BELLEVUE, Wash., Oct. 30, 2014 /PRNewswire/ -- Outerwall Inc. (Nasdaq: OUTR) today reported financial results for the third quarter ended September 30, 2014.

(Logo: http://photos.prnewswire.com/prnh/20130701/AQ41388LOGO)

"We made substantial progress on a number of fronts during the third quarter, including the disciplined execution of our initiatives to improve efficiency," said J. Scott Di Valerio, Outerwall's chief executive officer. "Our focus on managing Outerwall for profitability is driving tangible results, including solid core adjusted EBITDA from continuing operations and improvement of operating margins. On the content side, our studio relationships remain strong. We signed a new agreement with Lionsgate and extended our existing agreement with Universal Studios. Finally, we are scaling our ecoATM business through significant kiosk installations and several new agreements with our retail partners."

For purposes of year-over-year comparisons of third quarter 2014 GAAP results, the company noted that it completed the acquisition of ecoATM in the third quarter of 2013. As a result, Outerwall recognized a pretax gain on the re-measurement of its previously held 23% equity interest in ecoATM. This non-core item benefitted third quarter 2013 income from continuing operations by $68.4 million and third quarter 2013 diluted EPS from continuing operations by $2.36.


2014


2013


Change


Third Quarter


Third Quarter


%

GAAP Results






• Consolidated revenue

$

552.9 million


$

586.5 million


(5.7)%

• Income from continuing operations

$

17.9 million


$

86.8 million


(79.4)%

• Net income

$

17.9 million


$

82.7 million


(78.4)%

• Diluted EPS from continuing operations

$

0.93


$

3.10


(70.0)%

• Net cash provided by operating activities

$

49.6 million


$

60.9 million


(18.6)%







Core Results*






• Core adjusted EBITDA from continuing operations

$

111.6 million


$

114.3 million


(2.3)%

• Core diluted EPS from continuing operations

$

1.44


$

1.12


28.6%

• Free cash flow

$

30.3 million


$

21.8 million


38.9%


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

 

Highlights from the third quarter of 2014 include:

  • Managed the business for profitability as demonstrated by solid core adjusted EBITDA from continuing operations despite lower revenue that was driven primarily by soft flow-through from the second quarter of 2014 and the unfavorable timing of releases in the third quarter of 2014
  • General and administrative (G&A) expenses improved 21.6% compared with the third quarter of 2013 as a result of the company's ongoing focus on expense management initiatives
  • Segment operating margins in the Redbox and Coinstar businesses increased both year-over-year and sequentially
  • Extended the existing content agreement with Universal and recently signed a new content agreement with Lionsgate
  • Installed more than 530 net new ecoATM® kiosks in the quarter and signed several new installation agreements with retail partners
  • Generated $30.3 million in free cash flow in the quarter, bringing the year-to-date total to $134.7 million
  • Repurchased $70.6 million, or approximately 1.2 million shares, of common stock in the quarter
  • Settled all outstanding conversions on the company's 4.0% Senior Convertible Notes that matured on September 2, 2014

"Our third quarter results reflect our ongoing efforts to align costs and capital expenditures across the business with our revenue growth opportunities," said Galen C. Smith, chief financial officer of Outerwall. "We are on track to achieve our commitment of $22 million in G&A savings in 2014, with a substantial year-over-year improvement in G&A expense resulting in an increase in operating income margins year-over-year and sequentially. We achieved this improvement despite a weaker content release schedule in the quarter. Importantly, we continue to generate strong cash flow and repurchased more than $70 million of our common stock in the quarter."

CONSOLIDATED RESULTS

Consolidated revenue for the third quarter of 2014 decreased $33.7 million, or 5.7% to $552.9 million compared with $586.5 million for the third quarter of 2013. The year-over-year decline in consolidated revenue was primarily due to a $53.6 million decrease in revenue from the company's Redbox segment. The decrease in Redbox revenue was primarily due to soft flow-through from a weak release schedule in the second quarter of 2014 and the unfavorable timing and mix of content released in the third quarter of 2014.

G&A expenses were $47.9 million in the third quarter of 2014, a decrease of 21.6% from $61.0 million in the third quarter of 2013. The improvement was primarily due to the company's ongoing focus on expense management initiatives and also reflects a shift in the timing of expenses as certain initiatives and new hires moved from the third quarter to the fourth quarter of 2014.

Operating income for the third quarter of 2014 was $56.6 million and operating margin was 10.2% compared with operating income of $55.2 million and operating margin of 9.4% in the third quarter of 2013. The year-over-year increase in operating margin primarily reflects the improvement in G&A and direct operating expenses.

Income from continuing operations for the third quarter of 2014 was $17.9 million, or $0.93 earnings per diluted share from continuing operations, compared with $86.8 million, or $3.10 per diluted share, in the third quarter of 2013. Income from continuing operations in the third quarter of 2013 benefitted from a $68.4 million gain on the company's previously held equity interest in ecoATM that added $2.36 to earnings per diluted share from continuing operations.

