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

 FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
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 by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at May 4, 2015
Common Stock, $0.001 par value
 
18,450,813




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)
 
March 31,
2015
 
December 31,
2014
Assets

 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
197,934

 
$
242,696

Accounts receivable, net of allowances of $1,128 and $2,223
36,644

 
48,590

Content library
172,500

 
180,121

Prepaid expenses and other current assets
42,908

 
39,837

Total current assets
449,986

 
511,244

Property and equipment, net
385,548

 
428,468

Deferred income taxes
2,231

 
11,378

Goodwill and other intangible assets, net
620,645

 
623,998

Other long-term assets
7,651

 
8,231

Total assets
$
1,466,061

 
$
1,583,319

Liabilities and Stockholders’ Equity

 

Current Liabilities:

 

Accounts payable
$
165,336

 
$
168,633

Accrued payable to retailers
107,082

 
126,290

Other accrued liabilities
146,921

 
137,126

Current portion of long-term debt and other long-term liabilities
19,544

 
20,416

Deferred income taxes
20,926

 
21,432

Total current liabilities
459,809

 
473,897

Long-term debt and other long-term liabilities
887,089

 
973,669

Deferred income taxes
26,432

 
38,375

Total liabilities
1,373,330

 
1,485,941

Commitments and contingencies (Note 16)

 

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;

 

36,740,097 and 36,600,166 shares issued;

 

18,498,978 and 18,926,242 shares outstanding;
473,225

 
473,592

Treasury stock
(1,033,424
)
 
(996,293
)
Retained earnings
650,386

 
620,389

Accumulated other comprehensive income (loss)
2,544

 
(310
)
Total stockholders’ equity
92,731

 
97,378

Total liabilities and stockholders’ equity
$
1,466,061

 
$
1,583,319



See accompanying Notes to Consolidated Financial Statements
3



OUTERWALL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
 
Three Months Ended
 
March 31,
 
2015
 
2014
Revenue
$
608,636

 
$
597,762

Expenses:
 
 
 
Direct operating(1)
405,184

 
419,642

Marketing
8,420

 
6,993

Research and development
2,084

 
3,474

General and administrative
48,556

 
52,608

Restructuring and lease termination costs (Note 11)
15,851

 
557

Depreciation and other
42,686

 
47,942

Amortization of intangible assets
3,309

 
3,842

Total expenses
526,090

 
535,058

Operating income
82,546

 
62,704

Other expense, net:
 
 
 
Loss from equity method investments, net (Note 7)
(132
)
 
(9,368
)
Interest expense, net
(12,071
)
 
(9,648
)
Other, net
(2,346
)
 
(648
)
Total other expense, net
(14,549
)
 
(19,664
)
Income from continuing operations before income taxes
67,997

 
43,040

Income tax expense
(25,842
)
 
(15,434
)
Income from continuing operations
42,155

 
27,606

Loss from discontinued operations, net of tax (Note 12)
(6,556
)
 
(4,431
)
Net income
35,599

 
23,175

Foreign currency translation adjustment(2)
2,854

 
875

Comprehensive income
$
38,453

 
$
24,050

 
 
 
 
Income from continuing operations attributable to common shares (Note 13):
 
 
 
Basic
$
40,775

 
$
26,860

Diluted
$
40,776

 
$
26,879

 
 
 
 
Basic earnings (loss) per common share (Note 13):
 
 
 
Continuing operations
$
2.23

 
$
1.12

Discontinued operations
(0.36
)
 
(0.18
)
Basic earnings per common share
$
1.87

 
$
0.94

 
 
 
 
Diluted earnings (loss) per common share (Note 13):
 
 
 
Continuing operations
$
2.23

 
$
1.09

Discontinued operations
(0.36
)
 
(0.18
)
Diluted earnings per common share
$
1.87

 
$
0.91

 
 
 
 
Weighted average common shares used in basic and diluted per share calculations (Note 13):
 
 
 
Basic
18,269

 
23,944

Diluted
18,286

 
24,575

 
 
 
 
Dividends declared per common share (Note 19)
$
0.30

 
$

(1)
“Direct operating” excludes depreciation and other of $30.2 million and $31.7 million for the three months ended March 31, 2015 and 2014, respectively.
(2)
Foreign currency translation adjustment had no tax effect for the three months ended March 31, 2015 and 2014, respectively.

See accompanying Notes to Consolidated Financial Statements
4



OUTERWALL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
(unaudited)

 
 
 
 
 
 
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
Common Stock
 
Treasury
Stock
 
Retained
Earnings
 
 
 
 
Shares
 
Amount
 
 
 
 
Total
Balance, December 31, 2014
18,926,242

 
$
473,592

 
$
(996,293
)
 
$
620,389

 
$
(310
)
 
$
97,378

Proceeds from exercise of stock options, net
6,825

 
339

 

 

 

 
339

Adjustments related to tax withholding for share-based compensation
(52,800
)
 
(3,526
)
 

 

 

 
(3,526
)
Share-based payments expense
235,906

 
2,662

 
3,577

 

 

 
6,239

Excess tax benefit on share-based compensation expense

 
158

 

 

 

 
158

Repurchases of common stock
(617,195
)
 

 
(40,708
)
 

 

 
(40,708
)
Net income

 

 

 
35,599

 

 
35,599

Dividends (Note 19)

 

 

 
(5,602
)
 

 
(5,602
)
Foreign currency translation adjustment(1)

 

 

 

 
2,854

 
2,854

Balance, March 31, 2015
18,498,978

 
$
473,225

 
$
(1,033,424
)
 
$
650,386

 
$
2,544

 
$
92,731

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



See accompanying Notes to Consolidated Financial Statements
5



OUTERWALL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Three Months Ended
 
March 31,
 
2015
 
2014
Operating Activities:
 
 
 
Net income
$
35,599

 
$
23,175

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
Depreciation and other
48,543

 
49,104

Amortization of intangible assets
3,353

 
3,848

Share-based payments expense
3,903

 
3,765

Windfall excess tax benefits related to share-based payments
(526
)
 
(1,710
)
Deferred income taxes
(2,547
)
 
(9,564
)
Restructuring and lease termination costs(2)
1,680

 

Loss from equity method investments, net
132

 
9,368

Amortization of deferred financing fees and debt discount
693

 
1,306

Other
(1,198
)
 
(124
)
Cash flows from changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
11,823

 
(5,952
)
Content library
9,956

 
19,981

Prepaid expenses and other current assets
(3,106
)
 
46,955

Other assets
168

 
437

Accounts payable
2,920

 
(27,390
)
Accrued payable to retailers
(18,441
)
 
(15,485
)
Other accrued liabilities
13,120

 
(3,127
)
Net cash flows from operating activities(1)
106,072

 
94,587

Investing Activities:
 
 
 
Purchases of property and equipment
(20,709
)
 
(26,940
)
Proceeds from sale of property and equipment
123

 
831

Cash paid for equity investments

 
(10,500
)
Net cash flows used in investing activities(1)
(20,586
)
 
(36,609
)
Financing Activities:
 
 
 
Proceeds from new borrowing on Credit Facility
35,000

 
275,000

Principal payments on Credit Facility
(116,875
)
 
(29,375
)
Settlement and conversion of convertible debt

 
(4
)
Repurchases of common stock
(40,708
)
 
(421,067
)
Dividends paid (Note 19)
(5,602
)
 

Principal payments on capital lease obligations and other debt
(3,245
)
 
(3,697
)
Windfall excess tax benefits related to share-based payments
526

 
1,710

Withholding tax paid on vesting of restricted stock net of proceeds from exercise of stock options
(3,088
)
 
(1,588
)
Net cash flows used in financing activities(1)
(133,992
)
 
(179,021
)


6


 
Three Months Ended
 
March 31,
 
2015
 
2014
Effect of exchange rate changes on cash
3,744

 
1,152

Decrease in cash and cash equivalents
(44,762
)
 
(119,891
)
Cash and cash equivalents:
 
 
 
Beginning of period
242,696

 
371,437

End of period
$
197,934

 
$
251,546

Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for interest
$
11,913

 
$
14,013

Cash paid during the period for income taxes, net
$
12,991

 
$
23,664

Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Purchases of property and equipment financed by capital lease obligations
$
720

 
$
3,046

Purchases of property and equipment included in ending accounts payable
$
2,025

 
$
7,240

(1)
During the first quarter of 2015, we discontinued our Redbox operations in Canada. The first quarter of 2014 also includes the wind-down process of certain new ventures that were discontinued during 2013. Cash flows from these discontinued operations are not segregated from cash flows from continuing operations in all periods presented. See Note 12: Discontinued Operations for cash flow disclosures related to our discontinued Redbox operations in Canada.
(2)
The non-cash restructuring and lease termination costs in the first quarter of 2015 of $1.7 million is composed of $6.9 million in impairments of lease related assets partially offset by a $5.2 million benefit resulting from the lease termination.


See accompanying Notes to Consolidated Financial Statements
7



INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




8


OUTERWALL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1: Basis of Presentation and Principles of Consolidation
The unaudited consolidated financial information included herein has been prepared by Outerwall Inc., pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited consolidated financial statements of Outerwall Inc. included herein reflect all adjustments, consisting only of normal recurring adjustments that, in the opinion of management, are necessary to present fairly our consolidated financial position, results of operations, and cash flows for the periods presented. The financial information as of December 31, 2014, is derived from our 2014 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 2014 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.
Reclassifications
To be consistent with our 2015 reporting, the following have been retrospectively reported in our Consolidated Statements of Comprehensive Income for all periods presented with no effect on net income, cash flows or stockholder's equity:
Results of our Redbox Canada operations which were discontinued during the first quarter of 2015. See Note 12: Discontinued Operations for additional information;
Restructuring and lease termination costs. See Note 11: Restructuring for additional information; and
Basic and diluted earnings per share as a result of applying the two-class method of calculating earnings per share (the "Two-Class Method") during the first quarter of 2015. The Two-Class Method became significantly more dilutive than the previously applied treasury stock method as a result of stock repurchases increasing the average number of unvested restricted awards ("participating securities") as a percentage of total common shares outstanding. The impact of applying the Two-Class Method on both income from continuing operations and basic and diluted weighted average shares used to calculate earnings per common share is as follows:
 
Three Months Ended, March 31, 2014
In thousands, except per share data
As Reported Under the Treasury Stock Method
 
Amount Allocated to Participating Securities
 
As Revised Under the Two-Class Method
Income from continuing operations used in basic per share calculation
$
27,606

 
$
(746
)
 
$
26,860

Income from continuing operations used in diluted per share calculation
$
27,606

 
$
(727
)
 
$
26,879

Weighted average shares used in basic per share calculation
23,944

 

 
23,944

Weighted average shares used in diluted per share calculation
24,775

 
(200
)
 
24,575

Basic earnings per common share from continuing operations
$
1.15

 
$
(0.03
)
 
$
1.12

Diluted earnings per common share from continuing operations
$
1.11

 
$
(0.02
)
 
$
1.09

See Note 13: Earnings Per Share for additional information.
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


9


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:
 
Three Months Ended, March 31, 2014
Dollars in thousands
As Reported
 
Adjustment
 
As Revised
Cash flows from changes in operating assets and liabilities:
 
 
 
 
 
Accounts payable
$
(27,672
)
 
$
282

 
$
(27,390
)
Net cash flows from operating activities
$
94,305

 
$
282

 
$
94,587

Investing Activities:
 
 
 
 
 
Purchases of property and equipment
$
(26,658
)
 
$
(282
)
 
$
(26,940
)
Net cash flows from investing activities
$
(36,327
)
 
$
(282
)
 
$
(36,609
)
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
 
 
Purchases of property and equipment included in ending accounts payable
$
13,120

 
$
(5,880
)
 
$
7,240

Accounting Pronouncements Adopted During the Current Year
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 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 adopted the provisions of ASU 2014-08 during the first quarter of 2015 and applied the guidance to our disposition of our Redbox operations in Canada ("Redbox Canada"). See Note 12: Discontinued Operations for additional information.
Accounting Pronouncements Not Yet Adopted
There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on our consolidated financial statements, from those disclosed in our 2014 Annual Report on Form 10-K, except for the following:
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (Subtopic 835-30). This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, instead of as a deferred charge. We are currently evaluating the impact of ASU 2015-03, which is effective for us in our fiscal year beginning January 1, 2016. Early adoption is permitted.
Note 2: Organization and Business
Description of Business
We are a leading provider of automated retail solutions offering convenient products and services that benefit consumers and drive incremental retail traffic and revenue for retailers. During the first quarter of 2015:
To align with a change in how our chief operating decision maker evaluates business performance, we added ecoATM, our electronic device recycling business, as a separate reportable segment. Previously, the results of ecoATM along with those of other self-service concepts were included in our New Ventures segment. The combined results of the other self-service concepts, which include our product sampling kiosk concept SAMPLEit, are included in the All Other reporting category as they do not meet quantitative thresholds to be reported as a separate segment. See Note 14: Business Segments and Enterprise-Wide Information for additional information; and


10


We discontinued our Redbox operations in Canada as the business was not meeting our performance expectations. We have reclassified the results of Redbox Canada to discontinued operations for all periods presented in our Consolidated Statements of Comprehensive Income. See Note 12: Discontinued Operations for additional information.
Our core offerings in automated retail include our Redbox, Coinstar and ecoATM segments. Our Redbox segment consists of self-service kiosks where consumers can rent or purchase movies and video games. Our Coinstar segment consists of self-service coin-counting kiosks where consumers can convert their coins to cash or stored value products. We also offer self-service kiosks that exchange gift cards for cash under our Coinstar™ Exchange brand. Our ecoATM segment consists of self-service kiosks where consumers can recycle electronic devices for cash. In addition to our three reportable segments, we also conduct business activities through other self-service concepts, where we identify, evaluate, build or acquire and develop innovative new self-service retail concepts and regularly assess these concepts to determine whether continued funding or other alternatives are appropriate.
Our kiosks are located primarily in supermarkets, drug stores, mass merchants, financial institutions, convenience stores, malls and restaurants. Our kiosk and location counts as of March 31, 2015, are as follows:
 
