Attached files
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EXCEL - IDEA: XBRL DOCUMENT - OUTERWALL INC | Financial_Report.xls |
EX-32.2 - EXHIBIT - OUTERWALL INC | a2014q3_10-qxexhibit322.htm |
EX-32.1 - EXHIBIT - OUTERWALL INC | a2014q3_10-qxexhibitx321.htm |
EX-31.1 - EXHIBIT - OUTERWALL INC | a2014q3_10-qxexhibitx311.htm |
EX-31.2 - EXHIBIT - OUTERWALL INC | a2014q3_10-qxexhibitx312.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2014
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 000-22555
OUTERWALL INC.
(Exact name of registrant as specified in its charter)
Delaware | 94-3156448 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
1800 114th Avenue SE, Bellevue, Washington | 98004 | |
(Address of principal executive offices) | (Zip Code) |
(425) 943-8000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ý | Accelerated filer | ¨ | ||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at October 24, 2014 | |
Common Stock, $0.001 par value | 18,914,132 |
OUTERWALL INC.
FORM 10-Q
TABLE OF CONTENTS
Page | ||
PART I - FINANCIAL INFORMATION | ||
PART II - OTHER INFORMATION | ||
OUTERWALL INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
September 30, 2014 | December 31, 2013 | ||||||
Assets | |||||||
Current Assets: | |||||||
Cash and cash equivalents | $ | 184,901 | $ | 371,437 | |||
Accounts receivable, net of allowances of $1,700 and $1,826 | 32,787 | 50,296 | |||||
Content library | 151,068 | 199,868 | |||||
Prepaid expenses and other current assets | 59,807 | 84,709 | |||||
Total current assets | 428,563 | 706,310 | |||||
Property and equipment, net | 451,346 | 520,865 | |||||
Deferred income taxes | 9,290 | 6,443 | |||||
Goodwill and other intangible assets, net | 627,324 | 638,690 | |||||
Other long-term assets | 11,510 | 19,075 | |||||
Total assets | $ | 1,528,033 | $ | 1,891,383 | |||
Liabilities and Stockholders’ Equity | |||||||
Current Liabilities: | |||||||
Accounts payable | $ | 138,123 | $ | 236,018 | |||
Accrued payable to retailers | 105,989 | 134,140 | |||||
Other accrued liabilities | 129,873 | 134,127 | |||||
Current portion of long-term debt and other long-term liabilities | 20,595 | 103,889 | |||||
Deferred income taxes | 33,154 | 23,143 | |||||
Total current liabilities | 427,734 | 631,317 | |||||
Long-term debt and other long-term liabilities | 1,022,803 | 681,403 | |||||
Deferred income taxes | 29,370 | 58,528 | |||||
Total liabilities | 1,479,907 | 1,371,248 | |||||
Commitments and contingencies (Note 17) | |||||||
Debt conversion feature | — | 1,446 | |||||
Stockholders’ Equity: | |||||||
Preferred stock, $0.001 par value - 5,000,000 shares authorized; no shares issued or outstanding | — | — | |||||
Common stock, $0.001 par value - 60,000,000 authorized; | |||||||
36,593,850 and 36,356,357 shares issued; | |||||||
18,894,926 and 26,150,900 shares outstanding; | 470,157 | 482,481 | |||||
Treasury stock | (997,697 | ) | (476,796 | ) | |||
Retained earnings | 576,589 | 513,771 | |||||
Accumulated other comprehensive loss | (923 | ) | (767 | ) | |||
Total stockholders’ equity | 48,126 | 518,689 | |||||
Total liabilities and stockholders’ equity | $ | 1,528,033 | $ | 1,891,383 |
See accompanying Notes to Consolidated Financial Statements
1
OUTERWALL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Revenue | $ | 552,864 | $ | 586,539 | $ | 1,702,403 | $ | 1,712,896 | |||||||
Expenses: | |||||||||||||||
Direct operating(1) | 384,111 | 405,973 | 1,194,815 | 1,174,818 | |||||||||||
Marketing | 9,762 | 8,395 | 27,142 | 22,903 | |||||||||||
Research and development | 2,999 | 3,510 | 9,885 | 8,171 | |||||||||||
General and administrative | 47,864 | 61,031 | 149,829 | 168,786 | |||||||||||
Depreciation and other | 47,896 | 49,245 | 146,171 | 143,156 | |||||||||||
Amortization of intangible assets | 3,671 | 3,191 | 11,366 | 7,085 | |||||||||||
Total expenses | 496,303 | 531,345 | 1,539,208 | 1,524,919 | |||||||||||
Operating income | 56,561 | 55,194 | 163,195 | 187,977 | |||||||||||
Other income (expense), net: | |||||||||||||||
Income (loss) from equity method investments, net (Note 8) | (11,352 | ) | 57,934 | (31,261 | ) | 41,280 | |||||||||
Interest expense, net | (12,463 | ) | (8,402 | ) | (35,037 | ) | (25,953 | ) | |||||||
Other, net | (3,015 | ) | (2,402 | ) | (1,857 | ) | (3,323 | ) | |||||||
Total other income (expense), net | (26,830 | ) | 47,130 | (68,155 | ) | 12,004 | |||||||||
Income from continuing operations before income taxes | 29,731 | 102,324 | 95,040 | 199,981 | |||||||||||
Income tax expense | (11,841 | ) | (15,529 | ) | (31,454 | ) | (34,766 | ) | |||||||
Income from continuing operations | 17,890 | 86,795 | 63,586 | 165,215 | |||||||||||
Loss from discontinued operations, net of tax (Note 13) | — | (4,139 | ) | (768 | ) | (13,098 | ) | ||||||||
Net income | 17,890 | 82,656 | 62,818 | 152,117 | |||||||||||
Foreign currency translation adjustment(2) | (695 | ) | 1,852 | (156 | ) | (304 | ) | ||||||||
Comprehensive income | $ | 17,195 | $ | 84,508 | $ | 62,662 | $ | 151,813 | |||||||
Basic earnings (loss) per share: | |||||||||||||||
Continuing operations | $ | 0.95 | $ | 3.19 | $ | 3.06 | $ | 6.03 | |||||||
Discontinued operations | — | (0.16 | ) | (0.04 | ) | (0.48 | ) | ||||||||
Basic earnings per share | $ | 0.95 | $ | 3.03 | $ | 3.02 | $ | 5.55 | |||||||
Diluted earnings (loss) per share: | |||||||||||||||
Continuing operations | $ | 0.93 | $ | 3.10 | $ | 2.98 | $ | 5.78 | |||||||
Discontinued operations | — | (0.15 | ) | (0.04 | ) | (0.46 | ) | ||||||||
Diluted earnings per share | $ | 0.93 | $ | 2.95 | $ | 2.94 | $ | 5.32 | |||||||
Weighted average shares used in basic per share calculations | 18,798 | 27,244 | 20,792 | 27,391 | |||||||||||
Weighted average shares used in diluted per share calculations (Note 14) | 19,147 | 28,016 | 21,372 | 28,582 |
(1) | “Direct operating” excludes depreciation and other of $32.0 million and $96.5 million for the three and nine months ended September 30, 2014, respectively, and $33.0 million and $97.3 million for the three and nine months ended September 30, 2013, respectively. |
(2) | Foreign currency translation adjustment had no tax effect for the three and nine months ended September 30, 2014 and 2013, respectively. |
See accompanying Notes to Consolidated Financial Statements
2
OUTERWALL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
(unaudited)
Accumulated Other Comprehensive Loss | ||||||||||||||||||||||
Common Stock | Treasury | Retained | ||||||||||||||||||||
Shares | Amount | Stock | Earnings | Total | ||||||||||||||||||
Balance, June 30, 2014 | 19,865,273 | $ | 479,494 | $ | (941,167 | ) | $ | 558,699 | $ | (228 | ) | $ | 96,798 | |||||||||
Proceeds from exercise of stock options, net | 3,912 | 153 | — | — | — | 153 | ||||||||||||||||
Adjustments related to tax withholding for share-based compensation | (3,737 | ) | (212 | ) | — | — | — | (212 | ) | |||||||||||||
Share-based payments expense | (33,496 | ) | 3,249 | — | — | — | 3,249 | |||||||||||||||
Excess tax benefit on share-based compensation expense | — | 1,167 | — | — | — | 1,167 | ||||||||||||||||
Repurchases of common stock | (1,185,970 | ) | — | (70,587 | ) | — | — | (70,587 | ) | |||||||||||||
Conversion of callable convertible debt, net of tax | 248,944 | (13,857 | ) | 14,057 | — | — | 200 | |||||||||||||||
Adjustment and settlement of debt conversion feature classified as temporary equity | — | 163 | — | — | — | 163 | ||||||||||||||||
Net income | — | — | — | 17,890 | — | 17,890 | ||||||||||||||||
Foreign currency translation adjustment(1) | — | — | — | — | (695 | ) | (695 | ) | ||||||||||||||
Balance, September 30, 2014 | 18,894,926 | $ | 470,157 | $ | (997,697 | ) | $ | 576,589 | $ | (923 | ) | $ | 48,126 |
(1) | Foreign currency translation adjustment has no tax effect for the three months ended September 30, 2014. |
Accumulated Other Comprehensive Loss | ||||||||||||||||||||||
Common Stock | Treasury | Retained | ||||||||||||||||||||
Shares | Amount | Stock | Earnings | Total | ||||||||||||||||||
Balance, December 31, 2013 | 26,150,900 | $ | 482,481 | $ | (476,796 | ) | $ | 513,771 | $ | (767 | ) | $ | 518,689 | |||||||||
Proceeds from exercise of stock options, net | 87,789 | 2,943 | — | — | — | 2,943 | ||||||||||||||||
Adjustments related to tax withholding for share-based compensation | (57,694 | ) | (4,027 | ) | — | — | — | (4,027 | ) | |||||||||||||
Share-based payments expense | 207,398 | 10,093 | — | — | — | 10,093 | ||||||||||||||||
Excess tax benefit on share-based compensation expense | — | 1,992 | — | — | — | 1,992 | ||||||||||||||||
Repurchases of common stock | (7,925,227 | ) | — | (545,156 | ) | — | — | (545,156 | ) | |||||||||||||
Conversion of callable convertible debt, net of tax | 431,760 | (24,771 | ) | 24,255 | — | — | (516 | ) | ||||||||||||||
Adjustment and settlement of debt conversion feature classified as temporary equity | — | 1,446 | — | — | — | 1,446 | ||||||||||||||||
Net income | — | — | — | 62,818 | — | 62,818 | ||||||||||||||||
Foreign currency translation adjustment(1) | — | — | — | — | (156 | ) | (156 | ) | ||||||||||||||
Balance, September 30, 2014 | 18,894,926 | $ | 470,157 | $ | (997,697 | ) | $ | 576,589 | $ | (923 | ) | $ | 48,126 |
(1) | Foreign currency translation adjustment has no tax effect for the nine months ended September 30, 2014. |
See accompanying Notes to Consolidated Financial Statements
3
OUTERWALL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Operating Activities: | |||||||||||||||
Net income | $ | 17,890 | $ | 82,656 | $ | 62,818 | $ | 152,117 | |||||||
Adjustments to reconcile net income to net cash flows from operating activities: | |||||||||||||||
Depreciation and other | 47,898 | 49,664 | 146,156 | 144,173 | |||||||||||
Amortization of intangible assets | 3,671 | 3,191 | 11,366 | 7,085 | |||||||||||
Share-based payments expense | 3,249 | 2,774 | 10,093 | 11,454 | |||||||||||
Windfall excess tax benefits related to share-based payments | (35 | ) | (318 | ) | (1,988 | ) | (3,347 | ) | |||||||
Deferred income taxes | (2,404 | ) | 24,813 | (17,408 | ) | (12,098 | ) | ||||||||
Impairment expense | — | 2,586 | — | 5,262 | |||||||||||
Loss (income) from equity method investments, net | 11,352 | (57,934 | ) | 31,261 | (41,280 | ) | |||||||||
Amortization of deferred financing fees and debt discount | 901 | 1,158 | 3,423 | 5,205 | |||||||||||
Loss from early extinguishment of debt | 55 | 1 | 2,018 | 5,950 | |||||||||||
Other | (313 | ) | 2,831 | (1,477 | ) | 1,020 | |||||||||
Cash flows from changes in operating assets and liabilities: | |||||||||||||||
Accounts receivable, net | 12,133 | 2,344 | 17,464 | (306 | ) | ||||||||||
Content library | 1,314 | 4,534 | 48,800 | 9,446 | |||||||||||
Prepaid expenses and other current assets | 1,044 | (20,845 | ) | 23,047 | (31,456 | ) | |||||||||
Other assets | 611 | (633 | ) | 1,647 | 269 | ||||||||||
Accounts payable | (26,011 | ) | (14,722 | ) | (97,006 | ) | (70,180 | ) | |||||||
Accrued payable to retailers | (21,099 | ) | (9,368 | ) | (27,822 | ) | (9,641 | ) | |||||||
Other accrued liabilities | (629 | ) | (11,789 | ) | (5,345 | ) | (26,552 | ) | |||||||
Net cash flows from operating activities(1) | 49,627 | 60,943 | 207,047 | 147,121 | |||||||||||
Investing Activities: | |||||||||||||||
Purchases of property and equipment | (19,295 | ) | (39,102 | ) | (72,311 | ) | (123,346 | ) | |||||||
Proceeds from sale of property and equipment | 42 | 56 | 1,835 | 12,888 | |||||||||||
Sales of short term investments | — | 10,000 | — | — | |||||||||||
Acquisition of ecoATM, net of cash acquired | — | (244,036 | ) | — | (244,036 | ) | |||||||||
Receipt of note receivable principal | — | — | — | 95 | |||||||||||
Cash paid for equity investments | (14,000 | ) | (14,000 | ) | (24,500 | ) | (28,000 | ) | |||||||
Net cash flows used in investing activities(1) | (33,253 | ) | (287,082 | ) | (94,976 | ) | (382,399 | ) | |||||||
Financing Activities: | |||||||||||||||
Proceeds from issuance of senior unsecured notes | — | — | 295,500 | 343,769 | |||||||||||
Proceeds from new borrowing on Credit Facility | 130,000 | 150,000 | 635,000 | 150,000 | |||||||||||
Principal payments on Credit Facility | (86,875 | ) | (54,376 | ) | (621,250 | ) | (60,938 | ) | |||||||
Financing costs associated with Credit Facility and senior unsecured notes(2) | (824 | ) | — | (2,906 | ) | (444 | ) | ||||||||
Settlement and conversion of convertible debt | (33,425 | ) | (30 | ) | (51,149 | ) | (169,664 | ) | |||||||
Repurchases of common stock(3) | (70,598 | ) | (23,616 | ) | (545,078 | ) | (95,004 | ) | |||||||
Principal payments on capital lease obligations and other debt | (3,516 | ) | (3,373 | ) | (10,597 | ) | (10,824 | ) | |||||||
Windfall excess tax benefits related to share-based payments | 35 | 318 | 1,988 | 3,347 | |||||||||||
Withholding tax paid on vesting of restricted stock net of proceeds from exercise of stock options | (59 | ) | 1,018 | (1,084 | ) | 7,763 | |||||||||
Net cash flows from (used in) financing activities(1) | (65,262 | ) | 69,941 | (299,576 | ) | 168,005 |
4
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Effect of exchange rate changes on cash | 563 | 1,183 | 969 | (391 | ) | ||||||||||
Decrease in cash and cash equivalents | (48,325 | ) | (155,015 | ) | (186,536 | ) | (67,664 | ) | |||||||
Cash and cash equivalents: | |||||||||||||||
Beginning of period | 233,226 | 370,245 | 371,437 | 282,894 | |||||||||||
End of period | $ | 184,901 | $ | 215,230 | $ | 184,901 | $ | 215,230 | |||||||
Supplemental disclosure of cash flow information: | |||||||||||||||
Cash paid during the period for interest | $ | 12,614 | $ | 13,284 | $ | 29,824 | $ | 19,194 | |||||||
Cash paid during the period for income taxes, net | $ | 14,594 | $ | 9,999 | $ | 23,783 | $ | 54,997 | |||||||
Supplemental disclosure of non-cash investing and financing activities: | |||||||||||||||
Purchases of property and equipment financed by capital lease obligations | $ | 1,901 | $ | 1,128 | $ | 7,414 | $ | 6,743 | |||||||
Purchases of property and equipment included in ending accounts payable | $ | 5,869 | $ | 8,188 | $ | 5,869 | $ | 8,188 | |||||||
Non-cash gain included in equity investments | $ | — | $ | 68,376 | $ | — | $ | 68,376 | |||||||
Common stock issued on conversion of callable convertible debt, net of tax | $ | 14,057 | $ | 14 | $ | 24,255 | $ | 14,292 | |||||||
Non-cash debt issue costs(2) | $ | — | $ | — | $ | 4,500 | $ | 6,231 |
(1) | During 2013, we discontinued four ventures previously included in our New Ventures operating segment, Orango, Rubi, Crisp Market, and Star Studio. Cash flows from these discontinued operations are not segregated from cash flows from continuing operations in all periods presented because they were not material. |
(2) | Total financing costs associated with the Credit Facility and senior unsecured notes issued in the second quarter of 2014 were $8.2 million composed of non-cash debt issue costs of $4.5 million recorded as debt discount associated with our issuance of $300.0 million senior unsecured notes due 2021, $1.5 million in deferred financing fees associated with the senior unsecured notes, and $2.2 million in deferred financing fees associated with the refinancing of our credit facility. The cash payments for financing costs associated with the Credit Facility and senior unsecured notes during the three and nine months ended September 30, 2014 were $0.8 million and $2.9 million, respectively. The remaining accrued balance of the total financing cost as of September 30, 2014 was $0.8 million. |
(3) | The total cost of repurchases of common stock during the three and nine months ended September 30, 2014 was $70.6 million and $545.2 million, respectively, which includes $3.8 million in fees and expenses relating to the tender offer recorded as part of the cost of treasury stock in our Consolidated Balance Sheets. The cash payments for the tender offer fees during the three and nine months ended September 30, 2014 was $0.01 million and $3.7 million, respectively. The remaining accrued balance of the tender offer fees as of September 30, 2014 is $0.1 million. |
See accompanying Notes to Consolidated Financial Statements
5
INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page | ||
6
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, 2013, is derived from our 2013 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 2013 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.
Revision of Previously Issued Financial Statements
During the second quarter of 2014, we identified adjustments to prior periods related to purchases of property and equipment included in ending accounts payable which impact the amounts presented as cash paid for purchases of property and equipment in the investing activities section of our consolidated statements of cash flows, the change in accounts payable within the operating activities section of the cash flow statement and the supplemental non-cash investing and financing activities disclosure of purchases of property and equipment included in ending accounts payable. We concluded that the error was not material to any of our prior period financial statements under the guidance of SEC Staff Accounting Bulletin (“SAB”) No. 99, Materiality. We applied the guidance of SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements, and revised the prior period financial statements presented.
The impact of the immaterial error on our prior period consolidated statements of cash flows is presented in the following table:
As Reported | Adjustment | As Revised | |||||||||||||||||||||
Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | ||||||||||||||||||
Dollars in thousands | September 30, 2013 | September 30, 2013 | September 30, 2013 | ||||||||||||||||||||
Cash flows from changes in operating assets and liabilities: | |||||||||||||||||||||||
Accounts payable | $ | (13,938 | ) | $ | (84,910 | ) | $ | (784 | ) | $ | 14,730 | $ | (14,722 | ) | $ | (70,180 | ) | ||||||
Net cash flows from operating activities | $ | 61,727 | $ | 132,391 | $ | (784 | ) | $ | 14,730 | $ | 60,943 | $ | 147,121 | ||||||||||
Investing Activities: | |||||||||||||||||||||||
Purchases of property and equipment | $ | (39,886 | ) | $ | (108,616 | ) | $ | 784 | $ | (14,730 | ) | $ | (39,102 | ) | $ | (123,346 | ) | ||||||
Net cash flows from investing activities | $ | (287,866 | ) | $ | (367,669 | ) | $ | 784 | $ | (14,730 | ) | $ | (287,082 | ) | $ | (382,399 | ) | ||||||
Supplemental disclosure of non-cash investing and financing activities: | |||||||||||||||||||||||
Purchases of property and equipment included in ending accounts payable | $ | 24,773 | $ | 24,773 | $ | (16,585 | ) | $ | (16,585 | ) | $ | 8,188 | $ | 8,188 |
7
Accounting Pronouncements Adopted During the Current Year
In May 2013, the FASB issued ASU No. 2013-05, "Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity." This ASU addresses the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. For public entities, the ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to derecognition events occurring after the effective date. Prior periods should not be adjusted. Our adoption of ASU No. 2013-05 in the first quarter of 2014 did not have a material impact on our financial position, results of operations or cash flows.
In November 2013, the FASB issued ASU 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." This ASU requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss (NOL) carryforward, or similar tax loss or tax credit carryforward, rather than as a liability when:
1. | the uncertain tax position would reduce the NOL or other carryforward under the tax law of the applicable jurisdiction, and |
2. | the entity intends to use the deferred tax asset for that purpose. |
The ASU changes existing presentation requirements but does not require new recurring disclosures. The ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013 for public entities. Our adoption of ASU No. 2013-11 in the first quarter of 2014 did not have a material impact on our financial position, results of operations or cash flows.
8
Accounting Pronouncements Not Yet Adopted
In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 changes the requirements for reporting discontinued operations. Under the ASU discontinued operations is defined as either a:
• | Component of an entity, or group of components, that |
◦ | has been disposed of meets the criteria to be classified as held-for-sale, or has been abandoned/spun-off; and |
◦ | represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results, or a |
• | Business or nonprofit activity that, on acquisition, meets the criteria to be classified as held-for-sale. |
We are currently evaluating the impact of ASU 2014-08, which is effective for us in our fiscal year beginning on January 1, 2015.
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. The amendments in the ASU can be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the update recognized at the date of the initial application along with additional disclosures. We are currently evaluating the impact of ASU 2014-09, which is effective for us in our fiscal year beginning on January 1, 2017.
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 are currently evaluating the impact of ASU 2014-15, which is effective for us in our fiscal year beginning January 1, 2017.
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Note 2: Summary of Significant Accounting Policies
Content Library
Content library consists of movies and video games available for rent or purchase. We obtain our movie and video game content primarily through revenue sharing agreements and license agreements with studios and game publishers, as well as through distributors and other suppliers. The cost of content mainly includes the cost of the movies and video games, labor, overhead, freight, and studio revenue sharing expenses. The content purchases are capitalized and amortized to their estimated salvage value as a component of direct operating expenses over the usage period. For purchased content that we expect to sell at the end of its useful life, we determine an estimated salvage value. Content salvage values are estimated based on the amounts that we have historically recovered on disposal. For licensed content that we do not expect to sell, no salvage value is provided. The useful lives and salvage value of our content library are periodically reviewed and evaluated. The amortization charges were derived utilizing rental curves based on historical performance of movies and games over their useful lives and recorded on an accelerated basis, reflecting higher rentals of movies and video games in the first few weeks after release, and substantially all of the amortization expense is recognized within one year of purchase.