Core adjusted EBITDA from continuing operations for the third quarter of 2014 was $111.6 million compared with $114.3 million in the third quarter of 2013. The year-over-year decline was primarily due to lower segment operating income in the Redbox segment partially offset by an increase in segment operating income in the Coinstar segment and lower segment operating losses in the New Ventures segment.

Core diluted earnings per share from continuing operations in the third quarter of 2014 was $1.44 compared with $1.12 per diluted share in the third quarter of 2013.

Net cash provided by operating activities in the third quarter of 2014 was $49.6 million compared with $60.9 million in the third quarter of 2013. The decrease was primarily due to lower net income in the third quarter of 2014, an increase in net non-cash income and expense primarily related to the one-time gain of $68.4 million in the third quarter of 2013 on the company's previously held equity interest in ecoATM and changes in working capital.

Cash capital expenditures for the third quarter of 2014 were $19.3 million compared with $39.1 million in the third quarter of 2013. In 2013, the higher level of capital expenditures was due to the vertical merchandising zone retrofit at Redbox and higher corporate expenditures related to enterprise software development initiatives.

Free cash flow for the third quarter of 2014 was $30.3 million, compared with $21.8 million in the third quarter of 2013, primarily driven by lower capital expenditures partially offset by lower operating cash flow.

SEGMENT RESULTS

Redbox

Redbox segment revenue in the third quarter of 2014 was $438.0 million compared with $491.7 million in the third quarter of 2013. The year-over-year decrease in revenues was primarily due to soft flow-through from a weak release schedule in the second quarter of 2014 and the unfavorable timing and mix of content released in the third quarter of 2014. Rentals declined 13.7% compared with the third quarter of 2013 to approximately 172.2 million. Same store sales decreased 11.8% in the third quarter of 2014 compared with an increase of 2.1% in the third quarter of 2013, reflecting lower revenues in the quarter.

Net revenue per rental increased $0.08, or 3.3% to $2.54 from $2.46 in the third quarter of 2013. The increase was primarily the result of a higher percentage of Blu-ray and video game rentals as a percent of total disc rentals and a continued stabilization in single night rentals primarily due to more effective marketing promotions.

Redbox segment operating income in the third quarter of 2014 was $85.7 million compared with $91.0 million in the third quarter of 2013. Segment operating margin was 19.6% in the third quarter of 2014 compared with 18.5% in the third quarter of 2013, as the company continued to focus on managing G&A expenses and direct operating costs.

Coinstar

Coinstar segment revenue was $85.1 million, an increase of 6.9%, compared with $79.6 million in the third quarter of 2013, primarily due to the U.S. price increase that was implemented on October 1, 2013. Additional factors impacting revenue included higher volume in the U.K. due to an increase in the U.K. kiosk base, a price increase in the U.K., and an increase in the number of Coinstar™ Exchange kiosks. Same store sales grew 5.8% in the third quarter of 2014 compared with 0.4% in the third quarter of 2013, reflecting the higher revenue. The average transaction size in the third quarter of 2014 increased $0.67 to $41.92 from the third quarter of 2013.

Effective August 1, 2014, the company implemented a price increase for all U.K. grocery retail locations for the coin voucher product, increasing the fee from 8.9% to 9.9%.

Coinstar segment operating income was $33.4 million in the third quarter of 2014, an increase of 20.9% compared with the third quarter of 2013, and Coinstar segment operating margin was 39.3% in the third quarter of 2014, an increase of 460 basis points compared with 34.7% in the third quarter of 2013. The increases reflect the increase in revenue as well as continued efforts to manage costs and increase productivity in the business.

New Ventures

New Ventures segment revenue was $29.7 million compared with $15.2 million in the third quarter of 2013, primarily due to the inclusion of the ecoATM business that was acquired in July 2013 and an increase in the number of installed ecoATM kiosks and the continued ramping of ecoATM kiosks deployed in the 12 months following the end of the third quarter of 2013. New Ventures segment revenue also increased sequentially from the second quarter of 2014 primarily due to an increase in the number of devices collected in the ecoATM business primarily as a result of competitive pricing, kiosk enhancements, and a higher installed kiosk base.

New Ventures segment operating loss of $4.4 million in the third quarter of 2014 decreased from a loss of $5.4 million in the third quarter of 2013. The operating loss in the third quarter of 2013 included $4.0 million in costs associated with the acquisition of ecoATM. Direct operating costs increased year-over-year as the company continued to invest in the teams and infrastructure needed to scale the ecoATM business and support the ongoing testing of SAMPLEit.

During the quarter, ecoATM signed several new kiosk installation agreements with retail partners, primarily in the grocery channel, and installed approximately 530 net new ecoATM kiosks. At September 30, 2014, New Ventures had approximately 1,550 kiosks installed, including approximately 1,510 ecoATM kiosks.

