0001193125-16-662203.txt : 20160728 0001193125-16-662203.hdr.sgml : 20160728 20160728160755 ACCESSION NUMBER: 0001193125-16-662203 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20160728 ITEM INFORMATION: Results of Operations and Financial Condition ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20160728 DATE AS OF CHANGE: 20160728 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OUTERWALL INC CENTRAL INDEX KEY: 0000941604 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PERSONAL SERVICES [7200] IRS NUMBER: 913156448 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-22555 FILM NUMBER: 161790219 BUSINESS ADDRESS: STREET 1: 1800 114TH AVENUE SE CITY: BELLEVUE STATE: WA ZIP: 98004 BUSINESS PHONE: 4259438000 MAIL ADDRESS: STREET 1: 1800 114TH AVENUE SE CITY: BELLEVUE STATE: WA ZIP: 98004 FORMER COMPANY: FORMER CONFORMED NAME: OUTWERWALL INC DATE OF NAME CHANGE: 20130628 FORMER COMPANY: FORMER CONFORMED NAME: COINSTAR INC DATE OF NAME CHANGE: 19970311 8-K 1 d210246d8k.htm FORM 8-K Form 8-K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 8-K

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of Report (Date of earliest event reported)    July 28, 2016

 

 

OUTERWALL INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   000-22555   94-3156448

(State or other jurisdiction

of incorporation)

 

(Commission

File Number)

 

(I.R.S. Employer

Identification No.)

1800 – 114th Avenue SE

BELLEVUE, WA 98004

(Address of Principal Executive Offices and Zip Code)

Registrant’s telephone number, including area code: (425) 943-8000

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

  ¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

  ¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

  ¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

  ¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 


Item 2.02 Results of Operations and Financial Condition.

On July 28, 2016, Outerwall Inc. (the “Company”) issued an earnings release announcing its financial results for the quarter ended June 30, 2016, and separate prepared remarks from its Chief Executive Officer and Chief Financial Officer. Copies of the earnings release and prepared remarks are attached hereto as Exhibits 99.1 and 99.2.

 

Item 9.01 Financial Statements and Exhibits.

(d) Exhibits

 

Exhibit No.

  

Description

99.1    Earnings release for the quarter ended June 30, 2016.
99.2    Prepared remarks from the Chief Executive Officer and Chief Financial Officer.


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 hereunto duly authorized.

 

    OUTERWALL INC.
    By:        /s/ Galen C. Smith                                             
Date: July 28, 2016       Galen C. Smith
      Chief Financial Officer

 

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EX-99.1 2 d210246dex991.htm EX-99.1 EX-99.1

Exhibit 99.1

 

LOGO

OUTERWALL INC. ANNOUNCES 2016 SECOND QUARTER RESULTS

Reported $518 Million in Consolidated Revenue;

Solid Execution Drives Strong Margins, Profitability and Cash Flow

BELLEVUE, Wash.—July 28, 2016—Outerwall Inc. (Nasdaq: OUTR) today reported financial results for the second quarter ended June 30, 2016.

“Outerwall achieved strong results in the second quarter, underscoring our ability to generate continued profitability and cash flow, and deliver shareholder value,” said Erik E. Prusch, chief executive officer. “Our second quarter results reflect solid execution company-wide, with improved sequential results at Redbox and the highest second quarter revenue in Coinstar’s 25-year history. We also made substantial progress at ecoATM and continue to expect the business to achieve segment operating profitability for 2016.”

Prusch continued, “Earlier this week we announced that we completed our comprehensive process reviewing alternatives to maximize value for all shareholders and reached an agreement to be acquired by affiliates of Apollo Global Management. We are pleased with the agreement and the immediate and substantial cash premium it provides to our shareholders, and look forward to working with Apollo to continue serving our millions of loyal customers and unparalleled network of retail partners.”

Outerwall’s GAAP results for the second quarter of 2015 include the impact of a non-cash, non-tax deductible charge for goodwill impairment of $85.9 million related to its ecoATM business segment. The company’s Core results exclude the impact of the impairment charge as a non-core adjustment.

 

     2016      2015     Change  
Dollars in millions, except per share data    Second
Quarter
     Second
Quarter
    %  

GAAP Results

       

•    Consolidated revenue

   $ 518.0       $ 545.4        (5.0 )% 

•    Income (loss) from continuing operations

   $ 40.5       $ (47.4     NM

•    Net income (loss)

   $ 40.5       $ (45.6     NM

•    Diluted earnings (loss) from continuing operations per common share

   $ 2.38       $ (2.66     NM

•    Net cash provided by operating activities

   $ 75.0       $ 75.1        (0.2 )% 

Core Results**

       

•    Core adjusted EBITDA from continuing operations

   $ 115.9       $ 121.8        (4.9 )% 

•    Core diluted EPS from continuing operations***

   $ 2.41       $ 2.20        9.5

•    Free cash flow

   $ 60.1       $ 55.6        8.0

 

* Not meaningful
** Refer to Appendix A for a discussion of the Use of Non-GAAP Financial Measures and Core and Non-Core Results
*** Beginning in the first quarter of 2016, to better align with our GAAP presentation of EPS, we adjusted our non-GAAP financial measure of core diluted EPS from continuing operations to be defined as diluted earnings per share from continuing operations utilizing the two-class method excluding non-core adjustments, net of applicable taxes. Historically, we had defined this measure using diluted earnings per share from continuing operations utilizing the treasury stock method excluding non-core adjustments, net of applicable taxes. Prior period results have been updated to reflect this change.


Highlights from the second quarter 2016 include:

 

    Delivered $115.9 million in core adjusted EBITDA from continuing operations, down $6.0 million from the second quarter of 2015, despite $27.3 million in lower revenue

 

    Produced $2.41 in core diluted EPS from continuing operations

 

    Generated $60.1 million in free cash flow

 

    Distributed $10.2 million in quarterly cash dividends

 

    Repurchased $2.6 million in face value of 2021 Notes and reduced the outstanding balance on its credit facility by $44.7 million

“We generated solid margins and strong profitability in the second quarter by continuing to align expenses with revenue across the enterprise,” said Galen C. Smith, chief financial officer of Outerwall Inc. “During the quarter, we continued our disciplined expense management and reduced operating costs, G&A and marketing expenses while improving overall productivity. In line with our commitment to return substantial free cash flow to our investors, we distributed $10.2 million in cash dividends, opportunistically repurchased $2.6 million in face value of our senior notes, and further reduced the outstanding balance on our credit facility by $44.7 million.”

CONSOLIDATED RESULTS

GAAP Results

In the second quarter of 2016, consolidated revenue was $518.0 million, a decrease of $27.3 million, or 5.0%, compared with $545.4 million in the second quarter of 2015, primarily reflecting a $49.9 million decrease in Redbox revenue, partially offset by an $18.7 million increase in revenue from ecoATM and a $3.9 million increase from Coinstar.

Income from continuing operations for the second quarter of 2016 was $40.5 million, or $2.38 of diluted earnings from continuing operations per common share, compared with a $47.4 million loss from continuing operations, or a $2.66 loss per common share, in the second quarter of 2015. Income from continuing operations for the second quarter of 2016 increased $2.0 million from the second quarter of 2015, excluding the $85.9 million goodwill impairment charge recognized in the second quarter of 2015, primarily due to a $4.2 million decrease in operating loss from ecoATM, a $4.5 million decrease in operating loss in the All Other reporting category related to the shutdown of SAMPLEit in the fourth quarter of 2015, and a $2.1 million increase in operating income from Coinstar, partially offset by a $5.6 million decrease in operating income from Redbox. The $1.9 million decrease in net interest expense due to lower outstanding borrowings and gain from early extinguishment of debt in the second quarter of 2016 partially offset the higher income tax expense in the second quarter of 2016.

In the second quarter of 2016, net cash flows provided by operating activities was $75.0 million, compared with $75.1 million in the second quarter of 2015.

Cash capital expenditures for the second quarter of 2016 decreased $4.6 million, or 23.5%, to $14.9 million, compared with $19.5 million in the second quarter of 2015, with the decrease primarily related to reduced spending on property and equipment for kiosks.

 

2


Core Results

In the second quarter of 2016, core adjusted EBITDA from continuing operations was $115.9 million, a decrease of $6.0 million, compared with $121.8 million in the second quarter of 2015. The year-over-year decline was primarily due to lower segment operating income in the Redbox segment, partially offset by decreased segment operating losses in the ecoATM segment and All Other reporting category and an increase in segment operating income in the Coinstar segment.