Kiosks
 
Locations
Redbox
41,960

 
34,430

Coinstar
21,220

 
20,010

ecoATM
2,140

 
1,900

All Other
90

 
90

Total
65,410

 
56,430

Note 3: Cash and Cash Equivalents
We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. Our cash and cash equivalents were $197.9 million and $242.7 million at March 31, 2015, and December 31, 2014, respectively. Of this total, cash equivalents were $8.6 million and $0.9 million, respectively, and consisted of money market demand accounts and investment grade fixed income securities such as money market funds, certificate of deposits, and commercial paper. Our cash balances with financial institutions may exceed the deposit insurance limits.
Included in our cash and cash equivalents at March 31, 2015, and December 31, 2014, were $68.7 million and $81.7 million, respectively that we identified for settling our accrued payables to our retailer partners in relation to our Coinstar kiosks.
Separately included in our cash and cash equivalents at March 31, 2015, and December 31, 2014, were $37.8 million and $66.5 million, respectively in cash and cash equivalents held in financial institutions domestically and $10.7 million and $11.6 million, respectively in cash and cash equivalents held in foreign financial institutions.
Note 4: Prepaid Expenses and Other Current Assets and Other Accrued Liabilities
Prepaid expenses and other current assets:
Dollars in thousands
March 31,
2015
 
December 31,
2014
Spare parts
$
15,060

 
$
13,643

Licenses
8,298

 
5,881

Electronic devices inventory
4,818

 
5,259

Prepaid rent
1,464

 
1,446

DVD cases and labels
1,093

 
1,330

Income taxes receivable
122

 
113

Other
12,053

 
12,165

Total prepaid and other current assets
$
42,908

 
$
39,837




11


Other accrued liabilities consist of the following:
Dollars in thousands
March 31,
2015
 
December 31,
2014
Accrued content library expense
$
27,739

 
$
23,226

Payroll related expenses
26,877

 
33,343

Business taxes
21,573

 
21,629

Income taxes payable
17,107

 
9,463

Insurance
9,852

 
9,615

Deferred revenue
7,073

 
6,995

Accrued early lease termination and sublease expenses
6,995

 

Accrued interest expense
6,455

 
6,974

Service contract provider expenses
3,744

 
4,191

Deferred rent expense
3,537

 
6,162

Other
15,969

 
15,528

Total other accrued liabilities
$
146,921

 
$
137,126

Note 5: Property and Equipment
Dollars in thousands
March 31,
2015
 
December 31,
2014
Kiosks and components
$
1,165,096

 
$
1,165,925

Computers, servers, and software
194,825

 
200,915

Leasehold improvements
21,126

 
29,625

Office furniture and equipment
7,271

 
9,218

Vehicles
5,736

 
6,234

Property and equipment, at cost
1,394,054

 
1,411,917

Accumulated depreciation and amortization
(1,008,506
)
 
(983,449
)
Property and equipment, net
$
385,548

 
$
428,468

During the first quarter of 2015, we recognized impairment charges of $6.9 million in connection with our early lease termination. See Note 11: Restructuring for additional information.
Note 6: Goodwill and Other Intangible Assets
Goodwill
The carrying amount of goodwill was as follows:
Dollars in thousands
March 31,
2015
 
December 31,
2014
Goodwill
$
559,307

 
$
559,307



12


Other Intangible Assets
The gross amount of our other intangible assets and the related accumulated amortization were as follows:
Dollars in thousands
Amortization
Period
 
March 31,
2015
 
December 31,
2014
Retailer relationships
5 - 10 years
 
$
53,295

 
$
53,295

Accumulated amortization
 
 
(24,203
)
 
(23,200
)
Retailer relationships, net
 
 
29,092

 
30,095

Developed technology
5 years
 
34,000

 
34,000

Accumulated amortization
 
 
(11,333
)
 
(9,633
)
Developed technology, net
 
 
22,667

 
24,367

Other
1 - 40 years
 
16,800

 
16,800

Accumulated amortization
 
 
(7,221
)
 
(6,571
)
Other, net
 
 
9,579

 
10,229

Total intangible assets, net
 
 
$
61,338

 
$
64,691

Amortization expense was as follows:
 
Three Months Ended
 
March 31,
Dollars in thousands
2015
 
2014
Retailer relationships
$
1,003

 
$
1,536

Developed technology
1,700

 
1,700

Other
650

 
612

Total amortization of intangible assets
3,353

 
3,848

Less: amortization included in discontinued operations
(44
)
 
(6
)
Total amortization of intangible assets from continuing operations
$
3,309

 
$
3,842

Assuming no future impairment, the expected future amortization as of March 31, 2015 is as follows:
Dollars in thousands
Retailer
Relationships
 
Developed Technology
 
Other
 
Total
Remainder of 2015
$
3,009

 
$
5,100

 
$
1,787

 
$
9,896

2016
4,012

 
6,800

 
2,281

 
13,093

2017
4,012

 
6,800

 
2,281

 
13,093

2018
4,012

 
3,967

 
1,664

 
9,643

2019
4,012

 

 
801

 
4,813

2020
4,012

 

 
765

 
4,777

Thereafter
6,023

 

 

 
6,023

Total expected amortization
$
29,092

 
$
22,667

 
$
9,579

 
$
61,338

Note 7: Equity Method Investments

We include our equity method investments within other long-term assets on our Consolidated Balance Sheets. As of March 31, 2015 our $1.3 million investment in Pursuant Health, Inc., formerly known as SoloHealth, Inc., representing 10% ownership, was our only equity method investment.


13


Income (Loss) from Equity Method Investments

On October 19, 2014, Redbox and Verizon Ventures IV LLC, a wholly owned subsidiary of Verizon Communications Inc., entered into an agreement whereby we would withdraw from Redbox Instant™ by Verizon (the "Joint Venture") effective October 20, 2014. Pursuant to the Withdrawal Agreement, all of Redbox’s rights under the Joint Venture’s operating agreement were extinguished for a total of $16.8 million made to Redbox and no further capital contributions were required.
Loss from equity method investments within our Consolidated Statements of Comprehensive Income is composed of the following:
 
Three Months Ended
 
March 31,
Dollars in thousands
2015
 
2014
Proportionate share of net loss of equity method investees:
 
 
 
Joint Venture
$

 
$
(8,394
)
Pursuant Health, Inc. (fka SoloHealth, Inc.)
(132
)
 
(224
)
Total proportionate share of net loss of equity method investees
(132
)
 
(8,618
)
Amortization of difference in carrying amount and underlying equity in Joint Venture

 
(750
)
Total loss from equity method investments
$
(132
)
 
$
(9,368
)
Note 8: Debt and Other Long-Term Liabilities
 
Debt
 
Other Liabilities
 
Total
 
Senior Notes
 
Credit Facility
 
Total Debt
 
Capital Lease Obligations
 
Asset retirement obligations
 
Other long-term liabilities
 
Dollars in thousands
 Senior Unsecured Notes due 2019
 
 Senior Unsecured Notes due 2021
 
Term Loans
 
Revolving Line of Credit
 
 
 
 
 
As of March 31, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal
$
350,000

 
$
300,000

 
$
144,375

 
$
80,000

 
$
874,375

 
 
 
 
 
 
 

Discount
(4,041
)
 
(3,991
)
 
(317
)
 

 
(8,349
)
 
 
 
 
 
 
 

Total
345,959

 
296,009

 
144,058

 
80,000

 
866,026

 
$
12,652

 
$
12,663

 
$
15,292

 
$
906,633

Less: current portion

 

 
(10,313
)
 

 
(10,313
)
 
(9,231
)
 

 

 
(19,544
)
Total long-term portion
$
345,959

 
$
296,009

 
$
133,745

 
$
80,000

 
$
855,713

 
$
3,421

 
$
12,663

 
$
15,292

 
$
887,089

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unamortized deferred financing fees(1)
$
611

 
$
1,319

 
$

 
$
2,799

 
$
4,729

 
 
 
 
 
 
 
$
4,729

 
Debt
 
Other Liabilities
 
Total
 
Senior Notes
 
Credit Facility
 
Total Debt
 
Capital Lease Obligations
 
Asset retirement obligations
 
Other long-term liabilities
 
Dollars in thousands
 Senior Unsecured Notes due 2019
 
 Senior Unsecured Notes due 2021
 
Term Loans
 
Revolving Line of Credit
 
 
 
 
 
As of December 31, 2014:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal
$
350,000

 
$
300,000

 
$
146,250

 
$
160,000

 
$
956,250

 
 
 
 
 
 
 
 
Discount
(4,296
)
 
(4,152
)
 
(335
)
 

 
(8,783
)
 
 
 
 
 
 
 
 
Total
345,704

 
295,848

 
$
145,915

 
160,000

 
947,467

 
$
15,391

 
$
13,576

 
$
17,651

 
$
994,085

Less: current portion

 

 
(9,390
)
 

 
(9,390
)
 
(11,026
)
 

 

 
(20,416
)
Total long-term portion
$
345,704

 
$
295,848

 
$
136,525

 
$
160,000

 
$
938,077

 
$
4,365

 
$
13,576

 
$
17,651

 
$
973,669

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Unamortized deferred financing fees(1)
$
649

 
$
1,372

 
$

 
$
2,965

 
$
4,986

 
 
 
 
 
 
 
$
4,986

(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.


14


Interest Expense
Dollars in thousands
Three Months Ended
March 31,
2015
 
2014
Cash interest expense
$
11,395

 
$
8,362

Non-cash interest expense:
 
 
 
Amortization of debt discount
435

 
802

Amortization of deferred financing fees
258

 
504

Total non-cash interest expense
693

 
1,306

Total interest expense
$
12,088

 
$
9,668

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 March 31, 2015, 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. As of March 31, 2015, we were in compliance with the covenants of the related indenture.
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 "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 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”). As of March 31, 2015, the interest rate on amounts outstanding under the Credit Facility was 2.11% and we were in compliance with the covenants of the Credit Facility.
The Amended and Restated Credit Agreement requires principal amortization payments under the Term Loan as follows:
Dollars in thousands
Repayment Amount
Remainder of 2015
$
7,500

2016
13,125

2017
15,000

2018
18,750

2019
90,000

Total
$
144,375

 


15


Note 9: Repurchases of Common Stock
Board Authorization
On February 3, 2015, the Board approved an additional stock repurchase authorization of up to $250.0 million of its common stock plus the cash proceeds received from the exercise of stock options by our executives, non-employee directors and employees.
Repurchases
In the three months ended March 31, 2015, we repurchased a total of 617,195 shares of our common stock, via open market repurchases with an average price per share of $65.96 for $40.7 million.
The following table presents a summary of our authorized stock repurchase balance:
Dollars in thousands
Board Authorization
Authorized repurchase - as of January 1, 2015
$
163,655

Additional board authorization
250,000

Proceeds from the exercise of stock options
339

Repurchase of common stock from open market
(40,708
)
Authorized repurchase - as of March 31, 2015
$
373,286

Note 10: Share-Based Payments
We currently grant share-based awards to our executives, non-employee directors and employees under our 2011 Incentive Plan (the “Plan”). The Plan permits the granting of stock options, restricted stock, restricted stock units, and performance-based restricted stock.
Certain information regarding our share-based payments is as follows:
 
Three Months Ended
 
March 31,
Dollars in thousands
2015
 
2014
Share-based payments expense:
 
 
 
Share-based compensation - stock options
$
141

 
$
233

Share-based compensation - restricted stock
2,559

 
2,914

Share-based payments for content arrangements
1,241

 
618

Total share-based payments expense
$
3,941

 
$
3,765

Tax benefit on share-based payments expense
$
1,519

 
$
1,445

 
March 31, 2015
Dollars in thousands
Unrecognized Share-Based Payments Expense
 
Weighted-Average Remaining Life
Unrecognized share-based payments expense:
 
 
 
Share-based compensation - stock options
$
446

 
1.7 years
Share-based compensation - restricted stock
26,516

 
2.8 years
Share-based payments for content arrangements
3,376

 
0.7 years
Total unrecognized share-based payments expense
$
30,338

 
 


16


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 2015:
Shares in thousands
Options
 
Weighted Average Exercise Price
Outstanding, December 31, 2014
128

 
$
52.59

Granted

 

Exercised
(7
)
 
49.60

Canceled, expired, or forfeited
(16
)
 
53.75

Outstanding, March 31, 2015
105

 
52.60

Certain information regarding stock options outstanding as of March 31, 2015, is as follows:
 
Options
Shares and intrinsic value in thousands
Outstanding
 
Exercisable
Number
105

 
81

Weighted average per share exercise price
$
52.60

 
$
52.10

Aggregate intrinsic value
$
1,424

 
$
1,138

Weighted average remaining contractual term (in years)
4.96

 
4.41

Restricted stock and performance based restricted stock awards
Restricted stock awards are granted to eligible executives, non-employee directors and employees. Awards granted to employees and executives 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. We estimate forfeitures for restricted stock awards and recognize share-based compensation expense for only those awards expected to vest.
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 2015:
Shares in thousands
Restricted Stock Awards
 
Weighted Average Grant Date Fair Value
Non-vested, December 31, 2014
609

 
$
62.35

Granted
262

 
55.72

Vested
(157
)
 
59.28

Forfeited
(73
)
 
66.41

Non-vested, March 31, 2015
641

 
60.04

Share-Based Payments for Content Arrangements
We have granted restricted stock as part of content license agreements with certain movie studios. The expense related to these agreements is included within direct operating expenses in our Consolidated Statements of Comprehensive Income and is adjusted based on the number of unvested shares and market price of our common stock each reporting period. During the first quarter of 2015, 50,000 shares of restricted stock were granted and immediately vested pursuant to a revenue sharing agreement with Paramount.