REDBOX INSTANT BY VERIZON JOINT VENTURE

On October 22, 2014, the company announced that Redbox withdrew as a member of the Redbox Instant by Verizon joint venture. As part of the agreement, Redbox received a cash payment of $16.8 million in the fourth quarter of 2014. Over the life of the joint venture, Outerwall received $70.5 million in cash, including the $16.8 million, from payments for services and kiosk nights and invested $77.0 million in capital contributions, including $14.0 million in the third quarter of 2014. In addition, the company realized approximately $29.9 million in cash tax savings through deductions arising from the recognition of the company's share of the joint venture's losses through September 30, 2014. The company will make no further capital contributions related to the joint venture. The company does not expect a material net financial impact in the fourth quarter of 2014.

SHARE REPURCHASES AND CAPITAL STRUCTURE

During the third quarter of 2014, the company repurchased approximately $70.6 million of its common stock, representing approximately 1.2 million shares at an average price of $59.52 per share. At September 30, 2014, there was approximately $162.9 million in authority remaining under the company's stock repurchase authorization.

On September 2, 2014, the company's remaining outstanding 4.0% Convertible Senior Notes matured. During the quarter, the company retired or settled upon maturity $33.4 million in face value of convertible notes for $33.4 million in cash and the issuance of 248,944 shares of its common stock.

The company's net leverage ratio1 was 2.10x at September 30, 2014. The company continues to target a net leverage ratio in the range of 1.75x to 2.25x in 2014.

___________________________

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


GUIDANCE

Beginning in 2015, Outerwall will provide annual guidance only. The company believes annual guidance is a more relevant measurement of the business given its stage of growth, and full-year results better capture the varying seasonal patterns of each of its businesses.

The company provided guidance for the fourth quarter of 2014 and narrowed the range for its full-year 2014 guidance to reflect:

  • a shift in costs related to key initiatives and hiring to the fourth quarter of 2014;
  • lapping the price increase in the Coinstar business for U.S. retail grocery locations;
  • a lower average selling price for devices in our ecoATM business due to the iPhone® 6 launch and the timing of ecoATM kiosk installations; and
  • share repurchases in the third quarter of 2014.

The following table presents the company's fourth quarter 2014 and full-year 2014 guidance:

OUTERWALL INC.
2014 FOURTH QUARTER AND FULL YEAR GUIDANCE


In millions, except per share amounts

2014 FOURTH QUARTER GUIDANCE

As of

October 30, 2014

Consolidated revenue

$575 ‒ $605

Core adjusted EBITDA from continuing operations

$123 ‒ $138

Core diluted EPS from continuing operations(1)

$1.85 ‒ $2.15

Average diluted shares outstanding(1)

18.5 ‒ 18.6



In millions, except per share amounts


2014 FULL YEAR GUIDANCE

As of

October 30, 2014

Consolidated results


Revenue

$2,277 ‒ $2,307

Core adjusted EBITDA from continuing operations

$462 ‒ $477

Core diluted EPS from continuing operations(1)

$5.98 ‒ $6.28

Free cash flow

$210 ‒ $240

Average diluted shares outstanding(1)

20.6 ‒ 20.7

Effective tax rate

37% ‒ 39%



Segment revenue


Redbox

$1,868 ‒ $1,890

Coinstar

$312 ‒ $315

New Ventures

$97 ‒ $102



Capital expenditures


Redbox:


Kiosk, software and other

$8 ‒ $9

Maintenance

$16 ‒ $18

Total Redbox

$24 ‒ $27



Coinstar:


New

$13 ‒ $14

Maintenance

$4 ‒ $5

Total Coinstar

$17 ‒ $19



New Ventures

$41 ‒ $44

Corporate

$18 ‒ $20

TOTAL CAPEX

$100 ‒ $110



Net kiosk installations:


Redbox:


U.S.

(700) ‒ (500)

Canada

300 ‒ 400

Redbox total

(400) ‒ (100)

Coinstar

300 ‒ 400

New Ventures

1,000 ‒ 1,200

(1) Excludes the impact of any future share repurchases for the remainder of 2014

 

ADDITIONAL INFORMATION

Additional information regarding the company's 2014 third quarter operating and financial results and guidance are included in the company's prepared remarks. These items, as well as this press release, are posted on the Investor Relations section of the corporate website at ir.outerwall.com. The Segment Supplement, which provides historical data in Excel format, is also posted on the website.

CONFERENCE CALL

The company will host a conference call today at 2:30 p.m. PDT (5:30 p.m. EDT) to discuss third quarter 2014 earnings results and fourth quarter and full-year 2014 guidance. The conference call will be webcast live and archived on the Investor Relations section of Outerwall's website at ir.outerwall.com. A recording of the call will be available approximately two hours after the call ends through November 14, 2014, at 1-888-843-7419 or 1‑630-652-3042, passcode 3815 8258.

ABOUT OUTERWALL INC.