In the second quarter of 2013, Outerwall Inc. ("the Company") completed a review of its content library amortization methodology and updated the methodology in order to add greater precision to product cost amortization. The previous method recognized accelerated amortization of content library costs at a rate faster than the decline in the content library's value due to the recognition of charges in addition to the normal rental curve amortization whenever individual discs were removed from kiosks, a process we define as "thinning". The Company's most recent analysis has shown that its amortization curves can reasonably capture the effect of thinning and therefore eliminates the need for additional charges at the time of thinning and provides a better correlation of costs to revenue. The modified approach to amortizing the cost of the content library is based on updated rental curves, which incorporate thinning estimates, and provides a more systematic method for recognizing the costs of movie and game titles. The Company anticipates that this new method will better align the recognition of costs with the related revenue.
The Company believes that the change in its content library amortization methodology, made on a prospective basis, is a change in accounting estimate that is effected by a change in accounting principle. The Company believes that the modified content library amortization methodology is preferable because it better reflects the pattern of consumption of the expected benefits of the content library. A copy of our auditor's preferability letter is filed as an exhibit to our 10-Q for the period ended June 30, 2013.
The effect of this change resulted in a reduction of product costs, as reported in direct operating expenses, of approximately $21.7 million in the second quarter of 2013, with those costs shifted to primarily the third and fourth quarters and some into 2014. The change resulted in a corresponding increase to the balance of our content library. In addition, the change in amortization methodology shifted product costs on titles purchased during the second half of 2013 into 2014 as amortization is less accelerated than under the prior method. Under the modified amortization methodology we continue to recognize substantially all of the amortization expense within one year of purchase.
Reclassifications
During 2013, we discontinued four new venture concepts, Rubi, Crisp Market, Orango, and Star Studio. We have reclassified the results of operations of these four ventures to discontinued operations for all periods presented in our Consolidated Statements of Comprehensive Income. See Note 13: Discontinued Operations for more information.
During 2014, we reclassified certain deferred fees associated with the issuance of our Senior Notes due 2019 from other long-term assets to long-term debt and other long-term liabilities. We have reclassified these amounts for all periods presented in our Consolidated Balance Sheets.
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Note 3: 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 and Coinstar 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 New Ventures segment is focused on identifying, evaluating, building, or acquiring and developing innovative self-service concepts in the marketplace. New Ventures concepts are regularly assessed to determine whether continued funding or other alternatives are appropriate.
On July 23, 2013 we acquired the remaining 77.0% equity interest in our ecoATM business which provides an automated self-service kiosk system to purchase used mobile phones, tablets and MP3 players for cash. The primary reason for the business combination was to expand Outerwall’s presence in automated retail and gain exposure to the growing demand for refurbished products and mobile devices. Since the acquisition date, the results of ecoATM operations, with the exception of expense for rights to receive cash which are unallocated corporate expenses, are included in our New Ventures segment. See Note 15: Business Segments and Enterprise-Wide Information for more information. The majority of our New Ventures kiosks are those of our ecoATM business.
Our kiosks are located primarily in supermarkets, drug stores, mass merchants, financial institutions, convenience stores, malls and restaurants. Our kiosk and location counts as of September 30, 2014, are as follows:
Kiosks | Locations | ||||
Redbox | 43,790 | 36,210 | |||
Coinstar | 21,210 | 20,220 | |||
New Ventures | 1,550 | 1,330 | |||
Total | 66,550 | 57,760 |
Note 4: 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 $184.9 million and $371.4 million at September 30, 2014, and December 31, 2013, respectively. Of this total, cash equivalents were $5.7 million and $65.8 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 September 30, 2014, and December 31, 2013, were $71.7 million and $85.5 million, respectively that we identified for settling our accrued payable to our retailer partners in relation to our Coinstar kiosks.
Separately included in our cash and cash equivalents at September 30, 2014, and December 31, 2013, were $26.0 million and $199.0 million, respectively in cash and cash equivalents held in financial institutions domestically and $13.3 million and $15.2 million, respectively in cash and cash equivalents held in foreign financial institutions.
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Note 5: Prepaid Expenses and Other Current Assets and Other Accrued Liabilities
Prepaid expenses and other current assets:
Dollars in thousands | September 30, 2014 | December 31, 2013 | |||||
Income taxes receivable | $ | 11,611 | $ | 37,466 | |||
Spare parts | 14,882 | 18,975 | |||||
Licenses | 8,287 | 4,568 | |||||
Electronic devices inventory | 6,418 | 3,529 | |||||
DVD cases and labels | 1,197 | 2,596 | |||||
Prepaid rent | 1,293 | 1,302 | |||||
Other | 16,119 | 16,273 | |||||
Total prepaid and other current assets | $ | 59,807 | $ | 84,709 |
Other accrued liabilities consist of the following:
Dollars in thousands | September 30, 2014 | December 31, 2013 | |||||
Payroll related expenses | $ | 28,859 | $ | 33,852 | |||
Accrued content library expense | 21,387 | 21,602 | |||||
Business taxes | 23,591 | 22,939 | |||||
Insurance | 13,682 | 13,379 | |||||
Professional fees | 3,338 | 930 | |||||
Service contract provider expenses | 6,480 | 8,134 | |||||
Deferred rent expense | 5,848 | 5,713 | |||||
Accrued interest expense | 6,833 | 7,015 | |||||
Other | 19,855 | 20,563 | |||||
Total other accrued liabilities | $ | 129,873 | $ | 134,127 |
Note 6: Property and Equipment
Dollars in thousands | September 30, 2014 | December 31, 2013 | |||||
Kiosks and components | $ | 1,149,520 | $ | 1,105,761 | |||
Computers, servers, and software | 223,271 | 226,389 | |||||
Office furniture and equipment | 8,695 | 7,260 | |||||
Vehicles | 6,264 | 6,553 | |||||
Leasehold improvements | 23,338 | 23,198 | |||||
Property and equipment, at cost | 1,411,088 | 1,369,161 | |||||
Accumulated depreciation and amortization | (959,742 | ) | (848,296 | ) | |||
Property and equipment, net | $ | 451,346 | $ | 520,865 |
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Note 7: Goodwill and Other Intangible Assets
Goodwill
The carrying amount of goodwill was as follows:
Dollars in thousands | September 30, 2014 | December 31, 2013 | |||||
Goodwill | $ | 559,307 | $ | 559,307 |
Other Intangible Assets
The gross amount of our other intangible assets and the related accumulated amortization were as follows:
Dollars in thousands | Amortization Period | September 30, 2014 | December 31, 2013 | ||||||
Retailer relationships | 5 - 10 years | $ | 53,295 | $ | 53,295 | ||||
Accumulated amortization | (22,197 | ) | (17,768 | ) | |||||
Retailer relationships, net | 31,098 | 35,527 | |||||||
Developed technology | 5 years | 34,000 | 34,000 | ||||||
Accumulated amortization | (7,933 | ) | (2,833 | ) | |||||
Developed technology, net | 26,067 | 31,167 | |||||||
Other | 1 - 40 years | 16,800 | 16,800 | ||||||
Accumulated amortization | (5,948 | ) | (4,111 | ) | |||||
Other, net | 10,852 | 12,689 | |||||||
Total intangible assets, net | $ | 68,017 | $ | 79,383 |
Amortization expense was as follows:
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
Dollars in thousands | 2014 | 2013 | 2014 | 2013 | |||||||||||
Retailer relationships | $ | 1,358 | $ | 1,568 | $ | 4,429 | $ | 4,713 | |||||||
Developed technology | 1,700 | 1,133 | 5,100 | 1,133 | |||||||||||
Other | 613 | 490 | 1,837 | 1,239 | |||||||||||
Total amortization of intangible assets | $ | 3,671 | $ | 3,191 | $ | 11,366 | $ | 7,085 |
Assuming no future impairment, the expected future amortization as of September 30, 2014 is as follows:
Dollars in thousands | Retailer Relationships | Developed Technology | Other | Total | |||||||||||
Remainder of 2014 | $ | 1,003 | $ | 1,700 | $ | 612 | $ | 3,315 | |||||||
2015 | 4,012 | 6,800 | 2,419 | 13,231 | |||||||||||
2016 | 4,012 | 6,800 | 2,307 | 13,119 | |||||||||||
2017 | 4,012 | 6,800 | 2,285 | 13,097 | |||||||||||
2018 | 4,012 | 3,967 | 1,664 | 9,643 | |||||||||||
2019 | 4,012 | — | 801 | 4,813 | |||||||||||
Thereafter | 10,035 | — | 764 | 10,799 | |||||||||||
Total expected amortization | $ | 31,098 | $ | 26,067 | $ | 10,852 | $ | 68,017 |
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Note 8: Equity Method Investments and Related Party Transactions
Redbox Instant™ by Verizon
In February 2012, Redbox and Verizon Ventures IV LLC (“Verizon”), a wholly owned subsidiary of Verizon Communications Inc., entered into a Limited Liability Company Agreement (the “LLC Agreement”) and related arrangements. The LLC Agreement governs the relationship of the parties with respect to a joint venture, Redbox Instant by Verizon (the “Joint Venture”). Redbox initially acquired a 35.0% ownership interest in the Joint Venture and made an initial capital contribution of $14.0 million in cash in February 2012 subsequent to the formation of the Joint Venture. The Joint Venture board of managers may request each member to make additional capital contributions, on a pro rata basis relative to its respective ownership interest. So long as Redbox contributes its pro rata share of the first $450.0 million of capital contributions to the Joint Venture, Redbox’s interest cannot be diluted below 10.0%. The following table summarizes Redbox's initial cash capital contribution and subsequent cash capital contributions representing its pro-rata share of requests made by the Joint Venture board of managers:
Dollars in thousands | Cash Contributions | ||
2012 | $ | 24,500 | |
2013 | 28,000 | ||
2014 | 24,500 | ||
Total cash capital contributions | $ | 77,000 |
On October 19, 2014, the Company and Verizon entered into an agreement whereby we would withdraw from the Joint Venture. See Note 20: Subsequent Events for information regarding the terms of the withdrawal agreement.
Other Equity Method Investments
We make strategic equity investments in external companies that provide automated self-service kiosk solutions. Our equity method investments and ownership percentages as of September 30, 2014, were as follows:
Dollars in thousands | Equity Investment | Ownership Percentage | |||
Joint Venture | $ | 2,620 | 35% | ||
SoloHealth, Inc. | 1,326 | 10% | |||
Equity method investments | $ | 3,946 |
Our equity method investments are included within other long-term assets on our Consolidated Balance Sheets.
Since we acquired ecoATM on July 23, 2013, the results of ecoATM operations, with the exception of expense for rights to receive cash which are unallocated corporate expenses, are included in our New Ventures segment. See Note 15: Business Segments and Enterprise-Wide Information for more information.
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Income (Loss) from Equity Method Investments and Summarized Financial Information
Income (loss) from equity method investments within our Consolidated Statements of Comprehensive Income is composed of the following:
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
Dollars in thousands | 2014 | 2013 | 2014 | 2013 | |||||||||||
Gain on previously held equity interest on ecoATM | $ | — | $ | 68,376 | $ | — | $ | 68,376 | |||||||
Proportionate share of net loss of equity method investees: | |||||||||||||||
Joint Venture | (10,378 | ) | (8,516 | ) | (28,339 | ) | (21,913 | ) | |||||||
Other | (224 | ) | (1,307 | ) | (672 | ) | (3,326 | ) | |||||||
Total proportionate share of net loss of equity method investees | (10,602 | ) | (9,823 | ) | (29,011 | ) | (25,239 | ) | |||||||
Amortization of difference in carrying amount and underlying equity in Joint Venture | (750 | ) | (619 | ) | (2,250 | ) | (1,857 | ) | |||||||
Total income (loss) from equity method investments | $ | (11,352 | ) | $ | 57,934 | $ | (31,261 | ) | $ | 41,280 |
Our proportional share of the Joint Venture summarized financial information presented in the table below, as provided to us by the Joint Venture, is based on our ownership percentage of 35%:
Nine Months Ended | ||||||||
Statement of Operations | September 30, | |||||||
Dollars in thousands | 2014 | 2013 | ||||||
Revenue | $ | 18,499 | $ | 3,054 | ||||
Cost of sales and service | 36,969 | 14,021 | ||||||
Net loss and loss from continuing operations | 80,994 | 61,660 |
Related Party Transactions
At September 30, 2014 and December 31, 2013, included within accounts receivable, net of allowance, on our Consolidated Balance Sheets, was $4.4 million and $5.9 million, respectively, due from the Joint Venture related to costs incurred by Redbox on behalf of the Joint Venture during the normal course of business.
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Note 9: 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 September 30, 2014: | |||||||||||||||||||||||||||||||||||
Principal | $ | 350,000 | $ | 300,000 | $ | 148,125 | $ | 210,000 | $ | 1,008,125 | |||||||||||||||||||||||||
Discount | (4,551 | ) | (4,313 | ) | (354 | ) | — | (9,218 | ) | ||||||||||||||||||||||||||
Total | 345,449 | 295,687 | 147,771 | $ | 210,000 | 998,907 | $ | 18,051 | $ | 13,466 | $ | 12,974 | $ | 1,043,398 | |||||||||||||||||||||
Less: current portion | — | — | (8,445 | ) | — | (8,445 | ) | (12,150 | ) | — | — | (20,595 | ) | ||||||||||||||||||||||
Total long-term portion | $ | 345,449 | $ | 295,687 | $ | 139,326 | $ | 210,000 | $ | 990,462 | $ | 5,901 | $ | 13,466 | $ | 12,974 | $ | 1,022,803 | |||||||||||||||||
Unamortized deferred financing fees(1) | $ | 688 | $ | 1,425 | $ | — | $ | 3,132 | $ | 5,245 | $ | 5,245 |
(1)Deferred financing fees are recorded in other long-term assets in our Consolidated Balance Sheets and are amortized on a straight line basis over the life of the related loan.
Debt | Other Liabilities | Total | |||||||||||||||||||||||||||||||||
Senior Unsecured Notes due 2019 | Credit Facility | Convertible Notes | Total Debt | Capital Lease Obligations | Asset retirement obligations | Other long-term liabilities | |||||||||||||||||||||||||||||
Dollars in thousands | Term Loans | Revolving Line of Credit | |||||||||||||||||||||||||||||||||
As of December 31, 2013: | |||||||||||||||||||||||||||||||||||
Principal | $ | 350,000 | $ | 344,375 | $ | — | $ | 51,148 | $ | 745,523 | |||||||||||||||||||||||||
Discount | (5,317 | ) | — | — | (1,446 | ) | (6,763 | ) | |||||||||||||||||||||||||||
Total | 344,683 | 344,375 | $ | — | 49,702 | 738,760 | $ | 21,361 | $ | 13,086 | $ | 12,085 | $ | 785,292 | |||||||||||||||||||||
Less: current portion | — | (42,187 | ) | — | (49,702 | ) | (91,889 | ) | (11,997 | ) | — | (3 | ) | (103,889 | ) | ||||||||||||||||||||
Total long-term portion | $ | 344,683 | $ | 302,188 | $ | — | $ | — | $ | 646,871 | $ | 9,364 | $ | 13,086 | $ | 12,082 | $ | 681,403 | |||||||||||||||||
Unamortized deferred financing fees(1) | $ | 832 | $ | 1,259 | $ | 2,749 | $ | 186 | $ | 5,026 | $ | 5,026 |
(1)Deferred financing fees are recorded in other long-term assets in our Consolidated Balance Sheets and are amortized on a straight line basis over the life of the related loan.
Interest Expense
Dollars in thousands | Three Months Ended | Nine Months Ended | |||||||||||||
September 30, | September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Cash interest expense | $ | 11,517 | $ | 7,304 | $ | 29,646 | $ | 17,716 | |||||||
Non-cash interest expense: | |||||||||||||||
Amortization of debt discount | 616 | 804 | 2,171 | 3,876 | |||||||||||
Amortization of deferred financing fees | 285 | 366 | 1,252 | 1,341 | |||||||||||
Other | — | (54 | ) | — | (548 | ) | |||||||||
Total non-cash interest expense | 901 | 1,116 | 3,423 | 4,669 | |||||||||||
Total cash and non-cash interest expense | 12,418 | 8,420 | 33,069 | 22,385 | |||||||||||
Loss from early extinguishment of debt | 55 | 1 | 2,018 | 5,950 | |||||||||||
Total interest expense | $ | 12,473 | $ | 8,421 | $ | 35,087 | $ | 28,335 |
Senior Unsecured Notes Due 2019
On March 12, 2013, we and certain subsidiaries of ours, as subsidiary guarantors, entered into an indenture pursuant to which we issued $350.0 million principal amount of 6.000% Senior Notes due 2019 (the “Senior Notes due 2019”) at par for proceeds, net of expenses, of $343.8 million. The expenses were allocated between debt discount and deferred financing fees based on their nature. As of September 30, 2014, we were in compliance with the covenants of the related indenture.
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Senior Unsecured Notes Due 2021
On June 9, 2014, we and certain subsidiaries of ours, as subsidiary guarantors, 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. The expenses were allocated between debt discount and deferred financing fees based on their nature.
The Senior Notes due 2021 and related guarantees:
• | are general unsecured obligations and are effectively subordinated to all of our and our Subsidiary Guarantors’ existing and future secured debt to the extent of the collateral securing that secured debt, and |
• | will rank equally to all of our and our Subsidiary Guarantors’ other unsecured and unsubordinated indebtedness. |
In addition, the Senior Notes due 2021:
• | will be effectively subordinated to all of the liabilities of our existing and future subsidiaries that are not guaranteeing the Senior Notes due 2021, |
• | require interest payable on June 15 and December 15 of each year, beginning on December 15, 2014, and |
• | mature on June 15, 2021. |
We may redeem any of the Senior Notes due 2021:
• | beginning on June 15, 2017 at a redemption price of 104.406% of their principal amount plus accrued and unpaid interest and additional interest, if any; then |
• | the redemption price will be 102.938% of their principal amount plus accrued and unpaid interest and additional interest, if any, for the twelve-month period beginning June 15, 2018; then |
• | the redemption price will be 101.469% of their principal amount plus accrued and unpaid interest and additional interest, if any, for the twelve-month period beginning June 15, 2019; and then |
• | the redemption price will be 100.000% of their principal amount plus accrued interest and unpaid interest and additional interest, if any, beginning on June 15, 2020. |
• | We may also redeem some or all of the notes before June 15, 2017 at a redemption price of 100.000% of the principal amount, plus accrued and unpaid interest and additional interest, if any, to the redemption date, plus an applicable “make-whole” premium. |
• | In addition, before June 15, 2017, we may redeem up to 35% of the aggregate principal amount with the proceeds of certain equity offerings at 105.875% of their principal amount plus accrued and unpaid interest and additional interest, if any; we may make such redemption only if, after any such redemption, at least 65% of the aggregate principal amount originally issued remains outstanding. |
Upon a change of control as defined in the indenture related to the Senior Notes due 2021, we will be required to make an offer to purchase the Senior Notes due 2021 or any portion thereof. That purchase price will equal 101% of the principal amount of the Senior Notes due 2021 on the date of purchase plus accrued and unpaid interest and additional interest, if any. If we make certain asset sales and do not reinvest the proceeds or use such proceeds to repay certain debt, we will be required to use the proceeds of such asset sales to make an offer to purchase the Senior Notes due 2021 at 100% of their principal amount, together with accrued and unpaid interest and additional interest, if any, to the date of purchase.
The terms of the Senior Notes due 2021 restrict our ability and the ability of certain of its subsidiaries to, among other things: incur additional indebtedness; create liens; pay dividends or make distributions in respect of capital stock; purchase or redeem capital stock; make investments or certain other restricted payments; sell assets; enter into transactions with stockholders or affiliates; or effect a consolidation or merger. However, these and other limitations set forth in the related indenture will be subject to a number of important qualifications and exceptions.
The indenture related to the Senior Notes due 2021 provides for customary events of default which include (subject in certain cases to grace and cure periods), among others: nonpayment of principal or interest or premium; breach of covenants or other agreements in the indenture; defaults in failure to pay certain other indebtedness; the failure to pay certain final judgments; the invalidity of certain of the Subsidiary Guarantors’ guarantees; and certain events of bankruptcy, insolvency or reorganization. Generally, if an event of default occurs and is continuing under the indenture, either the trustee or the holders of at least 25% in aggregate principal amount then outstanding may declare the principal amount plus accrued and unpaid interest to be immediately due and payable. As of September 30, 2014, we were in compliance with the covenants of the related indenture.
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In connection with the issuance of the Senior Notes due 2021 and related guarantees, we agreed to register the Senior Notes due 2021 and related guarantees under the Securities Act of 1933, as amended (the “Securities Act”) so as to allow holders of the Senior Notes due 2021 and related guarantees to exchange the Senior Notes due 2021 and the related guarantees for the same principal amount of a new issue of Senior Notes due 2021 and related guarantees (collectively, the “Exchange Notes”) with substantially identical terms, except that the Exchange Notes will generally be freely transferable under the Securities Act. If we fail to comply with these obligations on time (a “registration default”), we generally will be required to pay additional interest at a rate of 0.25% per annum for the first 90-day period following a registration default and an additional 0.25% per annum for each subsequent 90-day period that such additional interest continues to accrue (provided that such rate may not exceed 1.00% per annum).
Revolving Line of Credit and Term Loan
On June 24, 2014, we entered into the Third Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) providing for a senior secured credit facility (the "New Credit Facility"). The Amended and Restated Credit Agreement amended and restated in its entirety the Second Amended and Restated Credit Agreement dated as of November 20, 2007 and amended and restated as of April 29, 2009 and as of July 15, 2011 and all amendments and restatements thereto (the “Previous Credit Agreement”). The credit facility provided under the Previous Credit Agreement was replaced by the New Credit Facility. As a result of this refinancing activity, in the six months ended June 30, 2014, we recorded a loss on the extinguishment of the Previous Credit Facility of $1.7 million for certain previously capitalized and unamortized debt issuance costs. The loss on extinguishment is recorded within Interest expense, net in our Consolidated Statements of Comprehensive Income.
The New Credit Facility consists of (a) a $150.0 million amortizing term loan (the “Term Loan”) and (b) a $600.0 million revolving line of credit (the “Revolving Line”), which includes (i) a $75.0 million sublimit for the issuance of letters of credit, (ii) a $50.0 million sublimit for swingline loans and (iii) a $75.0 million sublimit for loans in certain foreign currencies available to us and certain wholly owned Company foreign subsidiaries (the “Foreign Borrowers”). We may, subject to applicable conditions and subject to obtaining commitments from lenders, request an increase in the Revolving Line of up to $200.0 million in aggregate (the “Accordion”).
