidiaries, (2) owned by Parent or Outerwall Merger Sub or (3) owned by any stockholder who is entitled to demand and properly demands the appraisal of such shares) will be automatically cancelled and converted into the right to receive the Offer Price, without interest and subject to any withholding taxes. After the closing of the Outerwall Merger, the company will be a wholly owned subsidiary of Parent and will cease to be a publicly-traded company.
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.
|
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 and six months ended
June 30, 2016
.
Recent Events
Subsequent Events
|
|
•
|
On
July 24, 2016
, the Board declared a quarterly cash dividend of
$0.60
per share to be paid on
September 6, 2016
, to all stockholders of record as of the close of business on
August 23, 2016
.
|
|
|
•
|
On July 24, 2016, the company entered into the Merger Agreement providing for the acquisition of the company by Parent in an all cash transaction, consisting of a tender offer, followed by the subsequent back-end Outerwall Merger under Section 251(h) of the DGCL, immediately followed by the Redbox Merger. See
Note 17: Subsequent Events
in our
Notes to Consolidated Financial Statements
for additional information.
|
|
|
•
|
On July 25, 2016, Standards and Poor's downgraded the ratings assigned to our debt as follows:
|
|
|
◦
|
Corporate Credit Rating, to B+ from BB-; and
|
|
|
◦
|
Issue-level Ratings on Unsecured Notes, to B- from B.
|
|
|
•
|
On July 26, 2016, Moody's Investor Services revised their credit outlook and placed our debt on review for downgrade, ratings remain unchanged.
|
Q2 2016 Events
|
|
•
|
During the second quarter of 2016, we repurchased
$2.6 million
in face value of our 2021 Notes for
$2.2 million
in cash. The gain from early extinguishment of these notes was approximately
$0.4 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
June 21, 2016
, we paid a cash dividend of
$0.60
per outstanding share of our common stock totaling approximately
$10.2 million
.
|
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 cash dividend of
$0.60
per share to be paid on
June 21, 2016
to all stockholders of record as of 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
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
|
|
Change
|
|
June 30,
|
|
Change
|
Dollars in thousands, except per share amounts
|
2016
|
|
2015
|
|
$
|
|
%
|
|
2016
|
|
2015
|
|
$
|
|
%
|
Revenue
|
$
|
518,027
|
|
|
$
|
545,369
|
|
|
$
|
(27,342
|
)
|
|
(5.0
|
)%
|
|
$
|
1,053,983
|
|
|
$
|
1,154,005
|
|
|
$
|
(100,022
|
)
|
|
(8.7
|
)%
|
Operating income (loss)
|
$
|
71,847
|
|
|
$
|
(17,492
|
)
|
|
$
|
89,339
|
|
|
NM*
|
|
|
$
|
130,616
|
|
|
$
|
65,054
|
|
|
$
|
65,562
|
|
|
100.8
|
%
|
Income (loss) from continuing operations
|
$
|
40,548
|
|
|
$
|
(47,351
|
)
|
|
$
|
87,899
|
|
|
NM*
|
|
|
$
|
78,999
|
|
|
$
|
(5,196
|
)
|
|
$
|
84,195
|
|
|
NM*
|
|
Diluted earnings (loss) from continuing operations per common share
|
$
|
2.38
|
|
|
$
|
(2.66
|
)
|
|
$
|
5.04
|
|
|
NM*
|
|
|
$
|
4.67
|
|
|
$
|
(0.30
|
)
|
|
$
|
4.97
|
|
|
NM*
|
|
Comparing
three months ended
June 30, 2016
to
three months ended
June 30, 2015
Revenue
decreased
$27.3 million
, or
5.0%
, primarily due to:
|
|
•
|
$49.9 million
decrease
from our Redbox segment primarily due to a
10.0%
decrease
in same store sales, driven by a decline in movie rentals, and the removal of underperforming kiosks. Movie rentals were impacted primarily by higher secular decline in the physical market in the second quarter of 2016 as compared to the second 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. Box office was
44.5%
higher than the prior year with
three
more titles including one title that comprised
30.9%
of the box office for titles released in the second quarter of 2016. Excluding this title, box office decreased
0.1%
as compared to the second quarter of 2015. This was partially offset by;
|
|
|
•
|
$18.7 million
increase
from our ecoATM segment primarily due to revenue included in 2016 from devices acquired and sold through Gazelle; and
|
|
|
•
|
$3.9 million
increase from our Coinstar segment primarily due to increased volume in U.S. Coinstar kiosks.
|
Operating income
increased
$89.3 million
, primarily due to:
|
|
•
|
$90.1 million
decrease in operating loss within our ecoATM segment primarily due to the $85.9 million goodwill impairment charge recognized in 2015. Excluding the $85.9 million goodwill impairment charge, operating loss decreased
$4.2 million
for our ecoATM segment primarily due to the overall impacts from the addition of Gazelle and ongoing cost reduction initiatives;
|
|
|
•
|
$4.5 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
|
|
|
•
|
$2.1 million
increase
in operating income within our Coinstar segment primarily due to higher revenue partially offset by higher operating expenses, including increased direct operating expenses; partially offset by
|
|
|
•
|
$5.6 million
decrease in operating income within our Redbox segment primarily due to:
|
|
|
◦
|
$49.9 million
decrease
in revenue as described above; partially offset by
|
|
|
◦
|
$29.7 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;
|
|
|
◦
|
$11.3 million
decrease
in depreciation and amortization primarily from an increase in our fully depreciated asset base; and
|
|
|
◦
|
$3.0 million
decrease in general and administrative expenses primarily as a result of ongoing cost reduction initiatives.
|
Income from continuing operations
increased
$87.9 million
, primarily due to:
|
|
•
|
$89.3 million
increase
in operating income as described above; and
|
|
|
•
|
$1.9 million
decrease in interest expense, net primarily due to lower outstanding borrowings and gain from early extinguishment of debt; partially offset by
|
|
|
•
|
$2.8 million
increase in income tax expense primarily due to higher pre-tax income excluding the non-tax deductible goodwill impairment charge.