Outerwall Inc. (Nasdaq: OUTR) has more than 20 years of experience creating some of the most profitable spaces for their retail partners. The company mission is to create a better everyday by delivering breakthrough kiosk experiences that delight consumers and generate revenue for retailers. As the company that brought consumers Redbox® entertainment, Coinstar® money services, and ecoATM® electronics recycling kiosks, Outerwall is leading the next generation of automated retail and paving the way for inventive, scalable businesses. Outerwall™ kiosks are in neighborhood grocery stores, drug stores, mass merchants, malls, and other retail locations in the United States, Canada, Puerto Rico, the United Kingdom, and Ireland. Learn more at www.outerwall.com.

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS

Certain statements in this press release are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The words "believe," "estimate," "expect," "intend," "will," "anticipate," "goals," variations of such words, and similar expressions identify forward-looking statements, but their absence does not mean that the statement is not forward-looking. The forward-looking statements in this release include statements regarding Outerwall Inc.'s anticipated growth and future operating results, including 2014 fourth quarter and full year results. Forward-looking statements are not guarantees of future performance and actual results may vary materially from the results expressed or implied in such statements. Differences may result from actions taken by Outerwall Inc. or its subsidiaries, as well as from risks and uncertainties beyond Outerwall Inc.'s control. Such risks and uncertainties include, but are not limited to,

  • competition from other entertainment providers,
  • the ability to achieve the strategic and financial objectives for our entry into new businesses, including ecoATM, SAMPLEit and Redbox Instant™ by Verizon,
  • our ability to repurchase stock and the availability of an open trading window,
  • the termination, non-renewal or renegotiation on materially adverse terms of our contracts with our significant retailers and suppliers,
  • payment of increased fees to retailers, suppliers and other third-party providers, including financial service providers,
  • the timing of new DVD releases and the inability to receive delivery of DVDs on the date of their initial release to the general public, or shortly thereafter, or in sufficient quantity, for home entertainment viewing,
  • the effective management of our content library,
  • the timing of the release slate and the relative attractiveness of titles in a particular quarter or year,
  • the ability to attract new retailers, penetrate new markets and distribution channels and react to changing consumer demands,
  • the ability to generate sufficient cash flow to timely and fully service indebtedness and adhere to certain covenants and restrictions,
  • the ability to adequately protect our intellectual property, and
  • the application of substantial federal, state, local and foreign laws and regulations specific to our business.

The foregoing list of risks and uncertainties is illustrative, but by no means exhaustive. For more information on factors that may affect future performance, please review "Risk Factors" described in our most recent Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission. These forward-looking statements reflect Outerwall Inc.'s expectations as of the date of this press release. Outerwall Inc. undertakes no obligation to update the information provided herein.

(Financial Statements Follow)

OUTERWALL INC.

EARNINGS RELEASE SCHEDULES

Three Months and Nine Months Ended September 30, 2014


 •           Consolidated Statements of Comprehensive Income

10

 •           Consolidated Balance Sheets

11

 •           Consolidated Statements of Cash Flows

12

 •           Business Segment and Enterprisewide Information

14

 •           APPENDIX A


       ◦   Non-GAAP Financial Measures

16

       ◦   Core and Non-Core Results

16

       ◦   Core Adjusted EBITDA From Continuing Operations

17

       ◦   Core Diluted EPS From Continuing Operations

17

       ◦   Free Cash Flow

18

       ◦   Net Debt and Net Leverage Ratio

18

 

OUTERWALL INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands, except per share data)

(unaudited)



Three Months Ended


Nine Months Ended


September 30,


September 30,


2014


2013


2014


2013

Revenue

$

552,864


$

586,539


$

1,702,403


$

1,712,896

Expenses:








Direct operating(1)

384,111


405,973


1,194,815


1,174,818

Marketing

9,762


8,395


27,142


22,903

Research and development

2,999


3,510


9,885


8,171

General and administrative

47,864


61,031


149,829


168,786

Depreciation and other

47,896


49,245


146,171


143,156

Amortization of intangible assets

3,671


3,191


11,366


7,085

Total expenses

496,303


531,345


1,539,208


1,524,919

Operating income

56,561


55,194


163,195


187,977

Other income (expense), net:








Income (loss) from equity method investments, net

(11,352)


57,934


(31,261)


41,280

Interest expense, net

(12,463)


(8,402)


(35,037)


(25,953)

Other, net

(3,015)


(2,402)


(1,857)


(3,323)

Total other income (expense), net

(26,830)


47,130


(68,155)


12,004

Income from continuing operations before income taxes

29,731


102,324


95,040


199,981

Income tax expense

(11,841)


(15,529)


(31,454)


(34,766)

Income from continuing operations

17,890


86,795


63,586


165,215

Loss from discontinued operations, net of tax


(4,139)


(768)


(13,098)

Net income

17,890


82,656


62,818


152,117

Foreign currency translation adjustment(2)

(695)


1,852


(156)


(304)

Comprehensive income

$

17,195


$

84,508


$

62,662


$

151,813

Basic earnings (loss) per share:








Continuing operations

$

0.95


$

3.19


$

3.06


$

6.03

Discontinued operations


(0.16)


(0.04)


(0.48)

Basic earnings per share

$

0.95


$

3.03


$

3.02


$

5.55

Diluted earnings (loss) per share:








Continuing operations

$

0.93


$

3.10


$

2.98


$

5.78

Discontinued operations


(0.15)


(0.04)


(0.46)

Diluted earnings per share

$

0.93


$

2.95


$

2.94


$

5.32

Weighted average shares used in basic per share calculations

18,798


27,244


20,792


27,391

Weighted average shares used in diluted per share calculations

19,147


28,016


21,372


28,582



(1)

"Direct operating" excludes depreciation and other of $32.0 million and $96.5 million for the three and nine months ended September 30, 2014, respectively, and $33.0 million and $97.3 million for the three and nine months ended September 30, 2013, respectively.