We (or the Foreign Borrowers, if applicable), subject to applicable conditions, may generally elect interest rates on the Term Loan and Revolving Line calculated by reference to (a) LIBOR (“London Interbank Offered Rate”) (or the Canadian Dealer Offered Rate, in the case of loans denominated in Canadian Dollars or, if LIBOR is not available for a foreign currency, such other interest rate customarily used by Bank of America for such foreign currency) for given interest periods (the “LIBOR/Eurocurrency Rate”) or (b) on loans in U.S. Dollars made to us, Bank of America’s prime rate (or, if greater, (i) the average rate on overnight federal funds plus 0.50% or (ii) the daily floating one month LIBOR plus 1%) (the “Base Rate”), plus a margin determined by our consolidated net leverage ratio. For swingline borrowings, we will pay interest at the Base Rate, plus a margin determined by our consolidated net leverage ratio. For borrowings made with the LIBOR/Eurocurrency Rate, the margin ranges from 125 to 200 basis points, while for borrowings made with the Base Rate, the margin ranges from 25 to 100 basis points.
The Amended and Restated Credit Agreement requires principal amortization payments under the Term Loan as follows:
Dollars in thousands | Repayment Amount | ||
Remainder of 2014 | $ | 1,875 | |
2015 | 9,376 | ||
2016 | 13,126 | ||
2017 | 15,000 | ||
2018 | 18,750 | ||
2019 | 89,998 | ||
Total | $ | 148,125 |
The Revolving Line matures on June 24, 2019, at which time all outstanding borrowings must be repaid and all outstanding letters of credit must have been terminated or cash collateralized. The maturity date of the borrowings under the New Credit Facility may be accelerated to December 18, 2018 if our senior unsecured notes due 2019 remain outstanding on or after such date. We may prepay amounts borrowed under the Term Loan without premium or penalty (other than breakage costs in the case of borrowings made with the LIBOR/Eurocurrency Rate), but amounts prepaid may not be re-borrowed.
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The Amended and Restated Credit Agreement contains events of default that include, among others, non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations and warranties, bankruptcy and insolvency events, material judgments, cross defaults to certain other indebtedness, and events constituting a change of control. The occurrence of an event of default will increase the applicable rate of interest and could result in the acceleration of our obligations under the New Credit Facilities and the obligations of any or all of the Guarantors to pay the full amount of our (or any Foreign Borrower’s) obligations under the New Credit Facility.
The Amended and Restated Credit Agreement contains certain loan covenants, including, among others, financial covenants providing for a maximum consolidated net leverage ratio (i.e., consolidated total debt (net of certain cash and cash equivalents held by us and our domestic subsidiaries) to consolidated EBITDA) and a minimum consolidated interest coverage ratio, and limitations on our ability with regard to the incurrence of debt, the existence of liens, capital expenditures, stock repurchases and dividends, investments, and mergers, dispositions and acquisitions. Our obligations under the New Credit Facility are guaranteed by each of our direct and indirect U.S. subsidiaries (collectively, the “Guarantors”), and if any Foreign Borrower is added to the New Credit Facility, the Foreign Borrower’s obligations will be guaranteed by us and each of the Guarantors. As of September 30, 2014, the interest rate on amounts outstanding under the Credit Facility was 2.02% and we were in compliance with the covenants of the Credit Facility.
Convertible Debt
On September 2, 2014, our 4.0% Convertible Senior Notes (the “Convertible Notes”) matured. The aggregate outstanding principal was $51.1 million at December 31, 2013.
The Convertible Notes were convertible as of December 31, 2013 and the debt conversion feature was classified as temporary equity on our Consolidated Balance Sheets. In the nine months ended September 30, 2014, we retired or settled upon maturity, a combined 51,148 Convertible Notes for total consideration of $51.1 million in cash and the issuance of 431,760 shares of common stock. The amount by which total consideration exceeded the fair value of the Convertible Notes has been recorded as a reduction of stockholders’ equity. The loss from early extinguishment of the Convertible Notes was approximately $0.3 million and is recorded in interest expense in our Consolidated Statements of Comprehensive Income.
Note 10: Repurchases of Common Stock
Board Authorization
On January 30, 2014, our Board of Directors approved an additional stock repurchase program of up to $500.0 million of our common stock plus the cash proceeds received from the exercise of stock options by our officers, directors, and employees. The Board also authorized a tender offer for up to $350.0 million with the option to increase the tender by up to 2% of outstanding shares.
Repurchases
In the nine months ended September 30, 2014, we repurchased a total of 7,925,227 shares of our common stock, via open market repurchases and a tender offer, with an average price per share of $68.31 for $541.4 million, excluding fees and expenses associated with the tender offer. Of these shares, 2,633,526 were repurchased from the open market with an average price of $64.77 per share for $170.6 million. In addition, as part of a tender offer which expired on March 7, 2014, we accepted for payment an aggregate of 5,291,701 shares of our common stock at a final purchase price of $70.07 per share, for an aggregate cost of $370.8 million, excluding fees and expenses which totaled $3.8 million. All shares repurchased were recorded as treasury shares and made in accordance with current share repurchase authorizations of the Board. Fees associated with the tender offer were recorded as part of the cost of treasury stock in our Consolidated Balance Sheets.
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The following table presents a summary of our authorized stock repurchase balance:
Dollars in thousands | Board Authorization | ||
Authorized repurchase - as of January 1, 2014 (1) | $ | 201,291 | |
Additional board authorization (1) | 500,000 | ||
Proceeds from the exercise of stock options | 2,943 | ||
Repurchase of common stock from open market | (170,582 | ) | |
Repurchase from tender offer (2) | (370,789 | ) | |
Authorized repurchase - as of September 30, 2014 (1) | $ | 162,863 |
(1) | In addition to these amounts, the repurchase program approved by our Board of Directors allows for the use of cash proceeds received from the exercise of stock options by our officers, directors, and employees. |
(2) | Excludes expenses of $3.8 million associated with the tender offer. |
Note 11: Share-Based Payments
We currently grant share-based awards to our employees, non-employee directors and consultants 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 | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
Dollars in thousands | 2014 | 2013 | 2014 | 2013 | |||||||||||
Share-based payments expense: | |||||||||||||||
Share-based compensation - stock options | $ | 163 | $ | 348 | $ | 619 | $ | 1,246 | |||||||
Share-based compensation - restricted stock | 3,115 | 2,986 | 9,472 | 8,292 | |||||||||||
Share-based payments for content arrangements | (29 | ) | (560 | ) | 2 | 1,916 | |||||||||
Total share-based payments expense | $ | 3,249 | $ | 2,774 | $ | 10,093 | $ | 11,454 | |||||||
Tax benefit on share-based payments expense | $ | 1,246 | $ | 1,040 | $ | 3,873 | $ | 4,329 |
September 30, 2014 | |||||
Dollars in thousands | Unrecognized Share-Based Payments Expense | Weighted-Average Remaining Life | |||
Unrecognized share-based payments expense: | |||||
Share-based compensation - stock options | $ | 1,004 | 2.0 years | ||
Share-based compensation - restricted stock | 23,586 | 2.4 years | |||
Share-based payments for content arrangements | 157 | 0.3 years | |||
Total unrecognized share-based payments expense | $ | 24,747 |
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Share-Based Compensation
Stock options
Shares of common stock are issued upon exercise of stock options. The following table presents a summary of stock option activity for 2014:
Shares in thousands | Options | Weighted Average Exercise Price | ||||
Outstanding, December 31, 2013 | 248 | $ | 45.72 | |||
Granted | — | $ | — | |||
Exercised | (88 | ) | $ | 33.52 | ||
Canceled, expired, or forfeited | (17 | ) | $ | 52.04 | ||
Outstanding, September 30, 2014 | 143 | $ | 52.44 |
Certain information regarding stock options outstanding as of September 30, 2014, is as follows:
Options | |||||||
Shares and intrinsic value in thousands | Outstanding | Exercisable | |||||
Number | 143 | 74 | |||||
Weighted average per share exercise price | $ | 52.44 | $ | 51.42 | |||
Aggregate intrinsic value | $ | 605 | $ | 412 | |||
Weighted average remaining contractual term (in years) | 7.05 | 6.15 |
Restricted stock and performance based restricted stock awards
Restricted stock awards are granted to eligible employees, including executives, and non-employee directors. Awards granted to employees and executives vest annually in equal installments over four years. Non-employee director awards vest one year after 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. The fair value of non-performance-based awards is based on the market price on the grant date and is recognized on a straight-line basis over the vesting period.
Awards of performance-based restricted stock made prior to 2013, once earned, vest in equal installments over three years from the date of grant. Awards of performance-based restricted stock made in and subsequent to 2013, once earned, vest in two installments over three years from the date of grant (65% of the award vests two years from the date of grant and the remaining 35% of the award vests 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.
The following table presents a summary of restricted stock award activity for 2014:
Shares in thousands | Restricted Stock Awards | Weighted Average Grant Date Fair Value | ||||
Non-vested, December 31, 2013 | 597 | $ | 52.58 | |||
Granted | 334 | $ | 71.66 | |||
Vested | (178 | ) | $ | 50.30 | ||
Forfeited | (127 | ) | $ | 58.93 | ||
Non-vested, September 30, 2014 | 626 | $ | 62.12 |
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. No restricted stock was granted for content arrangements during the nine months ended September 30, 2014. See Note 17: Commitments and Contingencies for more information on changes in commitments to issue restricted stock for content license agreements.
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Information related to the shares of restricted stock granted as part of these agreements as of September 30, 2014, is as follows:
Whole shares | Granted | Vested | Unvested | Remaining Vesting Period | ||||||
Sony | 193,348 | 193,348 | — | 0.0 years | ||||||
Paramount | 300,000 | 255,000 | 45,000 | 0.3 years | ||||||
Total | 493,348 | 448,348 | 45,000 |
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 fair value of the original and replacement awards amounted to $32.1 million, of which $1.4 million was attributed to pre-combination services rendered and included in the calculation of total consideration transferred. The replacement awards are considered liability classified as they represent rights to receive cash. Expense associated with the post-combination awards will be recognized net of forfeitures, and cash payments will be made, in accordance with the awards' vesting schedule, generally on a monthly basis. We recognized $10.0 million in expense associated with the issuance of rights to receive cash for the nine months ended September 30, 2014. The expected future recognition of expense associated with the rights to receive cash as of September 30, 2014 is as follows:
Dollars in thousands | Expected Expense | |||
Remainder of 2014 | $ | 3,218 | ||
2015 | 4,631 | |||
2016 | 3,771 | |||
2017 | 516 | |||
Remaining total expected expense | $ | 12,136 |
Note 12: Restructuring
During the fourth quarter of 2013, as a result of a comprehensive operational review, we committed to a restructuring plan intended to, among other things, better align our cost structure with revenue growth in our core businesses. As part of the plan, we discontinued three concepts in our New Ventures operating segment. Also as part of the restructuring plan, we implemented actions to reduce costs in our continuing operations primarily through workforce reductions across the Company. The closure of the three ventures and the workforce reductions were substantially complete as of March 31, 2014. See Note 13: Discontinued Operations for further information.
The total amount expected to be incurred in connection with the restructuring, exclusive of asset impairments, and the amount incurred during the nine months ended September 30, 2014 by reportable segment (on an allocated basis) and expense type is as follows:
Dollars in thousands | Total Estimated Expense | Nine Months Ended September 30, 2014 | Cumulative as of September 30, 2014 | ||||||||
Redbox | |||||||||||
Severance | $ | 4,305 | $ | 535 | $ | 4,305 | |||||
Coinstar | |||||||||||
Severance | 748 | 23 | 748 | ||||||||
Discontinued Operations | |||||||||||
Severance | 1,026 | 155 | 1,026 | ||||||||
Other | 1,874 | 435 | 1,874 | ||||||||
Total | $ | 7,953 | $ | 1,148 | $ | 7,953 |
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A reconciliation of the beginning and ending liability balance by expense type is as follows:
Dollars in thousands | Severance | Other | |||||
Beginning Balance - December 31, 2013 | $ | 2,508 | $ | 1,418 | |||
Costs charged to expense | 713 | 435 | |||||
Costs paid or otherwise settled | (3,221 | ) | (1,853 | ) | |||
Ending Balance - September 30, 2014 | $ | — | $ | — |
The line items in our Consolidated Statements of Comprehensive Income for the nine months ended September 30, 2014 in which the expenses are recorded are as follows:
Dollars in thousands | Severance | Other | |||||
Direct Operating | $ | 410 | $ | — | |||
General and administrative | 148 | — | |||||
Loss from discontinued operations, net of tax | 155 | 435 | |||||
Total expense | $ | 713 | $ | 435 |
There were no restructuring expenses recorded in the three months ended September 30, 2014.
Note 13: Discontinued Operations
Discontinuation of Certain New Ventures
During 2013, we discontinued four new venture concepts; Rubi, Crisp Market, Orango, and Star Studio. The wind-down process was substantially completed as of March 31, 2014. The results of the discontinued ventures, associated impairment and restructuring charges, net of tax, are recorded within Loss from discontinued operations, net of tax in our Consolidated Statements of Comprehensive Income (see Note 12: Restructuring). The discontinued concepts did not meet the criteria to be classified as held for sale and accordingly the assets and liabilities are not separately presented in our Consolidated Balance Sheets.
Summary Financial Information
The disposition and operating results of the discontinued ventures are presented in discontinued operations in our Consolidated Statements of Comprehensive Income for all periods presented. The continuing cash flows from these operations after discontinuation are insignificant and are not segregated from cash flows from continuing operations in all periods presented in our Consolidated Statements of Cash Flows.
The following table sets forth the components of discontinued operations included in our Consolidated Statements of Comprehensive Income:
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
Dollars in thousands | 2014 | 2013 | 2014 | 2013 | |||||||||||
Revenue | $ | — | $ | 814 | $ | 100 | $ | 3,373 | |||||||
Loss from discontinued operations before income tax | $ | — | $ | (6,775 | ) | $ | (1,259 | ) | $ | (21,365 | ) | ||||
Income tax benefit | — | 2,636 | 491 | 8,267 | |||||||||||
Loss from discontinued operations, net of tax | $ | — | $ | (4,139 | ) | $ | (768 | ) | $ | (13,098 | ) |
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Note 14: Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing the net income for the period by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing the net income for the period by the weighted average number of common and dilutive potential common shares outstanding during the period. We consider restricted stock that provides the holder with a non-forfeitable right to receive dividends to be a participating security. Net income available to participating securities was not material for the periods presented.
Net income used for calculating basic and diluted EPS is the same for all periods presented. The following table sets forth the computation of shares used for the basic and diluted EPS calculations:
Three Months Ended | Nine Months Ended | ||||||||||
September 30, | September 30, | ||||||||||
In thousands | 2014 | 2013 | 2014 | 2013 | |||||||
Weighted average shares used for basic EPS | 18,798 | 27,244 | 20,792 | 27,391 | |||||||
Dilutive effect of stock options and other share-based awards | 179 | 351 | 273 | 439 | |||||||
Dilutive effect of convertible debt | 170 | 421 | 307 | 752 | |||||||
Weighted average shares used for diluted EPS | 19,147 | 28,016 | 21,372 | 28,582 | |||||||
Stock options and share-based awards not included in diluted EPS calculation because their effect would be antidilutive | 226 | 19 | 16 | 67 |
Note 15: 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 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 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.
On July 23, 2013, we completed the acquisition of ecoATM. Prior to July 23, 2013 we held a non-controlling equity interest in ecoATM and reported our share of ecoATM's operating results in loss from equity method investments in our Consolidated Statements of Comprehensive Income. Subsequent to our acquisition of ecoATM on July 23, 2013, the assets acquired and liabilities assumed, as well as the results of operations, with the exception of expense for rights to receive cash which are unallocated corporate expenses, are included in our New Ventures segment as our chief operating decision maker reviews the results in aggregate with other new ventures concepts.
During the year ended December 31, 2013, we discontinued the Rubi, Crisp Market, Orango and Star Studio concepts and accordingly their results of operations were reclassified from the New Ventures segment to Loss from discontinued operations, net of tax in our Consolidated Statements of Comprehensive Income for all periods presented. See Note 13: Discontinued Operations for further information.
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 New Ventures segments. Unallocated general and administrative expenses relate to share-based compensation and expense related to the rights to receive cash issued in connection with our acquisition of ecoATM.
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Dollars in thousands | |||||||||||||||||||
Three Months Ended September 30, 2014 | Redbox | Coinstar | New Ventures | Corporate Unallocated | Total | ||||||||||||||
Revenue | $ | 438,048 | $ | 85,074 | $ | 29,742 | $ | — | $ | 552,864 | |||||||||
Expenses: | |||||||||||||||||||
Direct operating | 312,792 | 42,428 | 26,988 | 1,903 | 384,111 | ||||||||||||||
Marketing | 6,038 | 1,834 | 1,212 | 678 | 9,762 | ||||||||||||||
Research and development | 15 | 64 | 2,088 | 832 | 2,999 | ||||||||||||||
General and administrative | 33,527 | 7,313 | 3,885 | 3,139 | 47,864 | ||||||||||||||
Segment operating income (loss) | 85,676 | 33,435 | (4,431 | ) | (6,552 | ) | 108,128 | ||||||||||||
Less: depreciation, amortization and other | (38,207 | ) | (8,989 | ) | (4,371 | ) | — | (51,567 | ) | ||||||||||
Operating income (loss) | 47,469 | 24,446 | (8,802 | ) | (6,552 | ) | 56,561 | ||||||||||||
Loss from equity method investments, net | — | — | — | (11,352 | ) | (11,352 | ) | ||||||||||||
Interest expense, net | — | — | — | (12,463 | ) | (12,463 | ) | ||||||||||||
Other, net | — | — | — | (3,015 | ) | (3,015 | ) | ||||||||||||
Income (loss) from continuing operations before income taxes | $ | 47,469 | $ | 24,446 | $ | (8,802 | ) | $ | (33,382 | ) | $ | 29,731 |
Dollars in thousands | |||||||||||||||||||
Three Months Ended September 30, 2013 | Redbox | Coinstar | New Ventures | Corporate Unallocated | Total | ||||||||||||||
Revenue | $ | 491,694 | $ | 79,611 | $ | 15,234 | $ | — | $ | 586,539 | |||||||||
Expenses: | |||||||||||||||||||
Direct operating | 350,759 | 41,833 | 12,114 | 1,267 | 405,973 | ||||||||||||||
Marketing | 5,883 | 1,352 | 421 | 739 | 8,395 | ||||||||||||||
Research and development | 69 | 1,428 | 1,358 | 655 | 3,510 | ||||||||||||||
General and administrative | 44,017 | 7,349 | 6,692 | 2,973 | 61,031 | ||||||||||||||
Segment operating income (loss) | 90,966 | 27,649 | (5,351 | ) | (5,634 | ) | 107,630 | ||||||||||||
Less: depreciation, amortization and other | (41,478 | ) | (8,539 | ) | (2,419 | ) | — | (52,436 | ) | ||||||||||
Operating income (loss) | 49,488 | 19,110 | (7,770 | ) | (5,634 | ) | 55,194 | ||||||||||||
Income from equity method investments, net | — | — | — | 57,934 | 57,934 | ||||||||||||||
Interest expense, net | — | — | — | (8,402 | ) | (8,402 | ) | ||||||||||||
Other, net | — | — | — | (2,402 | ) | (2,402 | ) | ||||||||||||
Income (loss) from continuing operations before income taxes | $ | 49,488 | $ | 19,110 | $ | (7,770 | ) | $ | 41,496 | $ | 102,324 |
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Dollars in thousands | |||||||||||||||||||
Nine Months Ended September 30, 2014 | Redbox | Coinstar | New Ventures | Corporate Unallocated | Total | ||||||||||||||
Revenue | $ | 1,399,185 | $ | 233,707 | $ | 69,511 | $ | — | $ | 1,702,403 | |||||||||
Expenses: | |||||||||||||||||||
Direct operating | 1,003,097 | 120,354 | 66,150 | 5,214 | 1,194,815 | ||||||||||||||
Marketing | 17,282 | 4,397 | 3,188 | 2,275 | 27,142 | ||||||||||||||
Research and development | 41 | 486 | 6,570 | 2,788 | 9,885 | ||||||||||||||
General and administrative | 106,658 | 21,502 | 11,822 | 9,847 | 149,829 | ||||||||||||||
Segment operating income (loss) | 272,107 | 86,968 | (18,219 | ) | (20,124 | ) | 320,732 | ||||||||||||
Less: depreciation, amortization and other | (118,928 | ) | (26,473 | ) | (12,136 | ) | — | (157,537 | ) | ||||||||||
Operating income (loss) | 153,179 | 60,495 | (30,355 | ) | (20,124 | ) | 163,195 | ||||||||||||
Loss from equity method investments, net | — | — | — | (31,261 | ) | (31,261 | ) | ||||||||||||
Interest expense, net | — | — | — | (35,037 | ) | (35,037 | ) | ||||||||||||
Other, net | — | — | — | (1,857 | ) | (1,857 | ) | ||||||||||||
Income (loss) from continuing operations before income taxes | $ | 153,179 | $ | 60,495 | $ | (30,355 | ) | $ | (88,279 | ) | $ | 95,040 |
Dollars in thousands | |||||||||||||||||||
Nine Months Ended September 30, 2013 | Redbox | Coinstar | New Ventures | Corporate Unallocated | Total | ||||||||||||||
Revenue | $ | 1,478,132 | $ | 219,520 | $ | 15,244 | $ | — | $ | 1,712,896 | |||||||||
Expenses: | |||||||||||||||||||
Direct operating | 1,040,706 | 119,290 | 12,848 | 1,974 | 1,174,818 | ||||||||||||||
Marketing | 18,057 | 3,357 | 596 | 893 | 22,903 | ||||||||||||||
Research and development | 73 | 5,107 | 2,155 | 836 | 8,171 | ||||||||||||||
General and administrative | 128,963 | 20,077 | 11,611 | 8,135 | 168,786 | ||||||||||||||
Segment operating income (loss) | 290,333 | 71,689 | (11,966 | ) | (11,838 | ) | 338,218 | ||||||||||||
Less: depreciation, amortization and other | (122,219 | ) | (25,493 | ) | (2,529 | ) | — | (150,241 | ) | ||||||||||
Operating income (loss) | 168,114 | 46,196 | (14,495 | ) | (11,838 | ) | 187,977 | ||||||||||||
Income from equity method investments, net | — | — | — | 41,280 | 41,280 | ||||||||||||||
Interest expense, net | — | — | — | (25,953 | ) | (25,953 | ) | ||||||||||||
Other, net | — | — | — | (3,323 | ) | (3,323 | ) | ||||||||||||
Income (loss) from continuing operations before income taxes | $ | 168,114 | $ | 46,196 | $ | (14,495 | ) | $ | 166 | $ | 199,981 |
Significant Retailer Relationships
Our Redbox and Coinstar kiosks are primarily located within retailers. The following retailers accounted for 10% or more of our consolidated revenue:
Three Months Ended | Nine Months Ended | ||||||||||
September 30, | September 30, | ||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||
Wal-Mart Stores Inc. | 15.4 | % | 14.9 | % | 15.3 | % | 15.1 | % | |||
Walgreen Co. | 13.2 | % | 14.3 | % | 13.7 | % | 14.7 | % | |||
The Kroger Company | 9.8 | % | 9.8 | % | 9.8 | % | 10.0 | % |
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Note 16: Fair Value
Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, we use a three-tier valuation hierarchy based upon observable and non-observable inputs:
• | Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities; |
• | Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; or |
• | Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions. |
The factors or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
Assets and Liabilities Measured and Reported at Fair Value on a Recurring Basis
The following table presents our financial assets and (liabilities) that are measured and reported at fair value in our Consolidated Balance Sheets on a recurring basis, by level within the fair value hierarchy (in thousands):
Fair Value at September 30, 2014 | Level 1 | Level 2 | Level 3 | ||||||||
Money market demand accounts and investment grade fixed income securities | $ | 5,708 | $ | — | $ | — | |||||
Fair Value at December 31, 2013 | Level 1 | Level 2 | Level 3 | ||||||||
Money market demand accounts and investment grade fixed income securities | $ | 65,800 | $ | — | $ | — |
Money Market Demand Accounts and Investment Grade Fixed Income Securities
We determine fair value for our money market demand accounts and investment grade fixed income securities based on quoted market prices. The fair value of these assets is included in cash and cash equivalents on our Consolidated Balance Sheets.