|
Comparing
six months ended
June 30, 2016
to
six months ended
June 30, 2015
Revenue
decreased
$100.0 million
, or
8.7%
, primarily due to:
|
|
•
|
$148.0 million
decrease
from our Redbox segment primarily due to a
14.0%
decrease
in same store sales, driven by a decline in movie rentals, and the removal of underperforming kiosks. Movie rentals were impacted primarily by higher secular decline in the physical market in the first half of 2016 as compared to the first half of 2015, partially offset by higher total box office of movie titles released. Box office was
29.0%
higher than the prior year with
ten
more titles, including one title that compromised
15.5%
of the box office for titles released in the first half of 2016. Excluding this title, box office increased
9.0%
as compared to the first half of 2015. This was partially offset by;
|
|
|
•
|
$41.1 million
increase
from our ecoATM segment primarily due to revenue included in 2016 from devices acquired and sold through Gazelle; and
|
|
|
•
|
$6.9 million
increase from our Coinstar segment primarily due to increased volume in U.S. Coinstar kiosks.
|
Operating income
increased
$65.6 million
, or
100.8%
, primarily due to:
|
|
•
|
$90.4 million
decrease in operating loss within our ecoATM segment primarily due to the $85.9 million goodwill impairment charge recognized in 2015. Excluding the $85.9 million goodwill impairment charge, operating loss decreased
$4.5 million
for our ecoATM segment primarily due to the overall impacts from the addition of Gazelle and ongoing cost reduction initiatives;
|
|
|
•
|
$8.7 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
|
|
|
•
|
$4.6 million
increase
in operating income within our Coinstar segment primarily due to higher revenue partially offset by higher operating expenses, including increased direct operating expenses; partially offset by
|
|
|
•
|
$36.9 million
decrease in operating income within our Redbox segment primarily due to:
|
|
|
◦
|
$148.0 million
decrease
in revenue as described above; partially offset by
|
|
|
◦
|
$73.6 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;
|
|
|
◦
|
$18.6 million
decrease
in depreciation and amortization primarily from an increase in our fully depreciated asset base;
|
|
|
◦
|
$12.8 million
decrease
in restructuring and related costs; and
|
|
|
◦
|
$4.7 million
decrease in general and administrative expenses primarily as a result of ongoing cost reduction initiatives.
|
Income from continuing operations
increased
$84.2 million
, primarily due to:
|
|
•
|
$65.6 million
increase
in operating income as described above;
|
|
|
•
|
$13.7 million
decrease in interest expense, net primarily due to gain from early extinguishment of debt, as we recognized a gain of
$11.4 million
in 2016, and lower outstanding borrowings;
|
|
|
•
|
$3.2 million
increase in other income, net primarily due to the impact of the Canadian dollar exchange rates on our Coinstar operations; and
|
|
|
•
|
$1.9 million
decrease in income tax expense primarily due to lower pre-tax income excluding the non-tax deductible goodwill impairment charge and reduced discrete tax expenses.
|
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
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
|
|
Change
|
|
June 30,
|
|
Change
|
Dollars in thousands
|
2016
|
|
2015
|
|
$
|
|
%
|
|
2016
|
|
2015
|
|
$
|
|
%
|
Direct operating
|
$
|
381
|
|
|
$
|
512
|
|
|
$
|
(131
|
)
|
|
(25.6
|
)%
|
|
$
|
722
|
|
|
$
|
1,501
|
|
|
$
|
(779
|
)
|
|
(51.9
|
)%
|
Marketing
|
39
|
|
|
142
|
|
|
(103
|
)
|
|
(72.5
|
)%
|
|
77
|
|
|
509
|
|
|
(432
|
)
|
|
(84.9
|
)%
|
Research and development
|
123
|
|
|
489
|
|
|
(366
|
)
|
|
(74.8
|
)%
|
|
233
|
|
|
1,202
|
|
|
(969
|
)
|
|
(80.6
|
)%
|
General and administrative
|
4,287
|
|
|
1,941
|
|
|
2,346
|
|
|
120.9
|
%
|
|
7,815
|
|
|
4,492
|
|
|
3,323
|
|
|
74.0
|
%
|
Total
|
$
|
4,830
|
|
|
$
|
3,084
|
|
|
$
|
1,746
|
|
|
56.6
|
%
|
|
$
|
8,847
|
|
|
$
|
7,704
|
|
|
$
|
1,143
|
|
|
14.8
|
%
|
Unallocated share-based compensation expense
increased
$1.7 million
, or
56.6%
and
$1.1 million
, or
14.8%
during the three and
six months ended
June 30, 2016
, primarily due to increased compensation expense related to restricted stock awards partially offset by 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. See
Note 8: Share-Based Payments
in our
Notes to Consolidated Financial Statements
for more information.
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.
Redbox
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
Dollars in thousands, except net revenue per rental amounts
|
June 30,
|
|
Change
|
|
June 30,
|
|
Change
|
2016
|
|
2015
|
|
$
|
|
%
|
|
2016
|
|
2015
|
|
$
|
|
%
|
Revenue
|
$
|
389,059
|
|
|
$
|
438,976
|
|
|
$
|
(49,917
|
)
|
|
(11.4
|
)%
|
|
$
|
810,547
|
|
|
$
|
958,509
|
|
|
$
|
(147,962
|
)
|
|
(15.4
|
)%
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating
|
271,731
|
|
|
301,444
|
|
|
(29,713
|
)
|
|
(9.9
|
)%
|
|
570,732
|
|
|
644,379
|
|
|
(73,647
|
)
|
|
(11.4
|
)%
|
Marketing
|
3,919
|
|
|
4,266
|
|
|
(347
|
)
|
|
(8.1
|
)%
|
|
7,743
|
|
|
9,091
|
|
|
(1,348
|
)
|
|
(14.8
|
)%
|
General and administrative
|
31,325
|
|
|
34,336
|
|
|
(3,011
|
)
|
|
(8.8
|
)%
|
|
63,354
|
|
|
68,071
|
|
|
(4,717
|
)
|
|
(6.9
|
)%
|
Restructuring and related costs (Note 9)
|
14
|
|
|
—
|
|
|
14
|
|
|
NM*
|
|
|
2,422
|
|
|
15,174
|
|
|
(12,752
|
)
|
|
(84.0
|
)%
|
Segment operating income
|
82,070
|
|
|
98,930
|
|
|
(16,860
|
)
|
|
(17.0
|
)%
|
|
166,296
|
|
|
221,794
|
|
|
(55,498
|
)
|
|
(25.0
|
)%
|
Less: depreciation and amortization
|
(21,806
|
)
|
|
(33,063
|
)
|
|
11,257
|
|
|
(34.0
|
)%
|
|
(46,101
|
)
|
|
(64,670
|
)
|
|
18,569
|
|
|
(28.7
|
)%
|
Operating income
|
$
|
60,264
|
|
|
$
|
65,867
|
|
|
$
|
(5,603
|
)
|
|
(8.5
|
)%
|
|
$
|
120,195
|
|
|
$
|
157,124
|
|
|
$
|
(36,929
|
)
|
|
(23.5
|
)%
|
Operating income as a percentage of revenue
|
15.5
|
%
|
|
15.0
|
%
|
|
|
|
|
|
14.8
|
%
|
|
16.4
|
%
|
|
|
|
|
Same store sales growth (decline)
|
(10.0
|
)%
|
|
(0.6
|
)%
|
|
|
|
|
|
(14.0
|
)%
|
|
0.5
|
%
|
|
|
|
|
Effect on change in revenue from same store sales growth (decline)
|
$
|
(42,822
|
)
|
|
$
|
(2,663
|
)
|
|
|
|
|
|
|
|
$
|
(130,630
|
)
|
|
$
|
4,573
|
|
|
|
|
|
|
|
Ending number of kiosks
|
39,970
|
|
|
41,340
|
|
|
(1,370
|
)
|
|
(3.3
|
)%
|
|
39,970
|
|
|
41,340
|
|
|
(1,370
|
)
|
|
(3.3
|
)%
|
Total rentals (in thousands)
|
123,593
|
|
|
146,047
|
|
|
(22,454
|
)
|
|
(15.4
|
)%
|
|
261,294
|
|
|
319,094
|
|
|
(57,800
|
)
|
|
(18.1
|
)%
|
Net revenue per rental
|
$
|
3.13
|
|
|
$
|
3.00
|
|
|
$
|
0.13
|
|
|
4.3
|
%
|
|
$
|
3.09
|
|
|
$
|
3.00
|
|
|
$
|
0.09
|
|
|
3.0
|
%
|
The comparable performance of our content library is continually affected by 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 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.