(2)

Foreign currency translation adjustment had no tax effect for the three and nine months ended September 30, 2014 and 2013, respectively.

 

OUTERWALL INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)



September 30,
 2014


December 31,
 2013

Assets




Current Assets:




Cash and cash equivalents

$

184,901


$

371,437

Accounts receivable, net of allowances of $1,700 and $1,826

32,787


50,296

Content library

151,068


199,868

Prepaid expenses and other current assets

59,807


84,709

Total current assets

428,563


706,310

Property and equipment, net

451,346


520,865

Deferred income taxes

9,290


6,443

Goodwill and other intangible assets, net

627,324


638,690

Other long-term assets

11,510


19,075

Total assets

$

1,528,033


$

1,891,383

Liabilities and Stockholders' Equity




Current Liabilities:




Accounts payable

$

138,123


$

236,018

Accrued payable to retailers

105,989


134,140

Other accrued liabilities

129,873


134,127

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

20,595


103,889

Deferred income taxes

33,154


23,143

Total current liabilities

427,734


631,317

Long-term debt and other long-term liabilities

1,022,803


681,403

Deferred income taxes

29,370


58,528

Total liabilities

1,479,907


1,371,248

Commitments and contingencies




Debt conversion feature


1,446

Stockholders' Equity:




Preferred stock, $0.001 par value - 5,000,000 shares authorized; no shares issued or outstanding


Common stock, $0.001 par value - 60,000,000 authorized;




 36,593,850 and 36,356,357 shares issued;




18,894,926 and 26,150,900 shares outstanding;

470,157


482,481

Treasury stock

(997,697)


(476,796)

Retained earnings

576,589


513,771

Accumulated other comprehensive loss

(923)


(767)

Total stockholders' equity

48,126


518,689

Total liabilities and stockholders' equity

$

1,528,033


$

1,891,383

 

OUTERWALL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



Three Months Ended


Nine Months Ended


September 30,


September 30,


2014


2013


2014


2013

Operating Activities:








Net income

$

17,890


$

82,656


$

62,818


$

152,117

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








Depreciation and other

47,898


49,664


146,156


144,173

Amortization of intangible assets

3,671


3,191


11,366


7,085

Share-based payments expense

3,249


2,774


10,093


11,454

Windfall excess tax benefits related to share-based payments

(35)


(318)


(1,988)


(3,347)

Deferred income taxes

(2,404)


24,813


(17,408)


(12,098)

Impairment expense


2,586



5,262

Loss (income) from equity method investments, net

11,352


(57,934)


31,261


(41,280)

Amortization of deferred financing fees and debt discount

901


1,158


3,423


5,205

Loss from early extinguishment of debt

55


1


2,018


5,950

Other

(313)


2,831


(1,477)


1,020

Cash flows from changes in operating assets and liabilities:








Accounts receivable, net

12,133


2,344


17,464


(306)

Content library

1,314


4,534


48,800


9,446

Prepaid expenses and other current assets

1,044


(20,845)


23,047


(31,456)

Other assets

611


(633)


1,647


269

Accounts payable

(26,011)


(14,722)


(97,006)


(70,180)

Accrued payable to retailers

(21,099)


(9,368)


(27,822)


(9,641)

Other accrued liabilities

(629)


(11,789)


(5,345)


(26,552)

Net cash flows from operating activities(1)

49,627


60,943


207,047


147,121

Investing Activities:








Purchases of property and equipment

(19,295)


(39,102)


(72,311)


(123,346)

Proceeds from sale of property and equipment

42


56


1,835


12,888

Sales of short term investments


10,000



Acquisition of ecoATM, net of cash acquired


(244,036)



(244,036)

Receipt of note receivable principal




95

Cash paid for equity investments

(14,000)


(14,000)


(24,500)


(28,000)

Net cash flows used in investing activities(1)

(33,253)


(287,082)


(94,976)


(382,399)

Financing Activities:








Proceeds from issuance of senior unsecured notes



295,500


343,769

Proceeds from new borrowing on Credit Facility

130,000


150,000


635,000


150,000

Principal payments on Credit Facility

(86,875)


(54,376)


(621,250)


(60,938)

Financing costs associated with Credit Facility and senior unsecured notes(2)

(824)



(2,906)


(444)

Settlement and conversion of convertible debt

(33,425)