Core diluted EPS from continuing operations for the second quarter of 2016 was $2.41, an increase of 9.5% compared with $2.20 per diluted share in the second quarter of 2015. The increase was primarily attributable to a reduction in the number of weighted average shares used in the diluted per share calculation due to stock repurchases in the second half of 2015.

Free cash flow for the second quarter of 2016 was $60.1 million, an increase of $4.5 million, or 8.0%, compared with $55.6 million in the second quarter of 2015, driven primarily by lower capital expenditures.

SEGMENT RESULTS

Redbox

Redbox segment revenue for the second quarter of 2016 was $389.1 million, compared with $439.0 million in the second quarter of 2015. Revenue decreased $49.9 million, or 11.4%, primarily due to a $42.8 million decrease from a 10.0% decline in same store sales reflecting lower total disc rentals primarily driven by a higher impact from secular decline in the physical market on movie rentals in the second quarter of 2016, compared with the second quarter of 2015. Kiosks removed or relocated subsequent to the second quarter of 2015 accounted for $7.1 million of the decline in revenue as the company continued its efforts to optimize its kiosk network by removing underperforming kiosks. The decline in revenue was partially offset by an increase in video game rentals as the market penetration of new generation game consoles continued to increase, and a 44.5% higher total box office of movie titles released in the second quarter of 2016, including one title that represented 30.9% of the total box office.

Redbox generated approximately 123.6 million rentals in the second quarter of 2016, down from approximately 146.0 million rentals in the second quarter of 2015.

Net revenue per rental was $3.13 in the second quarter of 2016, compared with $3.00 in the second quarter of 2015. The $0.13 increase in net revenue per rental was primarily due to lower promotional spend as compared with the second quarter of 2015 and higher video game rentals.

Redbox segment operating income in the second quarter of 2016 was $82.1 million, a decrease of $16.9 million, or 17.0%, compared with $98.9 million in the second quarter of 2015. The decrease was primarily due to the decrease in revenue described above, partially offset by a decrease in other direct operating expenses, primarily due to lower contractual fees paid to retail partners due to lower revenue and lower credit card fees driven by lower rental volume. The decline in revenue was further offset by lower movie content costs primarily due to content mix and fewer locations as compared with the second quarter of 2015, as the company continued to remove underperforming kiosks to maximize profitability, and a $3.0 million decrease in general and administrative expenses primarily related to ongoing cost reduction initiatives. Segment operating margin was 21.1% in the second quarter of 2016, compared with 22.5% in the second quarter of 2015. Sequentially, Redbox segment operating margin increased 110 basis points from 20.0% in the first quarter of 2016, reflecting an increase in gross margin, lower credit card fees and retailer revenue share rates, and savings in general and administrative expense due to restructuring actions taken in the first quarter of 2016.

 

3


Coinstar

Coinstar segment revenue for the second quarter of 2016 was $84.2 million, compared with $80.3 million in the second quarter of 2015. Revenue increased $3.9 million, or 4.8%, primarily due to continued strength in the core U.S. business, while foreign exchange rates continued to negatively impact revenue in the U.K. and Canada in the second quarter of 2016. The average transaction size increased $2.43, or 5.6% on a year-over-year basis, to $45.46, while the total number of transactions decreased slightly.

Coinstar segment operating income was $33.2 million in the second quarter of 2016, an increase of $1.3 million, or 3.9%, compared with $31.9 million in the second quarter of 2015. Coinstar segment operating margin declined 40 basis points to 39.4% for the second quarter of 2016, compared with 39.8% for the second quarter of 2015, primarily due to an increase in direct operating expenses associated with the higher revenue discussed above. General and administrative expenses also increased in the second quarter of 2016, as the result of increased corporate allocations associated with the increase in Coinstar’s proportionate share of the company’s total revenue compared to the second quarter of 2015, partially offset by ongoing cost reduction initiatives in the segment.

The company continues to expand its testing of Coinstar kiosks in Spain as part of its efforts to explore further international opportunities.

ecoATM

Revenue in the ecoATM segment increased $18.7 million, or 71.9%, to $44.8 million in the second quarter of 2016, primarily due to revenue included in the second quarter of 2016 from devices acquired and sold through Gazelle. The results of Gazelle have also favorably impacted the mix of value devices and the average selling price of value devices sold. The average selling price of value devices sold increased $2.81 to $64.53, compared with $61.72 for the second quarter of 2015.

In the second quarter of 2016, ecoATM segment operating loss decreased to $700,000, which included $384,000 of restructuring and related costs, compared with a loss of $92.8 million in the second quarter of 2015. Excluding the $85.9 million goodwill impairment charge recognized in the second quarter of 2015, the segment operating loss in the second quarter of 2016 was reduced by $6.3 million, or 89.9%, as the growth in revenue outpaced the increase in direct operating expenses, primarily due to operating efficiencies, ongoing cost reduction initiatives, and synergies recognized as a result of the Gazelle acquisition. The business unit continues to be on track to achieve segment operating profitability for 2016.

CAPITAL ALLOCATION

During the second quarter of 2016, the company repurchased $2.6 million in face value of its 5.875% Senior Notes due 2021 for $2.2 million, reducing the outstanding principal balance to $228.6 million. The gain from early extinguishment of these notes reduced net interest expense by approximately $418,000 in the quarter. In addition to the notes repurchased, the company also reduced the outstanding balance on its credit facility by $44.7 million.

On June 21, 2016, the company paid a cash dividend of $0.60 per outstanding share of its common stock totaling approximately $10.2 million. On July 24, 2016, the company’s board of directors declared a quarterly cash dividend of $0.60 per share to be paid on September 6, 2016, to stockholders of record as of the close of business on August 23, 2016.

As a result of the pending transaction with Apollo Global Management, there will not be additional repurchases of common stock or senior notes.

 

4


THE APOLLO ACQUISITION

On July 24, 2016, the company entered into an agreement and plan of merger with affiliates of certain funds managed by affiliates of Apollo Global Management, LLC (Apollo), whereby the company would be acquired by an Apollo affiliate in an all cash transaction, consisting of a tender offer, followed by a subsequent back-end merger. Under the terms of the merger agreement, an Apollo affiliate would soon commence a cash tender offer for all of the company’s outstanding shares of common stock at a purchase price of $52.00 per share, without interest and subject to any withholding taxes. The consummation of the tender offer is conditioned on shares of common stock having been validly tendered and not properly withdrawn that represent, together with the shares of common stock then owned by the Apollo affiliate, of at least a majority of the then outstanding shares, the expiration or early termination of the Hart-Scott-Rodino antitrust waiting period and various other conditions. In addition, other than the company’s regular quarterly cash dividend for the third quarter of 2016, the company is restricted from declaring or paying any dividend or distribution and authorizing or making any capital stock repurchases.

After closing the tender offer, subject to meeting certain customary conditions in the merger agreement, the company merger will be effected without a meeting or vote of the company’s stockholders. At merger closing, shares of common stock then issued and outstanding will be automatically cancelled and converted into the right to receive $52.00, without interest and subject to any withholding taxes. After the closing of the merger, the company will be a wholly owned subsidiary of an Apollo affiliate and will cease to be a publicly-traded company.

For more detailed information about the transaction, please see our filings with the SEC as well as all materials filed relating to the tender offer.

2016 ANNUAL GUIDANCE

In light of the merger agreement with Apollo, Outerwall is suspending full-year 2016 guidance.

ADDITIONAL INFORMATION

Additional information regarding Outerwall’s 2016 second quarter operating and financial results is included in the company’s prepared remarks. This press release and the prepared remarks are posted on the Investor Relations section of the corporate website at ir.outerwall.com.

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 delivers 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

 

5


2016 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,

 

    risks that the proposed acquisition, including the tender offer and the mergers, may not be completed in a timely manner or at all,

 

    competition from other entertainment providers,

 

    the ability to achieve the strategic and financial objectives for our entry into new businesses, including ecoATM and Gazelle,

 

    the timing of the release slate and the relative attractiveness of titles in a particular quarter or year,

 

    our ability to repurchase stock and the availability of an open trading window,

 

    our declaration and payment of dividends, including our board’s discretion to change the dividend policy,

 

    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 ability to attract new retailers, penetrate new markets and distribution channels and react to changing consumer demands,

 

    loss of key personnel or the inability of replacements to quickly and successfully perform in those new roles,

 

    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.