Assets and Liabilities Measured and Reported at Fair Value on a Nonrecurring Basis
We recognize or disclose the fair value of certain assets such as non-financial assets, primarily long-lived assets, goodwill, intangible assets and certain other assets in connection with impairment evaluations. All of our nonrecurring valuations use significant unobservable inputs and therefore fall under Level 3 of the fair value hierarchy.
Fair Value of Other Financial Instruments
The carrying value of our term loans approximates their fair value and falls under Level 2 of the fair value hierarchy.
We estimated the fair value of our convertible debt outstanding using a market rate of approximately 6.0% for similar high-yield debt at December 31, 2013. The estimated fair value of our convertible debt was approximately $50.5 million at December 31, 2013, and was determined based on its stated terms, maturing on September 1, 2014, and an annual interest rate of 4.0%. The fair value estimate of our convertible debt falls under Level 3 of the fair value hierarchy. We have reported the carrying value of our convertible debt, face value less the unamortized debt discount, in our Consolidated Balance Sheets.
We estimated the fair value of our senior unsecured notes due 2019 and 2021 outstanding using market rates of approximately 6.0% and 5.875%, respectively, for similar high-yield debt at September 30, 2014. The estimated fair value of our senior unsecured notes due 2019 and 2021 was approximately $350.0 million and $300.0 million, respectively, at September 30, 2014. The estimated fair value of our senior unsecured notes due 2019 was approximately $350.0 million at December 31, 2013. These estimated fair values for our senior unsecured notes due 2019 and 2021 were determined based on their stated terms, maturing on March 15, 2019, and June 15, 2021, respectively, and annual interest rates of 6.0% and 5.875%. The fair value estimate of our senior unsecured notes falls under Level 3 of the fair value hierarchy. We have reported the carrying value, face value less the unamortized debt discount, of our senior unsecured notes, issued at par, in our Consolidated Balance Sheets.
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Note 17: Commitments and Contingencies
Purchase commitments
Pursuant to the manufacturing and services agreement entered into as part of the NCR Asset Acquisition, Outerwall, Redbox or an affiliate were committed to purchase goods and services from NCR for a period of five years from June 22, 2012. At the end of the five-year period, if the aggregate amount paid in margin to NCR for goods and services delivered were to equal less than $25.0 million, Outerwall was to pay NCR the difference between such aggregate amount and $25.0 million. We made purchases in the nine months ended September 30, 2014 and 2013 that reduced this commitment by $2.1 million and $6.0 million, respectively. As of September 30, 2014, our remaining commitment is $15.8 million under this arrangement.
Content License Agreements
On June 27, 2014 Sony notified us of their intent to extend our existing content license agreement with them. This will extend the license period through September 30, 2015 and require us to issue 25,000 shares of additional restricted stock to Sony during the fourth quarter of 2014 which will vest immediately. See Note 11: Share-Based Payments for more information about our share-based payments for content arrangements. As of September 30, 2014, after accounting for this extension, our commitment to purchase content from Sony was approximately $162.8 million.
On September 26, 2014, Universal Studios Home Entertainment LLC exercised its option to extend the term of the revenue sharing license agreement between Redbox and Universal through December 31, 2015. As of September 30, 2014, after accounting for this extension, our commitment to purchase content from Universal was approximately $140.6 million.
Letters of Credit
As of September 30, 2014, we had six irrevocable standby letters of credit that totaled $6.4 million. These standby letters of credit, which expire at various times through September 2015, are used to collateralize certain obligations to third parties. As of September 30, 2014, no amounts were outstanding under these standby letter of credit agreements.
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 has moved to dismiss all remaining claims on mootness grounds. The motion is fully briefed, and is tentatively scheduled to be argued on November 12, 2014. We believe that the claims against us are without merit and intend to defend ourselves vigorously in this matter. 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.
28
In March 2011, a California resident, Blake Boesky, individually and on behalf of all others similarly situated, filed a putative class action complaint against our Redbox subsidiary in the U.S. District Court for the Northern District of Illinois. The plaintiff alleges that Redbox retains personally identifiable information of consumers for a time period in excess of that allowed under the Video Privacy Protection Act, 18 U.S.C. §§ 2710, et seq. A substantially similar complaint was filed in the same court in March 2011 by an Illinois resident, Kevin Sterk. Since the filing of the complaint, Blake Boesky has been replaced by a different named plaintiff, Jiah Chung, and an amended complaint has been filed alleging disclosures of personally identifiable information, in addition to plaintiffs' claims of retention of such information. Plaintiffs are seeking statutory damages, injunctive relief, attorneys' fees, costs of suit, and interest. The court has consolidated the cases. The court denied Redbox's motion to dismiss the plaintiffs' claims upon interlocutory appeal. The U.S. Court of Appeals for the Seventh Circuit reversed the district court's denial of Redbox's motion to dismiss plaintiff's claims involving retention of information, holding that the plaintiffs could not maintain a suit for damages under this theory. On April 25, 2012, the plaintiffs amended their complaint to add claims under the Stored Communications Act, 18 U.S.C. § 2707, and for breach of contract. On May 9, 2012, Redbox moved to dismiss the amended complaint. On July 23, 2012, the court dismissed the added retention claims, except to the extent that plaintiffs seek injunctive, non-monetary relief. On August 16, 2013, the court granted summary judgment in Redbox's favor on all remaining claims, and entered a final judgment for Redbox. On September 16, 2013, plaintiff filed a notice of appeal. The appeal was fully briefed as of July 1, 2014, and argument occurred on September 26, 2014. The appellate court has not scheduled a date for argument. We believe that the claims against us are without merit and intend to defend ourselves vigorously in this matter. Currently, no accrual has been established as it is 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.
Other Contingencies
During the three months ended March 31, 2013, we resolved a previously disclosed loss contingency related to a supply agreement and recorded a benefit of $11.4 million in the direct operating line item in our Consolidated Statements of Comprehensive Income.
Note 18: 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:
29
CONSOLIDATING BALANCE SHEETS | |||||||||||||||||||
(unaudited) | |||||||||||||||||||
As of September 30, 2014 | |||||||||||||||||||
(in thousands) | Outerwall Inc. | Combined Guarantor Subsidiaries | Combined Non-Guarantor Subsidiaries | Eliminations and Consolidation Reclassifications | Total | ||||||||||||||
Assets | |||||||||||||||||||
Current Assets: | |||||||||||||||||||
Cash and cash equivalents | $ | 130,943 | $ | 13,127 | $ | 40,831 | $ | — | $ | 184,901 | |||||||||
Accounts receivable, net of allowances | 1,633 | 29,515 | 1,639 | — | 32,787 | ||||||||||||||
Content library | — | 147,708 | 3,360 | — | 151,068 | ||||||||||||||
Prepaid expenses and other current assets | 38,342 | 26,526 | 1,023 | (6,084 | ) | 59,807 | |||||||||||||
Intercompany receivables | 33,298 | 385,821 | — | (419,119 | ) | — | |||||||||||||
Total current assets | 204,216 | 602,697 | 46,853 | (425,203 | ) | 428,563 | |||||||||||||
Property and equipment, net | 142,818 | 272,176 | 36,352 | — | 451,346 | ||||||||||||||
Deferred income taxes | — | 4,722 | 9,289 | (4,721 | ) | 9,290 | |||||||||||||
Goodwill and other intangible assets, net | 249,720 | 377,604 | — | — | 627,324 | ||||||||||||||
Other long-term assets | 6,801 | 4,335 | 374 | — | 11,510 | ||||||||||||||
Investment in related parties | 877,715 | 3,841 | — | (881,556 | ) | — | |||||||||||||
Total assets | $ | 1,481,270 | $ | 1,265,375 | $ | 92,868 | $ | (1,311,480 | ) | $ | 1,528,033 | ||||||||
Liabilities and Stockholders’ Equity | |||||||||||||||||||
Current Liabilities: | |||||||||||||||||||
Accounts payable | $ | 13,573 | $ | 122,393 | $ | 2,157 | $ | — | $ | 138,123 | |||||||||
Accrued payable to retailers | 59,908 | 33,123 | 12,958 | — | 105,989 | ||||||||||||||
Other accrued liabilities | 55,472 | 71,347 | 3,054 | — | 129,873 | ||||||||||||||
Current portion of long-term debt and other long-term liabilities | 20,186 | (2 | ) | 411 | — | 20,595 | |||||||||||||
Deferred income taxes | — | 39,238 | — | (6,084 | ) | 33,154 | |||||||||||||
Intercompany payables | 246,470 | 103,388 | 69,261 | (419,119 | ) | — | |||||||||||||
Total current liabilities | 395,609 | 369,487 | 87,841 | (425,203 | ) | 427,734 | |||||||||||||
Long-term debt and other long-term liabilities | 1,003,465 | 18,173 | 1,165 | — | 1,022,803 | ||||||||||||||
Deferred income taxes | 34,069 | — | 22 | (4,721 | ) | 29,370 | |||||||||||||
Total liabilities | 1,433,143 | 387,660 | 89,028 | (429,924 | ) | 1,479,907 | |||||||||||||
Commitments and contingencies | |||||||||||||||||||
Stockholders’ Equity: | |||||||||||||||||||
Preferred stock | — | — | — | — | — | ||||||||||||||
Common stock | 584,670 | 225,729 | 12,393 | (352,635 | ) | 470,157 | |||||||||||||
Treasury stock | (997,697 | ) | — | — | — | (997,697 | ) | ||||||||||||
Retained earnings | 462,965 | 651,986 | (9,441 | ) | (528,921 | ) | 576,589 | ||||||||||||
Accumulated other comprehensive income (loss) | (1,811 | ) | — | 888 | — | (923 | ) | ||||||||||||
Total stockholders’ equity | 48,127 | 877,715 | 3,840 | (881,556 | ) | 48,126 | |||||||||||||
Total liabilities and stockholders’ equity | $ | 1,481,270 | $ | 1,265,375 | $ | 92,868 | $ | (1,311,480 | ) | $ | 1,528,033 |
30
CONSOLIDATING BALANCE SHEETS | |||||||||||||||||||
(unaudited) | |||||||||||||||||||
As of December 31, 2013 | |||||||||||||||||||
(in thousands) | Outerwall Inc. | Combined Guarantor Subsidiaries | Combined Non-Guarantor Subsidiaries | Eliminations and Consolidation Reclassifications | Total | ||||||||||||||
Assets | |||||||||||||||||||
Current Assets: | |||||||||||||||||||
Cash and cash equivalents | $ | 315,250 | $ | 9,639 | $ | 46,548 | $ | — | $ | 371,437 | |||||||||
Accounts receivable, net of allowances | 2,029 | 45,672 | 2,595 | — | 50,296 | ||||||||||||||
Content library | 37 | 196,695 | 3,136 | — | 199,868 | ||||||||||||||
Prepaid expenses and other current assets | 67,664 | 28,234 | 960 | (12,149 | ) | 84,709 | |||||||||||||
Intercompany receivables | 180,100 | 355,418 | 5,093 | (540,611 | ) | — | |||||||||||||
Total current assets | 565,080 | 635,658 | 58,332 | (552,760 | ) | 706,310 | |||||||||||||
Property and equipment, net | 163,747 | 320,296 | 36,822 | — | 520,865 | ||||||||||||||
Deferred income taxes | — | — | 6,412 | 31 | 6,443 | ||||||||||||||
Goodwill and other intangible assets, net | 251,150 | 387,540 | — | — | 638,690 | ||||||||||||||
Other long-term assets | 7,156 | 11,499 | 420 | — | 19,075 | ||||||||||||||
Investment in related parties | 815,243 | 4,825 | — | (820,068 | ) | — | |||||||||||||
Total assets | $ | 1,802,376 | $ | 1,359,818 | $ | 101,986 | $ | (1,372,797 | ) | $ | 1,891,383 | ||||||||
Liabilities and Stockholders’ Equity | |||||||||||||||||||
Current Liabilities: | |||||||||||||||||||
Accounts payable | $ | 17,336 | $ | 215,703 | $ | 2,979 | $ | — | $ | 236,018 | |||||||||
Accrued payable to retailers | 71,085 | 48,126 | 14,929 | — | 134,140 | ||||||||||||||
Other accrued liabilities | 59,444 | 71,607 | 3,076 | — | 134,127 | ||||||||||||||
Current portion of long-term debt and other long-term liabilities | 103,519 | 3 | 367 | — | 103,889 | ||||||||||||||
Deferred income taxes | — | 35,292 | — | (12,149 | ) | 23,143 | |||||||||||||
Intercompany payables | 315,615 | 154,565 | 70,432 | (540,612 | ) | — | |||||||||||||
Total current liabilities | 566,999 | 525,296 | 91,783 | (552,761 | ) | 631,317 | |||||||||||||
Long-term debt and other long-term liabilities | 661,627 | 18,748 | 1,028 | — | 681,403 | ||||||||||||||
Deferred income taxes | 45,307 | 13,190 | — | 31 | 58,528 | ||||||||||||||
Total liabilities | 1,273,933 | 557,234 | 92,811 | (552,730 | ) | 1,371,248 | |||||||||||||
Commitments and contingencies | |||||||||||||||||||
Debt conversion feature | 1,446 | — | — | — | 1,446 | ||||||||||||||
Stockholders’ Equity: | |||||||||||||||||||
Preferred stock | — | — | — | — | — | ||||||||||||||
Common stock | 596,995 | 225,016 | 12,393 | (351,923 | ) | 482,481 | |||||||||||||
Treasury stock | (476,796 | ) | — | — | — | (476,796 | ) | ||||||||||||
Retained earnings | 407,959 | 577,568 | (3,612 | ) | (468,144 | ) | 513,771 | ||||||||||||
Accumulated other comprehensive income (loss) | (1,161 | ) | — | 394 | — | (767 | ) | ||||||||||||
Total stockholders’ equity | 526,997 | 802,584 | 9,175 | (820,067 | ) | 518,689 | |||||||||||||
Total liabilities and stockholders’ equity | $ | 1,802,376 | $ | 1,359,818 | $ | 101,986 | $ | (1,372,797 | ) | $ | 1,891,383 |
31
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME | |||||||||||||||||||
(unaudited) | |||||||||||||||||||
Three Months Ended September 30, 2014 | |||||||||||||||||||
(in thousands) | Outerwall Inc. | Combined Guarantor Subsidiaries | Combined Non-Guarantor Subsidiaries | Eliminations and Consolidation Reclassifications | Total | ||||||||||||||
Revenue | $ | 71,616 | $ | 464,814 | $ | 16,434 | $ | — | $ | 552,864 | |||||||||
Expenses: | |||||||||||||||||||
Direct operating | 36,930 | 335,780 | 11,401 | — | 384,111 | ||||||||||||||
Marketing | 1,945 | 7,059 | 758 | — | 9,762 | ||||||||||||||
Research and development | 861 | 2,138 | — | — | 2,999 | ||||||||||||||
General and administrative | 10,789 | 36,558 | 517 | — | 47,864 | ||||||||||||||
Depreciation and other | 8,173 | 37,495 | 2,228 | — | 47,896 | ||||||||||||||
Amortization of intangible assets | 358 | 3,313 | — | — | 3,671 | ||||||||||||||
Total expenses | 59,056 | 422,343 | 14,904 | — | 496,303 | ||||||||||||||
Operating income | 12,560 | 42,471 | 1,530 | — | 56,561 | ||||||||||||||
Other income (expense), net: | |||||||||||||||||||
Loss from equity method investments, net | (224 | ) | (11,128 | ) | — | — | (11,352 | ) | |||||||||||
Interest income (expense), net | (12,570 | ) | 163 | (56 | ) | — | (12,463 | ) | |||||||||||
Other, net | 1,941 | 573 | (5,529 | ) | — | (3,015 | ) | ||||||||||||
Total other expense, net | (10,853 | ) | (10,392 | ) | (5,585 | ) | — | (26,830 | ) | ||||||||||
Income (loss) from continuing operations before income taxes | 1,707 | 32,079 | (4,055 | ) | — | 29,731 | |||||||||||||
Income tax benefit (expense) | (1,915 | ) | (10,844 | ) | 918 | — | (11,841 | ) | |||||||||||
Income (loss) from continuing operations | (208 | ) | 21,235 | (3,137 | ) | — | 17,890 | ||||||||||||
Loss from discontinued operations, net of tax | — | — | — | — | — | ||||||||||||||
Equity in income (loss) of subsidiaries | 18,098 | (3,137 | ) | — | (14,961 | ) | — | ||||||||||||
Net Income (loss) | 17,890 | 18,098 | (3,137 | ) | (14,961 | ) | 17,890 | ||||||||||||
Foreign currency translation adjustment(1) | (680 | ) | — | (15 | ) | — | (695 | ) | |||||||||||
Comprehensive income (loss) | $ | 17,210 | $ | 18,098 | $ | (3,152 | ) | $ | (14,961 | ) | $ | 17,195 |
(1) | Foreign currency translation adjustment had no tax effect in 2014. |
32
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME | |||||||||||||||||||
(unaudited) | |||||||||||||||||||
Three Months Ended September 30, 2013 | |||||||||||||||||||
(in thousands) | Outerwall Inc. | Combined Guarantor Subsidiaries | Combined Non-Guarantor Subsidiaries | Eliminations and Consolidation Reclassifications | Total | ||||||||||||||
Revenue | $ | 67,545 | $ | 505,043 | $ | 13,951 | $ | — | $ | 586,539 | |||||||||
Expenses: | |||||||||||||||||||
Direct operating | 36,325 | 357,800 | 15,393 | (3,545 | ) | 405,973 | |||||||||||||
Marketing | 1,380 | 6,328 | 687 | — | 8,395 | ||||||||||||||
Research and development | 1,794 | 1,716 | — | — | 3,510 | ||||||||||||||
General and administrative | 11,608 | 45,337 | 533 | 3,553 | 61,031 | ||||||||||||||
Depreciation and other | 7,028 | 40,867 | 1,350 | — | 49,245 | ||||||||||||||
Amortization of intangible assets | 569 | 2,622 | — | — | 3,191 | ||||||||||||||
Total expenses | 58,704 | 454,670 | 17,963 | 8 | 531,345 | ||||||||||||||
Operating income (loss) | 8,841 | 50,373 | (4,012 | ) | (8 | ) | 55,194 | ||||||||||||
Other income (expense), net: | |||||||||||||||||||
Income (loss) from equity method investments, net | 67,069 | (9,135 | ) | — | — | 57,934 | |||||||||||||
Interest expense, net | (8,246 | ) | (115 | ) | (41 | ) | — | (8,402 | ) | ||||||||||
Other, net | (2,352 | ) | 8 | (66 | ) | 8 | (2,402 | ) | |||||||||||
Total other income (expense), net | 56,471 | (9,242 | ) | (107 | ) | 8 | 47,130 | ||||||||||||
Income (loss) from continuing operations before income taxes | 65,312 | 41,131 | (4,119 | ) | — | 102,324 | |||||||||||||
Income tax benefit (expense) | (1,819 | ) | (15,215 | ) | 1,505 | — | (15,529 | ) | |||||||||||
Income (loss) from continuing operations | 63,493 | 25,916 | (2,614 | ) | — | 86,795 | |||||||||||||
Loss from discontinued operations, net of tax | (3,743 | ) | (396 | ) | — | — | (4,139 | ) | |||||||||||
Equity in income (loss) of subsidiaries | 22,906 | (2,614 | ) | — | (20,292 | ) | — | ||||||||||||
Net income (loss) | 82,656 | 22,906 | (2,614 | ) | (20,292 | ) | 82,656 | ||||||||||||
Foreign currency translation adjustment(1) | 63 | — | 1,789 | — | 1,852 | ||||||||||||||
Comprehensive income (loss) | $ | 82,719 | $ | 22,906 | $ | (825 | ) | $ | (20,292 | ) | $ | 84,508 |
(1) | Foreign currency translation adjustment had no tax effect in 2013. |
33
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME | |||||||||||||||||||
(unaudited) | |||||||||||||||||||
Nine Months Ended September 30, 2014 | |||||||||||||||||||
(in thousands) | Outerwall Inc. | Combined Guarantor Subsidiaries | Combined Non-Guarantor Subsidiaries | Eliminations and Consolidation Reclassifications | Total | ||||||||||||||
Revenue | $ | 197,878 | $ | 1,460,447 | $ | 44,078 | $ | — | $ | 1,702,403 | |||||||||
Expenses: | |||||||||||||||||||
Direct operating | 105,399 | 1,057,882 | 31,534 | — | 1,194,815 | ||||||||||||||
Marketing | 4,723 | 20,220 | 2,199 | — | 27,142 | ||||||||||||||
Research and development | 2,589 | 7,296 | — | — | 9,885 | ||||||||||||||
General and administrative | 31,429 | 116,974 | 1,426 | — | 149,829 | ||||||||||||||
Depreciation and other | 26,744 | 113,407 | 6,020 | — | 146,171 | ||||||||||||||
Amortization of intangible assets | 1,430 | 9,936 | — | — | 11,366 | ||||||||||||||
Total expenses | 172,314 | 1,325,715 | 41,179 | — | 1,539,208 | ||||||||||||||
Operating income | 25,564 | 134,732 | 2,899 | — | 163,195 | ||||||||||||||
Other income (expense), net: | |||||||||||||||||||
Loss from equity method investments, net | (672 | ) | (30,589 | ) | — | — | (31,261 | ) | |||||||||||
Interest income (expense), net | (35,172 | ) | 286 | (151 | ) | — | (35,037 | ) | |||||||||||
Other, net | 7,662 | 1,409 | (10,928 | ) | — | (1,857 | ) | ||||||||||||
Total other expense, net | (28,182 | ) | (28,894 | ) | (11,079 | ) | — | (68,155 | ) | ||||||||||
Income (loss) from continuing operations before income taxes | (2,618 | ) | 105,838 | (8,180 | ) | — | 95,040 | ||||||||||||
Income tax benefit (expense) | 1,333 | (35,139 | ) | 2,352 | — | (31,454 | ) | ||||||||||||
Income (loss) from continuing operations | (1,285 | ) | 70,699 | (5,828 | ) | — | 63,586 | ||||||||||||
Income (loss) from discontinued operations, net of tax | (803 | ) | 35 | — | — | (768 | ) | ||||||||||||
Equity in income (loss) of subsidiaries | 64,906 | (5,828 | ) | — | (59,078 | ) | — | ||||||||||||
Net income (loss) | 62,818 | 64,906 | (5,828 | ) | (59,078 | ) | 62,818 | ||||||||||||
Foreign currency translation adjustment(1) | (650 | ) | — | 494 | — | (156 | ) | ||||||||||||
Comprehensive income (loss) | $ | 62,168 | $ | 64,906 | $ | (5,334 | ) | $ | (59,078 | ) | $ | 62,662 |
(1) | Foreign currency translation adjustment had no tax effect in 2014. |
34
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME | |||||||||||||||||||
(unaudited) | |||||||||||||||||||
Nine Months Ended September 30, 2013 | |||||||||||||||||||