Q2 2016 Events
|
|
•
|
On April 22, 2016, Redbox extended the existing agreement with Lions Gate Films, Inc., through September 30, 2017.
|
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
June 30, 2016
to
three months ended
June 30, 2015
Revenue
decreased
$49.9 million
, or
11.4%
, primarily due to the following:
|
|
•
|
$42.8 million
decrease from a
10.0%
decrease
in same store sales primarily due to:
|
|
|
◦
|
13.4%
decline in total disc rentals related to our same store kiosks primarily driven by:
|
|
|
▪
|
a higher impact from secular decline in the physical market on movie rentals in the second quarter of 2016 as compared to the second quarter of 2015; partially offset by
|
|
|
▪
|
an increase in video game rentals as the market penetration of new generation game consoles continued to increase; and
|
|
|
▪
|
higher total box office of movie titles released in the second quarter of 2016 compared to the second quarter of 2015. Box office was
44.5%
higher than the prior year with
three
more titles including one title that comprised
30.9%
of the box office for titles released in the second quarter of 2016. Excluding this title, box office decreased
0.1%
as compared to the second quarter of 2015.
|
|
|
•
|
$7.1 million
decrease in revenue primarily from kiosks removed or relocated subsequent to the second quarter of 2015, due to continued efforts to optimize our network by removing underperforming kiosks.
|
Net revenue per rental
increased
$0.13
to
$3.13
primarily due lower promotional spend as compared to the second quarter of 2015 and higher video game rentals, which have a higher per day rental price. While we continue to invest in customer-specific promotional offerings, we have continued to reduce overall promotional spend by driving further efficiency in promotional programs.
Video game revenue represented
4.3%
of total rental revenue and
1.5%
of total disc rentals in the second quarter of 2016 as compared with
2.4%
and
0.9%
, respectively, during the second quarter of 2015, primarily due to consumer transition to new generation platforms as discussed above. Blu-ray revenue represented
17.6%
of total rental revenue and
14.2%
of total disc rentals during the second quarter of 2016 as compared with
18.1%
and
14.1%
, respectively, during the second quarter of 2015.
Operating income
decreased
$5.6 million
, or
8.5%
, primarily due to the following:
|
|
•
|
$49.9 million
decrease
in revenue as described above; partially offset by
|
|
|
•
|
$29.7 million
decrease
in direct operating expenses, which were
69.8%
of revenue during the second quarter of 2016 as compared with
68.7%
during the second quarter of 2015 as a result of:
|
|
|
◦
|
$16.6 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; and
|
|
|
◦
|
$13.1 million
or
7.0%
decrease in product costs to
$173.3 million
due to lower spend on movie content primarily due to content mix and fewer locations as compared to the second quarter of 2015 as we continue to remove underperforming kiosks to maximize profitability. The net impact of the revenue decline discussed above partially offset by the reduction in product cost resulted in a
2.1%
decrease in gross margin to
55.4%
for the second quarter of 2016.
|
|
|
•
|
$11.3 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; and
|
|
|
•
|
$3.0 million
decrease in general and administrative expenses primarily as a result of ongoing cost reduction initiatives.
|
Comparing
six months ended
June 30, 2016
to
six months ended
June 30, 2015
Revenue
decreased
$148.0 million
, or
15.4%
, primarily due to the following:
|
|
•
|
$130.6 million
decrease from a
14.0%
decrease
in same store sales primarily due to:
|
|
|
◦
|
15.9%
decline in total disc rentals related to our same store kiosks primarily driven by:
|
|
|
▪
|
a higher impact from secular decline in the physical market on movie rentals in the first half of 2016 as compared to the first half of 2015;
|
|
|
▪
|
a higher negative impact on movie rentals in the first quarter of 2016 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 half of 2016 as consumer behavior under the new price points settled in at lower levels of demand; partially offset by
|
|
|
▪
|
an increase in video game rentals primarily due to 2015 holiday sales of new generation platforms and the subsequent continued increase in the market penetration of the new generation platforms that increased demand for new generation content released at the end of 2015 and during the first six months of 2016; and
|
|
|
▪
|
higher total box office of movie titles released. Box office was
29.0%
higher than the prior year with
ten
more titles including one title released in the first week of April 2016 that comprised
15.5%
of the box office for titles released in the first half of 2016. Excluding this title, box office increased
9.0%
as compared to the first half of 2015.
|
|
|
•
|
$17.3 million
decrease in revenue primarily from kiosks removed or relocated subsequent to the first half of 2015, due to continued efforts to optimize our network by removing underperforming kiosks.
|
Net revenue per rental
increased
$0.09
to
$3.09
primarily due lower promotional spend as compared to the first half of 2015 and higher video game rentals, which have a higher per day rental price. While we continue to invest in customer-specific promotional offerings, we have continued during the first half of 2016 to reduce overall promotional spend by driving further efficiency in promotional programs.