17


Information related to the shares of restricted stock granted as part of these agreements as of March 31, 2015, is as follows:
Whole shares
Granted
 
Vested
 
Unvested
Paramount(1)
350,000

 
350,000

 

(1)
Includes 95,000 shares that vested on January 1, 2015.
Rights to Receive Cash
As a part of the acquisition of ecoATM, we issued replacement awards for unvested restricted stock and options in ecoATM with rights to receive cash equal to the per share merger consideration for restricted stock and net of the exercise price for options. The replacement awards vest in accordance with the terms of the original replaced award. The replacement awards are considered liability classified as they represent rights to receive cash. Expense associated with the post-combination awards is recognized net of forfeitures, and cash payments are made in accordance with the awards' vesting schedule, generally on a monthly basis. We recognized $1.9 million in expense associated with the issuance of rights to receive cash for the three months ended March 31, 2015. The expected future recognition of expense associated with the rights to receive cash as of March 31, 2015 is as follows:
Dollars in thousands
Expected Expense
Remainder of 2015
$
2,690

2016
2,905

2017
511

Remaining total expected expense
$
6,106


Note 11: Restructuring
During the first quarter of 2015, we recorded restructuring charges arising from the following activities:
Discontinuing our Redbox operations in Canada. The disposal was completed on March 31, 2015. See Note 12: Discontinued Operations for further information; and
Reducing the size of our Redbox headquarters facility in Oakbrook Terrace, Illinois through early termination of operating leases for certain floors. We ceased using the office space on March 31, 2015 and the effective date of the early termination is July 31, 2016. Prior to exercising our early termination option, the leases had been scheduled to expire in July 2021; and
Implementing actions to further align costs with revenues in our continuing operations primarily through workforce reductions across the Company and subleasing a floor of a corporate facility.


18


We do not expect significant future restructuring charges related to our first quarter 2015 restructuring activities. The total amount incurred for restructuring, exclusive of asset impairments incurred by reportable segment (on an allocated basis) and expense type is as follows:
 
Three Months Ended
 
March 31,
Dollars in thousands
2015
 
2014
Redbox
 
 
 
Severance
$
3,701

 
$
534

Lease termination costs (excluding related asset impairments)
4,567

 

Total Redbox restructuring costs
8,268

 
534

Coinstar
 
 
 
Severance
492

 
23

Lease termination costs (excluding related asset impairments)
24

 

Total Coinstar restructuring costs
516

 
23

ecoATM
 
 
 
Severance
127

 

Lease termination costs (excluding related asset impairments)

 

Total ecoATM restructuring costs
127

 

Total restructuring costs in continuing operations
8,911

 
557

Restructuring costs in discontinued operations
522

 
557

Total restructuring costs
$
9,433

 
$
1,114


During the first quarter of 2015, we recognized $16.4 million in charges in connection with our restructuring and early lease termination including $6.9 million in impairments of lease related assets, and $9.4 million in restructuring costs, which include severance and lease termination costs.
 
Three Months Ended
 
March 31,
Dollars in thousands
2015
 
2014
Restructuring costs
$
9,433

 
$
1,114

Impairment of lease related assets (see Note 5)
6,940

 

Total restructuring and lease termination costs
16,373

 
1,114

Less: restructuring costs included in discontinued operations
(522
)
 
(557
)
Restructuring and lease termination costs from continuing operations
$
15,851

 
$
557

A reconciliation of the beginning and ending liability balance by expense type is as follows:
Dollars in thousands
Severance Expense
 
Lease Termination Costs
 
Other
Beginning Balance - January 1, 2015
$

 
$

 
$

Costs charged to expense
4,451

 
4,669

 
313

Costs paid or otherwise settled
(1,752
)
 
(2,614
)
 

Ending Balance - March 31, 2015
$
2,699

 
$
2,055

 
$
313



19


Note 12: Discontinued Operations
Summary Financial Information
On January 23, 2015, we made the decision to shut down our Redbox Canada operations as the business was not meeting the company's performance expectations. We believe this represents a strategic shift which has a major effect on our operations as it represents a significant geographical area for our Redbox segment and the losses generated were significant to our total operations. On March 31, 2015, we completed the disposal of the Redbox Canada operations. As a result, we updated certain estimates used in the preparation of the financial statements and the remaining value of the content library and certain capitalized property and equipment consisting primarily of installation costs were amortized over the wind-down period ending March 31, 2015. We have reclassified the results of Redbox Canada to discontinued operations for all periods presented in our Consolidated Statements of Comprehensive Income.
In addition to Redbox Canada, 2014 discontinued operations includes a $1.2 million pretax loss from operations and a $0.5 million income tax benefit related to the wind-down process of certain new ventures that were discontinued during 2013. Continuing cash flows from the wind-down process were not material. Total loss on discontinued operations is as follows:
 
Three Months Ended
 
March 31,
Dollars in thousands
2015
 
2014
Redbox Canada
$
(6,556
)
 
$
(3,720
)
Certain new ventures

 
(711
)
Net loss on discontinued operations
$
(6,556
)
 
$
(4,431
)
Redbox Canada
The disposition and operating results of Redbox Canada are presented in discontinued operations in our Consolidated Statements of Comprehensive Income for all periods presented. The following table sets forth the components of discontinued operations included in our Consolidated Statements of Comprehensive Income:

Three Months Ended
 
March 31,
Dollars in thousands
2015
 
2014
Major classes of line items constituting pretax loss of discontinued operations:





Revenue
$
1,557

 
$
2,607

Direct operating
4,269

 
4,593

Marketing
129

 
604

General and administrative
119

 
236

Restructuring and lease termination costs
522

 

Depreciation and other
5,858

 
1,153

Amortization of intangible assets
44

 
6

Other expense, net
(4,495
)
 
(1,093
)
Pretax loss of discontinued operations related to major classes of pretax loss
(13,879
)
 
(5,078
)
Income tax benefit(1)
7,323

 
1,358

Net loss on discontinued operations
$
(6,556
)
 
$
(3,720
)
(1)
The income tax benefit for the three months ended March 31, 2015 includes a benefit on the rate differential between the U.S. and Canada.



20


We estimate the cash expenditures after March 31, 2015 related to the disposition of Redbox Canada to be approximately $1.0 million. Significant operating and investing cash flows of Redbox Canada were as follows:
 
Three Months Ended
 
March 31,
Dollars in thousands
2015
 
2014
Net loss on discontinued operations
$
(6,556
)
 
$
(3,720
)
Adjustments to reconcile net loss to net cash flows from operating activities:
 
 
 
Depreciation and amortization
5,902

 
1,159

Content library
3,064

 
469

Prepaid and other current assets
544

 
146

Accounts payable
(1,621
)
 
(966
)
Accrued payables to retailers
(155
)
 
152

Other accrued liabilities
(32
)
 
336

Net cash flows from operating activities
$
1,146

 
$
(2,424
)
Investing activities:
 
 
 
Purchase of property, plant and equipment
(278
)
 
(2,766
)
Total cash flows used in investing activities
$
(278
)
 
$
(2,766
)



21


Note 13: Earnings Per Share

Beginning in the first quarter of 2015, we began applying the two-class method of calculating basic and diluted earnings per share (the "Two-Class Method") as it became significantly more dilutive than the previously applied treasury stock method as a result of stock repurchases increasing the average number of unvested restricted awards as a percentage of total common shares outstanding.
The Two-Class Method is an earnings allocation formula that treats a participating security, as having rights to earnings that otherwise would have been available to common shareholders and assumes all earnings for the period are distributed. Our unvested restricted stock awards granted are participating securities as they entitle recipients to receive nonforfeitable dividends during the vesting period on a basis equivalent to the dividends paid to holders of common stock.
Our calculation of basic and diluted earnings per share is as follows:
 
Three Months Ended
 
March 31,
In thousands, except per share data
2015
 
2014
Numerator
 
 
 
Income from continuing operations
$
42,155

 
$
27,606

Loss from discontinued operations
(6,556
)
 
(4,431
)
Net income
$
35,599

 
$
23,175

 
 
 
 
Distributed income from continuing operations to common shares
$
5,454

 
$

Distributed income from continuing operations to participating shares
148

 

Total distributed income from continuing operations
$
5,602

 
$

 
 
 
 
Undistributed income from continuing operations to common shares
$
35,321

 
$
26,860

Undistributed income from continuing operations to participating shares
1,232

 
746

Total undistributed income from continuing operations
$
36,553

 
$
27,606

 
 
 
 
Income from continuing operations to common shares - basic
$
40,775

 
$
26,860

Undistributed income from continuing operations allocated to participating shares
1,232

 
746

Undistributed income from continuing operations reallocated to participating shares
(1,231
)
 
(727
)
Income from continuing operations to common shares - diluted
$
40,776

 
$
26,879

 
 
 
 
Denominator
 
 
 
Weighted average common shares - basic
18,269

 
23,944

Dilutive effect of share-based payment awards
17

 
112

Dilutive effect of convertible debt

 
519

Weighted average common shares - diluted(1)
18,286

 
24,575

 
 
 
 
Basic earnings (loss) per common share:
 
 
 
Continuing operations
$
2.23

 
$
1.12

Discontinued operations
(0.36
)
 
(0.18
)
Basic earnings per common share
$
1.87

 
$
0.94

 
 
 
 
Diluted earnings (loss) per common share:
 
 
 
Continuing operations
$
2.23

 
$
1.09

Discontinued operations
(0.36
)
 
(0.18
)
Diluted earnings per common share
$
1.87

 
$
0.91

 
 
 
 
Stock options and share-based awards not included in diluted EPS calculation because their effect would have be antidilutive
3

 
156

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


22


Note 14: 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.
Changes in our Organizational Structure
During the first quarter of 2015, we added ecoATM, our electronic device recycling business, as a separate reportable segment. Previously, the results of ecoATM along with those of other self-service concepts were included in our New Ventures segment. The combined results of the other self-service concepts, which include product sampling kiosk concept SAMPLEit, are now included in the All Other reporting category in the reconciliation below as they do not meet quantitative thresholds to be reported as a separate segment. All goodwill previously allocated to the New Ventures segment has been allocated to the ecoATM segment.
Comparability of Segment Results
We have recast prior period results for the following:
Discontinued operations, consisting of our Redbox operations in Canada which we shut down during the first quarter of 2015. See Note 12: Discontinued Operations for further information; and
The addition of our ecoATM segment and an All Other reporting category, which we added during the first quarter of 2015.
Our analysis and reconciliation of our segment information to the consolidated financial statements that follows covers our results of operations, which consists of our Redbox, Coinstar and ecoATM segments, Corporate Unallocated expenses and All Other. All Other includes the results of other self-service concepts, which we regularly assess to determine whether continued funding or other alternatives are appropriate.


23


Dollars in thousands
 
Three Months Ended March 31, 2015
Redbox
 
Coinstar
 
ecoATM
 
All Other
 
Corporate Unallocated
 
Total
Revenue
$
519,533

 
$
69,330

 
$
19,749

 
$
24

 
$

 
$
608,636

Expenses:
 
 
 
 
 
 
 
 
 
 
 
Direct operating
342,935

 
37,263

 
22,806

 
1,191

 
989

 
405,184

Marketing
4,825

 
1,178

 
1,730

 
320

 
367

 
8,420

Research and development

 

 
1,456

 
(85
)
 
713

 
2,084

General and administrative
33,735

 
7,795

 
1,968

 
2,507

 
2,551

 
48,556

Restructuring and lease termination costs (Note 11)
15,174

 
550

 
127

 

 

 
15,851

Segment operating income (loss)
122,864

 
22,544

 
(8,338
)
 
(3,909
)
 
(4,620
)
 
128,541

Less: depreciation, amortization and other
(31,607
)
 
(7,818
)
 
(5,902
)
 
(668
)
 

 
(45,995
)
Operating income (loss)
91,257

 
14,726

 
(14,240
)
 
(4,577
)
 
(4,620
)
 
82,546

Loss from equity method investments, net

 

 

 

 
(132
)
 
(132
)
Interest expense, net

 

 

 

 
(12,071
)
 
(12,071
)
Other, net

 

 

 

 
(2,346
)
 
(2,346
)
Income (loss) from continuing operations before income taxes
$
91,257

 
$
14,726

 
$
(14,240
)
 
$
(4,577
)
 
$
(19,169
)
 
$
67,997

Dollars in thousands
 
Three Months Ended March 31, 2014
Redbox
 
Coinstar
 
ecoATM
 
All Other
 
Corporate Unallocated
 
Total
Revenue
$
513,049

 
$
68,753

 
$
15,946

 
$
14

 
$

 
$
597,762

Expenses:
 
 
 
 
 
 
 
 
 
 
 
Direct operating
363,601

 
37,723

 
15,931

 
408

 
1,979

 
419,642

Marketing
4,460

 
1,006

 
668

 
161

 
698

 
6,993

Research and development
8

 
269

 
1,784

 
632

 
781

 
3,474

General and administrative
38,701

 
6,997

 
2,879

 
921

 
3,110

 
52,608

Restructuring and lease termination costs (Note 11)
534

 
23

 