(in thousands) | Outerwall Inc. | Combined Guarantor Subsidiaries | Combined Non-Guarantor Subsidiaries | Eliminations and Consolidation Reclassifications | Total | ||||||||||||||
Revenue | $ | 186,625 | $ | 1,488,767 | $ | 37,504 | $ | — | $ | 1,712,896 | |||||||||
Expenses: | |||||||||||||||||||
Direct operating | 104,075 | 1,039,516 | 39,483 | (8,256 | ) | 1,174,818 | |||||||||||||
Marketing | 3,572 | 17,491 | 1,840 | — | 22,903 | ||||||||||||||
Research and development | 6,452 | 1,719 | — | — | 8,171 | ||||||||||||||
General and administrative | 28,410 | 130,863 | 1,249 | 8,264 | 168,786 | ||||||||||||||
Depreciation and other | 21,072 | 118,440 | 3,644 | — | 143,156 | ||||||||||||||
Amortization of intangible assets | 1,708 | 5,377 | — | — | 7,085 | ||||||||||||||
Total expenses | 165,289 | 1,313,406 | 46,216 | 8 | 1,524,919 | ||||||||||||||
Operating income (loss) | 21,336 | 175,361 | (8,712 | ) | (8 | ) | 187,977 | ||||||||||||
Other income (expense), net: | |||||||||||||||||||
Income (loss) from equity method investments, net | 65,050 | (23,770 | ) | — | — | 41,280 | |||||||||||||
Interest income (expense), net | (26,200 | ) | 338 | (91 | ) | — | (25,953 | ) | |||||||||||
Other, net | (3,442 | ) | 219 | (108 | ) | 8 | (3,323 | ) | |||||||||||
Total other income (expense), net | 35,408 | (23,213 | ) | (199 | ) | 8 | 12,004 | ||||||||||||
Income (loss) from continuing operations before income taxes | 56,744 | 152,148 | (8,911 | ) | — | 199,981 | |||||||||||||
Income tax benefit (expense) | 19,744 | (57,464 | ) | 2,954 | — | (34,766 | ) | ||||||||||||
Income (loss) from continuing operations | 76,488 | 94,684 | (5,957 | ) | — | 165,215 | |||||||||||||
Loss from discontinued operations, net of tax | (11,994 | ) | (1,104 | ) | — | — | (13,098 | ) | |||||||||||
Equity in income (loss) of subsidiaries | 87,623 | (5,957 | ) | — | (81,666 | ) | — | ||||||||||||
Net income (loss) | 152,117 | 87,623 | (5,957 | ) | (81,666 | ) | 152,117 | ||||||||||||
Foreign currency translation adjustment(1) | 84 | — | (388 | ) | — | (304 | ) | ||||||||||||
Comprehensive income (loss) | $ | 152,201 | $ | 87,623 | $ | (6,345 | ) | $ | (81,666 | ) | $ | 151,813 |
(1) | Foreign currency translation adjustment had no tax effect in 2013. |
35
CONSOLIDATING STATEMENTS OF CASH FLOWS | |||||||||||||||||||
(unaudited) | |||||||||||||||||||
Nine Months Ended September 30, 2014 | |||||||||||||||||||
(in thousands) | Outerwall Inc. | Combined Guarantor Subsidiaries | Combined Non-Guarantor Subsidiaries | Eliminations and Consolidation Reclassifications | Total | ||||||||||||||
Operating Activities: | |||||||||||||||||||
Net income (loss) | $ | 62,818 | $ | 64,906 | $ | (5,828 | ) | $ | (59,078 | ) | $ | 62,818 | |||||||
Adjustments to reconcile net income to net cash flows from operating activities: | |||||||||||||||||||
Depreciation and other | 26,728 | 113,408 | 6,020 | — | 146,156 | ||||||||||||||
Amortization of intangible assets | 1,430 | 9,936 | — | — | 11,366 | ||||||||||||||
Share-based payments expense | 8,227 | 1,866 | — | — | 10,093 | ||||||||||||||
Windfall excess tax benefits related to share-based payments | (1,988 | ) | — | — | — | (1,988 | ) | ||||||||||||
Deferred income taxes | 5,746 | (13,965 | ) | (3,105 | ) | (6,084 | ) | (17,408 | ) | ||||||||||
Loss from equity method investments, net | 672 | 30,589 | — | — | 31,261 | ||||||||||||||
Amortization of deferred financing fees and debt discount | 3,423 | — | — | — | 3,423 | ||||||||||||||
Loss from early extinguishment of debt | 2,018 | — | — | — | 2,018 | ||||||||||||||
Other | (1,149 | ) | (368 | ) | 40 | — | (1,477 | ) | |||||||||||
Equity in (income) losses of subsidiaries | (64,906 | ) | 5,828 | — | 59,078 | — | |||||||||||||
Cash flows from changes in operating assets and liabilities: | |||||||||||||||||||
Accounts receivable, net | 395 | 16,157 | 912 | — | 17,464 | ||||||||||||||
Content library | 36 | 48,988 | (224 | ) | — | 48,800 | |||||||||||||
Prepaid expenses and other current assets | 16,024 | 1,026 | (87 | ) | 6,084 | 23,047 | |||||||||||||
Other assets | 55 | 1,546 | 46 | — | 1,647 | ||||||||||||||
Accounts payable | (2,427 | ) | (94,130 | ) | (449 | ) | — | (97,006 | ) | ||||||||||
Accrued payable to retailers | (11,177 | ) | (15,003 | ) | (1,642 | ) | — | (27,822 | ) | ||||||||||
Other accrued liabilities | (5,049 | ) | (331 | ) | 35 | — | (5,345 | ) | |||||||||||
Net cash flows from (used in) operating activities(1) | 40,876 | 170,453 | (4,282 | ) | — | 207,047 | |||||||||||||
Investing Activities: | |||||||||||||||||||
Purchases of property and equipment | (24,933 | ) | (41,663 | ) | (5,715 | ) | — | (72,311 | ) | ||||||||||
Proceeds from sale of property and equipment | 750 | 1,085 | — | — | 1,835 | ||||||||||||||
Cash paid for equity investments | — | (24,500 | ) | — | — | (24,500 | ) | ||||||||||||
Investments in and advances to affiliates | 98,892 | (101,884 | ) | 2,992 | — | — | |||||||||||||
Net cash flows from (used in) investing activities(1) | 74,709 | (166,962 | ) | (2,723 | ) | — | (94,976 | ) | |||||||||||
Financing Activities: | |||||||||||||||||||
Proceeds from issuance of senior unsecured notes | 295,500 | — | — | — | 295,500 | ||||||||||||||
Proceeds from new borrowing of Credit Facility | 635,000 | — | — | — | 635,000 | ||||||||||||||
Principal payments on Credit Facility | (621,250 | ) | — | — | — | (621,250 | ) | ||||||||||||
Financing costs associated with Credit Facility and senior unsecured notes | (2,906 | ) | — | — | — | (2,906 | ) | ||||||||||||
Conversion of convertible debt | (51,149 | ) | — | — | — | (51,149 | ) | ||||||||||||
Repurchases of common stock | (545,078 | ) | — | — | — | (545,078 | ) | ||||||||||||
Principal payments on capital lease obligations and other debt | (10,263 | ) | (3 | ) | (331 | ) | — | (10,597 | ) | ||||||||||
Windfall excess tax benefits related to share-based payments | 1,988 | — | — | — | 1,988 | ||||||||||||||
Withholding tax paid on vesting of restricted stock net of proceeds from exercise of stock options | (1,084 | ) | — | — | — | (1,084 | ) | ||||||||||||
Net cash flows from (used in) financing activities(1) | (299,242 | ) | (3 | ) | (331 | ) | — | (299,576 | ) |
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Nine Months Ended September 30, 2014 | |||||||||||||||||||
Outerwall Inc. | Combined Guarantor Subsidiaries | Combined Non-Guarantor Subsidiaries | Eliminations and Consolidation Reclassifications | Total | |||||||||||||||
Effect of exchange rate changes on cash | (650 | ) | — | 1,619 | — | 969 | |||||||||||||
Increase (decrease) in cash and cash equivalents | (184,307 | ) | 3,488 | (5,717 | ) | — | (186,536 | ) | |||||||||||
Cash and cash equivalents: | |||||||||||||||||||
Beginning of period | 315,250 | 9,639 | 46,548 | — | 371,437 | ||||||||||||||
End of period | $ | 130,943 | $ | 13,127 | $ | 40,831 | $ | — | $ | 184,901 |
(1) | During 2013, we discontinued four ventures previously included in our New Ventures operating segment, Orango, Rubi, Crisp Market, and Star Studio. Cash flows from these discontinued operations are not segregated from cash flows from continuing operations in all periods presented because they were not material. |
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CONSOLIDATING STATEMENTS OF CASH FLOWS | |||||||||||||||||||
(unaudited) | |||||||||||||||||||
Nine Months Ended September 30, 2013 | |||||||||||||||||||
(in thousands) | Outerwall Inc. | Combined Guarantor Subsidiaries | Combined Non-Guarantor Subsidiaries | Eliminations and Consolidation Reclassifications | Total | ||||||||||||||
Operating Activities: | |||||||||||||||||||
Net income (loss) | $ | 152,117 | $ | 87,623 | $ | (5,957 | ) | $ | (81,666 | ) | $ | 152,117 | |||||||
Adjustments to reconcile net income to net cash flows from operating activities: | |||||||||||||||||||
Depreciation and other | 22,089 | 118,440 | 3,644 | — | 144,173 | ||||||||||||||
Amortization of intangible assets | 1,708 | 5,377 | — | — | 7,085 | ||||||||||||||
Share-based payments expense | 7,206 | 4,248 | — | — | 11,454 | ||||||||||||||
Windfall excess tax benefits related to share-based payments | (3,347 | ) | — | — | — | (3,347 | ) | ||||||||||||
Deferred income taxes | 17,698 | (26,759 | ) | (3,037 | ) | — | (12,098 | ) | |||||||||||
Impairment Expense | 5,262 | — | — | — | 5,262 | ||||||||||||||
Loss (income) from equity method investments, net | (65,050 | ) | 23,770 | — | — | (41,280 | ) | ||||||||||||
Amortization of deferred financing fees and debt discount | 5,205 | — | — | — | 5,205 | ||||||||||||||
Loss from early extinguishment of debt | 5,950 | — | — | — | 5,950 | ||||||||||||||
Other | 1,195 | (175 | ) | — | — | 1,020 | |||||||||||||
Equity in (income) losses of subsidiaries | (87,623 | ) | 5,957 | — | 81,666 | — | |||||||||||||
Cash flows from changes in operating assets and liabilities: | |||||||||||||||||||
Accounts receivable, net | (398 | ) | 1,916 | (1,824 | ) | — | (306 | ) | |||||||||||
Content library | 641 | 8,455 | 350 | — | 9,446 | ||||||||||||||
Prepaid expenses and other current assets | (22,600 | ) | (8,511 | ) | (414 | ) | 69 | (31,456 | ) | ||||||||||
Other assets | 163 | 91 | 15 | — | 269 | ||||||||||||||
Accounts payable | 18 | (69,415 | ) | (1,137 | ) | 354 | (70,180 | ) | |||||||||||
Accrued payable to retailers | (7,963 | ) | (3,252 | ) | 1,574 | — | (9,641 | ) | |||||||||||
Other accrued liabilities | (5,366 | ) | (21,857 | ) | 740 | (69 | ) | (26,552 | ) | ||||||||||
Net cash flows from (used in) operating activities(1) | 26,905 | 125,908 | (6,046 | ) | 354 | 147,121 | |||||||||||||
Investing Activities: | |||||||||||||||||||
Purchases of property and equipment | (46,496 | ) | (64,658 | ) | (12,192 | ) | — | (123,346 | ) | ||||||||||
Proceeds from sale of property and equipment | 12,078 | 803 | 7 | — | 12,888 | ||||||||||||||
Acquisition of ecoATM, net of cash acquired | (244,036 | ) | — | — | — | (244,036 | ) | ||||||||||||
Receipt of note receivable principal | 95 | — | — | — | 95 | ||||||||||||||
Cash paid for equity investments | — | (28,000 | ) | — | — | (28,000 | ) | ||||||||||||
Investments in and advances to affiliates | 4,031 | (19,782 | ) | 15,751 | — | — | |||||||||||||
Net cash flows from (used in) investing activities(1) | (274,328 | ) | (111,637 | ) | 3,566 | — | (382,399 | ) | |||||||||||
Financing Activities: | |||||||||||||||||||
Proceeds from issuance of senior unsecured notes | 343,769 | — | — | — | 343,769 | ||||||||||||||
Proceeds from new borrowing on Credit Facility | 150,000 | — | — | — | 150,000 | ||||||||||||||
Principal payments on Credit Facility | (60,938 | ) | — | — | — | (60,938 | ) | ||||||||||||
Financing costs associated with Credit Facility and senior unsecured notes | (444 | ) | — | — | — | (444 | ) | ||||||||||||
Conversion of convertible debt | (169,664 | ) | — | — | — | (169,664 | ) | ||||||||||||
Repurchases of common stock | (95,004 | ) | — | — | — | (95,004 | ) | ||||||||||||
Principal payments on capital lease obligations and other debt | (10,300 | ) | (214 | ) | (310 | ) | — | (10,824 | ) | ||||||||||
Windfall excess tax benefits related to share-based payments | 3,347 | — | — | — | 3,347 | ||||||||||||||
Withholding tax paid on vesting of restricted stock net of proceeds from exercise of stock options | 7,763 | — | — | — | 7,763 | ||||||||||||||
Net cash flows from (used in) financing activities(1) | 168,529 | (214 | ) | (310 | ) | — | 168,005 |
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Nine Months Ended September 30, 2013 | |||||||||||||||||||
Outerwall Inc. | Combined Guarantor Subsidiaries | Combined Non-Guarantor Subsidiaries | Eliminations and Consolidation Reclassifications | Total | |||||||||||||||
Effect of exchange rate changes on cash | 84 | — | (475 | ) | — | (391 | ) | ||||||||||||
Increase (decrease) in cash and cash equivalents | (78,810 | ) | 14,057 | (3,265 | ) | 354 | (67,664 | ) | |||||||||||
Cash and cash equivalents: | |||||||||||||||||||
Beginning of period | 242,489 | — | 40,759 | (354 | ) | 282,894 | |||||||||||||
End of period | $ | 163,679 | $ | 14,057 | $ | 37,494 | $ | — | $ | 215,230 |
(1) | During 2013, we discontinued four ventures previously included in our New Ventures operating segment, Orango, Rubi, Crisp Market, and Star Studio. Cash flows from these discontinued operations are not segregated from cash flows from continuing operations in all periods presented because they were not material. |
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Note 19: Income Taxes
Our effective tax rate from continuing operations was 39.8% and 15.2% for the three months ended September 30, 2014 and 2013, respectively, and 33.1% and 17.4% for the nine months ended September 30, 2014 and 2013, respectively.
Our effective tax rate for the three months ended September 30, 2014 was higher than the U.S. Federal statutory rate of 35.0% due primarily to state income taxes, offset partially by the Domestic Production Activities Deduction, which we are entitled to based on our domestic manufacturing activities. Our effective tax rate for the three months ended September 30, 2013 was lower than the U.S. Federal statutory rate of 35.0% due primarily to a $68.4 million nontaxable gain related to the re-measurement of our previously held equity interest in ecoATM and the Domestic Production Activities Deduction. The nontaxable gain decreased our effective tax rate by 23.4 percentage points for the three months ended September 30, 2013.
Our effective tax rate for the nine months ended September 30, 2014 was lower than the U.S. Federal statutory rate of 35.0% due primarily to the Domestic Production Activities Deduction, which was recorded net of a contingency reserve, and discrete benefits, offset partially by state income taxes.
Our effective tax rate for the nine months ended September 30, 2013 was lower than the U.S. Federal statutory rate of 35.0% due primarily to the following items. A $68.4 million nontaxable gain related to the re-measurement of our previously held equity interest in ecoATM decreased our effective tax rate by 12.0 percentage points. A second quarter discrete one-time tax benefit of $17.8 million, net of a valuation allowance, realized from an arrangement to sell certain NCR kiosks and a series of transactions to reorganize Redbox related subsidiary structures through the sale of a wholly owned subsidiary decreased our effective tax rate by 8.9 percentage points. Additionally, our effective tax rate was lower than the U.S. Federal statutory rate of 35.0% due to the Domestic Production Activities Deduction. These tax benefits were partially offset by state income taxes.
Note 20: Subsequent Events
Withdrawal from Joint Venture with Verizon
On October 19, 2014, Redbox, Verizon, the Joint Venture and Verizon Corporate Services Group, Inc. entered into a Withdrawal and Extinguishment of Rights Agreement (the “Withdrawal Agreement”) pursuant to which Redbox withdrew as a member of the Joint Venture effective on October 20, 2014. As previously announced, Redbox Instant by Verizon, the business operated by the Joint Venture, ceased operation of its consumer service effective October 7, 2014.
Pursuant to the Withdrawal Agreement, all of Redbox’s rights under the Joint Venture’s operating agreement will be extinguished and all outstanding amounts including expense reimbursements will be settled in exchange for a total payment of $16.8 million to Redbox. To date, Outerwall has made total cash capital contributions to the Joint Venture of $77.0 million and has received total cash from the Joint Venture of $70.5 million, inclusive of revenue attributable to the rental of DVDs and Blu-ray Discs through the Joint Venture and the $16.8 million payment. In addition, Outerwall realized approximately $29.9 million in cash tax savings through deductions arising from the recognition of our share of the Joint Venture’s losses through September 30, 2014.
Outerwall does not expect a net material financial impact resulting from the extinguishment and expense reimbursement. Neither Redbox nor Outerwall will take part in any material manner with the Joint Venture or in the winding down of Redbox Instant by Verizon following the withdrawal.
Content License Agreement
On October 27, 2014, we entered into an Amended and Restated Home Video Lease Output Agreement (the “Letter Agreement”) with Lions Gate Films, Inc. (“Lionsgate”). The Letter Agreement extends the term of Redbox’s arrangement to license theatrical and direct-to-video titles released by Lionsgate through September 30, 2016, which will be automatically extended for an additional year under certain conditions. After accounting for this agreement, our commitment to purchase content from Lionsgate was approximately $111.6 million.
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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, 2013 (our “2013 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. While we are focused on four consumer sectors, collectively our business segments and strategic investments currently operate within five consumer sectors: Entertainment, Money, Electronics, Beauty & Consumer Packaged Goods, and Health.
Our automated retail business model leverages technology advancements that allow delivery of new and innovative consumer products 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. Our products and services can be found at approximately 66,550 kiosks in leading supermarkets, drug stores, mass merchants, financial institutions, convenience stores, malls and restaurants.
Core Offerings
We have two 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 paper bills to stored value products. We also offer self-service kiosks that exchange gift cards for cash under our Coinstar™ Exchange brand. |
New Ventures
We identify, evaluate, build or acquire and develop innovative new self-service concepts in the automated retail space in our New Ventures business segment (“New Ventures”). Self-service kiosk concepts we are currently exploring in the marketplace are our ecoATM concept, in the Electronics sector, which provides an automated self-service kiosk where consumers can recycle mobile devices for cash and our consumer product sampling concept SAMPLEit, in the Beauty and Consumer Packaged Goods sector. New Ventures concepts are regularly assessed to determine whether continued funding or other alternatives are appropriate. Subsequent to our acquisition of ecoATM in the third quarter of 2013, results from ecoATM are included within our New Ventures segment results.
Strategic Investments and Joint Venture
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 SoloHealth, Inc. See Note 8: Equity Method Investments and Related Party Transactions in our Notes to Consolidated Financial Statements for more information and information regarding our acquisition of ecoATM, one of our prior strategic investments.
On October 19, 2014, Redbox and Verizon entered into an agreement whereby Redbox would withdraw from the Joint Venture. See Note 20: Subsequent Events in our Notes to Consolidated Financial Statements for information regarding the terms of the withdrawal agreement.
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Strategy
Our strategy 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 outlays of time and financial resources. We believe we have significant opportunities to continue to grow our revenues, profitability and cash flow by capitalizing on our strengths and favorable industry trends through the execution of the following strategies:
• | Continue growing our Redbox business profitably. We are focused on profitably growing Redbox through increased revenue generation and improved kiosk-operations efficiency. |
We expect to continue to grow revenue through attracting new customers, improving the Blu-ray rental mix, and utilizing our customer management tools. Blu-ray drives revenue growth by shifting rentals to its higher revenue price point, $1.50 per night, and higher margin dollars per rental. Not only does Blu-ray provide a strong financial benefit to our business, but it also offers consumers a better viewing experience due to superior picture and sound quality compared to other home video rental formats (including digital streaming). Further, our customer management tools allow us to provide personalized recommendations and promotions to our customers, which helps us generate incremental revenue. In addition, if we were to increase pricing as a result of ongoing testing, we expect it would have a positive impact on revenue.
While we have substantially completed the build out of our Redbox network in the U.S., we believe we can improve financial performance by redeploying underperforming kiosks to lower kiosk density or higher-consumer-traffic areas. 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. Our kiosk retrofit has yielded the equivalent of approximately 5,000 kiosks of new capacity at significantly lower cost as compared to equivalent new kiosk installation. 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 help offset the expected secular decline in the physical rental market.