Video game revenue represented
4.6%
of total rental revenue and
1.7%
of total disc rentals during the first half of 2016 as compared with
2.7%
and
1.1%
, respectively, during the first half 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
17.4%
of total rental revenue and
14.1%
of total disc rentals during the first half of 2016 as compared with
18.2%
and
14.3%
, respectively, during the first half of 2015.
Operating income
decreased
$36.9 million
, or
23.5%
, primarily due to the following:
|
|
•
|
$148.0 million
decrease
in revenue as described above; partially offset by
|
|
|
•
|
$73.6 million
decrease
in direct operating expenses, which were
70.4%
of revenue during the first half of 2016 as compared with
67.2%
during the first half of 2015 as a result of:
|
|
|
◦
|
$31.2 million
decrease in product costs to
$365.6 million
due to lower spend on movie content primarily due to content mix and fewer locations as compared to the first half of 2015 partially offset by higher amortization in the first quarter of 2016 from the content overbuy in the fourth quarter of 2015. The net impact of the revenue decline discussed above partially offset by the reduction in product cost resulted in a
3.7%
decrease in gross margin to
54.9%
for the first half of 2016; and
|
|
|
◦
|
$42.4 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.
|
|
|
•
|
$18.6 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;
|
|
|
•
|
$12.8 million
decrease
in restructuring and related costs;
|
|
|
•
|
$4.7 million
decrease in general and administrative expenses primarily as a result of ongoing cost reduction initiatives; and
|
|
|
•
|
$1.3 million
decrease in marketing expenses due to ongoing cost containment measures.
|
Coinstar
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
Dollars in thousands, except average transaction size
|
June 30,
|
|
Change
|
|
June 30,
|
|
Change
|
2016
|
|
2015
|
|
$
|
|
%
|
|
2016
|
|
2015
|
|
$
|
|
%
|
Revenue
|
$
|
84,168
|
|
|
$
|
80,279
|
|
|
$
|
3,889
|
|
|
4.8
|
%
|
|
$
|
156,547
|
|
|
$
|
149,609
|
|
|
$
|
6,938
|
|
|
4.6
|
%
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating
|
42,095
|
|
|
39,358
|
|
|
2,737
|
|
|
7.0
|
%
|
|
80,740
|
|
|
76,621
|
|
|
4,119
|
|
|
5.4
|
%
|
Marketing
|
399
|
|
|
1,232
|
|
|
(833
|
)
|
|
(67.6
|
)%
|
|
1,174
|
|
|
2,410
|
|
|
(1,236
|
)
|
|
(51.3
|
)%
|
General and administrative
|
8,494
|
|
|
7,768
|
|
|
726
|
|
|
9.3
|
%
|
|
16,358
|
|
|
15,563
|
|
|
795
|
|
|
5.1
|
%
|
Restructuring and related costs (Note 9)
|
3
|
|
|
—
|
|
|
3
|
|
|
NM*
|
|
|
465
|
|
|
550
|
|
|
(85
|
)
|
|
(15.5
|
)%
|
Segment operating income
|
33,177
|
|
|
31,921
|
|
|
1,256
|
|
|
3.9
|
%
|
|
57,810
|
|
|
54,465
|
|
|
3,345
|
|
|
6.1
|
%
|
Less: Depreciation and amortization
|
(7,595
|
)
|
|
(8,437
|
)
|
|
842
|
|
|
(10.0
|
)%
|
|
(15,004
|
)
|
|
(16,255
|
)
|
|
1,251
|
|
|
(7.7
|
)%
|
Operating income
|
$
|
25,582
|
|
|
$
|
23,484
|
|
|
$
|
2,098
|
|
|
8.9
|
%
|
|
$
|
42,806
|
|
|
$
|
38,210
|
|
|
$
|
4,596
|
|
|
12.0
|
%
|
Operating income as a percentage of revenue
|
30.4
|
%
|
|
29.3
|
%
|
|
|
|
|
|
27.3
|
%
|
|
25.5
|
%
|
|
|
|
|
Same store sales growth
|
11.1
|
%
|
|
1.9
|
%
|
|
|
|
|
|
10.1
|
%
|
|
1.4
|
%
|
|
|
|
|
Ending number of kiosks
|
20,810
|
|
|
21,140
|
|
|
(330
|
)
|
|
(1.6
|
)%
|
|
20,810
|
|
|
21,140
|
|
|
(330
|
)
|
|
(1.6
|
)%
|
Total transactions (in thousands)
|
17,987
|
|
|
18,200
|
|
|
(213
|
)
|
|
(1.2
|
)%
|
|
34,050
|
|
|
34,116
|
|
|
(66
|
)
|
|
(0.2
|
)%
|
Average transaction size
|
$
|
45.46
|
|
|
$
|
43.03
|
|
|
$
|
2.43
|
|
|
5.6
|
%
|
|
$
|
44.93
|
|
|
$
|
42.78
|
|
|
$
|
2.15
|
|
|
5.0
|
%
|
Comparing
three months ended
June 30, 2016
to
three months ended
June 30, 2015
Revenue
increased
$3.9 million
, or
4.8%
, 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
11.1%
.
The average Coinstar transaction size
increased
on a year over year basis, while the number of transactions decreased slightly.
Operating income
increased
$2.1 million
, or
8.9%
, primarily due to the following:
|
|
•
|
$3.9 million
increase
in revenue as described above;
|
|
|
•
|
$
0.8 million
decrease
in marketing expenses due to an expected shift in timing of spend to later in 2016; and
|
|
|
•
|
$0.8 million
decrease
in depreciation and amortization expenses primarily due to an increase in our fully depreciated asset base; partially offset by
|
|
|
•
|
$2.7 million
increase
in direct operating expenses primarily due to increased revenue sharing and increased transportation and processing expenses from the higher revenue discussed above. This increase was partially offset by 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 and by lower fleet vehicle expenses including fuel cost savings from reduced gas prices; and
|
|
|
•
|
$0.7 million
increase in general and administrative expenses primarily due to increased corporate allocations, as Coinstar's proportionate share of the total company's revenue has increased compared to the prior year, partially offset by ongoing cost reduction initiatives.
|
Comparing
six months ended
June 30, 2016
to
six months ended
June 30, 2015
Revenue
increased
$6.9 million
, or
4.6%
, 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
10.1%
.
The average Coinstar transaction size
increased
on a year over year basis, while the number of transactions was flat.