ADDITIONAL INFORMATION AND WHERE TO FIND IT

The tender offer for the outstanding shares of Outerwall referenced in this press release has not yet commenced. This communication is for informational purposes only and is neither an offer to purchase nor a solicitation of an offer to sell shares, nor is it a substitute for the tender offer materials that Apollo and its acquisition subsidiary will file with the U.S. Securities and Exchange Commission (the “SEC”) upon commencement of the tender offer. At the time the tender offer is commenced, Apollo and its acquisition subsidiary will file tender offer materials on Schedule TO, and Outerwall thereafter will file a Solicitation/Recommendation Statement on Schedule 14D-9 with the SEC with respect to the tender offer. THE TENDER OFFER MATERIALS (INCLUDING AN OFFER TO PURCHASE, A RELATED LETTER OF TRANSMITTAL AND CERTAIN OTHER TENDER OFFER DOCUMENTS) AND THE SOLICITATION/RECOMMENDATION STATEMENT WILL CONTAIN IMPORTANT INFORMATION. HOLDERS OF SHARES OF OUTERWALL ARE URGED TO READ THESE DOCUMENTS CAREFULLY WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION THAT HOLDERS OF THE OUTERWALL SECURITIES SHOULD CONSIDER BEFORE MAKING ANY DECISION REGARDING TENDERING THEIR SECURITIES.

 

6


The Offer to Purchase, the related Letter of Transmittal and certain other tender offer documents, as well as the Solicitation/Recommendation Statement, will be made available to all holders of shares of Outerwall at no expense to them. The tender offer materials, the Solicitation/Recommendation Statement and other related documents (when available) will be made available for free at the SEC’s web site at www.sec.gov. Investors and securityholders may access copies of the Solicitation/Recommendation Statement and other related documents (when available) that Outerwall files with the SEC at ir.outerwall.com or by contacting the Company’s Investor Relations Department by phone at (425) 943-8242 or by e-mail at investor.relations@outerwall.com.

# # #

(Consolidated Financial Statements, Business Segment Information and Appendix A Follow)

Investor Contact:

Rosemary Moothart

Director, Investor Relations

425-943-8140

rosemary.moothart@outerwall.com

Media Contact:

Susan Johnston

Vice President, Corporate Communications & Public Affairs

425-943-8993

susan.johnston@outerwall.com

 

7


OUTERWALL INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share data)

(unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2016     2015     2016     2015  

Revenue

   $ 518,027      $ 545,369      $ 1,053,983      $ 1,154,005   

Expenses:

        

Direct operating(1)

     351,581        369,619        727,548        774,803   

Marketing

     7,422        8,047        16,644        16,467   

Research and development

     1,317        2,039        2,362        4,123   

General and administrative

     47,681        48,783        95,451        97,339   

Restructuring and related costs

     401        —          3,676        15,851   

Goodwill impairment

     —          85,890        —          85,890   

Depreciation and other

     33,988        45,174        70,106        87,860   

Amortization of intangible assets

     3,790        3,309        7,580        6,618   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     446,180        562,861        923,367        1,088,951   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     71,847        (17,492     130,616        65,054   

Other income (expense), net:

        

Loss from equity method investments, net

     (208     (133     (415     (265

Interest expense, net

     (10,301     (12,183     (10,543     (24,254

Other, net

     223        642        1,452        (1,704
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     (10,286     (11,674     (9,506     (26,223
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     61,561        (29,166     121,110        38,831   

Income tax expense

     (21,013     (18,185     (42,111     (44,027
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     40,548        (47,351     78,999        (5,196

Income (loss) from discontinued operations, net of tax

     —          1,735        —          (4,821
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     40,548        (45,616     78,999        (10,017

Foreign currency translation adjustment(2)

     (1,680     473        (2,229     3,327   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 38,868      $ (45,143   $ 76,770      $ (6,690
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations attributable to common shares:

        

Basic

   $ 38,615      $ (47,472   $ 75,665      $ (5,465

Diluted

   $ 38,626      $ (47,472   $ 75,681      $ (5,465

Basic earnings (loss) per common share:

        

Continuing operations

   $ 2.39      $ (2.66   $ 4.69      $ (0.30

Discontinued operations

     —          0.10        —          (0.27
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings (loss) per common share

   $ 2.39      $ (2.56   $ 4.69      $ (0.57
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings (loss) per common share:

        

Continuing operations

   $ 2.38      $ (2.66   $ 4.67      $ (0.30

Discontinued operations

     —          0.10        —          (0.27
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings (loss) per common share

   $ 2.38      $ (2.56   $ 4.67      $ (0.57
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares used in basic and diluted per share calculations:

        

Basic

     16,149        17,848        16,122        18,057   

Diluted

     16,244        17,848        16,216        18,057   

Dividends paid per common share

   $ 0.60      $ 0.30      $ 0.90      $ 0.60   

 

(1) “Direct operating” excludes depreciation and other of $24.9 million and $51.1 million for the three and six months ended June 30, 2016, respectively, and $29.6 million and $58.0 million for the three and six months ended June 30, 2015, respectively.
(2) Foreign currency translation adjustment had no tax effect for the three and six months ended June 30, 2016 and 2015, respectively.

 

8


OUTERWALL INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

 

     June 30,
2016
    December 31,
2015
 

Assets

    

Current Assets:

    

Cash and cash equivalents

   $ 199,048      $ 222,549   

Accounts receivable, net of allowances of $806 and $1,272

     25,386        38,464   

Content library

     147,815        188,490   

Prepaid expenses and other current assets

     47,122        51,368   
  

 

 

   

 

 

 

Total current assets

     419,371        500,871   

Property and equipment, net

     270,414        316,013   

Deferred income taxes

     2,456        2,606   

Goodwill and other intangible assets, net

     532,934        540,514   

Other long-term assets

     1,489        2,207   
  

 

 

   

 

 

 

Total assets

   $ 1,226,664      $ 1,362,211   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity (Deficit)

    

Current Liabilities:

    

Accounts payable

   $ 126,654      $ 184,010   

Accrued payable to retailers

     100,332        115,098   

Other accrued liabilities

     155,347        141,437   

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

     18,418        17,131   
  

 

 

   

 

 

 

Total current liabilities

     400,751        457,676   

Long-term debt and other long-term liabilities

     766,570        893,517   

Deferred income taxes

     13,442        33,092   
  

 

 

   

 

 

 

Total liabilities

     1,180,763        1,384,285   

Commitments and contingencies

    

Stockholders’ Equity (Deficit):

    

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

     —          —     

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

    

37,272,647 and 36,720,579 shares issued;

    

17,209,584 and 16,607,516 shares outstanding;

     489,879        485,163   

Treasury stock

     (1,149,261     (1,151,063

Retained earnings

     707,138        643,452   

Accumulated other comprehensive income (loss)

     (1,855     374   
  

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     45,901        (22,074
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity (deficit)

   $ 1,226,664      $ 1,362,211   
  

 

 

   

 

 

 

 

9


OUTERWALL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2016     2015     2016     2015  

Operating Activities:

        

Net income (loss)

   $ 40,548      $ (45,616   $ 78,999      $ (10,017

Adjustments to reconcile net income (loss) to net cash flows from operating activities:

        

Depreciation and other

     33,988        45,174        70,106        93,718   

Amortization of intangible assets

     3,790        3,309        7,580        6,662   

Share-based payments expense

     5,174        3,289        9,504        7,192   

Windfall excess tax benefits related to share-based payments

     —          (160     —          (686

Deferred income taxes

     (10,736     (1,392     (18,558     (3,939

Restructuring, impairment and related costs(2)

     —          —          361        1,680   

Loss from equity method investments, net

     208        133        415        265   

Amortization of deferred financing fees and debt discount

     613        692        1,251        1,385   

Gain from early extinguishment of debt

     (418     —          (11,446     —     

Goodwill impairment

     —          85,890        —          85,890   

Other

     (244     383        (280     (816

Cash flows from changes in operating assets and liabilities:

        

Accounts receivable, net

     6,322        3,254        13,185        15,077   

Content library

     7,723        24,703        40,849        34,659   

Prepaid expenses and other current assets

     (759     (18,976     5,263        (22,082

Other assets

     170        154        333        322   

Accounts payable

     (17,055     (20,617     (52,460     (17,697

Accrued payable to retailers

     10,248        6,931        (14,398     (11,510

Other accrued liabilities

     (4,552     (12,008     11,521        1,112   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash flows from operating activities(1)

     75,020        75,143        142,225        181,215   

Investing Activities:

        

Purchases of property and equipment

     (14,921     (19,508     (28,374     (40,217

Proceeds from sale of property and equipment

     18        2,817        92        2,940   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash flows used in investing activities(1)

     (14,903     (16,691     (28,282     (37,277

Financing Activities:

        