• | Optimize and grow revenues from our Coinstar business. As with Redbox, we believe we can improve financial performance in our Coinstar business through kiosk optimization. We continue to focus on finding attractive locations for our kiosks, including through redeployment of underperforming kiosks to lower-kiosk-density or higher-consumer-traffic areas. 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. |
• | Use our expertise to continue to develop our existing businesses and new innovative automated 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. Further, we continue to make modest investments to test our product sampling kiosk concept, SAMPLEit. We are committed to addressing the changing needs and preferences of our consumers, including through strategic investments. |
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Recent Events
Q3 2014 Events
• | On September 26, 2014, Universal Studios Home Entertainment LLC exercised its option to extend the term of the revenue sharing license agreement between Redbox and Universal through December 31, 2015. |
• | On September 2, 2014, our remaining outstanding 4.0% Convertible Senior Notes ("Convertible Notes") matured. In the three months ended September 30, 2014, we retired or settled upon maturity $33.4 million in face value of Convertible Notes for $33.4 million in cash and the issuance of 248,944 shares of our common stock. See Note 9: Debt and Other Long-Term Liabilities in our Notes to Consolidated Financial Statements for more information. |
• | During the three months ended September 30, 2014, we repurchased 1,185,970 shares of our common stock at an average price of $59.52 per share for $70.6 million.(1) |
Q2 2014 Events
• | On June 27, 2014, Sony notified us of their intent to extend our existing content license agreement with them. This extension will extend the license period through September 30, 2015. |
• | On June 24, 2014, we entered into a new credit facility arrangement consisting of a senior secured $600.0 million revolving line of credit that, under certain conditions, may be increased up to an additional $200.0 million in aggregate, and a senior secured $150.0 million amortizing term loan. The maturity of the credit facility is extended until June 24, 2019. |
• | On June 9, 2014, we consummated a private offering to sell $300.0 million in aggregate principal amount of senior unsecured notes due 2021. We used the proceeds to repay indebtedness under our prior credit facility and for general corporate purposes. |
• | During the three months ended June, 30, 2014, we repurchased 711,556 shares of our common stock at an average price of $70.27 per share for $50.0 million.(1) |
Q1 2014 Events
• | During January 2014, we repurchased 736,000 shares of our common stock at an average price of $67.93 per share for $50.0 million.(1) |
• | During the three months ended March 31, 2014, we executed a tender offer in which we accepted for payment an aggregate of 5,291,701 shares of our common stock at a final purchase price of $70.07 per share, for an aggregate cost of $370.8 million, excluding fees and expenses.(1) |
(1) | Shares purchased as part of publicly announced repurchase plans or programs as approved by Board of Directors. See Note 10: Repurchases of Common Stock in our Notes to Consolidated Financial Statements for more information. |
Subsequent Events
• | On October 27, 2014, we entered into an Amended and Restated Home Video Lease Output Agreement (the “Letter Agreement”) with Lions Gate Films, Inc. (“Lionsgate”). The Letter Agreement extends the term of Redbox’s arrangement to license theatrical and direct-to-video titles released by Lionsgate through September 30, 2016, which will be automatically extended for an additional year under certain conditions. See Note 20: Subsequent Events in our Notes to Consolidated Financial Statements for more information. |
• | On October 19, 2014, the Redbox and Verizon entered into an agreement whereby we would withdraw from the Joint Venture. See Note 20: Subsequent Events in our Notes to Consolidated Financial Statements for information regarding the terms of the withdrawal agreement. |
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Consolidated Results
The discussion and analysis that follows covers our results from continuing operations:
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||
September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||
Dollars in thousands, except per share amounts | 2014 | 2013 | $ | % | 2014 | 2013 | $ | % | |||||||||||||||||||||
Revenue | $ | 552,864 | $ | 586,539 | $ | (33,675 | ) | (5.7 | )% | $ | 1,702,403 | $ | 1,712,896 | $ | (10,493 | ) | (0.6 | )% | |||||||||||
Operating income | $ | 56,561 | $ | 55,194 | $ | 1,367 | 2.5 | % | $ | 163,195 | $ | 187,977 | $ | (24,782 | ) | (13.2 | )% | ||||||||||||
Income from continuing operations | $ | 17,890 | $ | 86,795 | $ | (68,905 | ) | (79.4 | )% | $ | 63,586 | $ | 165,215 | $ | (101,629 | ) | (61.5 | )% | |||||||||||
Diluted earnings per share from continuing operations | $ | 0.93 | $ | 3.10 | $ | (2.17 | ) | (70.0 | )% | $ | 2.98 | $ | 5.78 | $ | (2.80 | ) | (48.4 | )% |
Comparing three months ended September 30, 2014 to three months ended September 30, 2013
Revenue decreased $33.7 million, or 5.7%, primarily due to:
• | $53.6 million decrease from our Redbox segment primarily due to a 11.8% decrease in same store sales, which we believe to be primarily due to the timing of releases and the continued impact of a considerably weaker second quarter 2014 content release schedule that was partially offset by the comparable strength of content in the third quarter, which resulted in 13.7% fewer rentals in the third quarter of 2014 compared to the third quarter of 2013; partially offset by |
• | $14.5 million increase from our New Ventures segment primarily due to the inclusion of ecoATM results in the third quarter of 2014 subsequent to our acquisition of ecoATM on July 23, 2013 and an increase of 730 kiosks installed from 820 as of September 30, 2013 to 1,550 as of September 30, 2014; and |
• | $5.5 million increase from our Coinstar segment, primarily due to growth of U.S. same store sales driven by a price increase implemented across all grocery locations in the U.S. which was effective October 1, 2013, higher volume in the U.K. due to an increased U.K. kiosk base, a price increase effective August 1, 2014 for all U.K. grocery retail locations for the coin voucher product taking the rate from 8.9% to 9.9% resulting in higher U.K. same store sales, and growth in the number of Coinstar Exchange kiosks. |
Operating income increased $1.4 million, or 2.5%, primarily due to:
• | $5.3 million increase in operating income within our Coinstar segment primarily due to revenue growth; partially offset by |
• | $2.0 million decrease in operating income within our Redbox segment due to a revenue decline partially offset by expense reductions; |
• | $1.0 million increase in operating loss within our New Ventures segment, primarily from investments being made to scale the ecoATM business; and |
• | $0.9 million increase in share based expense not allocated to our segments primarily as a result 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. |
Income from continuing operations decreased $68.9 million, or 79.4%, primarily due to:
• | $69.3 million increase in loss from equity method investments primarily due to the $68.4 million gain recorded in the third quarter of 2013 on the re-measurement of our previously held equity interest in ecoATM to its acquisition date fair value; and |
• | $4.1 million increase in interest expense due to increased borrowings; partially offset by |
• | $1.4 million increase in operating income discussed above; and |
• | $3.7 million decrease in income tax expense. |
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Comparing nine months ended September 30, 2014 to nine months ended September 30, 2013
Revenue decreased $10.5 million, or 0.6%, primarily due to:
• | $78.9 million decrease from our Redbox segment primarily due to a 6.1% decrease in same store sales which we believe to be primarily due to the timing of releases and a considerably weaker release schedule in the second quarter of 2014 that resulted in 7.2% fewer rentals in the first nine months of 2014 compared to the first nine months of 2013; partially offset by |
• | $54.3 million increase from our New Ventures segment primarily due to the inclusion of ecoATM results beginning on the July 23, 2013 acquisition date and an increase of 730 kiosks installed from 820 as of September 30, 2013 to 1,550 as of September 30, 2014; and |
• | $14.2 million increase from our Coinstar segment, primarily due to growth of U.S. same store sales driven by a price increase implemented across all grocery locations in the U.S. which was effective October 1, 2013, higher volume in the U.K. due to an increased U.K. kiosk base and a price increase effective August 1, 2014 for all U.K. grocery retail locations for the coin voucher product taking the rate from 8.9% to 9.9% resulting in higher U.K. same store sales, and growth in the number of Coinstar Exchange kiosks. |
Operating income decreased $24.8 million, or 13.2%, primarily due to:
• | $14.9 million decrease in operating income within our Redbox segment primarily due to a $78.9 million decrease in revenue partially offset by a $37.6 million decrease in direct operating expenses and a $22.3 million decrease in general and administrative expenses. Product cost, included within direct operating expense, for the nine months ended September 30, 2013 would have been $23.8 million higher had the new methodology for amortizing product costs in our content library that we implemented on a prospective basis in the second quarter of 2013 had been in place for the duration of the respective license periods of the titles in the content library as costs would have shifted from prior periods; |
• | $15.9 million increase in operating loss within our New Ventures segment, primarily from investments being made to scale the ecoATM business; and |
• | $8.3 million increase in share based expense not allocated to our segments primarily as a result of rights to receive cash we issued as replacement awards for unvested restricted stock as part of our acquisition of ecoATM in the third quarter of 2013; partially offset by |
• | $14.3 million increase in operating income within our Coinstar segment primarily due to $14.2 million increase in revenue, $1.4 million increase in general and administrative expenses primarily due to increased expenses associated with the growth of our Coinstar Exchange business, $1.1 million increase in direct operating expenses due to increased selling and customer service costs to support higher revenues, $1.0 million increase in marketing expenses primarily due to media buys for print, online and radio to support the growth of our Coinstar Exchange business, and $1.0 million increase in depreciation and amortization expense due to higher depreciation expense as a result of continued investment in our corporate technology infrastructure. |
Income from continuing operations decreased $101.6 million, or 61.5%, primarily due to:
• | $72.5 million increase in losses from equity method investments primarily due to the $68.4 million gain recorded in the third quarter of 2013 on the re-measurement of our previously held equity interest in ecoATM to its acquisition date fair value; |
• | $24.8 million decrease in operating income as described above; |
• | $9.1 million increase in interest expense due to increased borrowings; partially offset by |
• | $3.3 million decrease in income tax expense; and |
• | $1.5 million decrease in other expenses. |
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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. We also granted restricted stock to certain movie studios as part of content agreements with our Redbox segment. 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 | Nine Months Ended | ||||||||||||||||||||||||||||
September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||
Dollars in thousands | 2014 | 2013 | $ | % | 2014 | 2013 | $ | % | |||||||||||||||||||||
Direct operating | $ | 1,903 | $ | 1,267 | $ | 636 | 50.2 | % | $ | 5,214 | $ | 1,974 | $ | 3,240 | 164.1 | % | |||||||||||||
Marketing | 678 | 739 | (61 | ) | (8.3 | )% | 2,275 | 893 | 1,382 | NM* | |||||||||||||||||||
Research and development | 832 | 655 | 177 | 27.0 | % | 2,788 | 836 | 1,952 | 233.5 | % | |||||||||||||||||||
General and administrative | 3,139 | 2,973 | 166 | 5.6 | % | 9,847 | 8,135 | 1,712 | 21.0 | % | |||||||||||||||||||
Total | $ | 6,552 | $ | 5,634 | $ | 918 | 16.3 | % | $ | 20,124 | $ | 11,838 | $ | 8,286 | 70.0 | % |
* Not meaningful
Unallocated share-based compensation expense increased $0.9 million, or 16.3% and $8.3 million, or 70.0% during the three and nine months ended September 30, 2014, respectively, due to 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 and changes in the fair value of restricted stock awards granted. See Note 11: 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 New Ventures 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, which we calculate for our segments 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. The same store sales metric is not applicable to our ecoATM business because transactions at the kiosk are for product acquisition, not sales.
Detailed financial information about our business segments, including significant customer relationships is provided in Note 15: Business Segments and Enterprise-Wide Information in our Notes to Consolidated Financial Statements.
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Redbox
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||
Dollars in thousands, except net revenue per rental amounts | September 30, | Change | September 30, | Change | |||||||||||||||||||||||||
2014 | 2013 | $ | % | 2014 | 2013 | $ | % | ||||||||||||||||||||||
Revenue | $ | 438,048 | $ | 491,694 | $ | (53,646 | ) | (10.9 | )% | $ | 1,399,185 | $ | 1,478,132 | $ | (78,947 | ) | (5.3 | )% | |||||||||||
Expenses: | |||||||||||||||||||||||||||||
Direct operating | 312,792 | 350,759 | (37,967 | ) | (10.8 | )% | 1,003,097 | 1,040,706 | (37,609 | ) | (3.6 | )% | |||||||||||||||||
Marketing | 6,038 | 5,883 | 155 | 2.6 | % | 17,282 | 18,057 | (775 | ) | (4.3 | )% | ||||||||||||||||||
Research and development | 15 | 69 | (54 | ) | (78.3 | )% | 41 | 73 | (32 | ) | (43.8 | )% | |||||||||||||||||
General and administrative | 33,527 | 44,017 | (10,490 | ) | (23.8 | )% | 106,658 | 128,963 | (22,305 | ) | (17.3 | )% | |||||||||||||||||
Segment operating income | 85,676 | 90,966 | (5,290 | ) | (5.8 | )% | 272,107 | 290,333 | (18,226 | ) | (6.3 | )% | |||||||||||||||||
Less: depreciation and amortization | (38,207 | ) | (41,478 | ) | 3,271 | (7.9 | )% | (118,928 | ) | (122,219 | ) | 3,291 | (2.7 | )% | |||||||||||||||
Operating income | $ | 47,469 | $ | 49,488 | $ | (2,019 | ) | (4.1 | )% | $ | 153,179 | $ | 168,114 | $ | (14,935 | ) | (8.9 | )% | |||||||||||
Operating income as a percentage of revenue | 10.8 | % | 10.1 | % | 10.9 | % | 11.4 | % | |||||||||||||||||||||
Same store sales growth (decline) | (11.8 | )% | 2.1 | % | (6.1 | )% | (5.8 | )% | |||||||||||||||||||||
Effect on change in revenue from same store sales growth (decline) | $ | (57,302 | ) | $ | 9,121 | $ | (66,423 | ) | (728.2 | )% | $ | (89,572 | ) | $ | (79,940 | ) | $ | (9,632 | ) | 12.0 | % | ||||||||
Ending number of kiosks* | 43,790 | 43,600 | 190 | 0.4 | % | 43,790 | 43,600 | 190 | 0.4 | % | |||||||||||||||||||
Total rentals (in thousands)* | 172,172 | 199,480 | (27,308 | ) | (13.7 | )% | 541,466 | 583,707 | (42,241 | ) | (7.2 | )% | |||||||||||||||||
Net revenue per rental | $ | 2.54 | $ | 2.46 | $ | 0.08 | 3.3 | % | $ | 2.58 | $ | 2.53 | $ | 0.05 | 2.0 | % |
* | Excludes kiosks and the impact of kiosks acquired as part of the 2012 NCR Asset Acquisition which occurred on June 22, 2012. We acquired approximately 6,200 active kiosks. Approximately 1,900 of these kiosks remained in service at December 31, 2012. During the first quarter of 2013, we replaced 100 of these kiosks with Redbox kiosks and we removed but did not replace 1,500 more. As a result, there were approximately 300 of these kiosks still in service at March 31, 2013. During the three months ended September 30, 2013, kiosks acquired as part of the NCR acquisition made a negligible contribution to revenue. During the nine months ended September 30, 2013, kiosks acquired as part of the NCR acquisition generated revenue of approximately $2.8 million from 0.8 million rentals. |
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The comparable performance of our content library is continually affected by seasonality, the timing of the release slate and the relative attractiveness of titles available for rent in a particular quarter or year which may have lingering effects in subsequent periods. Compared with prior periods when kiosk installations were increasing and helping drive growth, Redbox revenue and other operating results may be more affected by these factors.
Comparing three months ended September 30, 2014 to three months ended September 30, 2013
Revenue decreased $53.6 million, or 10.9%, primarily due to the following:
• | $57.3 million decrease from an 11.8% decrease in same store sales primarily due to: |
◦ | Timing of releases - total box office (calculated as the total box office of titles with total North American box office receipts of at least $5.0 million) during the quarter increased 7.9%, however, excluding releases on the last day of the quarter, total box office decreased 2.8%; and |
◦ | Soft flow-through from the second quarter of 2014 - a 37.5% lower box office and timing of releases during the second quarter of 2014 as compared to the second quarter of 2013 lead to a lack of strong recent content at the end of the second quarter of 2014 which contributed to a 13.7% decrease in rentals in the third quarter of 2014 compared to the third quarter of 2013, partially offset by |
• | $3.7 million in sales from newly installed or relocated kiosks. |
Net revenue per rental increased $0.08 to $2.54 primarily due to:
• | A continued increase in Blu-ray rentals which represent 15.1% of total disc rentals and 17.6% of revenue during the quarter as compared to 13.0% and 15.3% during the prior quarter; |
• | Further stabilization in single night rentals due to more effective promotional activity that leverages customer-specific offerings; and |
• | Higher mix of video game rentals which increased from 1.9% to 2.1% of total disc rentals and have a higher daily rental fee than discs. |
We consider Blu-ray a key focus for future revenue growth as it has a higher revenue and margin dollar per rental and offers consumers a better viewing experience due to superior picture and sound quality compared to other options such as digital streaming and video on demand.
Operating income decreased $2.0 million or 4.1% primarily due to the following offsetting impacts:
• | $53.6 million decrease in revenue as described above; partially offset by |
• | $38.0 million decrease in direct operating expenses, which were 71.4% of revenue during the quarter and 71.3% during the prior quarter, primarily due to: |
◦ | $21.9 million decrease in product costs to $189.1 million primarily from less amortization of second quarter and prior releases as a result of lower prior period purchases and efficient management of content purchases during the third quarter. Our gross margin for the quarter was 56.8%, a decrease of 30 basis points from the prior quarter, and |
◦ | Lower retailer revenue sharing expenses primarily due to lower revenue, lower payment card processing fees due to fewer rentals and decreases in supply chain and repair and maintenance expenses due to cost containment measures; and |
• | $10.5 million decrease in general and administrative expenses primarily due to expense reductions attributable to corporate restructuring, lower variable expenses, lower legal fees and general cost containment initiatives. |
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Comparing nine months ended September 30, 2014 to nine months ended September 30, 2013
Revenue decreased $78.9 million, or 5.3%, primarily due to the following:
• | $89.6 million decrease from a 6.1% decrease in same store sales primarily due to: |
◦ | Timing of releases - total box office (as defined above) during the first nine months of 2014 increased 2.2%, however, excluding releases on the last day of the period, total box office decreased 1.1%; |
◦ | Soft flow-through from the second quarter of 2014 - 37.5% lower box office during the second quarter and 2.8% lower box office during the third quarter (when excluding content releases on the last day of the quarter) were partially offset by 28.1% higher box office during the first quarter. The significantly lower box office during the second quarter lead to a lack of strong recent content at quarter end which contributed to a 13.7% decrease in rentals in the third quarter and the 7.2% decrease in rentals for the nine month period; |
• | $2.8 million decrease from revenue earned by kiosks acquired from NCR that were subsequently closed and removed from service; partially offset by |
• | $13.4 million in revenue from newly installed or relocated kiosks including the replacement of the remaining NCR kiosks. |
Net revenue per rental increased $0.05 to $2.58 primarily due to:
• | A continued increase in Blu-ray rentals which represent 14.8% of total disc rentals and 17.4% of revenue during the first nine months of 2014 as compared to 12.8% and 15.0% during the prior year; and |
• | Further stabilization in single night rentals due to more effective promotional activity that leverages customer-specific offerings lead to a 23.7% reduction in promotional spend; partially offset by |
• | Lower video game rentals, which declined 20.2% during the first nine months of 2014 as compared to the prior year due to a lighter release slate during the first and second quarters and the game industry’s shift to next generation platforms. |
Operating income decreased $14.9 million, or 8.9%, primarily due to the following:
• | $78.9 million decrease in revenue as described above; partially offset by |
• | $37.6 million decrease in direct operating expenses, which were 71.7% of revenue during the first nine months of 2014 as compared to 70.4% during the prior year, not including the comparability impact arising from the change in how we amortize product costs discussed below, primarily as a result of: |
◦ | Product costs decreasing $13.7 million to $611.0 million, with gross margin decreased by 140 basis points to 56.3% during the first nine months of 2014, primarily due to a change in how we amortize our product costs in our content library that was prospectively applied as explained in Note 2: Summary of Significant Accounting Policies in our Notes to Consolidated Financial Statements resulting in a $21.7 million benefit which was recorded in the second quarter of 2013 to reflect an increase in the ending value of the Redbox content library as of June 30, 2013. For comparability purposes, product cost for the first nine months of 2013 would have been $23.8 million higher had the new methodology been applied retrospectively as costs would have shifted from prior periods into the first nine months of 2013; |
◦ | Further impacting gross margin was the performance of the content library as a result of the weak release schedule in the second quarter of 2014, partially offset by reduced promotional activity, a $1.9 million decrease in studio-related share-based expenses and closing underperforming NCR kiosks. The first nine months of 2013 benefited from an $11.4 million reduction in a loss contingency that had been previously expensed in 2012; |
◦ | Direct operating expenses were also impacted by lower retailer revenue sharing expenses primarily due to lower revenue, lower payment card processing fees due to fewer rentals and general cost containment initiatives; |
• | $22.3 million decrease in general and administrative expenses primarily as a result of ongoing cost reduction initiatives, including payroll related savings arising from our December 2013 workforce reduction and lower variable expenses associated with IT infrastructure costs, temporary staffing, legal and professional fees; and |
• | $0.8 million decrease in marketing costs due to cost containment initiatives and more efficient title and customer-specific marketing campaigns. |
49
Coinstar
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||
Dollars in thousands, except average transaction size | September 30, | Change | September 30, | Change | |||||||||||||||||||||||||
2014 | 2013 | $ | % | 2014 | 2013 | $ | % | ||||||||||||||||||||||
Revenue | $ | 85,074 | $ | 79,611 | $ | 5,463 | 6.9 | % | $ | 233,707 | $ | 219,520 | $ | 14,187 | 6.5 | % | |||||||||||||
Expenses: | |||||||||||||||||||||||||||||
Direct operating | 42,428 | 41,833 | 595 | 1.4 | % | 120,354 | 119,290 | 1,064 | 0.9 | % | |||||||||||||||||||
Marketing | 1,834 | 1,352 | 482 | 35.7 | % | 4,397 | 3,357 | 1,040 | 31.0 | % | |||||||||||||||||||
Research and development | 64 | 1,428 | (1,364 | ) | (95.5 | )% | 486 | 5,107 | (4,621 | ) | (90.5 | )% | |||||||||||||||||
General and administrative | 7,313 | 7,349 | (36 | ) | (0.5 | )% | 21,502 | 20,077 | 1,425 | 7.1 | % | ||||||||||||||||||
Segment operating income | 33,435 | 27,649 | 5,786 | 20.9 | % | 86,968 | 71,689 | 15,279 | 21.3 | % | |||||||||||||||||||
Less: Depreciation and amortization | (8,989 | ) | (8,539 | ) | (450 | ) | 5.3 | % | (26,473 | ) | (25,493 | ) | (980 | ) | 3.8 | % | |||||||||||||
Operating income | $ | 24,446 | $ | 19,110 | $ | 5,336 | 27.9 | % | $ | 60,495 | $ | 46,196 | $ | 14,299 | 31.0 | % | |||||||||||||
Operating income as a percentage of revenue | 28.7 | % | 24.0 | % | 25.9 | % | 21.0 | % | |||||||||||||||||||||
Same store sales growth (decline) | 5.8 | % | 0.4 | % | 5.2 | % | (0.1 | )% | |||||||||||||||||||||
Ending number of kiosks | 21,210 | 20,800 | 410 | 2.0 | % | 21,210 | 20,800 | 410 | 2.0 | % | |||||||||||||||||||
Total transactions (in thousands) | 19,601 | 20,597 | (996 | ) | (4.8 | )% | 55,039 | 57,651 | (2,612 | ) | (4.5 | )% | |||||||||||||||||
Average transaction size | $ | 41.92 | $ | 41.25 | $ | 0.67 | 1.6 | % | $ | 41.36 | $ | 40.40 | $ | 0.96 | 2.4 | % |
Comparing three months ended September 30, 2014 to three months ended September 30, 2013
Revenue increased $5.5 million, or 6.9%, primarily due to growth of U.S. same store sales, higher volume in the U.K. due to an increased U.K. kiosk base, higher U.K. same store sales and a growth in the number of Coinstar Exchange kiosks. The increase in same store sales in the U.S. was driven by the price increase implemented across all grocery locations in the U.S. effective October 1, 2013. Effective August 1, 2014, we increased the coin voucher product transaction fee from 8.9% to 9.9% at all U.K. grocery retail locations, resulting in higher U.K. same store sales during the third quarter of 2014.