Operating income
increased
$4.6 million
, or
12.0%
, primarily due to the following:
|
|
•
|
$6.9 million
increase
in revenue as described above;
|
|
|
•
|
$1.3 million
decrease
in depreciation and amortization expenses primarily due to an increase in our fully depreciated asset base; and
|
|
|
•
|
$1.2 million
decrease
in marketing expenses due to an expected shift in timing of spend to later in 2016; partially offset by
|
|
|
•
|
$4.1 million
increase
in direct operating expenses primarily due to increased revenue sharing and increased transportation and processing expenses 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; and
|
|
|
•
|
$0.8 million
increase in general and administrative expenses primarily due to increased corporate allocations as Coinstar's proportionate share of the total company's revenue has increased compared to the prior year, partially offset by ongoing cost reduction initiatives.
|
ecoATM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
Dollars in thousands, except average selling price of value devices sold
|
June 30,
|
|
Change
|
|
June 30,
|
|
Change
|
2016
|
|
2015
|
|
$
|
|
%
|
|
2016
|
|
2015
|
|
$
|
|
%
|
Revenue
|
$
|
44,800
|
|
|
$
|
26,062
|
|
|
$
|
18,738
|
|
|
71.9
|
%
|
|
$
|
86,889
|
|
|
$
|
45,811
|
|
|
$
|
41,078
|
|
|
89.7
|
%
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating
|
37,291
|
|
|
27,227
|
|
|
10,064
|
|
|
37.0
|
%
|
|
75,185
|
|
|
50,033
|
|
|
25,152
|
|
|
50.3
|
%
|
Marketing
|
3,058
|
|
|
2,149
|
|
|
909
|
|
|
42.3
|
%
|
|
7,638
|
|
|
3,879
|
|
|
3,759
|
|
|
96.9
|
%
|
Research and development
|
1,194
|
|
|
1,549
|
|
|
(355
|
)
|
|
(22.9
|
)%
|
|
2,129
|
|
|
3,005
|
|
|
(876
|
)
|
|
(29.2
|
)%
|
General and administrative
|
3,573
|
|
|
2,094
|
|
|
1,479
|
|
|
70.6
|
%
|
|
7,575
|
|
|
4,062
|
|
|
3,513
|
|
|
86.5
|
%
|
Restructuring and related costs (Note 9)
|
384
|
|
|
—
|
|
|
384
|
|
|
NM*
|
|
|
789
|
|
|
127
|
|
|
662
|
|
|
521
|
%
|
Goodwill impairment
|
—
|
|
|
85,890
|
|
|
(85,890
|
)
|
|
(100.0
|
)%
|
|
—
|
|
|
85,890
|
|
|
(85,890
|
)
|
|
(100
|
)%
|
Segment operating loss
|
(700
|
)
|
|
(92,847
|
)
|
|
92,147
|
|
|
(99.2
|
)%
|
|
(6,427
|
)
|
|
(101,185
|
)
|
|
94,758
|
|
|
(93.6
|
)%
|
Less: depreciation and amortization
|
(8,398
|
)
|
|
(6,305
|
)
|
|
(2,093
|
)
|
|
33.2
|
%
|
|
(16,602
|
)
|
|
(12,207
|
)
|
|
(4,395
|
)
|
|
36.0
|
%
|
Operating loss
|
$
|
(9,098
|
)
|
|
$
|
(99,152
|
)
|
|
$
|
90,054
|
|
|
(90.8
|
)%
|
|
$
|
(23,029
|
)
|
|
$
|
(113,392
|
)
|
|
$
|
90,363
|
|
|
(79.7
|
)%
|
Ending number of kiosks
|
2,460
|
|
|
2,260
|
|
|
200
|
|
|
8.8
|
%
|
|
2,460
|
|
|
2,260
|
|
|
200
|
|
|
8.8
|
%
|
Average selling price of value devices sold
|
$
|
64.53
|
|
|
$
|
61.72
|
|
|
$
|
2.81
|
|
|
4.6
|
%
|
|
$
|
65.10
|
|
|
$
|
61.09
|
|
|
$
|
4.01
|
|
|
6.6
|
%
|
Number of value devices sold
|
619,436
|
|
|
409,331
|
|
|
210,105
|
|
|
51.3
|
%
|
|
1,190,258
|
|
|
726,465
|
|
|
463,793
|
|
|
63.8
|
%
|
Number of overall devices sold
|
805,323
|
|
|
704,450
|
|
|
100,873
|
|
|
14.3
|
%
|
|
1,534,759
|
|
|
1,223,083
|
|
|
311,676
|
|
|
25.5
|
%
|
On November 10, 2015, we acquired certain assets and liabilities of Gazelle. Results of operations for Gazelle are included in ecoATM for the three and six months ended June 30, 2016.
Comparing
three months ended
June 30, 2016
to
three months ended
June 30, 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
$18.7 million
, or
71.9%
, 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
$90.1 million
primarily due to:
|
|
•
|
$85.9 million
goodwill impairment charge recognized in 2015; and
|
|
|
•
|
$18.7 million
increase
in revenue described above; partially offset by
|
|
|
•
|
$10.1 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 machine support costs from headcount reductions and lower transportation costs due to a reduction of trips to ecoATM machines as a result of operating efficiencies;
|
|
|
•
|
$2.1 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;
|
|
|
•
|
$1.5 million
increase
in general and administrative expenses primarily due to increased corporate allocations to better align with direct costs related to operating ecoATM and the addition of Gazelle, partially offset by ongoing cost reduction initiatives; and
|
|
|
•
|
$0.9 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.
|
Comparing
six months ended
June 30, 2016
to
six months ended
June 30, 2015
Revenue
increased
$41.1 million
, or
89.7%
, 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
$90.4 million
primarily due to:
|
|
•
|
$85.9 million
goodwill impairment charge recognized in 2015;
|
|
|
•
|
$41.1 million
increase
in revenue described above; and
|
|
|
•
|
$0.9 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
|
|
|
•
|
$25.2 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 and lower machine support costs from headcount reductions;
|
|
|
•
|
$4.4 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;
|
|
|
•
|
$3.8 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;
|
|
|
•
|
$3.5 million
increase
in general and administrative expenses primarily due to increased corporate allocations to better align with direct costs related to operating ecoATM and the addition of Gazelle, partially offset by ongoing cost reduction initiatives; and
|
|
|
•
|
$0.7 million
increase in restructuring and related costs.