Proceeds from new borrowing on Credit Facility

     91,000        77,000        176,000        112,000   

Principal payments on Credit Facility

     (135,687     (68,875     (244,000     (185,750

Repurchases of notes

     (2,179     —          (47,507     —     

Repurchases of common stock

     —          (22,023     —          (62,731

Dividends paid

     (10,084     (5,417     (15,122     (11,019

Principal payments on capital lease obligations and other debt

     (1,451     (3,033     (3,077     (6,278

Windfall excess tax benefits related to share-based payments

     —          160        —          686   

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

     (47     1,887        (1,472     (1,201
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash flows used in financing activities(1)

     (58,448     (20,301     (135,178     (154,293

 

10


     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2016     2015      2016     2015  

Effect of exchange rate changes on cash

     (1,471     1,623         (2,266     5,367   
  

 

 

   

 

 

    

 

 

   

 

 

 

Change in cash and cash equivalents

     198        39,774         (23,501     (4,988

Cash and cash equivalents:

         

Beginning of period

     198,850        197,934         222,549        242,696   
  

 

 

   

 

 

    

 

 

   

 

 

 

End of period

   $ 199,048      $ 237,708       $ 199,048      $ 237,708   
  

 

 

   

 

 

    

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

         

Cash paid during the period for interest

   $ 8,620      $ 10,933       $ 20,670      $ 22,846   

Cash paid during the period for income taxes, net

   $ 38,890      $ 53,905       $ 40,951      $ 66,896   

Supplemental disclosure of non-cash investing and financing activities:

         

Purchases of property and equipment financed by capital lease obligations

   $ 1,146      $ 257       $ 2,902      $ 977   

Purchases of property and equipment included in ending accounts payable

   $ 654      $ 4,436       $ 654      $ 4,436   

 

(1) During the first quarter of 2015 we discontinued our Redbox operations in Canada. Cash flows from these discontinued operations are not segregated from cash flows from continuing operations in the 2015 periods presented.
(2) The non-cash restructuring, impairment and related costs in the six months ended June 30, 2015 of $1.7 million is composed of $6.9 million in impairments of lease related assets partially offset by a $5.2 million benefit resulting from the lease termination.

 

11


OUTERWALL INC.

BUSINESS SEGMENT AND ENTERPRISEWIDE INFORMATION

(unaudited)

Comparability of Results

We regularly assess the performance of our concepts to determine whether continued funding or other alternatives are appropriate and as a result, we discontinued operating SAMPLEit in the fourth quarter of 2015. As SAMPLEit did not represent a major component of our operations or financial results, the results of SAMPLEit did not qualify to be reported as a discontinued operation and remain in our All Other reporting category.

On November 10, 2015, we acquired certain assets and liabilities of Gazelle, Inc. (“Gazelle”). Results of operations for Gazelle are included in ecoATM for the three and six months ended June 30, 2016.

Our analysis and reconciliation of our segment information to the consolidated financial statements that follows covers our results of operations, which consists of our Redbox, Coinstar and ecoATM segments, Corporate Unallocated expenses and All Other. All Other includes the results of other self-service concepts, which we regularly assess to determine whether continued funding or other alternatives are appropriate.

 

12


OUTERWALL INC.

BUSINESS SEGMENT AND ENTERPRISEWIDE INFORMATION

(unaudited)

 

Dollars in thousands                                     
Three Months Ended June 30, 2016    Redbox     Coinstar     ecoATM     All Other     Corporate
Unallocated
    Total  

Revenue

   $ 389,059      $ 84,168      $ 44,800      $  —        $ —        $ 518,027   

Expenses:

            

Direct operating

     271,731        42,095        37,291        83        381        351,581   

Marketing

     3,919        399        3,058        7        39        7,422   

Research and development

     —          —          1,194        —          123        1,317   

General and administrative

     31,325        8,494        3,573        2        4,287        47,681   

Restructuring and related costs

     14        3        384        —          —          401   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income (loss)

     82,070        33,177        (700     (92     (4,830     109,625   

Less: depreciation, amortization and other

     (21,806     (7,595     (8,398     21        —          (37,778
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     60,264        25,582        (9,098     (71     (4,830     71,847   

Loss from equity method investments, net

     —          —          —          —          (208     (208

Interest expense, net

     —          —          —          —          (10,301     (10,301

Other, net

     —          —          —          —          223        223   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

   $ 60,264      $ 25,582      $ (9,098   $ (71   $ (15,116   $ 61,561   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Dollars in thousands                                     

Three Months Ended June 30, 2015

   Redbox     Coinstar     ecoATM     All Other     Corporate
Unallocated
    Total  

Revenue

   $ 438,976      $ 80,279      $ 26,062      $ 52      $ —        $ 545,369   

Expenses:

            

Direct operating

     301,444        39,358        27,227        1,078        512        369,619   

Marketing

     4,266        1,232        2,149        258        142        8,047   

Research and development

     —          —          1,549        1        489        2,039   

General and administrative

     34,336        7,768        2,094        2,644        1,941        48,783   

Goodwill impairment

     —          —          85,890        —          —          85,890   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income (loss)

     98,930        31,921        (92,847     (3,929     (3,084     30,991   

Less: depreciation, amortization and other

     (33,063     (8,437     (6,305     (678     —          (48,483
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     65,867        23,484        (99,152     (4,607     (3,084     (17,492

Loss from equity method investments, net

     —          —          —          —          (133     (133

Interest expense, net

     —          —          —          —          (12,183     (12,183

Other, net

     —          —          —          —          642        642   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

   $ 65,867      $ 23,484      $ (99,152   $ (4,607   $ (14,758   $ (29,166
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

13


OUTERWALL INC.

BUSINESS SEGMENT AND ENTERPRISEWIDE INFORMATION

(unaudited)

 

Dollars in thousands                                     
Six Months Ended June 30, 2016    Redbox     Coinstar     ecoATM     All Other     Corporate
Unallocated
    Total  

Revenue

   $ 810,547      $ 156,547      $ 86,889      $ —        $ —        $ 1,053,983   

Expenses:

            

Direct operating

     570,732        80,740        75,185        169        722        727,548   

Marketing

     7,743        1,174        7,638        12        77        16,644   

Research and development

     —          —          2,129        —          233        2,362   

General and administrative

     63,354        16,358        7,575        349        7,815        95,451   

Restructuring and related costs

     2,422        465        789        —          —          3,676   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income (loss)

     166,296        57,810        (6,427     (530     (8,847     208,302   

Less: depreciation, amortization and other

     (46,101     (15,004     (16,602     21        —          (77,686
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     120,195        42,806        (23,029     (509     (8,847     130,616   

Loss from equity method investments, net

     —          —          —          —          (415     (415

Interest expense, net

     —          —          —          —          (10,543     (10,543

Other, net

     —          —          —          —          1,452        1,452   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

   $ 120,195      $ 42,806      $ (23,029   $ (509   $ (18,353   $ 121,110   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Dollars in thousands                                     
Six Months Ended June 30, 2015    Redbox     Coinstar     ecoATM     All Other     Corporate
Unallocated
    Total  

Revenue

   $ 958,509      $ 149,609      $ 45,811      $ 76      $ —        $ 1,154,005   

Expenses:

            

Direct operating

     644,379        76,621        50,033        2,269        1,501        774,803   

Marketing

     9,091        2,410        3,879        578        509        16,467   

Research and development

     —          —          3,005        (84     1,202        4,123   

General and administrative

     68,071        15,563        4,062        5,151        4,492        97,339   

Restructuring and related costs

     15,174        550        127        —          —          15,851   

Goodwill impairment

     —          —          85,890        —          —          85,890   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income (loss)

     221,794        54,465        (101,185     (7,838     (7,704     159,532   

Less: depreciation, amortization and other

     (64,670     (16,255     (12,207     (1,346     —          (94,478
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     157,124        38,210        (113,392     (9,184     (7,704     65,054   

Loss from equity method investments, net

     —          —          —          —          (265     (265

Interest expense, net

     —          —          —          —          (24,254     (24,254

Other, net

     —          —          —          —          (1,704     (1,704
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

   $ 157,124      $ 38,210      $ (113,392   $ (9,184   $ (33,927   $ 38,831   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

14


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 may include nonrecurring events or events we do not directly control. Our non-core adjustments for the periods presented include i) goodwill impairment, ii) restructuring costs (including severance and early lease termination costs, and the related asset impairments) associated with actions to reduce costs in our continuing operations across the company, iii) compensation expense for rights to receive cash issued in conjunction with our acquisition of ecoATM and attributable to post-combination services as they are fixed amount acquisition related awards and not indicative of the directly controllable future business results, and iv) loss from equity method investments, which represents our share of loss from entities we do not consolidate or control (“Non-Core Adjustments”).