 

 

 
557

Segment operating income (loss)
105,745

 
22,735

 
(5,316
)
 
(2,108
)
 
(6,568
)
 
114,488

Less: depreciation, amortization and other
(39,404
)
 
(8,563
)
 
(3,712
)
 
(105
)
 

 
(51,784
)
Operating income (loss)
66,341

 
14,172

 
(9,028
)
 
(2,213
)
 
(6,568
)
 
62,704

Loss from equity method investments, net

 

 

 

 
(9,368
)
 
(9,368
)
Interest expense, net

 

 

 

 
(9,648
)
 
(9,648
)
Other, net

 

 

 

 
(648
)
 
(648
)
Income (loss) from continuing operations before income taxes
$
66,341

 
$
14,172

 
$
(9,028
)
 
$
(2,213
)
 
$
(26,232
)
 
$
43,040

Significant Retailer Relationships
The following retailers accounted for 10% or more of our consolidated revenue:
 
Three Months Ended
 
March 31,
 
2015
 
2014
Wal-Mart Stores Inc.
16.3
%
 
15.3
%
Walgreen Co.
14.3
%
 
14.2
%


24


Note 15: Fair Value
Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, we use a three-tier valuation hierarchy based upon observable and non-observable inputs:
Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; or
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
The factors or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
Assets and Liabilities Measured and Reported at Fair Value on a Recurring Basis
The following table presents our financial assets and (liabilities) that are measured and reported at fair value in our Consolidated Balance Sheets on a recurring basis, by level within the fair value hierarchy (in thousands):
Fair Value at March 31, 2015
Level 1
 
Level 2
 
Level 3
Money market demand accounts and investment grade fixed income securities
$
8,589

 
$

 
$

 
 
 
 
 
 
Fair Value at December 31, 2014
Level 1
 
Level 2
 
Level 3
Money market demand accounts and investment grade fixed income securities
$
916

 
$

 
$

Money Market Demand Accounts and Investment Grade Fixed Income Securities
We determine fair value for our money market demand accounts and investment grade fixed income securities based on quoted market prices. The fair value of these assets is included in cash and cash equivalents on our Consolidated Balance Sheets.
Assets and Liabilities Measured and Reported at Fair Value on a Nonrecurring Basis
We recognize or disclose the fair value of certain assets such as non-financial assets, primarily long-lived assets, goodwill, intangible assets and certain other assets in connection with impairment evaluations. All of our nonrecurring valuations use significant unobservable inputs and therefore fall under Level 3 of the fair value hierarchy.
Fair Value of Other Financial Instruments
The carrying value of our term loans approximates their fair value and falls under Level 2 of the fair value hierarchy.
We estimated the fair value of our senior unsecured notes due 2019 and 2021 outstanding using market rates of approximately 6.000% and 5.875%, respectively, for similar high-yield debt at March 31, 2015. The estimated fair value of our senior unsecured notes due 2019 and 2021 was approximately $350.0 million and $300.0 million, at March 31, 2015 and December 31, 2014, respectively. 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 6.000% 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.


25


Note 16: Commitments and Contingencies
Lease Commitments
Operating Leases
During the first quarter of 2015, we made the following changes to our operating leases:
We early terminated our operating lease of certain floors of our Redbox headquarters and recognized the fair value of the ongoing lease payments and other related costs through the effective date of termination, July 31, 2016, as of the cease use date, March 31, 2015. See Note 11: Restructuring for additional information; and
We entered into a new operating lease of 16,085 square feet of office space in Woodland Hills, California which expires May 31, 2022.
As of March 31, 2015, our future minimum lease payments, net of sublease income are as follows:
Dollars in thousands
Operating Leases(1)
Remaining in 2015
$
13,617

2016
17,193

2017
10,161

2018
6,374

2019
5,637

Thereafter
10,873

Total minimum lease commitments
63,855

Less: sublease income
(1,412
)
Total minimum lease commitments, net
$
62,443

(1)
Includes all operating leases having an initial or remaining non-cancelable lease term in excess of one year.
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 no purchases in the three months ended March 31, 2015. As of March 31, 2015, our remaining commitment is $15.8 million under this arrangement.
We have also entered into other certain miscellaneous purchase agreements, which resulted in total purchase commitments of $22.2 million as of March 31, 2015.
Content License Agreements
On March 26, 2015, we entered into a revenue sharing agreement with Warner Home Video, a division of Warner Bros. Home Entertainment Inc., (the "Warner Agreement") under which Redbox agrees to license minimum quantities of theatrical and direct-to-video titles for rental through March 31, 2017. The Warner Agreement maintains a 28-day window on such titles.
We have entered into certain license agreements to obtain content for movie and video game rentals. A summary of the estimated commitments in relation to these agreements as of March 31, 2015 is presented in the following table:


26


Dollars in thousands
 
 
Years Ended December 31,
Total
 
2015
 
2016
 
2017
Warner
$
206,110

 
$
87,081

 
$
98,237

 
$
20,792

Lionsgate
123,376

 
69,699

 
53,677

 

Universal
111,085

 
102,550

 
8,535

 

Sony
95,934

 
95,934

 

 

Paramount
88,963

 
88,963

 

 

Fox
48,842

 
48,842

 

 

Total estimated commitments
$
674,310

 
$
493,069

 
$
160,449

 
$
20,792

Letters of Credit
As of March 31, 2015, we had six irrevocable standby letters of credit that totaled $6.4 million. These standby letters of credit, which expire at various times through October 2015, are used to collateralize certain obligations to third parties. As of March 31, 2015, 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, and the Court granted Redbox’s motion on December 11, 2014. The plaintiffs appealed on January 7, 2015. 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.



27


Note 17: Guarantor Subsidiaries
Certain of our wholly owned subsidiaries have, jointly and severally, fully and unconditionally guaranteed the Senior Notes. Pursuant to SEC regulations, we have presented in columnar format the condensed consolidating financial information for Outerwall Inc., the guarantor subsidiaries on a combined basis, and all non-guarantor subsidiaries on a combined basis in the following tables:
CONSOLIDATING BALANCE SHEETS
(unaudited)
 
As of March 31, 2015
(in thousands)
Outerwall Inc.
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Eliminations and Consolidation Reclassifications
 
Total
Assets
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
145,914

 
$
15,192

 
$
36,828

 
$

 
$
197,934

Accounts receivable, net of allowances
2,490

 
29,356

 
4,798

 

 
36,644

Content library

 
172,162

 
338

 

 
172,500

Prepaid expenses and other current assets
24,630

 
24,513

 
745

 
(6,980
)
 
42,908

Intercompany receivables
48,904

 
490,452

 
265

 
(539,621
)
 

Total current assets
221,938

 
731,675

 
42,974

 
(546,601
)
 
449,986

Property and equipment, net
123,224

 
246,045

 
16,279

 

 
385,548

Deferred income taxes

 
3,004

 
2,231

 
(3,004
)
 
2,231

Goodwill and other intangible assets, net
249,713

 
370,932

 

 

 
620,645

Other long-term assets
6,250

 
1,108

 
293

 

 
7,651

Investment in related parties
960,644

 
18,217

 

 
(978,861
)
 

Total assets
$
1,561,769

 
$
1,370,981

 
$
61,777

 
$
(1,528,466
)
 
$
1,466,061

Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
15,770

 
$
148,364

 
$
1,202

 
$

 
$
165,336

Accrued payable to retailers
58,389

 
37,247

 
11,446

 

 
107,082

Other accrued liabilities
68,815

 
75,696

 
2,410

 

 
146,921

Current portion of long-term debt and other long-term liabilities
19,170

 

 
374

 

 
19,544

Deferred income taxes

 
27,906

 

 
(6,980
)
 
20,926

Intercompany payables
410,845

 
100,963

 
27,813

 
(539,621
)
 

Total current liabilities
572,989

 
390,176

 
43,245

 
(546,601
)
 
459,809

Long-term debt and other long-term liabilities
866,637

 
20,161

 
291

 

 
887,089

Deferred income taxes
29,412

 

 
24

 
(3,004
)
 
26,432

Total liabilities
1,469,038

 
410,337

 
43,560

 
(549,605
)
 
1,373,330

Commitments and contingencies
 
 
 
 
 
 
 
 
 
Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
Preferred stock

 

 

 

 

Common stock
587,738

 
225,729

 
12,393

 
(352,635
)
 
473,225

Treasury stock
(1,033,424
)
 

 

 

 
(1,033,424
)
Retained earnings
539,274

 
734,915

 
2,423

 
(626,226
)
 
650,386

Accumulated other comprehensive income (loss)
(857
)
 

 
3,401

 

 
2,544

Total stockholders’ equity
92,731

 
960,644

 
18,217

 
(978,861
)
 
92,731

Total liabilities and stockholders’ equity
$
1,561,769

 
$
1,370,981

 
$
61,777

 
$
(1,528,466
)
 
$
1,466,061



28


CONSOLIDATING BALANCE SHEETS
(unaudited)
 
As of December 31, 2014
(in thousands)
Outerwall Inc.
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Eliminations and Consolidation Reclassifications
 
Total
Assets
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
180,889

 
$
17,939

 
$
43,868

 
$

 
$
242,696

Accounts receivable, net of allowances
3,203

 
43,874

 
1,513

 

 
48,590

Content library

 
176,490

 
3,631

 

 
180,121

Prepaid expenses and other current assets
21,442

 
23,923

 
1,030

 
(6,558
)
 
39,837

Intercompany receivables
40,762

 
467,181

 

 
(507,943
)
 

Total current assets
246,296

 
729,407

 
50,042

 
(514,501
)
 
511,244

Property and equipment, net
133,923

 
263,412

 
31,133

 

 
428,468

Deferred income taxes

 

 
11,378

 

 
11,378

Goodwill and other intangible assets, net
249,717

 
374,281

 

 

 
623,998

Other long-term assets
6,665

 
1,231

 
335

 

 
8,231

Investment in related parties
917,234

 
(5,114
)
 

 
(912,120
)
 

Total assets
$
1,553,835

 
$
1,363,217

 
$
92,888

 
$
(1,426,621
)
 
$
1,583,319

Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
12,899

 
$
153,260

 
$
2,474

 
$

 
$
168,633

Accrued payable to retailers
69,189

 
42,977

 
14,124

 

 
126,290

Other accrued liabilities
59,770

 
74,536

 
2,820

 

 
137,126

Current portion of long-term debt and other long-term liabilities
20,020

 

 
396

 

 
20,416

Deferred income taxes

 
27,961

 
29

 
(6,558
)
 
21,432

Intercompany payables
309,932

 
121,015

 
76,996

 
(507,943
)
 

Total current liabilities
471,810

 
419,749

 
96,839

 
(514,501
)
 
473,897

Long-term debt and other long-term liabilities
949,588

 
22,946

 
1,135

 

 
973,669

Deferred income taxes
35,058

 
3,288

 
29

 

 
38,375

Total liabilities
1,456,456

 
445,983

 
98,003

 
(514,501
)
 
1,485,941

Commitments and contingencies
 
 
 
 
 
 
 
 
 
Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
Preferred stock

 

 

 

 

Common stock
588,105

 
225,729

 
12,393

 
(352,635
)
 
473,592

Treasury stock
(996,293
)
 

 

 

 
(996,293
)
Retained earnings
506,360

 
691,505

 
(17,991
)
 
(559,485
)
 
620,389

Accumulated other comprehensive income (loss)
(793
)
 

 
483

 

 
(310
)
Total stockholders’ equity
97,379

 
917,234

 
(5,115
)
 
(912,120
)
 
97,378

Total liabilities and stockholders’ equity
$
1,553,835

 
$
1,363,217

 
$
92,888

 
$
(1,426,621
)
 
$
1,583,319






29


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

 
$
539,281

 
$
10,545

 
$

 
$
608,636

Expenses:
 
 
 
 
 
 
 
 
 
Direct operating
33,726

 
366,411

 
5,047

 

 
405,184

Marketing
1,514

 
6,906

 

 

 
8,420

Research and development
(84
)
 
2,168

 

 

 
2,084

General and administrative
12,056

 
36,295

 
205

 

 
48,556

Restructuring and lease termination costs
550

 
15,301

 

 

 
15,851

Depreciation and other
4,649

 
36,983

 
1,054

 

 
42,686

Amortization of intangible assets
3

 
3,306

 

 

 
3,309

Total expenses
52,414

 
467,370

 
6,306

 

 
526,090

Operating income
6,396

 
71,911

 
4,239

 

 
82,546

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

 

 

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

 
(50
)
 

 
(12,071
)
Other, net
2,436

 
(16
)
 
(4,766
)
 

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

 
(4,816
)
 

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

 
(577
)
 

 
67,997

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

 

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

 
(561
)
 

 
42,155

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

 
(29,054
)
 
20,974

 

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

 
20,413

 

 
(58,732
)
 

Net income (loss)
35,599

 
38,319

 
20,413

 
(58,732
)
 
35,599

Foreign currency translation adjustment(1)
(64
)
 

 
2,918

 

 
2,854

Comprehensive income (loss)
$
35,535

 
$
38,319

 
$
23,331

 
$
(58,732
)
 
$
38,453

(1)
Foreign currency translation adjustment had no tax effect in 2015.