|
Interest Expense, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in thousands
|
Three Months Ended
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
Change
|
|
June 30,
|
|
Change
|
2016
|
|
2015
|
|
$
|
|
%
|
|
2016
|
|
2015
|
|
$
|
|
%
|
Cash interest expense
|
$
|
10,141
|
|
|
$
|
11,499
|
|
|
$
|
(1,358
|
)
|
|
(11.8
|
)%
|
|
$
|
20,795
|
|
|
$
|
22,894
|
|
|
$
|
(2,099
|
)
|
|
(9.2
|
)%
|
Amortization of debt discount and deferred financing fees
|
613
|
|
|
692
|
|
|
(79
|
)
|
|
(11.4
|
)%
|
|
1,251
|
|
|
1,385
|
|
|
(134
|
)
|
|
(9.7
|
)%
|
Total cash and non-cash interest expense
|
10,754
|
|
|
12,191
|
|
|
(1,437
|
)
|
|
(11.8
|
)%
|
|
22,046
|
|
|
24,279
|
|
|
(2,233
|
)
|
|
(9.2
|
)%
|
Gain from early extinguishment of debt
|
(418
|
)
|
|
—
|
|
|
(418
|
)
|
|
NM*
|
|
|
(11,446
|
)
|
|
—
|
|
|
(11,446
|
)
|
|
NM*
|
|
Total interest expense
|
10,336
|
|
|
12,191
|
|
|
(1,855
|
)
|
|
(15.2
|
)%
|
|
10,600
|
|
|
24,279
|
|
|
(13,679
|
)
|
|
(56.3
|
)%
|
Interest income
|
(35
|
)
|
|
(8
|
)
|
|
(27
|
)
|
|
337.5
|
%
|
|
(57
|
)
|
|
(25
|
)
|
|
(32
|
)
|
|
128.0
|
%
|
Interest expense, net
|
$
|
10,301
|
|
|
$
|
12,183
|
|
|
$
|
(1,882
|
)
|
|
(15.4
|
)%
|
|
$
|
10,543
|
|
|
$
|
24,254
|
|
|
$
|
(13,711
|
)
|
|
(56.5
|
)%
|
Comparing
three months ended
June 30, 2016
to
three months ended
June 30, 2015
Interest expense, net decreased
$1.9 million
, or
15.4%
, primarily due to:
|
|
•
|
$1.4 million
lower interest expense due to lower outstanding borrowings; and
|
|
|
•
|
$0.4 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.
|
Comparing
six months ended
June 30, 2016
to
six months ended
June 30, 2015
Interest expense, net decreased
$13.7 million
, or
56.5%
, primarily due to:
|
|
•
|
$11.4 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
|
|
|
•
|
$2.2 million
lower interest expense due to lower outstanding borrowings.
|
Other Income (Expense), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in thousands
|
Three Months Ended
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
Change
|
|
June 30,
|
|
Change
|
2016
|
|
2015
|
|
$
|
|
%
|
|
2016
|
|
2015
|
|
$
|
|
%
|
Other, net
|
$
|
223
|
|
|
$
|
642
|
|
|
$
|
(419
|
)
|
|
(65.3
|
)%
|
|
$
|
1,452
|
|
|
$
|
(1,704
|
)
|
|
$
|
3,156
|
|
|
NM*
|
Comparing
three months ended
June 30, 2016
to
three months ended
June 30, 2015
Other income (expense), net decreased by
$0.4 million
or
65.3%
, primarily due to the impact of the Canadian dollar exchange rates on our Coinstar operations.
Comparing
six months ended
June 30, 2016
to
six months ended
June 30, 2015
Other income (expense), net increased by
$3.2 million
, primarily due to the impact of the Canadian dollar exchange rates on our Coinstar operations.
Income Tax Expense
Comparing
three months ended
June 30, 2016
to
three months ended
June 30, 2015
Our effective tax rate from continuing operations was
34.1%
and
(62.4)%
for the
three months ended
June 30, 2016
and
2015
, respectively. Our effective tax rate for the
three months ended
June 30, 2016
, was lower than the U.S. Federal statutory rate of
35.0%
primarily due to the domestic production activities deduction, partially offset by state income taxes. Our effective tax rate for the
three months ended
June 30, 2015
, was lower than the U.S. Federal statutory rate of
35.0%
primarily due to an $85.9 million non-tax deductible goodwill impairment charge that was recorded in the second quarter of 2015 and state income taxes, partially offset by the domestic production activities deduction and a net decrease in valuation allowances related to capital loss carryforwards and state tax credit carryforwards.
Comparing
six months ended
June 30, 2016
to
six months ended
June 30, 2015
Our effective tax rate from continuing operations was
34.8%
and
113.4%
for the
six months ended
June 30, 2016
and
2015
, respectively. Our effective tax rate for the
six months ended
June 30, 2016
, was lower than the U.S. Federal statutory rate of
35.0%
primarily due to the domestic production activities deduction, partially offset by state income taxes. Our effective tax rate for the
six months ended
June 30, 2015
, was higher than the U.S. Federal statutory rate of
35.0%
primarily due to an $85.9 million non-tax deductible goodwill impairment charge that was recorded in the second quarter of 2015 and state income taxes, partially offset by the domestic production activities deduction.
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;
|
|
|
•
|
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) goodwill impairment, ii) 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, iii) compensation expense for rights to receive cash issued in conjunction with our acquisition of ecoATM and attributable to post-combination services as they are fixed amount acquisition related awards and not indicative of the directly controllable future business results, and iv) loss from equity method investments, which represents our share of loss from entities we do not consolidate or control (“Non-Core Adjustments”).
We believe investors should consider our core results because they are more indicative of our ongoing performance and trends, are more consistent with how management evaluates our operational results and trends, provide meaningful supplemental information to investors through the exclusion of certain expenses which are either nonrecurring or may not be indicative of our directly controllable business operating results, allow for greater transparency in assessing our performance, help investors better analyze the results of our business and assist in forecasting future periods.
Core Adjusted EBITDA from continuing operations
Our non-GAAP financial measure core adjusted EBITDA from continuing operations is defined as earnings from continuing operations before depreciation, amortization and other; interest expense, net; income taxes; share-based payments expense; and Non-Core Adjustments.