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

 

15


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
June 30,
    Six Months Ended
June 30,
 
Dollars in thousands    2016      2015     2016      2015  

Net income (loss) from continuing operations

   $ 40,548       $ (47,351   $ 78,999       $ (5,196

Depreciation, amortization and other

     37,778         48,483        77,686         94,478   

Interest expense, net

     10,301         12,183        10,543         24,254   

Income taxes

     21,013         18,185        42,111         44,027   

Share-based payments expense(1)

     5,298         3,320        9,690         7,261   
  

 

 

    

 

 

   

 

 

    

 

 

 

Adjusted EBITDA from continuing operations

     114,938         34,820        219,029         164,824   

Non-Core Adjustments:

          

Goodwill impairment

     —           85,890        —           85,890   

Restructuring and related costs

     401         —          3,676         15,851   

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

     345         1,005        785         2,925   

Loss from equity method investments, net

     208         133        415         265   
  

 

 

    

 

 

   

 

 

    

 

 

 

Core adjusted EBITDA from continuing operations

   $ 115,892       $ 121,848      $ 223,905       $ 269,755   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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

 

16


Core Diluted EPS from continuing operations

Beginning in the first quarter of 2016, to align better with our GAAP presentation of EPS, we adjusted our non-GAAP financial measure of core diluted EPS from continuing operations to be defined as diluted earnings per share from continuing operations utilizing the two class method excluding non-core adjustments, net of applicable taxes. Historically we had defined this measure using diluted earnings per share from continuing operations utilizing the treasury stock method excluding non-core adjustments, net of applicable taxes. Prior period results have been updated to reflect this change.

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2016     2015     2016     2015  

Diluted EPS from continuing operations per common share

   $ 2.38      $ (2.66   $ 4.67      $ (0.30

Non-Core Adjustments:

        

Goodwill impairment(1)

     —          4.81        —          4.75   

Restructuring and related costs (pre-tax)

     0.02        —          0.21        0.89   

Rights to receive cash issued in connection with the acquisition of ecoATM (pre-tax)

     0.02        0.06        0.04        0.16   

Loss from equity method investments, net (pre-tax)

     0.01        0.01        0.02        0.01   

Tax impact of non-core adjustments(1)(2)

     (0.02     (0.02     (0.09     (0.40
  

 

 

   

 

 

   

 

 

   

 

 

 

Core diluted EPS from continuing operations

   $ 2.41      $ 2.20      $ 4.85      $ 5.11   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The goodwill impairment recognized in 2015 is non-tax deductible.
(2) Using the applicable effective tax rate for the respective periods.

Free Cash Flow

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
Dollars in thousands    2016     2015     2016     2015  

Net cash provided by operating activities

   $ 75,020      $ 75,143      $ 142,225      $ 181,215   

Purchase of property and equipment

     (14,921     (19,508     (28,374     (40,217
  

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow

   $ 60,099      $ 55,635      $ 113,851      $ 140,998   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

17


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:

 

Dollars in thousands    June 30,
2016
    December 31,
2015
 

Senior unsecured notes

   $ 549,212      $ 608,908   

Term loans

     129,375        136,875   

Revolving line of credit

     80,000        140,500   

Capital leases

     5,531        5,889   
  

 

 

   

 

 

 

Total principal value of outstanding debt including capital leases

     764,118        892,172   

Less domestic cash and cash equivalents held in financial institutions

     (41,742     (46,192
  

 

 

   

 

 

 

Net debt

     722,376        845,980   

LTM Core adjusted EBITDA from continuing operations(1)

   $ 439,435      $ 485,285   
  

 

 

   

 

 

 

Net leverage ratio

     1.64        1.74   

 

(1) LTM Core Adjusted EBITDA from continuing operations for the twelve months ended June 30, 2016 and December 31, 2015 was determined as follows:

 

Dollars in thousands       

Core adjusted EBITDA from continuing operations for the six months ended June 30, 2016

   $ 223,905   

Add: Core adjusted EBITDA from continuing operations for the twelve months ended December 31, 2015(1)

     485,285   

Less: Core adjusted EBITDA from continuing operations for the six months ended June 30, 2015

     (269,755
  

 

 

 

LTM Core adjusted EBITDA from continuing operations for the twelve months ended June 30, 2016

   $ 439,435   
  

 

 

 

 

(1) Core adjusted EBITDA from continuing operations for the twelve months ended December 31, 2015 is obtained from our Annual Report on Form 10-K for the period ended December 31, 2015, where it is reconciled to net income from continuing operations, the most comparable GAAP financial measure, and represents the LTM core adjusted EBITDA from continuing operations we use in our calculation of net leverage ratio as of December 31, 2015.

 

18

EX-99.2 3 d210246dex992.htm EX-99.2 EX-99.2

Exhibit 99.2

 

LOGO

Outerwall Inc. 2016 Second Quarter Earnings

Prepared Remarks

July 28, 2016

Today, July 28, 2016, Outerwall Inc. issued a press release announcing financial results for the 2016 second quarter. The following prepared remarks provide additional information related to the company’s second quarter operating and financial performance.

The earnings press release and prepared remarks are available on the Investor Relations section of Outerwall’s website at ir.outerwall.com.

Safe Harbor for Forward-Looking Statements

Certain statements in these prepared remarks 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 2016 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,

 

    risks that the proposed acquisition, including the tender offer and the mergers, may not be completed in a timely manner or at all,

 

    competition from other entertainment providers,

 

    the ability to achieve the strategic and financial objectives for our entry into new businesses, including ecoATM and Gazelle,

 

    the timing of the release slate and the relative attractiveness of titles in a particular quarter or year,

 

    our ability to repurchase stock and the availability of an open trading window,

 

    our declaration and payment of dividends, including our board’s discretion to change the dividend policy,

 

    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 ability to attract new retailers, penetrate new markets and distribution channels and react to changing consumer demands,

 

    loss of key personnel or the inability of replacements to quickly and successfully perform in those new roles,

 

    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 these prepared remarks. Outerwall Inc. undertakes no obligation to update the information provided herein.

©2016 Outerwall Inc. All Rights Reserved. These materials may not be reproduced, altered or distributed without the express written consent of Outerwall Inc.


Outerwall Inc. 2016 Second Quarter Earnings

Prepared Remarks

July 28, 2016

 

Additional Information and Where to Find It

The tender offer for the outstanding shares of Outerwall referenced in these prepared remarks has not yet commenced. This communication is for informational purposes only and is neither an offer to purchase nor a solicitation of an offer to sell shares, nor is it a substitute for the tender offer materials that Apollo and its acquisition subsidiary will file with the U.S. Securities and Exchange Commission (the “SEC”) upon commencement of the tender offer. At the time the tender offer is commenced, Apollo and its acquisition subsidiary will file tender offer materials on Schedule TO, and Outerwall thereafter will file a Solicitation/Recommendation Statement on Schedule 14D-9 with the SEC with respect to the tender offer. THE TENDER OFFER MATERIALS (INCLUDING AN OFFER TO PURCHASE, A RELATED LETTER OF TRANSMITTAL AND CERTAIN OTHER TENDER OFFER DOCUMENTS) AND THE SOLICITATION/RECOMMENDATION STATEMENT WILL CONTAIN IMPORTANT INFORMATION. HOLDERS OF SHARES OF OUTERWALL ARE URGED TO READ THESE DOCUMENTS CAREFULLY WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION THAT HOLDERS OF THE OUTERWALL SECURITIES SHOULD CONSIDER BEFORE MAKING ANY DECISION REGARDING TENDERING THEIR SECURITIES.

The Offer to Purchase, the related Letter of Transmittal and certain other tender offer documents, as well as the Solicitation/Recommendation Statement, will be made available to all holders of shares of Outerwall at no expense to them. The tender offer materials, the Solicitation/Recommendation Statement and other related documents (when available) will be made available for free at the SEC’s web site at www.sec.gov. Investors and securityholders may access copies of the Solicitation/Recommendation Statement and other related documents (when available) that Outerwall files with the SEC at ir.outerwall.com or by contacting the Company’s Investor Relations Department by phone at (425) 943-8242 or by e-mail at investor.relations@outerwall.com.

 

Page 2

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Outerwall Inc. 2016 Second Quarter Earnings

Prepared Remarks

July 28, 2016

 

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

Core and Non-Core Results

We distinguish our core activities, those associated with our primary operations which we directly control, from non-core activities. Non-core activities may include nonrecurring events or events we do not directly control. Our non-core adjustments for the periods presented include i) goodwill impairment, ii) restructuring costs (including severance and early lease termination costs, and the related asset impairments) associated with actions to reduce costs in our continuing operations across the company, iii) compensation expense for rights to receive cash issued in conjunction with our acquisition of ecoATM and attributable to post-combination services as they are fixed amount acquisition related awards and not indicative of the directly controllable future business results, and iv) loss from equity method investments, which represents our share of loss from entities we do not consolidate or control (“Non-Core Adjustments”).