30


CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
Three Months Ended March 31, 2014
(in thousands)
Outerwall Inc.
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Eliminations and Consolidation Reclassifications
 
Total
Revenue
$
58,177

 
$
528,994

 
$
10,591

 
$

 
$
597,762

Expenses:
 
 
 
 
 
 
 
 
 
Direct operating
33,068

 
381,101

 
5,473

 

 
419,642

Marketing
1,127

 
5,810

 
56

 

 
6,993

Research and development
896

 
2,578

 

 

 
3,474

General and administrative
10,252

 
42,152

 
204

 

 
52,608

Restructuring and lease termination costs
23

 
534

 

 

 
557

Depreciation and other
9,102

 
37,740

 
1,100

 

 
47,942

Amortization of intangible assets
536

 
3,306

 

 

 
3,842

Total expenses
55,004

 
473,221

 
6,833

 

 
535,058

Operating income (loss)
3,173

 
55,773

 
3,758

 

 
62,704

Other income (expense), net:
 
 
 
 
 
 
 
 
 
Income (loss) from equity method investments, net
(224
)
 
(9,144
)
 

 

 
(9,368
)
Interest income (expense), net
(9,631
)
 
32

 
(49
)
 

 
(9,648
)
Other, net
1,607

 
64

 
(2,319
)
 

 
(648
)
Total other income (expense), net
(8,248
)
 
(9,048
)
 
(2,368
)
 

 
(19,664
)
Income (loss) from continuing operations before income taxes
(5,075
)
 
46,725

 
1,390

 

 
43,040

Income tax benefit (expense)
2,328

 
(17,515
)
 
(247
)
 

 
(15,434
)
Income (loss) from continuing operations
(2,747
)
 
29,210

 
1,143

 

 
27,606

Loss from discontinued operations, net of tax
(709
)
 
(147
)
 
(3,575
)
 

 
(4,431
)
Equity in income (loss) of subsidiaries
26,631

 
(2,432
)
 

 
(24,199
)
 

Net income (loss)
23,175

 
26,631

 
(2,432
)
 
(24,199
)
 
23,175

Foreign currency translation adjustment(1)
(267
)
 

 
1,142

 

 
875

Comprehensive income (loss)
$
22,908

 
$
26,631

 
$
(1,290
)
 
$
(24,199
)
 
$
24,050

(1)
Foreign currency translation adjustment had no tax effect in 2014.








31


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

 
$
38,319

 
$
20,413

 
$
(58,732
)
 
$
35,599

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

 
38,828

 
5,066

 

 
48,543

Amortization of intangible assets
3

 
3,306

 
44

 

 
3,353

Share-based payments expense
1,916

 
1,987

 

 

 
3,903

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

 

 

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

 

 
(2,547
)
Restructuring and lease termination costs
136

 
1,544

 

 

 
1,680

Loss from equity method investments, net
132

 

 

 

 
132

Amortization of deferred financing fees and debt discount
693

 

 

 

 
693

Other
(149
)
 
(322
)
 
(727
)
 

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

 
58,732

 

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

 
14,518

 
(3,407
)
 

 
11,823

Content library

 
6,663

 
3,293

 

 
9,956

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

 

 
(3,106
)
Other assets
15

 
122

 
31

 

 
168

Accounts payable
2,895

 
1,202

 
(1,177
)
 

 
2,920

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

 
(18,441
)
Other accrued liabilities
9,718

 
3,994

 
(592
)
 


 
13,120

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

 
31,147

 

 
106,072

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

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

 
123

 

 

 
123

Investments in and advances to affiliates
106,713

 
(65,229
)
 
(41,484
)
 

 

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

 
(79,827
)
 
(41,865
)
 

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

 

 

 

 
35,000

Principal payments on Credit Facility
(116,875
)
 

 

 

 
(116,875
)
Dividends paid (Note 19)
(5,602
)
 

 

 

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

 

 

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

 
(102
)
 

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

 

 

 

 
526

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

 

 

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

 
(102
)
 

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

 
3,780

 

 
3,744

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

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

 
17,939

 
43,868

 

 
242,696

End of period
$
145,914

 
$
15,192

 
$
36,828

 
$

 
$
197,934

(1)
During the first quarter of 2015 we discontinued our Redbox operations in Canada. Cash flows from these discontinued operations are not segregated from cash flows from continuing operations in all periods presented. See Note 12: Discontinued Operations for cash flow disclosures related to our discontinued Redbox operations in Canada.


32


CONSOLIDATING STATEMENTS OF CASH FLOWS
(unaudited)
 
Three Months Ended March 31, 2014
(in thousands)
Outerwall Inc.
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Eliminations and Consolidation Reclassifications
 
Total
Operating Activities:
 
 
 
 
 
 
 
 
 
Net income (loss)
$
23,175

 
$
26,631

 
$
(2,432
)
 
$
(24,199
)
 
$
23,175

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Depreciation and other
9,111

 
38,180

 
1,813

 

 
49,104

Amortization of intangible assets
536

 
3,312

 

 

 
3,848

Share-based payments expense
2,575

 
1,190

 

 

 
3,765

Windfall excess tax benefits related to share-based payments
(1,710
)
 

 

 

 
(1,710
)
Deferred income taxes
2,927

 
(11,261
)
 
(1,230
)
 

 
(9,564
)
Loss (income) from equity method investments, net
224

 
9,144

 

 

 
9,368

Amortization of deferred financing fees and debt discount
1,306

 

 

 

 
1,306

Other
(130
)
 
(11
)
 
17

 

 
(124
)
Equity in (income) losses of subsidiaries
(26,631
)
 
2,432

 

 
24,199

 

Cash flows from changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
Accounts receivable, net
609

 
(6,532
)
 
(29
)
 

 
(5,952
)
Content library
36

 
19,373

 
572

 

 
19,981

Prepaid expenses and other current assets
47,126

 
(439
)
 
281

 
(13
)
 
46,955

Other assets
14

 
431

 
(8
)
 

 
437

Accounts payable
(1,276
)
 
(25,159
)
 
(955
)
 

 
(27,390
)
Accrued payable to retailers
(7,642
)
 
(8,213
)
 
370

 

 
(15,485
)
Other accrued liabilities
(13,179
)
 
9,612

 
427

 
13

 
(3,127
)
Net cash flows from (used in) operating activities(1)
37,071

 
58,690

 
(1,174
)
 

 
94,587

Investing Activities:
 
 
 
 
 
 
 
 
 
Purchases of property and equipment
(9,239
)
 
(15,316
)
 
(2,385
)
 

 
(26,940
)
Proceeds from sale of property and equipment

 
831

 

 

 
831

Cash paid for equity investments

 
(10,500
)
 

 

 
(10,500
)
Investments in and advances to affiliates
31,807

 
(31,385
)
 
(422
)
 

 

Net cash flows from (used in) investing activities(1)
22,568

 
(56,370
)
 
(2,807
)
 

 
(36,609
)
Financing Activities:
 
 
 
 
 
 
 
 
 
Proceeds from new borrowing on Credit Facility
275,000

 

 

 

 
275,000

Principal payments on Credit Facility
(29,375
)
 

 

 

 
(29,375
)
Conversion of convertible debt
(4
)
 

 

 

 
(4
)
Repurchases of common stock
(421,067
)
 

 

 

 
(421,067
)
Principal payments on capital lease obligations and other debt
(3,602
)
 
(3
)
 
(92
)
 

 
(3,697
)
Windfall excess tax benefits related to share-based payments
1,710

 

 

 

 
1,710

Withholding tax paid on vesting of restricted stock net of proceeds from exercise of stock options
(1,588
)
 

 

 

 
(1,588
)
Net cash flows from (used in) financing activities(1)
(178,926
)
 
(3
)
 
(92
)
 

 
(179,021
)
Effect of exchange rate changes on cash
(267
)
 

 
1,419

 

 
1,152

Increase (decrease) in cash and cash equivalents
(119,554
)
 
2,317

 
(2,654
)
 

 
(119,891
)
Cash and cash equivalents:
 
 
 
 
 
 
 
 
 
Beginning of period
315,250

 
9,639

 
46,548

 

 
371,437

End of period
$
195,696

 
$
11,956

 
$
43,894

 
$

 
$
251,546

(1)
During the first quarter of 2015 we discontinued our Redbox operations in Canada. The first quarter of 2014 also includes the wind-down process of certain new ventures that were discontinued during 2013. Cash flows from these discontinued operations are not segregated from cash flows from continuing operations in all periods presented. See Note 12: Discontinued Operations for cash flow disclosures related to our discontinued Redbox operations in Canada.



33


Note 18: Income Taxes From Continuing Operations
Our effective tax rate from continuing operations was 38.0% and 35.9% for the three months ended March 31, 2015 and 2014, respectively. Our effective tax rate for the three months ended March 31, 2015 was higher than the U.S. Federal statutory rate of 35.0% due primarily to state income taxes and the recording of valuation allowances related to capital loss carryforwards in Canada, offset partially by the Domestic Production Activities Deduction. Our effective tax rate for the three months ended March 31, 2014 was higher than the U.S. Federal statutory rate of 35.0% primarily due to state income taxes partially offset by discrete benefits.
Note 19: Dividends
On February 3, 2015, the Board declared a quarterly cash dividend of $0.30 per share of common stock to shareholders of record at the close of business on March 3, 2015. The dividend was paid on March 18, 2015 and totaled $5.6 million including $0.2 million paid to recipients of unvested restricted stock awards, which participate in earnings on a basis equivalent to the dividends paid to holders of common stock. See Note 13: Earnings Per Share for additional information.
Note 20: Subsequent Event
On May 5, 2015, our board of directors declared a quarterly cash dividend of $0.30 per share expected to be paid on June 23, 2015, to all stockholders of record as of the close of business on June 9, 2015.


34


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, 2014 (our “2014 Form 10-K”). Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made in this report and in our other reports filed with the SEC that attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations.
Overview
We are a leading provider of automated retail solutions offering convenient products and services that benefit consumers and drive incremental retail traffic and revenue for retailers. Our automated retail business model leverages technology advancements that allow delivery of new and innovative consumer products 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 65,410 kiosks in leading supermarkets, drug stores, mass merchants, financial institutions, convenience stores, malls and restaurants. While we are focused on four consumer sectors: Entertainment, Money, Electronics, and Beauty & Consumer Packaged Goods, we also have an investment within the Health sector.
Core Offerings
We have three core businesses:
Our Redbox business segment (“Redbox”), where consumers can rent or purchase movies and video games from self-service kiosks, is focused on the entertainment consumer sector.
Our Coinstar business segment (“Coinstar”) is focused on the money consumer sector and provides self-service kiosks where consumers can convert their coins to cash and convert coins and paper bills to stored value products. We also offer self-service kiosks that exchange gift cards for cash under our Coinstar Exchange brand.
Our ecoATM business segment ("ecoATM") is focused on the electronics consumer sector and provides self-service kiosks where consumers can recycle certain electronic devices for cash and generates revenue through the sale of devices collected at our kiosks to third parties.
Other Self-Service Concepts
In addition to our three reportable segments, we also conduct business activities through other self-service concepts, where we identify, evaluate, build or acquire and develop innovative new self-service concepts in the automated retail space. Currently, we are exploring in the marketplace our consumer product sampling kiosk concept SAMPLEit, in the Beauty and Consumer Packaged Goods sector. We regularly assess the performance of our concepts to determine whether continued funding or other alternatives are appropriate. The combined results of these concepts are included in the All Other reporting category as they do not meet quantitative thresholds to be reported as a separate segment.
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 Pursuant Health, Inc., formerly known as SoloHealth, Inc.
See Note 7: Equity Method Investments in our Notes to Consolidated Financial Statements for more information.


35


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 grow revenue through attracting new customers, testing pricing strategies, 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, $2.00 per night, and higher margin dollars per rental. Further, our customer management tools enable us to provide personalized recommendations and promotions to our customers, which helps us generate incremental 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. 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.

Scale and grow our ecoATM business to profitability. We are focused on strategically scaling our ecoATM business while also enhancing existing kiosk performance in order to drive the business to profitability. We expect to increase revenue through continued focus on placing new kiosks in attractive locations `and driving increased productivity at existing kiosks while also leveraging expenses as a percentage of revenue as the business scales. We plan to increase collections of devices and accelerate the ramp time of new kiosk installations in our mass merchant channel through targeted promotions and continuous marketing to customers in our key demographic segments.

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.


36


Comparability of Results
We have recast prior period results to reflect the following:
Discontinued operations, consisting of our Redbox operations in Canada ("Redbox Canada"), which we shut down during the first quarter of 2015. See Note 12: Discontinued Operations in our Notes to Consolidated Financial Statements for additional information;
Added ecoATM, our electronic device recycling business, as a separate reportable segment. Previously, the results of ecoATM along with those of other self-service concepts were included in our New Ventures segment. The combined results of the other self-service concepts, which include our product sampling kiosk concept SAMPLEit, are now included in the All Other reporting category as they do not meet quantitative thresholds to be reported as a separate segment. See Note 14: Business Segments and Enterprise-Wide Information in our Notes to Consolidated Financial Statements for additional information; and
Calculated basic and diluted earnings per share under the two-class method (the "Two-Class Method"). During the first quarter of 2015, the Two-Class Method became significantly more dilutive than the previously applied treasury stock method as a result of stock repurchases increasing the average number of unvested restricted awards as a percentage of total common shares outstanding. See Note 13: Earnings Per Share in our Notes to Consolidated Financial Statements for additional information.
Recent Events
Subsequent Events
On May 5, 2015, our board of directors declared a quarterly cash dividend of $0.30 per share expected to be paid on June 23, 2015, to all stockholders of record as of the close of business on June 9, 2015.
Q1 2015 Events
On March 31, 2015, we completed the shutdown of the Redbox Canada operations as the business was not meeting performance expectations. The value of the content library and certain capitalized property and equipment consisting primarily of installation costs were amortized over the wind-down period ending on the disposal date of March 31, 2015. See Note 12: Discontinued Operations in our Notes to Consolidated Financial Statements for additional information;
On March 31, 2015, we reduced the size of our Redbox headquarters facility in Oakbrook Terrace, Illinois through early termination of operating leases for certain floors. See Redbox results discussion and Note 11: Restructuring in our Notes to Consolidated Financial Statements for additional information;
On March 26, 2015, Redbox entered into a revenue sharing license agreement with Warner Home Video, a division of Warner Bros. Home Entertainment Inc. to license content through March 31, 2017;
On February 5, 2015, we paid a cash dividend of $0.30 per outstanding share of our common stock totaling approximately $5.6 million; and
During the three months ended March 31, 2015, we repurchased 617,195 shares of our common stock at an average price of $65.96 per share for $40.7 million. See Note 9: Repurchases of Common Stock in our Notes to Consolidated Financial Statements for additional information.