The average transaction size continued to increase while the number of transactions have declined. The decline in transactions is the result of larger pours and less frequent visits, a slight decrease in the U.S. kiosk base year over year as a result of optimization efforts, and the impact of the Royal Canadian Mint’s penny reclamation efforts in Canada.
Operating income increased $5.3 million, or 27.9%, primarily due to the following:
• | $5.5 million increase in revenue as described above; and |
• | $1.4 million decrease in research and development expenses primarily due to a reduction in kiosk hardware and software engineering efforts for Coinstar and Coinstar Exchange; partially offset by |
• | $0.6 million increase in direct operating expenses due to increased revenue sharing, selling and customer service costs to support higher revenues; |
• | $0.5 million increase in marketing expenses primarily due to a shift in timing of marketing spend for Coinstar in the U.S. to the second half of 2014 compared to the prior year and other corporate marketing initiatives; and |
• | $0.5 million increase in depreciation and amortization expense due to higher depreciation expense as a result of continued investment in our corporate technology infrastructure. |
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Comparing nine months ended September 30, 2014 to nine months ended September 30, 2013
Revenue increased $14.2 million, or 6.5%, primarily due to growth of U.S. same store sales, higher volume in the U.K. due to an increased U.K. kiosk base, higher U.K. same store sales and growth in the number of Coinstar Exchange kiosks. The increase in same store sales in the U.S. was driven by the price increase implemented across all grocery locations in the U.S. which was effective October 1, 2013. The price increase in the U.K. discussed above resulted in higher U.K. same store sales during the third quarter of 2014.
The average transaction size continued to increase while the number of transactions have declined. The decline in transactions is the result of larger pours and less frequent visits, a slight decrease in the U.S. kiosk base year over year as a result of optimization efforts, and the impact of the penny reclamation in Canada.
Operating income increased $14.3 million, or 31.0%, primarily due to the following:
• | $14.2 million increase in revenue as described above; and |
• | $4.6 million decrease in research and development expenses primarily due to a reduction in kiosk hardware and software engineering efforts for Coinstar and Coinstar Exchange; partially offset by |
• | $1.4 million increase in general and administrative expenses primarily due to increased expenses associated with the growth of our Coinstar Exchange business; |
• | $1.1 million increase in direct operating expenses due to increased selling and customer service costs to support higher revenues; |
• | $1.0 million increase in marketing expenses primarily due to media buys for print, online and radio to support the growth of our Coinstar Exchange business; and |
• | $1.0 million increase in depreciation and amortization expense due to higher depreciation expense as a result of continued investment in our corporate technology infrastructure. |
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New Ventures
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
Dollars in thousands | September 30, | Change | September 30, | Change | |||||||||||||||||||
2014 | 2013 | $ | 2014 | 2013 | $ | ||||||||||||||||||
Revenue | $ | 29,742 | $ | 15,234 | $ | 14,508 | $ | 69,511 | $ | 15,244 | $ | 54,267 | |||||||||||
Expenses: | |||||||||||||||||||||||
Direct operating | 26,988 | 12,114 | 14,874 | 66,150 | 12,848 | 53,302 | |||||||||||||||||
Marketing | 1,212 | 421 | 791 | 3,188 | 596 | 2,592 | |||||||||||||||||
Research and development | 2,088 | 1,358 | 730 | 6,570 | 2,155 | 4,415 | |||||||||||||||||
General and administrative | 3,885 | 6,692 | (2,807 | ) | 11,822 | 11,611 | 211 | ||||||||||||||||
Segment operating loss | (4,431 | ) | (5,351 | ) | 920 | (18,219 | ) | (11,966 | ) | (6,253 | ) | ||||||||||||
Less: depreciation and amortization | (4,371 | ) | (2,419 | ) | (1,952 | ) | (12,136 | ) | (2,529 | ) | (9,607 | ) | |||||||||||
Operating loss | $ | (8,802 | ) | $ | (7,770 | ) | $ | (1,032 | ) | $ | (30,355 | ) | $ | (14,495 | ) | $ | (15,860 | ) | |||||
Ending number of kiosks | 1,550 | 820 | 730 | 1,550 | 820 | 730 |
On July 23, 2013 we completed the acquisition of ecoATM. The primary reason for the business combination was to expand Outerwall’s presence in automated retail and gain exposure to the growing demand for refurbished electronic products and mobile devices. Also during 2013, except for ecoATM and our product sampling kiosk venture, SAMPLEit, we discontinued all other concepts and reclassified their results of operations to discontinued operations for all periods presented. See Note 13: Discontinued Operations for more information. The New Ventures results of operations presented here represent the results of ecoATM from the July 23, 2013 acquisition date and the results of SAMPLEit.
Comparing three months ended September 30, 2014 to three months ended September 30, 2013
Revenue increased $14.5 million primarily due to the acquisition of ecoATM as previously described and an increase of 730 kiosks installed from 820 as of September 30, 2013 to 1,550 as of September 30, 2014. The key drivers of ecoATM revenue are devices collected per kiosk per day, the percentage of those devices that are non-scrap and the average selling price that ecoATM receives when reselling the devices. Compared to the second quarter of 2014, we continued to see improvement in devices collected per kiosk per day through more competitive pricing and kiosk enhancements, as well as an increase in the quantity of high value devices collected. These factors, along with our higher installed kiosk base, combined to increase our revenue $5.9 million from the second quarter. As we expand our installed kiosk base, we expect our revenue to grow from these new kiosks, as well as the continued ramping of kiosks installed during the nine months of 2014. Additionally, we expect our expenses to increase due to operating these additional kiosks.
Operating loss increased $1.0 million primarily due to the following;
• | $14.9 million increase in direct operating expenses mainly due to costs associated with the acquisition, transportation and processing of mobile devices in our ecoATM business, as well as costs for servicing of our kiosks and payments to our retailers. As we install additional ecoATM kiosks and our existing kiosks continue to ramp, we expect to leverage the fixed cost portions of our direct operating expenses; |
• | $2.0 million increase in depreciation and amortization expense from depreciation on our increased installed kiosk base and amortization expense related to certain ecoATM intangible assets acquired as part of the business combination; |
• | $0.7 million increase in research and development expense primarily at ecoATM due to continued development of our kiosk hardware and software platforms; and |
• | $0.8 million increase in marketing costs mainly due to costs to promote the ecoATM and SAMPLEit kiosks, as well as additional headcount to support our installed kiosk base; partially offset by |
• | $2.8 million decrease in general and administrative expense primarily due to $4.0 million in transaction expenses related to the acquisition of ecoATM in the third quarter of 2013 partially offset by higher costs in the third quarter of 2014 to support the continued growth in our installed kiosk base, as well as expenses related to facilities expansion, and human resource programs; and |
• | $14.5 million increase in revenue described above. |
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Comparing nine months ended September 30, 2014 to nine months ended September 30, 2013
Revenue increased $54.3 million primarily due to the acquisition of ecoATM as previously described and an increase of 730 kiosks installed from 820 as of September 30, 2013 to 1,550 as of September 30, 2014. While there are several drivers that impact ecoATM revenue, the key revenue drivers are devices collected per kiosk per day, the percentage of those devices that are high value devices and the average selling price that ecoATM receives when reselling the devices. In 2014, we continue to see improvement in devices collected per kiosk per day through more competitive pricing and kiosk enhancements, including the software solution we deployed in the fourth quarter of 2013 to alleviate the locked iPhone issue. As we expand our installed kiosk base, we expect our revenue to grow from these new kiosks, as well as the continued ramping of kiosks installed during the first nine months of 2014. Additionally, we expect our expenses to increase due to operating these additional kiosks.
Operating loss increased $15.9 million primarily due to the following;
• | $53.3 million increase in direct operating expenses mainly due to costs associated with the acquisition, transportation and processing of mobile devices in our ecoATM business, as well as costs for servicing of our kiosks and payments to our retailers. As we install additional ecoATM kiosks and our existing kiosks continue to ramp, we expect to leverage the fixed cost portions of our direct operating expenses; |
• | $9.6 million increase in depreciation and amortization expense from depreciation on our increased installed kiosk base and amortization expense related to certain ecoATM intangible assets acquired as part of the business combination; |
• | $4.4 million increase in research and development expense mainly at ecoATM due to continued development of our kiosk hardware and software platforms; |
• | $2.6 million increase in marketing costs primarily due to costs to promote the ecoATM and SAMPLEit kiosks, as well as additional headcount to support our installed kiosk base; and |
• | $0.2 million increase in general and administrative expense primarily due to higher costs to support the continued growth in our installed kiosk base, as well as expenses related to facilities expansion and human resource programs, partially offset by $5.7 million in transaction expenses related to the acquisition of ecoATM in the nine months ended September 30, 2013; partially offset by |
• | $54.3 million increase in revenue described above. |
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Loss from equity method investments
Comparing three months ended September 30, 2014 to three months ended September 30, 2013
Loss from equity method investments was $11.4 million compared to income of $57.9 million primarily due to a gain of $68.4 million in the third quarter of 2013 resulting from the re-measurement of our previously held equity interest in ecoATM at its acquisition date fair value offset by an increased loss from our investment in the Joint Venture. On October 19, 2014, the Company and Verizon entered into an agreement whereby we would withdraw from the Joint Venture. See Note 20: Subsequent Events in our Notes to Consolidated Financial Statements for information regarding the terms of the withdrawal agreement.
Additional financial information about our equity method investments is provided in Note 8: Equity Method Investments and Related Party Transactions in our Notes to Consolidated Financial Statements.
Comparing nine months ended September 30, 2014 to nine months ended September 30, 2013
Loss and income from equity method investments was $31.3 million of loss compared to income of $41.3 million primarily due to a gain of $68.4 million in the first nine months of 2013 resulting from the re-measurement of our previously held equity interest in ecoATM at its acquisition date fair value offset by an increased loss from our investment in the Joint Venture.
Interest Expense, Net
Dollars in thousands | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||
September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||
2014 | 2013 | $ | % | 2014 | 2013 | $ | % | ||||||||||||||||||||||
Cash interest expense | $ | 11,517 | $ | 7,304 | $ | 4,213 | 57.7 | % | $ | 29,646 | $ | 17,716 | $ | 11,930 | 67.3 | % | |||||||||||||
Non-cash interest expense: | |||||||||||||||||||||||||||||
Amortization of debt discount | 616 | 804 | (188 | ) | (23.4 | )% | 2,171 | 3,876 | (1,705 | ) | (44.0 | )% | |||||||||||||||||
Amortization of deferred financing fees | 285 | 366 | (81 | ) | (22.1 | )% | 1,252 | 1,341 | (89 | ) | (6.6 | )% | |||||||||||||||||
Other | — | (54 | ) | 54 | (100.0 | )% | — | (548 | ) | 548 | (100.0 | )% | |||||||||||||||||
Total non-cash interest expense | 901 | 1,116 | (215 | ) | (19.3 | )% | 3,423 | 4,669 | (1,246 | ) | (26.7 | )% | |||||||||||||||||
Total cash and non-cash interest expense | 12,418 | 8,420 | 3,998 | 47.5 | % | 33,069 | 22,385 | 10,684 | 47.7 | % | |||||||||||||||||||
Loss from early extinguishment of debt | 55 | 1 | 54 | NM* | 2,018 | 5,950 | (3,932 | ) | (66.1 | )% | |||||||||||||||||||
Total interest expense | $ | 12,473 | $ | 8,421 | $ | 4,052 | 48.1 | % | $ | 35,087 | $ | 28,335 | $ | 6,752 | 23.8 | % | |||||||||||||
Interest income | (10 | ) | (19 | ) | 9 | (47.4 | )% | (50 | ) | (2,382 | ) | 2,332 | (97.9 | )% | |||||||||||||||
Interest expense, net | 12,463 | 8,402 | 4,061 | 48.3 | % | 35,037 | 25,953 | 9,084 | 35.0 | % |
* | Not meaningful |
Comparing three months ended September 30, 2014 to three months ended September 30, 2013
Interest expense, net increased $4.1 million, or 48.3%, primarily due to interest expense from increased borrowing.
Comparing nine months ended September 30, 2014 to nine months ended September 30, 2013
Interest expense, net increased $9.1 million, or 35.0%, primarily due to interest expense from increased borrowing and a $2.3 million decrease in interest income primarily due to the prior period including income from a note receivable which settled in the second half of 2013. This was partially offset by a $3.9 million decrease in losses from the early extinguishment or conversion of debt. See Note 9: Debt and Other Long-Term Liabilities in our Notes to Consolidated Financial Statements for more information.
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Income Tax Expense
Comparing three months ended September 30, 2014 to three months ended September 30, 2013
Our effective tax rate from continuing operations was 39.8% and 15.2% for the three months ended September 30, 2014 and 2013, respectively.
Our effective tax rate for the three months ended September 30, 2014 was higher than the U.S. Federal statutory rate of 35.0% due primarily to state income taxes, offset partially by the Domestic Production Activities Deduction, which we are entitled to based on our domestic manufacturing activities. Our effective tax rate for the three months ended September 30, 2013 was lower than the U.S. Federal statutory rate of 35.0% due primarily to a $68.4 million nontaxable gain related to the re-measurement of our previously held equity interest in ecoATM and the Domestic Production Activities Deduction. The nontaxable gain decreased our effective tax rate by 23.4 percentage points for the three months ended September 30, 2013.
Comparing nine months ended September 30, 2014 to nine months ended September 30, 2013
Our effective tax rate from continuing operations was 33.1% and 17.4% for the nine months ended September 30, 2014 and 2013, respectively.
Our effective tax rate for the nine months ended September 30, 2014 was lower than the U.S. Federal statutory rate of 35.0% due primarily to the Domestic Production Activities Deduction, which was recorded net of a contingency reserve, and discrete benefits, offset partially by state income taxes.
Our effective tax rate for the nine months ended September 30, 2013 was lower than the U.S. Federal statutory rate of 35.0% due primarily to the following items. A $68.4 million nontaxable gain related to the re-measurement of our previously held equity interest in ecoATM decreased our effective tax rate by 12.0 percentage points. A second quarter discrete one-time tax benefit of $17.8 million, net of a valuation allowance, realized from an arrangement to sell certain NCR kiosks and a series of transactions to reorganize Redbox related subsidiary structures through the sale of a wholly owned subsidiary decreased our effective tax rate by 8.9 percentage points. Additionally, our effective tax rate was lower than the U.S. Federal statutory rate of 35.0% due to the Domestic Production Activities Deduction. These tax benefits were partially offset by state income taxes.
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Non-GAAP Financial Measures
Non-GAAP measures may be provided as a complement to results provided in accordance with United States generally accepted accounting principles (“GAAP”).
We use the following non-GAAP financial measures to evaluate our financial results:
• | Core adjusted EBITDA from continuing operations; |
• | Core diluted earnings per share (“EPS”) from continuing operations; |
• | Free cash flow; and |
• | Net debt and net leverage ratio. |
These measures, the definitions of which are presented below, are non-GAAP because they exclude certain amounts which are included in the most directly comparable measure calculated and presented in accordance with GAAP. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for our GAAP financial measures and may not be comparable with similarly titled measures of other companies.
Core and Non-Core Results
We distinguish our core activities, those associated with our primary operations which we directly control, from non-core activities. Non-core activities are primarily nonrecurring events or events we do not directly control. Our non-core adjustments for the periods presented include i) restructuring costs associated with actions to reduce costs in our continuing operations primarily through workforce reductions across the Company, ii) acquisition costs primarily related to the acquisition of ecoATM, iii) compensation expense for rights to receive cash issued in conjunction with our acquisition of ecoATM and attributable to post-combination services as they are fixed amount acquisition related awards and not indicative of the directly controllable future business results, iv) income or loss from equity method investments, which represents our share of income or loss from entities we do not consolidate or control and includes the impacts of the gain on re-measurement of our previously held equity interest in ecoATM upon acquisition , and v) tax benefits related to a net operating loss adjustment and the recognition of a worthless stock deduction in a corporate subsidiary ("Non-Core Adjustments").
We believe investors should consider our core results because they are more indicative of our ongoing performance and trends, are more consistent with how management evaluates our operational results and trends, provide meaningful supplemental information to investors through the exclusion of certain expenses which are either nonrecurring or may not be indicative of our directly controllable business operating results, allow for greater transparency in assessing our performance, help investors better analyze the results of our business and assist in forecasting future periods.
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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 | Nine Months Ended | ||||||||||||||||||||||||||||
September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||
Dollars in thousands | 2014 | 2013 | $ | % | 2014 | 2013 | $ | % | |||||||||||||||||||||
Net income from continuing operations | $ | 17,890 | $ | 86,795 | $ | (68,905 | ) | (79.4 | )% | $ | 63,586 | $ | 165,215 | $ | (101,629 | ) | (61.5 | )% | |||||||||||
Depreciation, amortization and other | 51,567 | 52,436 | (869 | ) | (1.7 | )% | 157,537 | 150,241 | 7,296 | 4.9 | % | ||||||||||||||||||
Interest expense, net | 12,463 | 8,402 | 4,061 | 48.3 | % | 35,037 | 25,953 | 9,084 | 35.0 | % | |||||||||||||||||||
Income taxes | 11,841 | 15,529 | (3,688 | ) | (23.7 | )% | 31,454 | 34,766 | (3,312 | ) | (9.5 | )% | |||||||||||||||||
Share-based payments expense(1) | 3,249 | 2,774 | 475 | 17.1 | % | 10,093 | 11,454 | (1,361 | ) | (11.9 | )% | ||||||||||||||||||
Adjusted EBITDA from continuing operations | 97,010 | 165,936 | (68,926 | ) | (41.5 | )% | 297,707 | 387,629 | (89,922 | ) | (23.2 | )% | |||||||||||||||||
Non-Core Adjustments: | |||||||||||||||||||||||||||||
Restructuring costs | — | — | — | NM* | 469 | — | 469 | NM* | |||||||||||||||||||||
Acquisition costs | — | 4,003 | (4,003 | ) | (100.0 | )% | — | 5,669 | (5,669 | ) | (100.0 | )% | |||||||||||||||||
Rights to receive cash issued in connection with the acquisition of ecoATM | 3,274 | 2,300 | 974 | 42.3 | % | 10,033 | 2,300 | 7,733 | NM* | ||||||||||||||||||||
Loss from equity method investments | 11,352 | 10,442 | 910 | 8.7 | % | 31,261 | 27,096 | 4,165 | 15.4 | % | |||||||||||||||||||
Gain on previously held equity interest in ecoATM | — | (68,376 | ) | 68,376 | (100.0 | )% | — | (68,376 | ) | 68,376 | (100.0 | )% | |||||||||||||||||
Core adjusted EBITDA from continuing operations | $ | 111,636 | $ | 114,305 | $ | (2,669 | ) | (2.3 | )% | $ | 339,470 | $ | 354,318 | $ | (14,848 | ) | (4.2 | )% |
* Not Meaningful
(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 September 30, 2014 to three months ended September 30, 2013
The decrease in our core adjusted EBITDA from continuing operations was primarily due to decreased segment operating income in our Redbox segment and increased operating loss in our New Ventures segment during the third quarter of 2013, after excluding the $4.0 million of non-core ecoATM acquisition costs, partially offset by increased segment operating income in our Coinstar segment. The other significant components of core adjusted EBITDA from continuing operations have been discussed previously in the Results of Operations section above.
Comparing nine months ended September 30, 2014 to nine months ended September 30, 2013
The decrease in our core adjusted EBITDA from continuing operations was primarily due to decreased segment operating income in our Redbox segment and increased segment operating loss in our New Ventures segment, including the impact of $5.7 million in non-core ecoATM acquisition costs, partially offset by increased segment operating income in our Coinstar segment. The other significant components of core adjusted EBITDA from continuing operations have been discussed previously in the Results of Operations section above.
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Core Diluted EPS from continuing operations
Our non-GAAP financial measure core diluted EPS from continuing operations is defined as diluted earnings per share from continuing operations excluding Non-Core Adjustments, net of applicable taxes.
A reconciliation of core diluted EPS from continuing operations to diluted EPS from continuing operations, the most comparable GAAP financial measure, is presented in the following table:
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||
September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||
2014 | 2013 | $ | % | 2014 | 2013 | $ | % | ||||||||||||||||||||||
Diluted EPS from continuing operations | $ | 0.93 | $ | 3.10 | $ | (2.17 | ) | (70.0 | )% | $ | 2.98 | $ | 5.78 | $ | (2.80 | ) | (48.4 | )% | |||||||||||
Non-Core Adjustments, net of tax:(1) | |||||||||||||||||||||||||||||
Restructuring costs | — | — | — | NM* | 0.01 | — | 0.01 | NM* | |||||||||||||||||||||
Acquisition costs | — | 0.09 | (0.09 | ) | (100.0 | )% | — | 0.14 | (0.14 | ) | (100.0 | )% | |||||||||||||||||
Rights to receive cash issued in connection with the acquisition of ecoATM | 0.14 | 0.06 | 0.08 | 133.3 | % | 0.37 | 0.06 | 0.31 | NM* | ||||||||||||||||||||
Loss from equity method investments | 0.36 | 0.23 | 0.13 | 56.5 | % | 0.89 | 0.58 | 0.31 | 53.4 | % | |||||||||||||||||||
Gain on previously held equity interest on ecoATM | — | (2.36 | ) | 2.36 | (100.0 | )% | — | (2.32 | ) | 2.32 | (100.0 | )% | |||||||||||||||||
Tax benefit from net operating loss adjustment | — | — | — | NM* | (0.04 | ) | — | (0.04 | ) | NM* | |||||||||||||||||||
Tax (benefit) expense of worthless stock deduction | 0.01 | — | 0.01 | NM* | (0.10 | ) | — | (0.10 | ) | NM* | |||||||||||||||||||
Core diluted EPS from continuing operations | $ | 1.44 | $ | 1.12 | $ | 0.32 | 28.6 | % | $ | 4.11 | $ | 4.24 | $ | (0.13 | ) | (3.1 | )% |
* Not Meaningful
(1) Non-Core Adjustments are presented after-tax using the applicable effective tax rate for the respective periods.
Free Cash Flow
Our non-GAAP financial measure free cash flow is defined as net cash provided by operating activities after capital expenditures. We believe free cash flow is an important non-GAAP measure as it provides additional information to users of the financial statements regarding our ability to service, incur or pay down indebtedness and repurchase our securities. A reconciliation of free cash flow to net cash provided by operating activities, the most comparable GAAP financial measure, is presented in the following table:
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||
September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||
Dollars in thousands | 2014 | 2013 | $ | % | 2014 | 2013 | $ | % | |||||||||||||||||||||
Net cash provided by operating activities | $ | 49,627 | $ | 60,943 | $ | (11,316 | ) | (18.6 | )% | $ | 207,047 | $ | 147,121 | $ | 59,926 | 40.7 | % | ||||||||||||
Purchase of property and equipment | (19,295 | ) | (39,102 | ) | 19,807 | (50.7 | )% | (72,311 | ) | (123,346 | ) | 51,035 | (41.4 | )% | |||||||||||||||
Free cash flow | $ | 30,332 | $ | 21,841 | $ | 8,491 | 38.9 | % | $ | 134,736 | $ | 23,775 | $ | 110,961 | 466.7 | % |
An analysis of our net cash from operating activities and used in investing and financing activities is provided below.