A reconciliation of core adjusted EBITDA from continuing operations to net income from continuing operations, the most comparable GAAP financial measure, is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
|
|
Change
|
|
June 30,
|
|
Change
|
Dollars in thousands
|
2016
|
|
2015
|
|
$
|
|
%
|
|
2016
|
|
2015
|
|
$
|
|
%
|
Net income (loss) from continuing operations
|
$
|
40,548
|
|
|
$
|
(47,351
|
)
|
|
$
|
87,899
|
|
|
NM*
|
|
|
$
|
78,999
|
|
|
$
|
(5,196
|
)
|
|
$
|
84,195
|
|
|
NM*
|
|
Depreciation, amortization and other
|
37,778
|
|
|
48,483
|
|
|
(10,705
|
)
|
|
(22.1
|
)%
|
|
77,686
|
|
|
94,478
|
|
|
(16,792
|
)
|
|
(17.8
|
)%
|
Interest expense, net
|
10,301
|
|
|
12,183
|
|
|
(1,882
|
)
|
|
(15.4
|
)%
|
|
10,543
|
|
|
24,254
|
|
|
(13,711
|
)
|
|
(56.5
|
)%
|
Income taxes
|
21,013
|
|
|
18,185
|
|
|
2,828
|
|
|
15.6
|
%
|
|
42,111
|
|
|
44,027
|
|
|
(1,916
|
)
|
|
(4.4
|
)%
|
Share-based payments expense
(1)
|
5,298
|
|
|
3,320
|
|
|
1,978
|
|
|
59.6
|
%
|
|
9,690
|
|
|
7,261
|
|
|
2,429
|
|
|
33.5
|
%
|
Adjusted EBITDA from continuing operations
|
114,938
|
|
|
34,820
|
|
|
80,118
|
|
|
230.1
|
%
|
|
219,029
|
|
|
164,824
|
|
|
54,205
|
|
|
32.9
|
%
|
Non-Core Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
—
|
|
|
85,890
|
|
|
(85,890
|
)
|
|
(100.0
|
)%
|
|
—
|
|
|
85,890
|
|
|
(85,890
|
)
|
|
(100.0
|
)%
|
Restructuring and related costs
|
401
|
|
|
—
|
|
|
401
|
|
|
NM*
|
|
|
3,676
|
|
|
15,851
|
|
|
(12,175
|
)
|
|
(76.8
|
)%
|
Rights to receive cash issued in connection with the acquisition of ecoATM
|
345
|
|
|
1,005
|
|
|
(660
|
)
|
|
(65.7
|
)%
|
|
785
|
|
|
2,925
|
|
|
(2,140
|
)
|
|
(73.2
|
)%
|
Loss from equity method investments, net
|
208
|
|
|
133
|
|
|
75
|
|
|
56.4
|
%
|
|
415
|
|
|
265
|
|
|
150
|
|
|
56.6
|
%
|
Core adjusted EBITDA from continuing operations
|
$
|
115,892
|
|
|
$
|
121,848
|
|
|
$
|
(5,956
|
)
|
|
(4.9
|
)%
|
|
$
|
223,905
|
|
|
$
|
269,755
|
|
|
$
|
(45,850
|
)
|
|
(17.0
|
)%
|
|
|
(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
June 30, 2016
to
three months ended
June 30, 2015
The decrease in our core adjusted EBITDA from continuing operations was primarily due to decreased segment operating income in our Redbox segment, partially offset by decreased segment operating losses in our ecoATM segment and our All Other reporting category. The other significant components of core adjusted EBITDA from continuing operations have been discussed previously in the
Results of Operations
section above.
Comparing
six months ended
June 30, 2016
to
six months ended
June 30, 2015
The decrease in our core adjusted EBITDA from continuing operations was primarily due to decreased segment operating income in our Redbox segment, partially offset by decreased segment operating losses in our ecoATM segment and our All Other reporting category. The other significant components of core adjusted EBITDA from continuing operations have been discussed previously in the
Results of Operations
section above.
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
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
Change
|
|
June 30,
|
|
Change
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
2016
|
|
2015
|
|
$
|
|
%
|
Diluted EPS from continuing operations per common share
|
$
|
2.38
|
|
|
$
|
(2.66
|
)
|
|
$
|
5.04
|
|
|
NM*
|
|
|
$
|
4.67
|
|
|
$
|
(0.30
|
)
|
|
$
|
4.97
|
|
|
NM*
|
|
Non-Core Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment
(1)
|
—
|
|
|
4.81
|
|
|
(4.81
|
)
|
|
(100.0
|
)%
|
|
—
|
|
|
4.75
|
|
|
(4.75
|
)
|
|
(100.0
|
)%
|
Restructuring and related costs (pre-tax)
|
0.02
|
|
|
—
|
|
|
0.02
|
|
|
NM*
|
|
|
0.21
|
|
|
0.89
|
|
|
(0.68
|
)
|
|
(76.4
|
)%
|
Rights to receive cash issued in connection with the acquisition of ecoATM (pre-tax)
|
0.02
|
|
|
0.06
|
|
|
(0.04
|
)
|
|
(66.7
|
)%
|
|
0.04
|
|
|
0.16
|
|
|
(0.12
|
)
|
|
(75.0
|
)%
|
Loss from equity method investments, net (pre-tax)
|
0.01
|
|
|
0.01
|
|
|
—
|
|
|
—
|
%
|
|
0.02
|
|
|
0.01
|
|
|
0.01
|
|
|
100.0
|
%
|
Tax impact of non-core adjustments
(1)(2)
|
(0.02
|
)
|
|
(0.02
|
)
|
|
—
|
|
|
—
|
%
|
|
(0.09
|
)
|
|
(0.40
|
)
|
|
0.31
|
|
|
(77.5
|
)%
|
Core diluted EPS from continuing operations
|
$
|
2.41
|
|
|
$
|
2.20
|
|
|
$
|
0.21
|
|
|
9.5
|
%
|
|
$
|
4.85
|
|
|
$
|
5.11
|
|
|
$
|
(0.26
|
)
|
|
(5.1
|
)%
|
(1) The goodwill impairment recognized in 2015 is non-tax deductible.
(2) 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
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
|
|
Change
|
|
June 30,
|
|
Change
|
Dollars in thousands
|
2016
|
|
2015
|
|
$
|
|
%
|
|
2016
|
|
2015
|
|
$
|
|
%
|
Net cash provided by operating activities
|
$
|
75,020
|
|
|
$
|
75,143
|
|
|
$
|
(123
|
)
|
|
(0.2
|
)%
|
|
$
|
142,225
|
|
|
$
|
181,215
|
|
|
$
|
(38,990
|
)
|
|
(21.5
|
)%
|
Purchase of property and equipment
|
(14,921
|
)
|
|
(19,508
|
)
|
|
4,587
|
|
|
(23.5
|
)%
|
|
(28,374
|
)
|
|
(40,217
|
)
|
|
11,843
|
|
|
(29.4
|
)%
|
Free cash flow
|
$
|
60,099
|
|
|
$
|
55,635
|
|
|
$
|
4,464
|
|
|
8.0
|
%
|
|
$
|
113,851
|
|
|
$
|
140,998
|
|
|
$
|
(27,147
|
)
|
|
(19.3
|
)%
|
An analysis of our net cash from operating activities and used in investing and financing activities is provided below.