37


Consolidated Results
The discussion and analysis that follows covers our results from continuing operations:
 
Three Months Ended
 
 
 
 
 
March 31,
 
Change
Dollars in thousands, except per share amounts
2015
 
2014
 
$
 
%
Revenue
$
608,636

 
$
597,762

 
$
10,874

 
1.8
%
Operating income
$
82,546

 
$
62,704

 
$
19,842

 
31.6
%
Income from continuing operations
$
42,155

 
$
27,606

 
$
14,549

 
52.7
%
Diluted earnings from continuing operations per common share
$
2.23

 
$
1.09

 
$
1.14

 
104.6
%
Comparing three months ended March 31, 2015 to three months ended March 31, 2014
Revenue increased $10.9 million, or 1.8%, primarily due to:
$6.5 million increase from our Redbox segment primarily due to a 0.7% increase in same store sales driven by the price increases for movie content implemented in December 2014, partially offset by lower box office of content released and fewer titles released during the first quarter of 2015;
$3.8 million increase from our ecoATM segment from the installation of 1,230 kiosks primarily in grocery locations during the second half of 2014 partially offset by a decrease in collections due to lower traffic experienced by our retail partners; and
$0.6 million increase from our Coinstar segment, primarily due to growth in our Coinstar Exchange installed kiosk base partially offset by lower volume in U.S. Coinstar kiosks.
Operating income increased $19.8 million, or 31.6%, primarily due to:
$24.9 million increase in operating income within our Redbox segment primarily due to:
$20.7 million decrease in direct operating expenses driven primarily by lower product costs and rental volume;
$7.8 million decrease in depreciation and amortization primarily from lower kiosk related depreciation;
$6.5 million in revenue growth; and a
$5.0 million decrease in general and administrative expenses driven by ongoing cost reduction initiatives; partially offset by
$14.6 million increase in restructuring and lease termination costs related mainly to early lease termination of certain floors at our Redbox headquarters and severance costs.
$0.6 million increase in operating income within our Coinstar segment primarily due to $0.6 million increase in revenue and lower operating expenses including depreciation and amortization, direct operating and research and development offset by general administrative, restructuring and marketing expenses; and
$1.9 million decrease 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
$5.2 million increase in operating loss within our ecoATM segment, primarily from $6.9 million increase in direct operating expenses related to the acquisition, transportation and processing of electronic devices and kiosk servicing costs and $2.2 million increase in depreciation and amortization from growth in our installed kiosk base as well as higher marketing costs from increased promotions, partially offset by a $3.8 million increase in revenue.


38


Income from continuing operations increased $14.5 million, or 52.7%, primarily due to:
$19.8 million increase in operating income as described above;
$9.2 million lower losses from equity method investments due to our withdrawal from Redbox Instant by Verizon during the fourth quarter of 2014; partially offset by
$10.4 million increase in income tax expense;
$2.4 million increase in interest expense primarily due to a shift in the composition of our debt to higher fixed rate debt, partially offset by lower borrowings; and
$1.7 million increase in other expenses primarily related to foreign exchange.
Share-Based Payments and Rights to Receive Cash
Our share-based payments consist of share-based compensation granted to executives, non-employee directors and employees and share-based payments granted to movie studios as part of content agreements. We grant stock options, restricted stock and performance-based restricted stock to executives and non-employee directors and restricted stock to our employees. In connection with our acquisition of ecoATM, we also granted certain rights to receive cash. The expense associated with the grants to movie studios is allocated to our Redbox segment and included within direct operating expenses. The expenses associated with share-based compensation to our executives, non-employee directors, employees and related to the rights to receive cash issued in connection with our acquisition of ecoATM are part of our shared services support function and are not allocated to our segments. The components of our unallocated share-based compensation expense are presented in the following table.
Unallocated Share-Based Compensation and Rights to Receive Cash Expense
 
Three Months Ended
 
 
 
 
 
March 31,
 
Change
Dollars in thousands
2015
 
2014
 
$
 
%
Direct operating
$
989

 
$
1,979

 
$
(990
)
 
(50.0
)%
Marketing
367

 
698

 
(331
)
 
(47.4
)%
Research and development
713

 
781

 
(68
)
 
(8.7
)%
General and administrative
2,551

 
3,110

 
(559
)
 
(18.0
)%
Total
$
4,620

 
$
6,568

 
$
(1,948
)
 
(29.7
)%

Unallocated share-based compensation expense decreased $1.9 million, or 29.7% during the three months ended March 31, 2015, 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 10: Share-Based Payments in our Notes to Consolidated Financial Statements for more information.


39


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

Detailed financial information about our business segments, including our change in reportable segments in the first quarter of 2015 and significant customer relationships is provided in Note 14: Business Segments and Enterprise-Wide Information in our Notes to Consolidated Financial Statements.




40


Redbox
 
Three Months Ended
 
 
 
 
Dollars in thousands, except net revenue per rental amounts
March 31,
 
Change
2015
 
2014
 
$
 
%
Revenue
$
519,533

 
$
513,049

 
$
6,484

 
1.3
 %
Expenses:


 


 
 
 
 
Direct operating
342,935

 
363,601

 
(20,666
)
 
(5.7
)%
Marketing
4,825

 
4,460

 
365

 
8.2
 %
Research and development

 
8

 
(8
)
 
(100.0
)%
General and administrative
33,735

 
38,701

 
(4,966
)
 
(12.8
)%
Restructuring and lease termination costs
15,174

 
534

 
14,640

 
NM*

Segment operating income
122,864

 
105,745

 
17,119

 
16.2
 %
Less: depreciation and amortization
(31,607
)
 
(39,404
)
 
7,797

 
(19.8
)%
Operating income
$
91,257

 
$
66,341

 
$
24,916

 
37.6
 %
Operating income as a percentage of revenue
17.6
%
 
12.9
%
 
 
 
 
Same store sales growth
0.7
%
 
0.9
%
 
 
 
 
Effect on change in revenue from same store sales growth (decline)
$
3,362

 
$
4,715

 
$
(1,353
)
 
(28.7
)%
Ending number of kiosks
41,960

 
42,800

 
(840
)
 
(2.0
)%
Total rentals (in thousands)
173,047

 
198,770

 
(25,723
)
 
(12.9
)%
Net revenue per rental
$
3.00

 
$
2.58

 
$
0.42

 
16.3
 %
*
Not Meaningful
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.
Q1 2015 Events
During the first quarter of 2015, we made the decision to shut down our Redbox Canada operations as the business was not meeting the company's performance expectations. The results of Redbox Canada have been presented as discontinued operations on our Consolidated Statements of Comprehensive Income and are no longer included in segment operating results presented above. See Note 12: Discontinued Operations in our Notes to Consolidated Financial Statements for additional information;
On March 31, as part of restructuring efforts, we reduced the size of our Redbox headquarters facility in Oakbrook Terrace, Illinois through early termination of operating leases for certain floors. In accordance with accounting for exit and disposal activities, we recorded pre-tax charges totaling $11.0 million at the cease use date, March 31, 2015. These charges include $4.4 million for the estimated fair value of our remaining lease obligations including an early termination penalty and $6.6 million in impairments of lease related assets. We have included these costs in restructuring and lease termination costs in our Consolidated Statements of Comprehensive Income; and
On March 26, 2015, we entered into a revenue sharing agreement (the "Warner Agreement") with Warner Home Video, a division of Warner Bros. Home Entertainment Inc., under which Redbox agrees to license minimum quantities of theatrical and direct-to-video titles for rental through March 31, 2017. The Warner Agreement maintains a 28-day window on such titles.
Comparing three months ended March 31, 2015 to three months ended March 31, 2014
Revenue increased $6.5 million, or 1.3%, primarily due to the following:
$3.4 million increase from a 0.7% increase in same store sales primarily due to:
Price increases - Implemented a 30 cent increase in the rental price for DVDs to $1.50 per day, effective December 2, 2014, a 50 cent increase in the rental price for Blu-ray Discs to $2.00 per day, effective December 2, 2014, and a $1.00 increase in the rental price for video games to $3.00 per day, effective January 6, 2015.


41


The benefit from the price increases was partially offset by the negative impact on demand from fewer releases and lower box office of content released, lower demand from price-sensitive customers following the price increases and the impact from the expected secular decline in the market. Continued investment through the early stages of the price changes in customer-specific promotional offerings drove incremental revenue and lessened the impact of the demand decline. The total box office (representing titles with North American box office receipts of at least $5.0 million) of titles released during the first three months of 2015 decreased 29.3% and included 18% less or 8 fewer titles compared with the first three months of 2014. The net result of these factors contributed to a 12.9% decrease in rentals in the first three months of 2015.
$3.1 million in revenue from newly installed or relocated kiosks.
Net revenue per rental increased $0.42 to $3.00 primarily due to:
The impact of the increase in daily rental prices discussed above partially offset by an expected increase in single night rental activity as a result of the price increases; and
An increase in Blu-ray revenue which represented 18.2% of total revenue and 14.5% of total disc rentals during the first three months of 2015 as compared with 17.7% and 15.2% during the prior year. The increase in revenue due to the price increase was partially offset by decreases in rental volume due to fewer releases and a resulting lower availability of recent Blu-ray content in the first three months of 2015 compared with the prior year. Blu-ray rentals were also impacted by lower box office of content released, lower demand from price-sensitive customers and an expected increase in single night rental activity as discussed above; partially offset by
A decrease in video game revenue which represented 2.9% of total revenue and 1.1% of total disc rentals during the first three months of 2015 as compared with 3.4% and 1.4% during the prior year primarily due to continued under performance of titles released in the last three months of 2014 and consumer transition to new generation platforms. Video games also were impacted by lower demand from price-sensitive customers and an increase in single night rental activity driven by the price change.
Operating income increased $24.9 million, or 37.6%, primarily due to the following:
$20.7 million decrease in direct operating expenses, which were 66.0% of revenue during the first three months of 2015 as compared with 70.9% during the prior year primarily as a result of:
$13.8 million decrease in product costs to $210.4 million primarily due to lower spending on content in the first three months of 2015 due to fewer releases primarily in January and a lower average cost per disc due to the mix of content that combined with the revenue impact discussed above increased gross margin 320 basis points to 59.5% during the first three months of 2015;
Direct operating expenses were also impacted by lower credit card fees driven by the lower volume of rentals, lower supply chain costs due to cost containment and field optimization initiatives and lower wireless network charges tied to data usage under new contracts starting in January 2015, partially offset by higher retailer revenue sharing expenses due to higher revenue;
7.8 million decrease in depreciation and amortization expenses primarily due to the benefit from kiosk assets that are depreciated over three to five years becoming fully depreciated partially offset by higher depreciation expense as a result of continued investment in our corporate technology infrastructure and additional depreciation for newly installed or replaced kiosks;
$6.5 million increase in revenue as described above; and
$5.0 million decrease in general and administrative expenses primarily as a result of ongoing cost reduction initiatives and lower variable expenses associated with IT infrastructure costs, temporary staffing, legal and professional fees; partially offset by
$15.2 million of restructuring and lease termination charges incurred in the first three months of 2015, which included restructuring efforts surrounding our Redbox facility as discussed above and severance related expenses.