(30)


(51,149)


(169,664)

Repurchases of common stock(3)

(70,598)


(23,616)


(545,078)


(95,004)

Principal payments on capital lease obligations and other debt

(3,516)


(3,373)


(10,597)


(10,824)

Windfall excess tax benefits related to share-based payments

35


318


1,988


3,347

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

(59)


1,018


(1,084)


7,763

Net cash flows from (used in) financing activities(1)

(65,262)


69,941


(299,576)


168,005






Three Months Ended


Nine Months Ended


September 30,


September 30,


2014


2013


2014


2013

Effect of exchange rate changes on cash

563


1,183


969


(391)

Decrease in cash and cash equivalents

(48,325)


(155,015)


(186,536)


(67,664)

Cash and cash equivalents:








Beginning of period

233,226


370,245


371,437


282,894

End of period

$

184,901


$

215,230


$

184,901


$

215,230











(1)

During 2013, we discontinued four ventures previously included in our New Ventures operating segment, Orango, Rubi, Crisp Market, and Star Studio. Cash flows from these discontinued operations are not segregated from cash flows from continuing operations in all periods presented because they were not material. 

(2)

Total financing costs associated with the Credit Facility and senior unsecured notes issued in the second quarter of 2014 were $8.2 million composed of non-cash debt issue costs of $4.5 million recorded as debt discount associated with our issuance of $300.0 million senior unsecured notes due 2021, $1.5 million in deferred financing fees associated with the senior unsecured notes, and $2.2 million in deferred financing fees associated with the refinancing of our credit facility. The cash payments for financing costs associated with the Credit Facility and senior unsecured notes during the three and nine months ended September 30, 2014 were $0.8 million and $2.9 million, respectively. The remaining accrued balance of the total financing cost as of September 30, 2014 was $0.8 million. 

(3)

The total cost of repurchases of common stock during the three and nine months ended September 30, 2014 was $70.6 million and $545.2 million, respectively, which includes $3.8 million in fees and expenses relating to the tender offer recorded as part of the cost of treasury stock in our Consolidated Balance Sheets. The cash payments for the tender offer fees during the three and nine months ended September 30, 2014 was $0.01 million and $3.7 million, respectively. The remaining accrued balance of the tender offer fees as of September 30, 2014 is $0.1 million.

 

OUTERWALL INC.
BUSINESS SEGMENT AND ENTERPRISEWIDE INFORMATION
(unaudited)


The analysis and reconciliation of the company's segment information to the consolidated financial statements that follows covers the company's results of operations, which consists of the Redbox, Coinstar and New Ventures segments. Unallocated general and administrative expenses relate to share-based compensation and expense related to the rights to receive cash issued in connection with our acquisition of ecoATM.      
















Dollars in thousands















Three Months Ended September 30, 2014

Redbox


Coinstar


New Ventures


Corporate Unallocated


Total

Revenue

$

438,048


$

85,074


$

29,742


$


$

552,864

Expenses:










Direct operating

312,792


42,428


26,988


1,903


384,111

Marketing

6,038


1,834


1,212


678


9,762

Research and development

15


64


2,088


832


2,999

General and administrative

33,527


7,313


3,885


3,139


47,864

Segment operating income (loss)

85,676


33,435


(4,431)


(6,552)


108,128

Less: depreciation, amortization and other

(38,207)


(8,989)


(4,371)



(51,567)

Operating income (loss)

47,469


24,446


(8,802)


(6,552)


56,561

Loss from equity method investments, net




(11,352)


(11,352)

Interest expense, net




(12,463)


(12,463)

Other, net




(3,015)


(3,015)

Income (loss) from continuing operations before income taxes

$

47,469


$

24,446


$

(8,802)


$

(33,382)


$

29,731































Dollars in thousands















Three Months Ended September 30, 2013

Redbox


Coinstar


New Ventures


Corporate Unallocated


Total

Revenue

$

491,694


$

79,611


$

15,234


$


$

586,539

Expenses:










Direct operating

350,759


41,833


12,114


1,267


405,973

Marketing

5,883


1,352


421


739


8,395

Research and development

69


1,428


1,358


655


3,510

General and administrative

44,017


7,349


6,692


2,973


61,031

Segment operating income (loss)

90,966


27,649


(5,351)


(5,634)


107,630

Less: depreciation, amortization and other

(41,478)


(8,539)


(2,419)



(52,436)

Operating income (loss)

49,488


19,110


(7,770)


(5,634)


55,194

Income from equity method investments, net




57,934


57,934

Interest expense, net




(8,402)


(8,402)

Other, net




(2,402)


(2,402)

Income (loss) from continuing operations before income taxes

$

49,488


$

19,110


$

(7,770)


$

41,496


$

102,324

 

OUTERWALL INC.