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

 

Page 3

©2016 Outerwall Inc. All Rights Reserved. These materials may not be reproduced, altered or distributed without the express written consent of Outerwall Inc.


Outerwall Inc. 2016 Second Quarter Earnings

Prepared Remarks

July 28, 2016

 

Overview

Outerwall’s second quarter results continued to demonstrate strong execution in generating profitability and cash flow, and creating shareholder value. We produced solid margins, earnings and cash flow in Q2. Across the enterprise, we delivered improved results in the Redbox business on a sequential basis, strong performance in our Coinstar business and a significant improvement in segment operating loss in our ecoATM business with it nearly reaching profitability in the quarter. We demonstrated our commitment to returning capital to investors as we continued to reduce our total debt outstanding and paid our quarterly cash dividend, which we had doubled since March.

Earlier this week, we announced that our board had completed its comprehensive review of strategic and financial alternatives to maximize value for all shareholders and had entered into an agreement to be acquired by affiliates of Apollo Global Management for $52.00 per share in cash, which represents approximately a 51% premium to our closing price on March 14, 2016, immediately prior to announcing our strategic alternatives process. We expect the transaction to close in Q3 2016.

In addition, the board declared a $0.60 dividend to be paid on September 6, 2016, to shareholders of record as of August 23, 2016.

Q2 Consolidated Results

The quarter-over-quarter comparisons we make in these prepared remarks will be Q2 2016 versus Q2 2015 unless otherwise stated. GAAP results for Q2 2015 include a non-cash, non-tax deductible goodwill impairment charge of $85.9 million taken for ecoATM.

 

     Three Months Ended
June 30,
     Change  

(In millions, except per share data)

   2016      2015      %  

GAAP Results

        

Consolidated revenue

   $ 518.0       $ 545.4         (5.0 )% 

Income (loss) from continuing operations

   $ 40.5       $ (47.4      NM

Net income (loss)

   $ 40.5       $ (45.6      NM

Diluted earnings (loss) from continuing operations per common share

   $ 2.38       $ (2.66      NM

Net cash provided by operating activities

   $ 75.0       $ 75.1         (0.2 )% 

Core Results**

        

Core adjusted EBITDA from continuing operations

   $ 115.9       $ 121.8         (4.9 )% 

Core diluted EPS from continuing operations***

   $ 2.41       $ 2.20         9.5

Free cash flow (FCF)

   $ 60.1       $ 55.6         8.0

 

* Not Meaningful
** Refer to Appendix A for a discussion of the Use of Non-GAAP Financial Measures and Core and Non-Core Results
*** Beginning in the first quarter of 2016, to better align with our GAAP presentation of EPS, we adjusted our non-GAAP financial measure of core diluted EPS from continuing operations to be defined as diluted earnings per share from continuing operations utilizing the two-class method excluding non-core adjustments, net of applicable taxes. Historically we had defined this measure using diluted earnings per share from continuing operations utilizing the treasury stock method excluding non-core adjustments, net of applicable taxes. Prior period results have been updated to reflect this change.

 

Page 4

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Outerwall Inc. 2016 Second Quarter Earnings

Prepared Remarks

July 28, 2016

 

Capital Allocation

During Q2, we opportunistically repurchased $2.6 million in face value of our 5.875% Senior Notes due 2021 for $2.2 million, reducing the outstanding principal balance to $228.6 million. The gain from the early extinguishment of the notes was approximately $418,000 and is included in net interest expense. In addition, during the quarter, we had a 10b5-1 plan in place with a major financial institution to repurchase up to $100 million in face value of outstanding Senior Notes. Unfortunately, the financial institution was unable to execute on the repurchase of any additional notes over the two-month period the agreement was in place.

We deployed excess free cash flow to pay down $44.7 million net on our credit facility to reduce total debt outstanding including capital leases to $764.1 million. As a result, our net leverage ratio at the end of the quarter was 1.64x, down from 1.72x at the end of Q1.

During Q2 we also paid a quarterly cash dividend of $0.60 per share for a total of $10.2 million, bringing the total dividend distributions in 2016 to $15.3 million. Beyond the Q3 2016 dividend expected to be paid in September 2016, there will not be any additional stock or bond repurchases in the quarter due to the pending transaction.

Capital Expenditures

In Q2 our total investment in capital expenditures (CAPEX) on an accrual basis was $13.1 million, primarily reflecting investments in managing and optimizing our kiosk network as well as maintaining the infrastructure that supports our businesses.

The following is a breakdown of CAPEX by category for Q2:

 

Q2 2016 CAPEX (Accrual Basis)  

(In millions)

   New      Maintenance      Other      Total  

Redbox

   $ 0.1       $ 2.0       $ 2.0       $ 4.1   

Coinstar

     1.3         1.2         —           2.5   

ecoATM

     1.5         —           —           1.5   

All Other

     —           —           —           —     

Corporate

     —           —           5.0         5.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL

   $ 2.9       $ 3.2       $ 7.0       $ 13.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Additional Q2 Consolidated Metrics

 

Metric

   Amount    

Comment

Total net interest expense

   $ 10.3  MM    Includes $0.6MM in noncash interest expense and a $0.4MM gain on early extinguishment of debt

Core effective tax rate

     34.2  

Cash and cash equivalents

   $ 199.0  MM    Includes $74.7MM payable to retailer partners; additionally, $41.7MM of total cash was held in financial institutions domestically

Total principal value of outstanding debt, including capital leases

   $ 764.1  MM   

Net leverage ratio*

     1.64  x   

 

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

 

Page 5

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Outerwall Inc. 2016 Second Quarter Earnings

Prepared Remarks

July 28, 2016

 

Q2 2016 Segment Operating Results – Redbox

Key Metrics

 

Category

   Q2 2016     Q2 2015  

Revenue

   $ 389.1  MM    $ 439.0  MM 

Rentals

     123.6  MM      146.0  MM 

Net revenue per rental

   $ 3.13      $ 3.00   

Same store sales growth (decline)

     (10.0 )%      (0.6 )% 

Gross margin

     55.4     57.5

Segment operating income

   $ 82.1  MM    $ 98.9  MM 

Segment operating margin

     21.1     22.5

Unique credit cards renting in quarter

     31.5  MM      35.1  MM 

Total kiosks (at quarter end)

     39,970        41,340   

Total locations (at quarter end)

     32,710        33,840   

Blu-ray

    

Blu-ray as percentage of rentals

     14.2     14.1

Blu-ray as percentage of Redbox revenue

     17.6     18.1

We were pleased with the results we drove at Redbox with key indicators pointing to stabilization in the business, including less impact from secular decline compared with Q1 2016 and Q4 2015. The rate of decline in revenue, rentals and high frequency renters (HFR) from Q1 2016 to Q2 2016 was the lowest first to second quarter decline Redbox has experienced since 2013. Redbox remains committed to optimizing costs and, during Q2, continued to reduce operating expense, promotional spend and G&A to limit the margin impact from the year-over-year decline in revenue.

Q2 Redbox revenue was $389.1 million, a decrease of 11.4% year-over-year, while total rentals were down 15.4% year-over-year due to several factors, including:

 

    Impact from secular decline in the physical market;

 

    Lower Blu-ray mix; and

 

    Kiosk removals, with total kiosks down nearly 1,400 year-over-year; partially offset by

 

    Video games, which provided a lift to revenue due to higher rentals and higher nights out.

Q2 box office for Redbox titles was $3.0 billion, up 44.5% from Q2 2015, with Star Wars: The Force Awakens representing $936.7 million or 30.9% of the total. Without Star Wars, box office was down slightly year-over-year. While Star Wars was a strong title, comedy titles Daddy’s Home and Sisters had the top rentals for the quarter. Q2 releases included 18 day and date titles, 3 more than a year ago, and 7 more comedy titles than a year ago. Sequentially, Q2 box office dollars, including the impact of Star Wars, were relatively flat; excluding that title, box office would have been down 30.1% compared with Q1 2016. In addition, sequentially we had 7 fewer titles in Q2 2016.

Q2 net revenue per rental, or average check, was $3.13, an increase year-over-year and sequentially, reflecting a greater contribution from video games, particularly as a percentage of revenue, as well as continued optimization of promotional spending. Single night rentals represented 58.4% of total rentals in Q2, down slightly year-over-year, and lower sequentially primarily reflecting the reduction in promotional discount offers, which tend to drive higher single night rentals.