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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:
September 30, 2014 | December 31, 2013 | Change | ||||||||||||
Dollars in thousands | $ | % | ||||||||||||
Senior unsecured notes(1) | $ | 650,000 | $ | 350,000 | $ | 300,000 | 85.7 | % | ||||||
Term loans(1) | 148,125 | 344,375 | (196,250 | ) | (57.0 | )% | ||||||||
Revolving line of credit | 210,000 | — | 210,000 | NM* | ||||||||||
Convertible debt(1) | — | 51,148 | (51,148 | ) | (100.0 | )% | ||||||||
Capital leases | 18,051 | 21,361 | (3,310 | ) | (15.5 | )% | ||||||||
Total principal value of outstanding debt including capital leases | 1,026,176 | 766,884 | 259,292 | 33.8 | % | |||||||||
Less domestic cash and cash equivalents held in financial institutions | (26,003 | ) | (199,027 | ) | 173,024 | (86.9 | )% | |||||||
Net debt | 1,000,173 | 567,857 | 432,316 | 76.1 | % | |||||||||
LTM Core adjusted EBITDA from continuing operations(2) | $ | 476,804 | $ | 491,652 | $ | (14,848 | ) | (3.0 | )% | |||||
Net leverage ratio | 2.10 | 1.15 |
* Not Meaningful
(1) See debt section of Liquidity and Capital Resources below and Note 9: 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 September 30, 2014 and December 31, 2013 was determined as follows:
Dollars in thousands | |||
Core adjusted EBITDA from continuing operations for the nine months ended September 30, 2014 | $ | 339,470 | |
Add: Core adjusted EBITDA from continuing operations for the twelve months ended December 31, 2013(A) | 491,652 | ||
Less: Core adjusted EBITDA from continuing operations for the nine months ended September 30, 2013 | (354,318 | ) | |
LTM Core adjusted EBITDA from continuing operations for the twelve months ended September 30, 2014 | $ | 476,804 |
(A) Core adjusted EBITDA from continuing operations for the twelve months ended December 31, 2013 is obtained from our Annual Report on Form 10-K for the period ended December 31, 2013, where it is reconciled to net income from continuing operations, the most comparable GAAP financial measure, and represents the LTM core adjusted EBITDA from continuing operations we use in our calculation of net leverage ratio as of December 31, 2013.
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 New Venture 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 services, the timing and number of machine installations, the number of available installable kiosks, the type and scope of service enhancements, the cost of developing potential new product service offerings, and enhancements, and cash required to fund potential future acquisitions, investment or capital returns to shareholders such as through share repurchases.
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The following is an analysis of our year-to-date cash flows:
Net Cash from Operating Activities
Our net cash from operating activities increased by $59.9 million primarily due to the following:
• | $89.2 million increase in net cash inflows from changes in working capital primarily due to changes in prepaid expenses and other current assets, content library, accounts payable, other accrued liabilities, accrued payable to retailers, and accounts receivable; |
• | $60.0 million change in net non-cash income and expense included in net income primarily due to a one-time gain of $68.4 million in the 2013 period resulting from the re-measurement of our previously held equity interest in ecoATM at its acquisition date fair value; partially offset by |
• | $89.3 million decrease in net income to $62.8 million as discussed in the Consolidated Results section above. |
Net Cash used in Investing Activities
We used $95.0 million of net cash in our investing activities primarily due to:
• | $72.3 million used for purchases of property and equipment for kiosks and corporate infrastructure, including information technology primarily related to our Enterprise Resource Planning implementation; and |
• | $24.5 million used for capital contributions to our Redbox Instant by Verizon Joint Venture. |
Net Cash used in Financing Activities
We used $299.6 million of net cash from financing activities as follows:
• | $545.1 million for repurchases of our common stock; |
• | $51.1 million to repurchase and settle convertible debt; |
• | $10.6 million to pay capital lease obligations and other debt; and |
• | $2.0 million for other financing activities; partially offset by |
• | $295.5 million from issuance of our senior unsecured notes due 2021; and |
• | $13.8 million in net borrowings from our Credit Facility. The revolving line of credit had an average daily balance of $150.8 million over the first nine months of 2014 and was used to support the activities discussed above relative to the timing of cash flows from operations throughout the same period. |
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 September 30, 2014, our cash and cash equivalent balance was $184.9 million, of which $71.7 million was identified for settling our payable to the 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 September 30, 2014: | |||||||||||||||||||
Principal | $ | 350,000 | $ | 300,000 | $ | 148,125 | $ | 210,000 | $ | 1,008,125 | |||||||||
Discount | (4,551 | ) | (4,313 | ) | (354 | ) | — | (9,218 | ) | ||||||||||
Total | 345,449 | 295,687 | 147,771 | $ | 210,000 | 998,907 | |||||||||||||
Less: current portion | — | — | (8,445 | ) | — | (8,445 | ) | ||||||||||||
Total long-term portion | $ | 345,449 | $ | 295,687 | $ | 139,326 | $ | 210,000 | $ | 990,462 |
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Senior Unsecured Notes Due 2019
On March 12, 2013, we and certain subsidiaries of ours, as subsidiary guarantors, entered into an indenture pursuant to which we issued $350.0 million principal amount of 6.000% Senior Notes due 2019 (the “Senior Notes due 2019”) at par for proceeds, net of expenses, of $343.8 million. The expenses were allocated between debt discount and deferred financing fees based on their nature. As of September 30, 2014, we were in compliance with the covenants of the related indenture.
Senior Unsecured Notes Due 2021
On June 9, 2014, we and certain subsidiaries of ours, as subsidiary guarantors, 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. The expenses were allocated between debt discount and deferred financing fees based on their nature.
The Senior Notes due 2021 and related guarantees:
• | are general unsecured obligations and are effectively subordinated to all of our and our Subsidiary Guarantors’ existing and future secured debt to the extent of the collateral securing that secured debt, and |
• | will rank equally to all of our and our Subsidiary Guarantors’ other unsecured and unsubordinated indebtedness. |
In addition, the Senior Notes due 2021;
• | will be effectively subordinated to all of the liabilities of our existing and future subsidiaries that are not guaranteeing the Senior Notes due 2021, |
• | require interest payable on June 15 and December 15 of each year, beginning on December 15, 2014, and |
• | mature on June 15, 2021. |
We may redeem any of the Senior Notes due 2021:
• | beginning on June 15, 2017 at a redemption price of 104.406% of their principal amount plus accrued and unpaid interest and additional interest, if any; then |
• | the redemption price will be 102.938% of their principal amount plus accrued and unpaid interest and additional interest, if any, for the twelve-month period beginning June 15, 2018; then |
• | the redemption price will be 101.469% of their principal amount plus accrued and unpaid interest and additional interest, if any, for the twelve-month period beginning June 15, 2019; and then |
• | the redemption price will be 100.000% of their principal amount plus accrued interest and unpaid interest and additional interest, if any, beginning on June 15, 2020. |
• | We may also redeem some or all of the notes before June 15, 2017 at a redemption price of 100.000% of the principal amount, plus accrued and unpaid interest and additional interest, if any, to the redemption date, plus an applicable “make-whole” premium. |
• | In addition, before June 15, 2017, we may redeem up to 35% of the aggregate principal amount with the proceeds of certain equity offerings at 105.875% of their principal amount plus accrued and unpaid interest and additional interest, if any; we may make such redemption only if, after any such redemption, at least 65% of the aggregate principal amount originally issued remains outstanding. |
Upon a change of control as defined in the indenture related to the Senior Notes due 2021, we will be required to make an offer to purchase the Senior Notes due 2021 or any portion thereof. That purchase price will equal 101% of the principal amount of the Senior Notes due 2021 on the date of purchase plus accrued and unpaid interest and additional interest, if any. If we make certain asset sales and do not reinvest the proceeds or use such proceeds to repay certain debt, we will be required to use the proceeds of such asset sales to make an offer to purchase the Senior Notes due 2021 at 100% of their principal amount, together with accrued and unpaid interest and additional interest, if any, to the date of purchase.
The terms of the Senior Notes due 2021 restrict our ability and the ability of certain of its subsidiaries to, among other things: incur additional indebtedness; create liens; pay dividends or make distributions in respect of capital stock; purchase or redeem capital stock; make investments or certain other restricted payments; sell assets; enter into transactions with stockholders or affiliates; or effect a consolidation or merger. However, these and other limitations set forth in the related indenture will be subject to a number of important qualifications and exceptions.
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The indenture related to the Senior Notes due 2021 provides for customary events of default which include (subject in certain cases to grace and cure periods), among others: nonpayment of principal or interest or premium; breach of covenants or other agreements in the indenture; defaults in failure to pay certain other indebtedness; the failure to pay certain final judgments; the invalidity of certain of the Subsidiary Guarantors’ guarantees; and certain events of bankruptcy, insolvency or reorganization. Generally, if an event of default occurs and is continuing under the indenture, either the trustee or the holders of at least 25% in aggregate principal amount then outstanding may declare the principal amount plus accrued and unpaid interest to be immediately due and payable. As of September 30, 2014, we were in compliance with the covenants of the related indenture.
In connection with the issuance of the Senior Notes due 2021 and related guarantees, we agreed to register the Senior Notes due 2021 and related guarantees under the Securities Act of 1933, as amended (the “Securities Act”) so as to allow holders of the Senior Notes due 2021 and related guarantees to exchange the Senior Notes due 2021 and the related guarantees for the same principal amount of a new issue of Senior Notes due 2021 and related guarantees (collectively, the “Exchange Notes”) with substantially identical terms, except that the Exchange Notes will generally be freely transferable under the Securities Act. If we fail to comply with these obligations on time (a “registration default”), we generally will be required to pay additional interest at a rate of 0.25% per annum for the first 90-day period following a registration default and an additional 0.25% per annum for each subsequent 90-day period that such additional interest continues to accrue (provided that such rate may not exceed 1.00% per annum).
Revolving Line of Credit and Term Loan
On June 24, 2014, we entered into the Third Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) providing for a senior secured credit facility (the "New Credit Facility"). The Amended and Restated Credit Agreement amended and restated in its entirety the Second Amended and Restated Credit Agreement dated as of November 20, 2007 and amended and restated as of April 29, 2009 and as of July 15, 2011 and all amendments and restatements thereto (the “Previous Credit Agreement”). The credit facility provided under the Previous Credit Agreement was replaced by the New Credit Facility. As a result of this refinancing activity, in the six months ended June 30, 2014, we recorded a loss on the extinguishment of the Previous Credit Facility of $1.7 million for certain previously capitalized and unamortized debt issuance costs. The loss on extinguishment is recorded within interest expense, net in our Consolidated Statements of Comprehensive Income.
The New Credit Facility consists of (a) a $150.0 million amortizing term loan (the “Term Loan”) and (b) a $600.0 million revolving line of credit (the “Revolving Line”), which includes (i) a $75.0 million sublimit for the issuance of letters of credit, (ii) a $50.0 million sublimit for swingline loans and (iii) a $75.0 million sublimit for loans in certain foreign currencies available to us and certain wholly owned Company foreign subsidiaries (the “Foreign Borrowers”). We may, subject to applicable conditions and subject to obtaining commitments from lenders, request an increase in the Revolving Line of up to $200.0 million in aggregate (the “Accordion”).
We (or the Foreign Borrowers, if applicable), subject to applicable conditions, may generally elect interest rates on the Term Loan and Revolving Line calculated by reference to (a) LIBOR (“London Interbank Offered Rate”) (or the Canadian Dealer Offered Rate, in the case of loans denominated in Canadian Dollars or, if LIBOR is not available for a foreign currency, such other interest rate customarily used by Bank of America for such foreign currency) for given interest periods (the “LIBOR/Eurocurrency Rate”) or (b) on loans in U.S. Dollars made to us, Bank of America’s prime rate (or, if greater, (i) the average rate on overnight federal funds plus 0.50% or (ii) the daily floating one month LIBOR plus 1%) (the “Base Rate”), plus a margin determined by our consolidated net leverage ratio. For swingline borrowings, we will pay interest at the Base Rate, plus a margin determined by our consolidated net leverage ratio. For borrowings made with the LIBOR/Eurocurrency Rate, the margin ranges from 125 to 200 basis points, while for borrowings made with the Base Rate, the margin ranges from 25 to 100 basis points.
The Amended and Restated Credit Agreement requires principal amortization payments under the Term Loan as follows:
Dollars in thousands | Repayment Amount | ||
Remainder of 2014 | $ | 1,875 | |
2015 | 9,376 | ||
2016 | 13,126 | ||
2017 | 15,000 | ||
2018 | 18,750 | ||
2019 | 89,998 | ||
Total | $ | 148,125 |
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The Revolving Line matures on June 24, 2019, at which time all outstanding borrowings must be repaid and all outstanding letters of credit must have been terminated or cash collateralized. The maturity date of the borrowings under the New Credit Facility may be accelerated to December 18, 2018 if our senior unsecured notes due 2019 remain outstanding on or after such date. We may prepay amounts borrowed under the Term Loan without premium or penalty (other than breakage costs in the case of borrowings made with the LIBOR/Eurocurrency Rate), but amounts prepaid may not be re-borrowed.
The Amended and Restated Credit Agreement contains events of default that include, among others, non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations and warranties, bankruptcy and insolvency events, material judgments, cross defaults to certain other indebtedness, and events constituting a change of control. The occurrence of an event of default will increase the applicable rate of interest and could result in the acceleration of our obligations under the New Credit Facilities and the obligations of any or all of the Guarantors to pay the full amount of our (or any Foreign Borrower’s) obligations under the New Credit Facility.
The Amended and Restated Credit Agreement contains certain loan covenants, including, among others, financial covenants providing for a maximum consolidated net leverage ratio (i.e., consolidated total debt (net of certain cash and cash equivalents held by us and our domestic subsidiaries) to consolidated EBITDA) and a minimum consolidated interest coverage ratio, and limitations on our ability with regard to the incurrence of debt, the existence of liens, capital expenditures, stock repurchases and dividends, investments, and mergers, dispositions and acquisitions. Our obligations under the New Credit Facility are guaranteed by each of our direct and indirect U.S. subsidiaries (collectively, the “Guarantors”), and if any Foreign Borrower is added to the New Credit Facility, the Foreign Borrower’s obligations will be guaranteed by us and each of the Guarantors. As of September 30, 2014, the interest rate on amounts outstanding under the Credit Facility was 2.02% and we were in compliance with the covenants of the Credit Facility.
Convertible Debt
On September 2, 2014, our 4.0% Convertible Senior Notes (the “Convertible Notes”) matured. The aggregate outstanding principal was $51.1 million at December 31, 2013.
The Convertible Notes were convertible as of December 31, 2013 and the debt conversion feature was classified as temporary equity on our Consolidated Balance Sheets. In the nine months ended September 30, 2014, we retired or settled upon maturity, a combined 51,148 Convertible Notes for total consideration of $51.1 million in cash and the issuance of 431,760 shares of common stock. The amount by which total consideration exceeded the fair value of the Convertible Notes has been recorded as a reduction of stockholders’ equity. The loss from early extinguishment of the Convertible Notes was approximately $0.3 million and is recorded in interest expense in our Consolidated Statements of Comprehensive Income.
Letters of Credit
As of September 30, 2014, we had six irrevocable standby letters of credit that totaled $6.4 million. These standby letters of credit, which expire at various times through September 2015, are used to collateralize certain obligations to third parties. As of September 30, 2014, no amounts were outstanding under these standby letter of credit agreements.
Other Contingencies
During the three months ended March 31, 2013, we resolved a previously disclosed loss contingency related to a supply agreement and recorded a benefit of $11.4 million in the direct operating line item in our Consolidated Statements of Comprehensive Income.
Contractual Payment Obligations
As of September 30, 2014, other than the following, there have been no material changes during the period covered by this report to our contractual obligations specified in the table of contractual obligations included in our 2013 Form 10-K:
On June 27, 2014 Sony notified us of their intent to extend our existing content license agreement with them. This will extend the license period through September 30, 2015 and require us to issue 25,000 shares of additional restricted stock to Sony during the fourth quarter of 2014 which will vest immediately. See Note 11: Share-Based Payments for more information about our share-based payments for content arrangements. As of September 30, 2014, after accounting for this extension, our commitment to purchase content from Sony was approximately $162.8 million.
On September 26, 2014, Universal Studios Home Entertainment LLC exercised its option to extend the term of the revenue sharing license agreement between Redbox and Universal through December 31, 2015. As of September 30, 2014, after accounting for this extension, our commitment to purchase content from Universal was approximately $140.6 million.
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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 2013 Form 10-K at Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
In the second quarter of 2013, we updated our methodology for amortizing our Redbox content library. The amortization charges are still recorded on an accelerated basis and substantially all of the amortization expense is recognized within one year of purchase. Our updated methodology is more precise in the utilization of our rental curves, which incorporate thinning estimates in amortizing content costs. We update our rental curves on a quarterly basis to better reflect changes in these rental curves prospectively. See Note 2: Summary of Significant Accounting Policies in our Notes to Consolidated Financial Statements.
The preceding explanation of the updated amortization methodology for our Redbox content library is included here because it impacts the comparability of first and second quarter of 2014 and 2013 results of operations. There have been no material changes to the critical accounting policies previously disclosed in our 2013 Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our reported market risks and risk management policies since the filing of our 2013 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report and has determined that such disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
We also maintain a system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). No changes in our internal control over financial reporting occurred during the year-to-date period ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In October 2009, an Illinois resident, Laurie Piechur, individually and on behalf of all others similarly situated, filed a putative class action complaint against our Redbox subsidiary in the Circuit Court for the Twentieth Judicial Circuit, St. Clair County, Illinois. The plaintiff alleged that, among other things, Redbox charges consumers illegal and excessive late fees in violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, and that Redbox's rental terms violate the Illinois Rental Purchase Agreement Act or the Illinois Automatic Contract Renewal Act and the plaintiff is seeking monetary damages and other relief. In November 2009, Redbox removed the case to the U.S. District Court for the Southern District of Illinois. In February 2010, the District Court remanded the case to the Circuit Court for the Twentieth Judicial Circuit, St. Clair County, Illinois. In May 2010, the court denied Redbox's motion to dismiss the plaintiff's complaint. In November 2011, the plaintiff moved for class certification, and Redbox moved for summary judgment. The court denied Redbox's motion for summary judgment in February 2012. The plaintiff filed an amended complaint on April 19, 2012, and an amended motion for class certification on June 5, 2012. The court denied Redbox's motion to dismiss the amended complaint. The amended class certification motion was briefed and argued. At the hearing on plaintiff's amended motion for class certification, the plaintiff dismissed all claims but two and is pursuing only her claims under the Illinois Rental Purchase Agreement Act and the Illinois Automatic Contract Renewal Act. On May 21, 2013, the court denied plaintiff's amended class action motion. On January 29, 2014, the Illinois Supreme Court denied plaintiff’s petition for leave to appeal the trial court’s denial of class certification. Redbox has moved to dismiss all remaining claims on mootness grounds. The motion is fully briefed, and is tentatively scheduled to be argued on November 12, 2014. We believe that the claims against us are without merit and intend to defend ourselves vigorously in this matter. 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.
In March 2011, a California resident, Blake Boesky, individually and on behalf of all others similarly situated, filed a putative class action complaint against our Redbox subsidiary in the U.S. District Court for the Northern District of Illinois. The plaintiff alleges that Redbox retains personally identifiable information of consumers for a time period in excess of that allowed under the Video Privacy Protection Act, 18 U.S.C. §§ 2710, et seq. A substantially similar complaint was filed in the same court in March 2011 by an Illinois resident, Kevin Sterk. Since the filing of the complaint, Blake Boesky has been replaced by a different named plaintiff, Jiah Chung, and an amended complaint has been filed alleging disclosures of personally identifiable information, in addition to plaintiffs' claims of retention of such information. Plaintiffs are seeking statutory damages, injunctive relief, attorneys' fees, costs of suit, and interest. The court has consolidated the cases. The court denied Redbox's motion to dismiss the plaintiffs' claims upon interlocutory appeal. The U.S. Court of Appeals for the Seventh Circuit reversed the district court's denial of Redbox's motion to dismiss plaintiff's claims involving retention of information, holding that the plaintiffs could not maintain a suit for damages under this theory. On April 25, 2012, the plaintiffs amended their complaint to add claims under the Stored Communications Act, 18 U.S.C. § 2707, and for breach of contract. On May 9, 2012, Redbox moved to dismiss the amended complaint. On July 23, 2012, the court dismissed the added retention claims, except to the extent that plaintiffs seek injunctive, non-monetary relief. On August 16, 2013, the court granted summary judgment in Redbox's favor on all remaining claims, and entered a final judgment for Redbox. On September 16, 2013, plaintiff filed a notice of appeal. The appeal was fully briefed as of July 1, 2014, and argument occurred on September 26, 2014. The appellate court has not scheduled a date for argument. We believe that the claims against us are without merit and intend to defend ourselves vigorously in this matter. Currently, no accrual has been established as it is not possible to estimate the possible loss or range of loss because this matter had not advanced to a stage where we could make any such estimate.
ITEM 1A. RISK FACTORS
There have been no material changes from risk factors previously disclosed in our Form 10-Q for the period ended June 30, 2014.
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ITEM 2. UNREGISTERED SALES OF EQUITY, SECURITIES, AND USE OF PROCEEDS
The following table summarizes information regarding shares repurchased during the quarter ended September 30, 2014:
Total Number of Shares Repurchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Repurchase Plans or Programs | Maximum Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs | (2) | ||||||||||
7/1/14 - 7/31/14 | 1,617 | $ | 54.98 | — | $ | 233,297 | ||||||||
8/1/14 - 8/31/14 | 1,187,241 | $ | 59.52 | 1,185,970 | $ | 162,781 | ||||||||
9/1/14 - 9/30/14 | 849 | $ | 56.70 | — | $ | 162,863 | (3) | |||||||
1,189,707 | (1) | 1,185,970 |
(1) | Includes 3,737 shares tendered for tax withholding on vesting of restricted stock awards, none of which are included against the dollar value of shares that may be purchased under programs approved by our Board of Directors. |
(2) | Dollars in thousands |
(3) | On January 30, 2014, our Board of Directors approved an additional repurchase program of up to $500.0 million of our common stock plus the cash proceeds received from the exercise of stock options by our officers, directors, and employees. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The following exhibits are filed herewith and this list is intended to constitute the exhibit index.
Exhibit Number | Description of Document | |
31.1 | Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS | XBRL Instance Document. | |
101.SCH | XBRL Taxonomy Extension Schema. | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase. | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase. | |
101.LAB | XBRL Taxonomy Extension Label Linkbase. | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
OUTERWALL INC. | |||
By: | /s/ Galen C. Smith | ||
Galen C. Smith | |||
Chief Financial Officer | |||
October 30, 2014 |
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