BUSINESS SEGMENT AND ENTERPRISEWIDE INFORMATION

(unaudited)
















Dollars in thousands















Nine Months Ended September 30, 2014

Redbox


Coinstar


New Ventures


Corporate Unallocated


Total

Revenue

$

1,399,185


$

233,707


$

69,511


$


$

1,702,403

Expenses:










Direct operating

1,003,097


120,354


66,150


5,214


1,194,815

Marketing

17,282


4,397


3,188


2,275


27,142

Research and development

41


486


6,570


2,788


9,885

General and administrative

106,658


21,502


11,822


9,847


149,829

Segment operating income (loss)

272,107


86,968


(18,219)


(20,124)


320,732

Less: depreciation, amortization and other

(118,928)


(26,473)


(12,136)



(157,537)

Operating income (loss)

153,179


60,495


(30,355)


(20,124)


163,195

Loss from equity method investments, net




(31,261)


(31,261)

Interest expense, net




(35,037)


(35,037)

Other, net




(1,857)


(1,857)

Income (loss) from continuing operations before income taxes

$

153,179


$

60,495


$

(30,355)


$

(88,279)


$

95,040































Dollars in thousands















Nine Months Ended September 30, 2013

Redbox


Coinstar


New Ventures


Corporate Unallocated


Total

Revenue

$

1,478,132


$

219,520


$

15,244


$


$

1,712,896

Expenses:










Direct operating

1,040,706


119,290


12,848


1,974


1,174,818

Marketing

18,057


3,357


596


893


22,903

Research and development

73


5,107


2,155


836


8,171

General and administrative

128,963


20,077


11,611


8,135


168,786

Segment operating income (loss)

290,333


71,689


(11,966)


(11,838)


338,218

Less: depreciation, amortization and other

(122,219)


(25,493)


(2,529)



(150,241)

Operating income (loss)

168,114


46,196


(14,495)


(11,838)


187,977

Income from equity method investments, net




41,280


41,280

Interest expense, net




(25,953)


(25,953)

Other, net




(3,323)


(3,323)

Income (loss) from continuing operations before income taxes

$

168,114


$

46,196


$

(14,495)


$

166


$

199,981

 

APPENDIX A

Non-GAAP Financial Measures

Non-GAAP measures may be provided as a complement to results provided in accordance with United States generally accepted accounting principles ("GAAP").

We use the following non-GAAP financial measures to evaluate our financial results:

  • Core adjusted EBITDA from continuing operations;
  • Core diluted earnings per share ("EPS") from continuing operations;
  • Free cash flow; and
  • Net debt and net leverage ratio.

These measures, the definitions of which are presented below, are non-GAAP because they exclude certain amounts which are included in the most directly comparable measure calculated and presented in accordance with GAAP. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for our GAAP financial measures and may not be comparable with similarly titled measures of other companies.

Core and Non-Core Results

We distinguish our core activities, those associated with our primary operations which we directly control, from non-core activities. Non-core activities are primarily nonrecurring events or events we do not directly control. Our non-core adjustments for the periods presented include i) restructuring costs associated with actions to reduce costs in our continuing operations primarily through workforce reductions across the Company, ii) acquisition costs primarily related to the acquisition of ecoATM, iii) compensation expense for rights to receive cash issued in conjunction with our acquisition of ecoATM and attributable to post-combination services as they are fixed amount acquisition related awards and not indicative of the directly controllable future business results, iv) income or loss from equity method investments, which represents our share of income or loss from entities we do not consolidate or control and includes the impacts of the gain on re-measurement of our previously held equity interest in ecoATM upon acquisition, and v) tax benefits related to a net operating loss adjustment and the recognition of a worthless stock deduction in a corporate subsidiary ("Non-Core Adjustments").

We believe investors should consider our core results because they are more indicative of our ongoing performance and trends, are more consistent with how management evaluates our operational results and trends, provide meaningful supplemental information to investors through the exclusion of certain expenses which are either nonrecurring or may not be indicative of our directly controllable business operating results, allow for greater transparency in assessing our performance, help investors better analyze the results of our business and assist in forecasting future periods.

Core Adjusted EBITDA from continuing operations

Our non-GAAP financial measure core adjusted EBITDA from continuing operations is defined as earnings from continuing operations before depreciation, amortization and other; interest expense, net; income taxes; share-based payments expense; and Non-Core Adjustments.

A reconciliation of core adjusted EBITDA from continuing operations to net income from continuing operations, the most comparable GAAP financial measure, is presented in the following table:


Three Months Ended


Nine Months Ended


September 30,

September 30,

Dollars in thousands

2014


2013


2014


2013

Net income from continuing operations

$

17,890


$

86,795


$

63,586


$

165,215

Depreciation, amortization and other

51,567


52,436


157,537


150,241

Interest expense, net

12,463


8,402


35,037


25,953

Income taxes

11,841


15,529


31,454


34,766

Share-based payments expense(1)

3,249


2,774


10,093


11,454

Adjusted EBITDA from continuing operations

97,010


165,936


297,707


387,629

Non-Core Adjustments:








Restructuring costs



469


Acquisition costs


4,003



5,669

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

3,274


2,300


10,033


2,300

Loss from equity method investments

11,352


10,442


31,261


27,096

Gain on previously held equity interest in ecoATM


(68,376)



(68,376)

Core adjusted EBITDA from continuing operations

$

111,636


$

114,305


$

339,470


$

354,318

(1)

Includes both non-cash share-based compensation for executives, non-employee directors and employees as well as share-based payments for content arrangements.