42


Coinstar
 
Three Months Ended
 
 
 
 
Dollars in thousands, except average transaction size
March 31,
 
Change
2015
 
2014
 
$
 
%
Revenue
$
69,330

 
$
68,753

 
$
577

 
0.8
 %
Expenses:

 

 
 
 
 
Direct operating
37,263

 
37,723

 
(460
)
 
(1.2
)%
Marketing
1,178

 
1,006

 
172

 
17.1
 %
Research and development

 
269

 
(269
)
 
(100.0
)%
General and administrative
7,795

 
6,997

 
798

 
11.4
 %
Restructuring and lease termination costs (Note 11)
550

 
23

 
527

 
NM*

Segment operating income
22,544

 
22,735

 
(191
)
 
(0.8
)%
Less: Depreciation and amortization
(7,818
)
 
(8,563
)
 
745

 
(8.7
)%
Operating income
$
14,726

 
$
14,172

 
$
554

 
3.9
 %
Operating income as a percentage of revenue
21.2
%
 
20.6
%
 
 
 
 
Same store sales growth
0.8
%
 
3.1
%
 
 
 
 
Ending number of kiosks
21,220

 
21,000

 
220

 
1.0
 %
Total transactions (in thousands)
15,916

 
16,588

 
(672
)
 
(4.1
)%
Average transaction size
$
42.49

 
$
40.76

 
$
1.73

 
4.2
 %
*
Not Meaningful
Comparing three months ended March 31, 2015 to three months ended March 31, 2014
Revenue increased $0.6 million, or 0.8%, primarily due to growth in the number of Coinstar Exchange kiosks and transactions partially offset by a decrease in Coinstar revenue in the U.S. due to a reduction in volume. The impact of the increased coin voucher product transaction fee from 8.9% to 9.9% implemented in the U.K. in August 2014 was primarily offset by the unfavorable exchange rate impact on U.K. revenue due to the recent strengthening of the U.S. dollar versus the British pound. Same store sales growth was primarily flat as a result of these factors.
The average Coinstar 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 and a slight decrease in the U.S. kiosk base year over year as a result of continued optimization efforts.
Operating income increased $0.6 million, or 3.9%, primarily due to the following:
$0.7 million decrease in depreciation and amortization expense primarily due to intangible assets related to customer contracts being fully amortized in August 2014;
$0.6 million increase in revenue as described above; and
$0.5 million decrease in direct operating expenses due to lower wireless charges tied to data usage under new contracts in 2015, improved transportation and processing efficiencies in our Coinstar business, partially offset by increased revenue sharing, selling and customer service costs to support higher revenues; partially offset by
$0.8 million increase in general and administrative expenses primarily due to an increase in technology costs, partially offset by a lower shared services costs related to professional fees, business taxes, temporary staffing and facilities expenses as a result of an overall reduction in organization costs; and
$0.5 million increase in allocated restructuring expenses related to the subleasing of certain corporate facilities and severance expense from our ongoing cost saving initiatives.



43


ecoATM
 
Three Months Ended
 
 
 
 
Dollars in thousands, except average selling price of value devices sold
March 31,
 
Change
2015
 
2014
 
$
 
%
Revenue
$
19,749

 
$
15,946

 
$
3,803

 
23.8
 %
Expenses:
 
 
 
 
 
 
 
Direct operating
22,806

 
15,931

 
6,875

 
43.2
 %
Marketing
1,730

 
668

 
1,062

 
159.0
 %
Research and development
1,456

 
1,784

 
(328
)
 
(18.4
)%
General and administrative
1,968

 
2,879

 
(911
)
 
(31.6
)%
Restructuring and lease termination costs (Note 11)
127

 

 
127

 
NM*

Segment operating loss
(8,338
)
 
(5,316
)
 
(3,022
)
 
56.8
 %
Less: depreciation and amortization
(5,902
)
 
(3,712
)
 
(2,190
)
 
59.0
 %
Operating loss
$
(14,240
)
 
$
(9,028
)
 
$
(5,212
)
 
57.7
 %
Ending number of kiosks
2,140

 
910

 
1,230

 
135.2
 %
Average selling price of value devices sold
$
60.28

 
$
94.31

 
$
(34.03
)
 
(36.1
)%
Number of value devices sold
317,134

 
166,940

 
150,194

 
90.0
 %
Number of overall devices sold
518,633

 
240,999

 
277,634

 
115.2
 %
*
Not Meaningful
Q1 2015 Events
During the first quarter of 2015, we added ecoATM, our electronic device recycling business, as a separate reportable segment. Previously, the results of ecoATM along with those of other self-service concepts were included in our New Ventures segment. The combined results of the other self-service concepts, previously included in our New Ventures segment, are included in All Other as they do not meet quantitative thresholds to be reported as a separate segment. All goodwill previously allocated to the New Ventures segment has been allocated to the ecoATM segment.
Comparing three months ended March 31, 2015 to three months ended March 31, 2014
Revenue increased $3.8 million primarily due to the increase in the number of ecoATM installed kiosks. A majority of the growth in installs occurred during the second half of 2014 in the grocery channel. Relative to the mall and mass merchant channels, locations in the grocery channel typically are smaller in overall square footage and have less foot traffic. As a result, we expect ecoATM kiosks in the grocery channel to ramp at a slower rate and have lower collections relative to the mall and mass merchant kiosks.
Our key revenue drivers are devices collected per kiosk per day, and the percentage of those devices that are value devices, as well as the average selling price that we receive when reselling the devices. Our collections of value devices on a per kiosk basis were below those in the first quarter of last year as a result of lower transactions at our kiosks due to declines in consumer traffic at ecoATM locations and expanded alternative recycling options such as carrier promotions. This also impacted the mix of value devices collected and was the primary reason for the decline in our average selling price of value devices compared to the prior year.
While the decrease in retail foot traffic impacted our collection rates during the first quarter, we have seen increased traffic and collections following the quarter and expect those to return to historical levels over time. As we continue to expand our ecoATM installed kiosk base, we expect our revenue to grow from newly installed kiosks and the continued ramping of previously installed kiosks. Additionally, we expect our total expenses to increase due to operating these additional kiosks, but expect expenses as a percentage of revenue to decrease as the business scales. We continually review performance and the impact of device recycling trends such as value devices collected and the ASP on those devices, as well as kiosk installations on long term projections for purposes of assessing whether the reporting unit goodwill may be at risk of impairment.
Operating loss increased $5.2 million primarily due to the following;
$6.9 million increase in direct operating expenses mainly due to costs associated with the acquisition, transportation and processing of electronic devices, as well as costs for servicing kiosks and payments to retailers. As we install additional kiosks and existing kiosks continue to ramp, we expect to leverage the fixed cost portions of our direct operating expenses;


44


$2.2 million increase in depreciation and amortization expense from depreciation on our increased installed ecoATM kiosk base; and
$1.1 million increase in marketing costs primarily due to costs to promote the ecoATM brand and additional headcount to support our installed ecoATM kiosk base; partially offset by
$3.8 million increase in revenue described above; and
$0.9 million decrease in general and administrative expense primarily from a reduction in headcount, lower data facilities costs, and lower temp staffing; and
$0.3 million decrease in research and development expense due to lower development costs on ecoATM kiosk hardware and software platforms.
Loss from Equity Method Investments
Comparing three months ended March 31, 2015 to three months ended March 31, 2014
For the three months ended March 31, 2015, our loss from our equity method investments was $0.1 million compared to $9.4 million during the same period of 2014. The decrease in equity method losses is a result of our withdrawal from Redbox Instant by Verizon on October 20, 2014. See Note 7: Equity Method Investments in our Notes to Consolidated Financial Statements for more information.
Interest Expense, Net
Dollars in thousands
Three Months Ended
 
 
 
 
March 31,
 
Change
2015
 
2014
 
$
 
%
Cash interest expense
$
11,395

 
$
8,362

 
$
3,033

 
36.3
 %
Non-cash interest expense:
 
 
 
 
 
 
 
Amortization of debt discount
435

 
802

 
(367
)
 
(45.8
)%
Amortization of deferred financing fees
258

 
504

 
(246
)
 
(48.8
)%
Total non-cash interest expense
693

 
1,306

 
(613
)
 
(46.9
)%
Total interest expense
12,088

 
9,668

 
2,420

 
25.0
 %
Interest income
(17
)
 
(20
)
 
3

 
(15.0
)%
Interest expense, net
$
12,071

 
$
9,648

 
$
2,423

 
25.1
 %
Comparing three months ended March 31, 2015 to three months ended March 31, 2014
Interest expense, net increased $2.4 million, or 25.1%, primarily due to a shift in the composition of our debt to higher fixed rate debt, partially offset by lower borrowings. See Note 8: Debt and Other Long-Term Liabilities in our Notes to Consolidated Financial Statements for more information.
Other, Net
Dollars in thousands
Three Months Ended
 
 
 
 
March 31,
 
Change
2015
 
2014
 
$
 
%
Other, net
$
(2,346
)
 
$
(648
)
 
$
(1,698
)
 
262.0
%
Comparing three months ended March 31, 2015 to three months ended March 31, 2014

Other, net increased by $1.7 million or 262.0%, primarily due to the impact of the Canadian dollar exchange rates on our Coinstar operations.


45


Income Tax Expense
Comparing three months ended March 31, 2015 to three months ended March 31, 2014
Our effective tax rate from continuing operations was 38.0% and 35.9% for the three months ended March 31, 2015 and 2014, respectively. Our effective tax rate for the three months ended March 31, 2015 was higher than the U.S. Federal statutory rate of 35.0% due primarily to state income taxes and the recording of valuation allowances related to capital loss carryforwards in Canada, offset partially by the Domestic Production Activities Deduction. Our effective tax rate for the three months ended March 31, 2014 was higher than the U.S. Federal statutory rate of 35.0% primarily due to state income taxes partially offset by discrete benefits.
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 (including severance and early lease termination costs and related impairment of assets) associated with actions to reduce costs in our continuing operations across the Company, ii) compensation expense for rights to receive cash issued in conjunction with our acquisition of ecoATM and attributable to post-combination services as they are fixed amount acquisition related awards and not indicative of the directly controllable future business results, iii) income or loss from equity method investments, which represents our share of income or loss from entities we do not consolidate or control and iv) tax benefits related to a net operating loss adjustment ("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.


46


Core Adjusted EBITDA from continuing operations
Our non-GAAP financial measure core adjusted EBITDA from continuing operations is defined as earnings from continuing operations before depreciation, amortization and other; interest expense, net; income taxes; share-based payments expense; and Non-Core Adjustments.
A reconciliation of core adjusted EBITDA from continuing operations to net income from continuing operations, the most comparable GAAP financial measure, is presented in the following table:
 
Three Months Ended
 
 
 
 
 
March 31,
 
Change
Dollars in thousands
2015
 
2014
 
$
 
%
Net income from continuing operations
$
42,155

 
$
27,606

 
$
14,549

 
52.7
 %
Depreciation, amortization and other
45,995

 
51,784

 
(5,789
)
 
(11.2
)%
Interest expense, net
12,071

 
9,648

 
2,423

 
25.1
 %
Income taxes
25,842

 
15,434

 
10,408

 
67.4
 %
Share-based payments expense(1)
3,941

 
3,765

 
176

 
4.7
 %
Adjusted EBITDA from continuing operations
130,004

 
108,237

 
21,767

 
20.1
 %
Non-Core Adjustments:
 
 
 
 

 

Restructuring costs
15,851

 
469

 
15,382

 
NM*

Rights to receive cash issued in connection with the acquisition of ecoATM
1,920

 
3,421

 
(1,501
)
 
(43.9
)%
Loss from equity method investments
132

 
9,368

 
(9,236
)
 
(98.6
)%
Core adjusted EBITDA from continuing operations
$
147,907

 
$
121,495

 
$
26,412

 
21.7
 %
 *
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 March 31, 2015 to three months ended March 31, 2014
The increase in our core adjusted EBITDA from continuing operations was primarily due to increased segment operating income in our Redbox segment and lower losses from equity method investments as a result of our withdrawal from Redbox Instant by Verizon during the fourth quarter of 2015. The other significant components of core adjusted EBITDA from continuing operations have been discussed previously in the Results of Operations section above.




47


Core Diluted EPS from continuing operations
Our non-GAAP financial measure core diluted EPS from continuing operations is defined as diluted earnings per share from continuing operations utilizing the treasury stock method excluding non-core adjustments, net of applicable taxes.
A reconciliation of core diluted EPS from continuing operations to diluted EPS from continuing operations, the most comparable GAAP financial measure, is presented in the following table:
 
Three Months Ended
 
 
 
 
March 31,
 
Change
 
2015
 
2014
 
$
 
%
Diluted EPS from continuing operations per common share (two-class method)
$
2.23

 
$
1.09

 
$
1.14

 
104.6
 %
Adjustment from participating securities allocation and share differential to treasury stock method(1)
0.05

 
0.02

 
0.03

 
150.0
 %
Diluted EPS from continuing operations (treasury stock method)
2.28

 
1.11

 
1.17

 
105.4
 %
Non-Core Adjustments, net of tax:(1)
 
 
 
 
 
 
 
Restructuring costs
0.52

 
0.01

 
0.51

 
NM*

Rights to receive cash issued in connection with the acquisition of ecoATM
0.07

 
0.11

 
(0.04
)
 
(36.4
)%
Loss from equity method investments

 
0.23

 
(0.23
)
 
(100.0
)%
Tax benefit from net operating loss adjustment

 
(0.04
)
 
0.04

 
(100.0
)%
Core diluted EPS from continuing operations
$
2.87

 
$
1.42

 
$
1.45

 
102.1
 %
 *
Not Meaningful
(1) Non-Core Adjustments are presented after-tax using the applicable effective tax rate for the respective periods.
A reconciliation of amounts used in core diluted EPS from continuing operations table above is presented in the following table:
 
Three Months Ended
March 31,
In thousands
2015
 
2014
Income from continuing operations attributable to common shares
$
40,776

 
$
26,879

Add: income from continuing operations allocated to participating securities
1,379

 
727

Income from continuing operations
$
42,155

 
$
27,606

 
 
 
 
Weighted average diluted common shares
18,286

 
24,575

Add: diluted common equivalent shares of participating securities
184

 
200

Weighted average diluted shares
18,470

 
24,775

Free Cash Flow
Our non-GAAP financial measure free cash flow is defined as net cash provided by operating activities after capital expenditures. We believe free cash flow is an important non-GAAP measure as it provides additional information to users of the financial statements regarding our ability to service, incur or pay down indebtedness and repurchase our securities. A reconciliation of free cash flow to net cash provided by operating activities, the most comparable GAAP financial measure, is presented in the following table:
 
Three Months Ended
 
 
 
 
 
March 31,
 
Change
Dollars in thousands
2015
 
2014
 
$
 
%
Net cash provided by operating activities
$
106,072

 
$
94,587

 
$
11,485

 
12.1
 %
Purchase of property and equipment
(20,709
)
 
(26,940
)
 
6,231

 
(23.1
)%
Free cash flow
$
85,363

 
$
67,647

 
$
17,716

 
26.2
 %
An analysis of our net cash from operating activities and used in investing and financing activities is provided below.