 

Page 6

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Outerwall Inc. 2016 Second Quarter Earnings

Prepared Remarks

July 28, 2016

 

Blu-ray represented 14.2% of rentals in Q2, similar to Q2 2015, while Blu-ray as a percentage of revenue decreased reflecting the increased contribution from video games in Q2 2016.

Total unique cards renting during the quarter were 31.5 million, compared with 35.1 million last year. Sequentially, cards were down 2.9% partially driven by fewer new releases in the quarter. HFRs represented 20.8% of unique cards in Q2 2016 and contributed 45.9% of revenue.

New cards renting in Q2 represented 23.1% of total unique cards, up from 20.4% a year ago and 22.6% sequentially. Our Play Pass loyalty program continued to gain traction, increasing 11.8% sequentially to 4.2 million customers. Play Pass customers accounted for 13.6% of rentals in the quarter, the highest percentage of overall rentals to date for the Play Pass program. Our customer touchpoints also continue to grow, with our marketable email addresses reaching 43.4 million, up 8.6% from Q2 2015 and 1.9% sequentially allowing Redbox to continue to communicate with our customers and provide targeted offers.

In Q2 Redbox segment operating income was $82.1 million, down 17.0% and segment operating margin was 21.1%, a decrease of 140 basis points compared with Q2 2015 primarily due to lower gross margin.

Year-over-year gross margin was down 210 basis points to 55.4% due to the $49.9 million decline in revenue which was partially offset by $13.1 million lower product cost.

Compared with Q1 2016, gross margin increased 100 basis points in Q2 primarily due to lower product cost. Sequentially, segment operating margin increased 110 basis points reflecting the improvement in gross margin, lower credit card fees and retailer revenue share rates, and savings in G&A expense due to workforce reductions taken in Q1 2016.

Video Games Rentals and Revenue

 

Video Games Performance

   Q2 2016     Q2 2015  

Percentage of rentals

     1.5     0.9

Percentage of Redbox revenue

     4.3     2.4

Q2 video game content was strong with 6 major title releases driving 37.8% higher rental volume and 58.0% higher revenue than Q2 2015. Top titles in the quarter included Doom, Tom Clancy’s: The Division, and Uncharted 4: A Thief’s End. Video games average check was $8.80 due to higher nights out for new generation games and reduced discounting due to increasing demand for new generation video games.

As the industry continues to transition to new generation consoles, customers see Redbox as the try-before-you-buy destination for new generation games, an important factor in the improvement in video game rentals and revenue. Video games remain a key component of the Redbox strategy and the business will continue to focus on meeting growing demand while maintaining profitability.

 

Page 7

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Outerwall Inc. 2016 Second Quarter Earnings

Prepared Remarks

July 28, 2016

 

Q2 2016 Segment Operating Results – Coinstar

Key Metrics

 

Category

   Q2 2016     Q2 2015  

Revenue

   $ 84.2  MM    $ 80.3  MM 

Average transaction

   $ 45.46      $ 43.03   

Transactions

     18.0  MM      18.2  MM 

Same store sales (SSS) growth

     11.1     1.9

Segment operating income

   $ 33.2  MM    $ 31.9  MM 

Segment operating margin

     39.4     39.8

Kiosks (at quarter end)

     20,810        21,140   

Locations (at quarter end)

     19,560        19,950   

Coinstar segment revenue increased $3.9 million, or 4.8%, compared with Q2 2015 primarily driven by continued strength in the core U.S. business, while foreign exchange rates continued to negatively impact revenue in the U.K. and Canada. Overall same store sales increased 11.1% reflecting higher U.S. volume.

Coinstar segment operating income increased $1.3 million, or 3.9%, compared with Q2 2015. Segment operating margin was 39.4%, slightly lower year-over-year primarily reflecting higher allocated costs. Coinstar’s operating results underscore the business’s key strengths of operational excellence and sustainable cash flow.

The first coin-counting kiosk installed in Spain at the end of Q1 produced results that have exceeded our expectations. We are in the process of expanding the test in Spain and are exploring other international opportunities.

Q2 2016 Segment Operating Results – ecoATM

Key Metrics

 

Category

   Q2 2016*     Q2 2015  

Revenue

   $ 44.8   MM    $ 26.1  MM 

Segment operating loss

   $ (0.7 ) MM    $ (92.8 ) MM 

ASP of value devices sold

   $ 64.53      $ 61.72   

Number of value devices sold

     619,436        409,331   

Number of overall devices sold

     805,323        704,450   

Kiosks (at quarter end)

     2,460        2,260   

Locations (at quarter end)

     2,230        2,020   

 

* ecoATM’s Q2 2016 segment results include the operating results of Gazelle, which we acquired in November 2015

ecoATM’s Q2 segment results underscore our focus on achieving segment operating profitability for 2016 through kiosk optimization, the integration of Gazelle, and continued efforts to reduce costs and increase productivity. Our actions drove a decrease in segment operating loss of $6.3 million year-over-year, excluding the non-cash goodwill impairment charge of $85.9 million that was included in ecoATM’s Q2 2015 segment results, to a loss of $700,000, which included restructuring charges of approximately $384,000 in the quarter. Without the restructuring charges, the ecoATM segment would have been nearly breakeven for the quarter on a segment operating level.

 

Page 8

©2016 Outerwall Inc. All Rights Reserved. These materials may not be reproduced, altered or distributed without the express written consent of Outerwall Inc.


Outerwall Inc. 2016 Second Quarter Earnings

Prepared Remarks

July 28, 2016

 

ecoATM segment revenue increased 71.9% year-over-year, primarily due to revenue earned from devices acquired and sold through Gazelle. The increase in average selling price (ASP) compared with Q2 2015 was due to increased collections of higher value devices and higher ASP in the direct-to-consumer channel. Kiosk productivity improved and was a factor in increased collections overall and increased collections of higher value devices, some of which were sold through the higher margin direct-to-consumer channel.

During Q2 we continued to redeploy underperforming kiosks to more productive locations and utilize previously manufactured kiosks in inventory. We installed approximately 230 kiosks, primarily in the higher traffic mass channel, and removed approximately 310 underperforming kiosks. We ended the quarter with 2,460 kiosks, a decrease of 80 installed kiosks sequentially. Our optimization strategy is yielding the desired result and in Q2 we generated a 4% increase in kiosk traffic but a 22% increase in value device transactions and a 9% increase in revenue per kiosk, per day.

We continued to integrate the ecoATM and Gazelle operations, including consolidating device processing in Kentucky. We expect the consolidation to lower overhead substantially over time. We also took steps to reduce direct operating expense including transitioning servicing of the ecoATM kiosks to the Redbox field service teams from higher cost third party sources.

The integration is driving higher product margins on certain devices collected at our ecoATM kiosks due to the device refurbishment capabilities at the Kentucky facility as well as the ability to sell devices through Gazelle’s direct-to-consumer channel. Devices collected via the kiosk channel and sold via the direct-to-consumer channel produced an incremental ASP of $118 per device for Q2. The high value devices collected via Gazelle combined with the higher ASP and gross margin channels of Gazelle led to significantly improved results and margins compared with Q2 2015 as well as Q1 2016. ecoATM is driving a more efficient business through its consolidated operations and multiple channels to collect and sell devices.

The Apollo Acquisition

On July 24, 2016, the company entered into an agreement and plan of merger with affiliates of certain funds managed by affiliates of Apollo Global Management, LLC (Apollo), whereby the company would be acquired by an Apollo affiliate in an all cash transaction, consisting of a tender offer, followed by a subsequent back-end merger. Under the terms of the merger agreement, an Apollo affiliate would soon commence a cash tender offer for all of the company’s outstanding shares of common stock at a purchase price of $52.00 per share, without interest and subject to any withholding taxes. The consummation of the tender offer is conditioned on shares of common stock having been validly tendered and not properly withdrawn that represent, together with the shares of common stock then owned by the Apollo affiliate, of at least a majority of the then outstanding shares, the expiration or early termination of the Hart-Scott-Rodino antitrust waiting period and various other conditions. In addition, other than the company’s regular quarterly cash dividend for the third quarter of 2016, the company is restricted from declaring or paying any dividend or distribution and authorizing or making any capital stock repurchases.

 

Page 9

©2016 Outerwall Inc. All Rights Reserved. These materials may not be reproduced, altered or distributed without the express written consent of Outerwall Inc.