 

Core Diluted EPS from continuing operations

Our non-GAAP financial measure core diluted EPS from continuing operations is defined as diluted earnings per share from continuing operations excluding Non-Core Adjustments, net of applicable taxes.

A reconciliation of core diluted EPS from continuing operations to diluted EPS from continuing operations, the most comparable GAAP financial measure, is presented in the following table:


Three Months Ended


Nine Months Ended

September 30,


September 30,


2014


2013


2014


2013

Diluted EPS from continuing operations

$

0.93


$

3.10


$

2.98


$

5.78

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








Restructuring costs



0.01


Acquisition costs


0.09



0.14

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

0.14


0.06


0.37


0.06

Loss from equity method investments

0.36


0.23


0.89


0.58

Gain on previously held equity interest on ecoATM


(2.36)



(2.32)

Tax benefit from net operating loss adjustment



(0.04)


Tax (benefit) expense of worthless stock deduction

0.01



(0.10)


Core diluted EPS from continuing operations

$

1.44


$

1.12


$

4.11


$

4.24

(1)

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

 

Free Cash Flow

Our non-GAAP financial measure free cash flow is defined as net cash provided by operating activities after capital expenditures. We believe free cash flow is an important non-GAAP measure as it provides additional information to users of the financial statements regarding our ability to service, incur or pay down indebtedness and repurchase our securities.

A reconciliation of free cash flow to net cash provided by operating activities, the most comparable GAAP financial measure, is presented in the following table:


Three Months Ended


Nine Months Ended


September 30,


September 30,

Dollars in thousands

2014


2013


2014


2013

Net cash provided by operating activities

$

49,627


$

60,943


$

207,047


$

147,121

Purchase of property and equipment

(19,295)


(39,102)


(72,311)


(123,346)

Free cash flow

$

30,332


$

21,841


$

134,736


$

23,775

 

Net Debt and Net Leverage Ratio

Our non-GAAP financial measure net debt is defined as the total face value of outstanding debt, including capital leases, less cash and cash equivalents held in financial institutions domestically. Our non-GAAP financial measure net leverage ratio is defined as net debt divided by core adjusted EBITDA from continuing operations for the last twelve months (LTM). We believe net debt and net leverage ratio are important non-GAAP measures because they:

  • are used to assess the degree of leverage by management;
  • provide additional information to users of the financial statements regarding our ability to service, incur or pay down indebtedness and repurchase our securities as well as additional information about our capital structure; and
  • are reported quarterly to support covenant compliance under our credit agreement.

A reconciliation of net debt to total outstanding debt including capital leases, the most comparable GAAP financial measure, is presented in the following table:


September 30,
 2014


December 31,
 2013

Dollars in thousands


Senior unsecured notes(1)

$

650,000


$

350,000

Term loans(1)

148,125


344,375

Revolving line of credit

210,000


Convertible debt(2)


51,148

Capital leases

18,051


21,361

Total principal value of outstanding debt including capital leases

1,026,176


766,884

Less domestic cash and cash equivalents held in financial institutions

(26,003)


(199,027)

Net debt

1,000,173


567,857

LTM Core adjusted EBITDA from continuing operations(3)

$

476,804


$

491,652

Net leverage ratio

2.10


1.15

(1)

The senior unsecured notes on our Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013 included $8.9 million and $5.3 million in associated debt discount, respectively. The Term loan on our Consolidated Balance Sheets as of September 30, 2014 included $0.4 million in associated debt discount. There was no associated debt discount with the Term loans as of December 31, 2013.

(2)

The convertible debt balance on our Consolidated Balance Sheet as of December 31, 2013 included $1.4 million in associated debt discount.

(3)

LTM Core Adjusted EBITDA from continuing operations for the twelve months ended September 30, 2014 and December 31, 2013 was determined as follows:









Dollars in thousands





Core adjusted EBITDA from continuing operations for the nine months ended September 30, 2014

$

339,470




Add: Core adjusted EBITDA from continuing operations for the twelve months ended December 31, 2013(A)

491,652




Less: Core adjusted EBITDA from continuing operations for the nine months ended September 30, 2013

(354,318)




LTM Core adjusted EBITDA from continuing operations for the twelve months ended September 30, 2014

$

476,804




(A)

Core adjusted EBITDA from continuing operations for the twelve months ended December 31, 2013 is obtained from our Annual Report on Form 10-K for the period ended December 31, 2013, where it is reconciled to net income from continuing operations, the most comparable GAAP financial measure, and represents the LTM core adjusted EBITDA from continuing operations we use in our calculation of net leverage ratio as of December 31, 2013.

 

SOURCE Outerwall Inc.

Copyright 2014 PR Newswire

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