48


Net Debt and Net Leverage Ratio
Our non-GAAP financial measure net debt is defined as the total face value of outstanding debt, including capital leases, less cash and cash equivalents held in financial institutions domestically. Our non-GAAP financial measure net leverage ratio is defined as net debt divided by core adjusted EBITDA from continuing operations for the last twelve months (LTM). We believe net debt and net leverage ratio are important non-GAAP measures because they:
are used to assess the degree of leverage by management;
provide additional information to users of the financial statements regarding our ability to service, incur or pay down indebtedness and repurchase our securities as well as additional information about our capital structure; and
are reported quarterly to support covenant compliance under our credit agreement.
A reconciliation of net debt to total outstanding debt including capital leases, the most comparable GAAP financial measure, is presented in the following table:
 
March 31,
2015
 
December 31,
2014
 
Change
Dollars in thousands
 
 
$
 
%
Senior unsecured notes(1)
$
650,000

 
$
650,000

 
$

 
 %
Term loans(1)
144,375

 
146,250

 
(1,875
)
 
(1.3
)%
Revolving line of credit
80,000

 
160,000

 
(80,000
)
 
(50.0
)%
Capital leases
12,652

 
15,391

 
(2,739
)
 
(17.8
)%
Total principal value of outstanding debt including capital leases
887,027

 
971,641

 
(84,614
)
 
(8.7
)%
Less domestic cash and cash equivalents held in financial institutions
(37,772
)
 
(66,546
)
 
28,774

 
(43.2
)%
Net debt
849,255

 
905,095

 
(55,840
)
 
(6.2
)%
LTM Core adjusted EBITDA from continuing operations(2)
$
523,232

 
$
496,820

 
$
26,412

 
5.3
 %
Net leverage ratio
1.62

 
1.82

 


 


*
Not Meaningful
(1)
See debt section of Liquidity and Capital Resources below and Note 8: Debt and Other Long-Term Liabilities in our Notes to Consolidated Financial Statements for detail of associated debt discount.
(2)    LTM Core Adjusted EBITDA from continuing operations for the twelve months ended March 31, 2015 and December 31, 2014 was determined as follows:
Dollars in thousands
 
Core adjusted EBITDA from continuing operations for the three months ended March 31, 2015
$
147,907

Add: Core adjusted EBITDA from continuing operations for the twelve months ended December 31, 2014:
 
Core adjusted EBITDA from continuing operations for the twelve months ended December 31, 2014 as reported in our Annual Report on Form 10-K for the period ended December 31, 2014(1)
480,497

Add: Core adjusted EBITDA loss from Redbox Canada operations for the twelve months ended December 31, 2014
16,323

Core adjusted EBITDA from continuing operations for the twelve months ended December 31, 2014 as adjusted for discontinued operations
496,820

Less: Core adjusted EBITDA from continuing operations for the three months ended March 31, 2014
(121,495
)
LTM Core adjusted EBITDA from continuing operations for the twelve months ended March 31, 2015
$
523,232

(1) Core adjusted EBITDA from continuing operations for the twelve months ended December 31, 2014 is obtained from our Form 10-K for the period ended December 31, 2014, where it is reconciled to net income from continuing operations, the most comparable GAAP financial measure, and represents the LTM core adjusted EBITDA from continuing operations we use in our calculation of net leverage ratio as of December 31, 2014.


49


Liquidity and Capital Resources
We believe our existing cash, cash equivalents and amounts available to us under our Credit Facility will be sufficient to fund our cash requirements and capital expenditure needs for at least the next 12 months. After that time, the extent of additional financing needed, if any, will depend on the success of our business. If we significantly increase kiosk installations beyond planned levels or if our Redbox, Coinstar or ecoATM kiosks generate lower than anticipated revenue or operating results, then our cash needs may increase. Furthermore, our future capital requirements will depend on a number of factors, including consumer use of our 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.
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 $11.5 million primarily due to the following:
$12.4 million increase in net income to $35.6 million; and
$1.0 million decrease 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, partially offset by
$2.0 million change in net non-cash income and expense included in net income.
Net Cash used in Investing Activities
We used $20.7 million of net cash in our investing activities primarily for the purchases of property and equipment for kiosks and corporate infrastructure.
Net Cash used in Financing Activities
We used $134.0 million of net cash from financing activities as follows:
$81.9 million in net payments for borrowings from our Credit Facility
$40.7 million for repurchases of our common stock;
$5.6 million for dividends paid;
$3.2 million to pay capital lease obligations and other debt; and
$3.1 million for withholding tax paid on vesting of restricted stock net of proceeds from exercise of stock options.
Cash and Cash Equivalents
A portion of our business involves collecting and processing large volumes of cash, most of it in the form of coins. As of March 31, 2015, our cash and cash equivalent balance was $197.9 million, of which $68.7 million was identified for settling our accrued payable to our retailer partners in relation to our Coinstar kiosks. The remaining balance of our cash and cash equivalents was available for use to support our liquidity needs.


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Debt
Debt comprises the following:
 
Senior Notes
 
Credit Facility
 
Total Debt
Dollars in thousands
 Senior Unsecured Notes due 2019
 
 Senior Unsecured Notes due 2021
 
Term Loans
 
Revolving Line of Credit
 
As of March 31, 2015
 
 
 
 
 
 
 
 
 
Principal
$
350,000

 
$
300,000

 
$
144,375

 
$
80,000

 
$
874,375

Discount
(4,041
)
 
(3,991
)
 
(317
)
 

 
(8,349
)
Total
345,959

 
296,009

 
144,058

 
80,000

 
866,026

Less: current portion

 

 
(10,313
)
 

 
(10,313
)
Total long-term portion
$
345,959

 
$
296,009

 
$
133,745

 
$
80,000

 
$
855,713

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 March 31, 2015, 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. As of March 31, 2015, we were in compliance with the covenants of the related indenture.
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 "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 Credit Facility consists of (a) a $150.0 million amortizing term loan (the “Term Loan”) and (b) a $600.0 million revolving line of credit (the “Revolving Line”), which includes (i) a $75.0 million sublimit for the issuance of letters of credit, (ii) a $50.0 million sublimit for swingline loans and (iii) a $75.0 million sublimit for loans in certain foreign currencies available to us and certain wholly owned Company foreign subsidiaries (the “Foreign Borrowers”). We may, subject to applicable conditions and subject to obtaining commitments from lenders, request an increase in the Revolving Line of up to $200.0 million in aggregate (the “Accordion”). As of March 31, 2015, the interest rate on amounts outstanding under the Credit Facility was 2.11% and we were in compliance with the covenants of the Credit Facility.
The Amended and Restated Credit Agreement requires principal amortization payments under the Term Loan as follows:
Dollars in thousands
Repayment Amount
Remainder of 2015
$
7,500

2016
13,125

2017
15,000

2018
18,750

2019
90,000

Total
$
144,375

 
Letters of Credit
As of March 31, 2015, we had six irrevocable standby letters of credit that totaled $6.4 million. These standby letters of credit, which expire at various times through October 2015, are used to collateralize certain obligations to third parties. As of March 31, 2015, no amounts were outstanding under these standby letter of credit agreements.


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Other Contingencies
Contractual Payment Obligations
During the first quarter the following significant changes occurred to our contractual obligations:
Operating Lease Obligations
We early terminated of operating leases of certain floors of our Redbox headquarters and recognized the fair value of the ongoing lease payments and other related costs through the effective date of termination, July 31, 2016, as of the cease use date, March 31, 2015. See Note 11: Restructuring for additional information; and
We entered into a new operating lease of 16,085 square feet of office space in Woodland Hills, California which expires May 31, 2022.
Content Agreement Obligations
On March 26, 2015, Redbox entered into a Kiosk Rental Revenue Sharing Terms Agreement (the “Agreement”) with Warner Home Video, a division of Warner Bros. Home Entertainment Inc. (“Warner Home Video”). Under the Agreement, Redbox will license theatrical and direct-to-video titles released by Warner Home Video and WB Animation through March 31, 2017. The Agreement maintains a 28-day window on such titles.
As of March 31, 2015, our contractual payment obligations are as follows:
Dollars in thousands
Total
 
Remaining in 2015
 
2016 &
2017
 
2018 &
2019
 
2020 &
Beyond
Long-term debt and other(1)
$
874,375

 
$
87,500

 
$
28,125

 
$
18,750

 
$
740,000

Contractual interest on long-term debt
194,156

 
28,969

 
77,250

 
38,625

 
49,312

Capital lease obligations
13,146

 
8,516

 
3,938

 
556

 
136

Operating lease obligations, net(2)
62,443

 
13,245

 
26,314

 
12,011

 
10,873

Purchase obligations(3)(4)
22,150

 
17,938

 
4,212

 

 

Asset retirement obligations
12,663

 

 

 

 
12,663

Content agreement obligations(3)
674,310

 
493,069

 
181,241

 

 

Retailer revenue share obligations
5,299

 
1,993

 
3,143

 
163

 

Total
$
1,858,542

 
$
651,230

 
$
324,223

 
$
70,105

 
$
812,984

(1) 
See Note 8: Debt and Other Long-Term Liabilities in our Notes to Consolidated Financial Statements.
(2) 
Net of sublease income of $1.4 million. See Note 16: Commitments and Contingencies in our Notes to Consolidated Financial Statements.
(3) 
See Note 16: Commitments and Contingencies in our Notes to Consolidated Financial Statements.
(4) 
Excludes any amounts associated with the manufacturing and services agreement entered into as part of the NCR Asset Acquisition, pursuant to which Outerwall, Redbox or an affiliate will 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 equals less than $25.0 million, Outerwall will pay NCR the difference between such aggregate amount and $25.0 million. As of March 31, 2015, the remaining commitment is $15.8 million under this agreement.
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 2014 Form 10-K at Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
There have been no material changes to the critical accounting policies previously disclosed in our 2014 Form 10-K.


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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 2014 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report and has determined that such disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
We also maintain a system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). No changes in our internal control over financial reporting occurred during the year-to-date period ended March 31, 2015 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, and the Court granted Redbox’s motion on December 11, 2014. The plaintiffs appealed on January 7, 2015. 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.
ITEM 1A. RISK FACTORS
There have been no material changes from risk factors previously disclosed in our 2014 Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY, SECURITIES, AND USE OF PROCEEDS
The following table summarizes information regarding shares repurchased during the quarter ended March 31, 2015:
 
Total Number of
Shares
Repurchased(1)
 
Average Price
Paid per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Repurchase Plans or
Programs
 
Maximum Approximate
Dollar Value (in thousands) of Shares that May Yet be
Purchased Under the Plans or Programs(2)
1/1/15 - 1/31/15
1,487

 
$
64.50

 

 
$
163,655

2/1/15 - 2/28/15
276,264

 
$
66.44

 
226,090

 
$
398,656

3/1/15 - 3/31/15
392,244

 
$
65.73

 
391,105

 
$
373,286

 
669,995

 
 
 
617,195

 
 
(1)
Includes 52,800 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)
On February 3, 2015, our Board of Directors approved an additional repurchase program of up to $250.0 million of our common stock plus the cash proceeds received from the exercise of stock options by our executives, non-employee directors and employees.
On January 1, 2015, we issued 50,000 shares of unregistered restricted common stock to Paramount Home Entertainment Inc. (“Paramount”) as partial consideration for the extension of our existing revenue sharing license agreement with Paramount discussed in Note 10: Share-Based Payments and Note 16: Commitments and Contingencies in our Notes to Consolidated Financial Statements. The issuance of the common stock was exempt from registration pursuant to the Securities Act of 1933, as amended (the “Securities Act”) by virtue of Section 4(a)(2) as a transaction not involving a public offering. We believe that the issuance is exempt from the registration requirements of the Securities Act on the basis, among other things, that: (1) Paramount represented it was an accredited investor as defined under the Securities Act; (2) there was no general solicitation; and (3) Paramount represented that it was purchasing such shares for its own account and not with a view towards distribution. The shares of common stock carry a legend stating that the shares are not registered under the Securities Act and therefore cannot be resold unless they are registered under the Securities Act or unless an exemption to registration is available.


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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
 
 
 
10.1*
  
2015 Incentive Compensation Plan for Executive Leaders.
 
 
 
10.2*
  
Outerwall Inc. 2011 Incentive Plan, as amended and restated on February 12, 2015.
 
 
 
10.3*
  
Form of Notice of Restricted Stock Award and Form of Restricted Stock Award Agreement under the 2011 Incentive Plan for Performance-Based Awards made to Executives on or after February 12, 2015.
 
 
 
10.4*
  
Letter Agreement between Outerwall Inc. and Donald Rench, dated February 12, 2015.
 
 
 
10.5*
  
Interim CEO Agreement between Outerwall Inc. and Nora M. Denzel, dated January 18, 2015.(1)
 
 
 
10.6*
  
Release of Claims Agreement between Outerwall Inc. and James Pinckney, dated March 6, 2015.(2)
 
 
 
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.
*
Indicates a management contract or compensatory plan or arrangement.
(1)
Incorporated by reference to the Registrant’s Form 8-K filed on January 20, 2015 (File Number 000-22555).
(2)
Incorporated by reference to the Registrant’s Form 8-K/A filed on March 12, 2015 (File Number 000-22555).



55


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
 
 
 
May 7, 2015




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