Outerwall Inc. 2016 Second Quarter Earnings

Prepared Remarks

July 28, 2016

 

After closing the tender offer, subject to meeting certain customary conditions in the merger agreement, the company merger will be effected without a meeting or vote of the company’s stockholders. At merger closing, shares of common stock then issued and outstanding will be automatically cancelled and converted into the right to receive $52.00, without interest and subject to any withholding taxes. After the closing of the merger, the company will be a wholly owned subsidiary of an Apollo affiliate and will cease to be a publicly-traded company.

For more detailed information about the transaction, please see our filings with the SEC as well as all materials filed relating to the tender offer.

Guidance

In light of the merger agreement with Apollo, the company is suspending full year 2016 guidance.

That said, we want to provide some context for Redbox movie releases in 2016. We currently expect 2016 box office of $11.0 billion for Redbox titles, up 11.0% from 2015, with 15 more titles released than in 2015. Star Wars: The Force Awakens drove $936.7 million or 8.5% of box office for the year. Since our April outlook, there are 2 additional titles in Q4 and second half box office increased 8.7% to $4.9 billion. For 2016, we continue to expect Q2 to have the highest box office for Redbox releases followed by Q1, Q4, and Q3.

In Q3 2016 we expect the lowest box office and number of releases for the year primarily due to the Rio Olympic Games in August. Studios typically have not released new titles during the summer Olympics, which impacts both rental volume and momentum. Q3 2016 box office is expected to be $2.2 billion, down 26.1% sequentially from Q2 2016 with 7 fewer titles. (Exhibit 1) Year-over-year, Q3 2016 box office is up 65.2% or $884.3 million from Q3 2015, with 4 more titles and specifically 10 more action and comedy genre titles than Q3 2015. However, it is important to note that Q3 2015 had the lowest box office in four years for Redbox. In addition, due to the summer Olympics, customer viewing habits may be interrupted.

 

Page 10

©2016 Outerwall Inc. All Rights Reserved. These materials may not be reproduced, altered or distributed without the express written consent of Outerwall Inc.


Outerwall Inc. 2016 Second Quarter Earnings

Prepared Remarks

July 28, 2016

 

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 may include nonrecurring events or events we do not directly control. Our non-core adjustments for the periods presented include i) goodwill impairment, ii) restructuring costs (including severance and early lease termination costs, and the related asset impairments) associated with actions to reduce costs in our continuing operations across the company, iii) compensation expense for rights to receive cash issued in conjunction with our acquisition of ecoATM and attributable to post-combination services as they are fixed amount acquisition related awards and not indicative of the directly controllable future business results, and iv) loss from equity method investments, which represents our share of loss from entities we do not consolidate or control (“Non-Core Adjustments”).

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

 

Page 11

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Outerwall Inc. 2016 Second Quarter Earnings

Prepared Remarks

July 28, 2016

 

Core Adjusted EBITDA from continuing operations

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

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

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
Dollars in thousands    2016      2015      2016      2015  

Net income (loss) from continuing operations

   $ 40,548       $ (47,351    $ 78,999       $ (5,196

Depreciation, amortization and other

     37,778         48,483         77,686         94,478   

Interest expense, net

     10,301         12,183         10,543         24,254   

Income taxes

     21,013         18,185         42,111         44,027   

Share-based payments expense(1)

     5,298         3,320         9,690         7,261   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA from continuing operations

     114,938         34,820         219,029         164,824   

Non-Core Adjustments:

           

Goodwill impairment

     —           85,890         —           85,890   

Restructuring and related costs

     401         —           3,676         15,851   

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

     345         1,005         785         2,925   

Loss from equity method investments, net

     208         133         415         265   
  

 

 

    

 

 

    

 

 

    

 

 

 

Core adjusted EBITDA from continuing operations

   $ 115,892       $ 121,848       $ 223,905       $ 269,755   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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

Beginning in the first quarter of 2016, to align better with our GAAP presentation of EPS, we adjusted our non-GAAP financial measure of core diluted EPS from continuing operations to be defined as diluted earnings per share from continuing operations utilizing the two class method excluding non-core adjustments, net of applicable taxes. Historically we had defined this measure using diluted earnings per share from continuing operations utilizing the treasury stock method excluding non-core adjustments, net of applicable taxes. Prior period results have been updated to reflect this change.

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

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2016      2015      2016      2015  

Diluted EPS from continuing operations per common share

   $ 2.38       $ (2.66    $ 4.67       $ (0.30

Non-Core Adjustments:

           

Goodwill impairment(1)

     —           4.81         —           4.75   

Restructuring and related costs (pre-tax)

     0.02         —           0.21         0.89   

Rights to receive cash issued in connection with the acquisition of ecoATM (pre-tax)

     0.02         0.06         0.04         0.16   

Loss from equity method investments, net (pre-tax)

     0.01         0.01         0.02         0.01   

Tax impact of non-core adjustments(1)(2)

     (0.02      (0.02      (0.09      (0.40
  

 

 

    

 

 

    

 

 

    

 

 

 

Core diluted EPS from continuing operations

   $ 2.41       $ 2.20       $ 4.85       $ 5.11   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The goodwill impairment recognized in 2015 is non-tax deductible.
(2) Using the applicable effective tax rate for the respective periods.

 

Page 12

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Outerwall Inc. 2016 Second Quarter Earnings

Prepared Remarks

July 28, 2016

 

Free Cash Flow

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

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  

Dollars in thousands

   2016      2015      2016      2015  

Net cash provided by operating activities

   $ 75,020       $ 75,143       $ 142,225       $ 181,215   

Purchase of property and equipment

     (14,921      (19,508      (28,374      (40,217
  

 

 

    

 

 

    

 

 

    

 

 

 

Free cash flow

   $ 60,099       $ 55,635       $ 113,851       $ 140,998   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 13

©2016 Outerwall Inc. All Rights Reserved. These materials may not be reproduced, altered or distributed without the express written consent of Outerwall Inc.


Outerwall Inc. 2016 Second Quarter Earnings

Prepared Remarks

July 28, 2016

 

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:

 

Dollars in thousands    June 30,
2016
     December 31,
2015
 

Senior unsecured notes

   $ 549,212       $ 608,908   

Term loans

     129,375         136,875   

Revolving line of credit

     80,000         140,500   

Capital leases

     5,531         5,889   
  

 

 

    

 

 

 

Total principal value of outstanding debt including capital leases

     764,118         892,172   

Less domestic cash and cash equivalents held in financial institutions

     (41,742      (46,192
  

 

 

    

 

 

 

Net debt

     722,376         845,980   

LTM Core adjusted EBITDA from continuing operations(1)

   $ 439,435       $ 485,285   
  

 

 

    

 

 

 

Net leverage ratio

     1.64         1.74   

 

(1) LTM Core Adjusted EBITDA from continuing operations for the twelve months ended June 30, 2016 and December 31, 2015 was determined as follows:

 

Dollars in thousands       

Core adjusted EBITDA from continuing operations for the six months ended June 30, 2016

   $ 223,905   

Add: Core adjusted EBITDA from continuing operations for the twelve months ended December 31, 2015(1)

     485,285   

Less: Core adjusted EBITDA from continuing operations for the six months ended June 30, 2015

     (269,755
  

 

 

 

LTM Core adjusted EBITDA from continuing operations for the twelve months ended June 30, 2016

   $ 439,435   
  

 

 

 

 

(1) Core adjusted EBITDA from continuing operations for the twelve months ended December 31, 2015 is obtained from our Annual Report on Form 10-K for the period ended December 31, 2015, where it is reconciled to net income from continuing operations, the most comparable GAAP financial measure, and represents the LTM core adjusted EBITDA from continuing operations we use in our calculation of net leverage ratio as of December 31, 2015.

 

Page 14

©2016 Outerwall Inc. All Rights Reserved. These materials may not be reproduced, altered or distributed without the express written consent of Outerwall Inc.


Slide 1

Exhibit 1: 2016 Q3 Redbox Release Schedule (5) $338 $0 (1) $15 (3) $49 (2) $69 (2) $440 (2) $117 (3) $388 (2) $101 (3) $174 (1) $55 Box Office2 ($MM) = # of new releases Q3 20161 Q3 2015 Box Office2 Titles Box Office2 Titles Total $2.24Bn 30 $1.36Bn 26 July $468.4MM 10 $441.9MM 11 August $994.8MM 10 $446.8MM 7 September $778.4MM 10 $468.6MM 8 As of July 28, 2016 NOTE: Colors in chart show box office for the individual titles that make up the total new releases for the week 1 Q3 2016 data subject to change 2 Includes titles with total North American box office greater than $5MM (2) $46 (4) $449

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