Net Debt and Net Leverage Ratio
Our non-GAAP financial measure net debt is defined as the total face value of outstanding debt, including capital leases, less cash and cash equivalents held in financial institutions domestically. Our non-GAAP financial measure net leverage ratio is defined as net debt divided by core adjusted EBITDA from continuing operations for the last twelve months (LTM). We believe net debt and net leverage ratio are important non-GAAP measures because they:
|
|
•
|
are used to assess the degree of leverage by management;
|
|
|
•
|
provide additional information to users of the financial statements regarding our ability to service, incur or pay down indebtedness and repurchase our securities as well as additional information about our capital structure; and
|
|
|
•
|
are reported quarterly to support covenant compliance under our credit agreement.
|
A reconciliation of net debt to total outstanding debt including capital leases, the most comparable GAAP financial measure, is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
December 31,
2015
|
|
Change
|
Dollars in thousands
|
|
|
$
|
|
%
|
Senior unsecured notes
(1)
|
$
|
549,212
|
|
|
$
|
608,908
|
|
|
$
|
(59,696
|
)
|
|
(9.8
|
)%
|
Term loans
(1)
|
129,375
|
|
|
136,875
|
|
|
(7,500
|
)
|
|
(5.5
|
)%
|
Revolving line of credit
|
80,000
|
|
|
140,500
|
|
|
(60,500
|
)
|
|
(43.1
|
)%
|
Capital leases
|
5,531
|
|
|
5,889
|
|
|
(358
|
)
|
|
(6.1
|
)%
|
Total principal value of outstanding debt including capital leases
|
764,118
|
|
|
892,172
|
|
|
(128,054
|
)
|
|
(14.4
|
)%
|
Less domestic cash and cash equivalents held in financial institutions
|
(41,742
|
)
|
|
(46,192
|
)
|
|
4,450
|
|
|
(9.6
|
)%
|
Net debt
|
722,376
|
|
|
845,980
|
|
|
(123,604
|
)
|
|
(14.6
|
)%
|
LTM Core adjusted EBITDA from continuing operations
(2)
|
$
|
439,435
|
|
|
$
|
485,285
|
|
|
$
|
(45,850
|
)
|
|
(9.4
|
)%
|
Net leverage ratio
|
1.64
|
|
|
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
June 30, 2016
and
December 31, 2015
was determined as follows:
|
|
|
|
|
Dollars in thousands
|
|
Core adjusted EBITDA from continuing operations for the six months ended June 30, 2016
|
$
|
223,905
|
|
Add: Core adjusted EBITDA from continuing operations for the twelve months ended December 31, 2015
(1)
|
485,285
|
|
Less: Core adjusted EBITDA from continuing operations for the six months ended June 30, 2015
|
(269,755
|
)
|
LTM Core adjusted EBITDA from continuing operations for the twelve months ended June 30, 2016
|
$
|
439,435
|
|
|
|
(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.
|
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
$39.0 million
primarily due to the following:
|
|
•
|
$132.4 million
change in net non-cash income and expense included in net income primarily due to changes in goodwill impairment, depreciation and other, gain from early extinguishment of debt and deferred income taxes; and
|
|
|
•
|
$4.4 million
increase in net cash inflow from changes in working capital primarily due to changes in accounts payable, content library, accrued payable to retailers, other accrued liabilities, accounts receivable, and prepaid expenses; partially offset by
|
|
|
•
|
$89.0 million
increase in net income.
|
Net Cash used in Investing Activities
We used
$28.3 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
$135.2 million
of net cash from financing activities primarily due to:
|
|
•
|
$68.0 million
in net payments for borrowings from our Credit Facility;
|
|
|
•
|
$47.5 million
used to repurchase a portion of our 2021 and 2019 Notes;
|
|
|
•
|
$15.1 million
for dividends paid; and
|
|
|
•
|
$3.1 million
payment for capital lease obligations and other debt.
|
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
June 30, 2016
, our cash and cash equivalent balance was
$199.0 million
, of which
$74.7 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 June 30, 2016
|
|
|
|
|
|
|
|
|
|
Principal
|
$
|
320,614
|
|
|
$
|
228,598
|
|
|
$
|
129,375
|
|
|
$
|
80,000
|
|
|
$
|
758,587
|
|
Unamortized discount and deferred financing fees
|
(2,922
|
)
|
|
(3,234
|
)
|
|
(224
|
)
|
|
(1,968
|
)
|
|
(8,348
|
)
|
Total
|
317,692
|
|
|
225,364
|
|
|
129,151
|
|
|
78,032
|
|
|
750,239
|
|
Less: current portion
|
—
|
|
|
—
|
|
|
(15,000
|
)
|
|
—
|
|
|
(15,000
|
)
|
Total long-term portion
|
$
|
317,692
|
|
|
$
|
225,364
|
|
|
$
|
114,151
|
|
|
$
|
78,032
|
|
|
$
|
735,239
|
|
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 six months ended
June 30, 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
June 30, 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 six months ended
June 30, 2016
, we repurchased
30,310
notes, or
$30.3 million
in face value of notes, for
$24.1 million
in cash. The gain from early extinguishment of these notes was approximately
$5.8 million
and is included in interest expense, net on our
Consolidated Statements of Comprehensive Income.
As of
June 30, 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 swing line 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
June 30, 2016
, the interest rate on amounts outstanding under the Credit Facility was
2.20%
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
|
$
|
7,500
|
|
2017
|
15,000
|
|
2018
|
20,625
|
|
2019
|
86,250
|
|
Total
|
$
|
129,375
|
|
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).
|
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
June 30, 2016
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in thousands
|
Total
|
|
Remaining in 2016
|
|
2017 &
2018
|
|
2019 &
2020
|
|
2021 &
Beyond
|
Long-term debt
(1)
|
$
|
758,587
|
|
|
$
|
87,500
|
|
|
$
|
33,750
|
|
|
$
|
408,739
|
|
|
$
|
228,598
|
|
Contractual interest on long-term debt
|
$
|
120,052
|
|
|
$
|
16,333
|
|
|
$
|
65,334
|
|
|
$
|
31,670
|
|
|
$
|
6,715
|
|
Total estimated movie content commitments
(2)
|
$
|
460,681
|
|
|
$
|
226,902
|
|
|
$
|
233,779
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
(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
.
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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.