OUTERWALL INC - FORM 10-Q - July 30, 2015

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

 FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-22555
 OUTERWALL INC.
(Exact name of registrant as specified in its charter)
Delaware
 
94-3156448
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
 
 
1800 114th Avenue SE, Bellevue, Washington
 
98004
(Address of principal executive offices)
 
(Zip Code)
(425) 943-8000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
 
Accelerated filer
¨
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
 
Smaller reporting company
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at July 23, 2015
Common Stock, $0.001 par value
 
18,127,265



OUTERWALL INC.
FORM 10-Q
TABLE OF CONTENTS
  
Page
PART I - FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
 
 



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

OUTERWALL INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
 
June 30,
2015
 
December 31,
2014
Assets

 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
237,708

 
$
242,696

Accounts receivable, net of allowances of $979 and $2,223
33,432

 
48,590

Content library
146,556

 
180,121

Prepaid expenses and other current assets
60,064

 
39,837

Total current assets
477,760

 
511,244

Property and equipment, net
360,445

 
428,468

Deferred income taxes
2,480

 
11,378

Goodwill and other intangible assets, net (Note 6)
531,446

 
623,998

Other long-term assets
7,098

 
8,231

Total assets
$
1,379,229

 
$
1,583,319

Liabilities and Stockholders’ Equity

 

Current Liabilities:

 

Accounts payable
$
147,209

 
$
168,633

Accrued payable to retailers
114,815

 
126,290

Other accrued liabilities
134,566

 
137,126

Current portion of long-term debt and other long-term liabilities
18,490

 
20,416

Deferred income taxes
25,676

 
21,432

Total current liabilities
440,756

 
473,897

Long-term debt and other long-term liabilities
892,075

 
973,669

Deferred income taxes
22,237

 
38,375

Total liabilities
1,355,068

 
1,485,941

Commitments and contingencies (Note 16)

 

Stockholders’ Equity:

 

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

 
—

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

 

36,695,640 and 36,600,166 shares issued;

 

18,169,984 and 18,926,242 shares outstanding;
477,259

 
473,592

Treasury stock
(1,055,447
)
 
(996,293
)
Retained earnings
599,332

 
620,389

Accumulated other comprehensive income (loss)
3,017

 
(310
)
Total stockholders’ equity
24,161

 
97,378

Total liabilities and stockholders’ equity
$
1,379,229

 
$
1,583,319



See accompanying Notes to Consolidated Financial Statements
3


OUTERWALL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$
545,369

 
$
546,527

 
$
1,154,005

 
$
1,144,289

Expenses:
 
 
 
 
 
 
 
Direct operating(1)
369,619

 
381,734

 
774,803

 
801,376

Marketing
8,047

 
9,136

 
16,467

 
16,129

Research and development
2,039

 
3,412

 
4,123

 
6,886

General and administrative
48,783

 
48,596

 
97,339

 
101,204

Restructuring and lease termination costs (Note 11)
—

 
—

 
15,851

 
557

Depreciation and other
45,174

 
47,812

 
87,860

 
95,754

Amortization of intangible assets
3,309

 
3,840

 
6,618

 
7,682

Goodwill impairment (Note 6)
85,890

 
—

 
85,890

 
—

Total expenses
562,861

 
494,530

 
1,088,951

 
1,029,588

Operating income (loss)
(17,492
)
 
51,997

 
65,054

 
114,701

Other income (expense), net:
 
 
 
 
 
 
 
Loss from equity method investments, net (Note 7)
(133
)
 
(10,541
)
 
(265
)
 
(19,909
)
Interest expense, net
(12,183
)
 
(12,932
)
 
(24,254
)
 
(22,580
)
Other income (expense), net
642

 
1,614

 
(1,704
)
 
966

Total other income (expense), net
(11,674
)
 
(21,859
)
 
(26,223
)
 
(41,523
)
Income (loss) from continuing operations before income taxes
(29,166
)
 
30,138

 
38,831

 
73,178

Income tax expense
(18,185
)
 
(6,305
)
 
(44,027
)
 
(21,739
)
Income (loss) from continuing operations
(47,351
)
 
23,833

 
(5,196
)
 
51,439

Income (loss) from discontinued operations, net of tax (Note 12)
1,735

 
(2,080
)
 
(4,821
)
 
(6,511
)
Net income (loss)
(45,616
)
 
21,753

 
(10,017
)
 
44,928

Foreign currency translation adjustment(2)
473

 
(336
)
 
3,327

 
539

Comprehensive income (loss)
$
(45,143
)
 
$
21,417

 
$
(6,690
)
 
$
45,467

 
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to common shares (Note 13):
 
 
 
 
 
 
 
Basic
$
(47,472
)
 
$
23,016

 
$
(5,465
)
 
$
49,880

Diluted
$
(47,472
)
 
$
23,036

 
$
(5,465
)
 
$
49,918

 
 
 
 
 
 
 
 
Basic earnings (loss) per common share (Note 13):
 
 
 
 
 
 
 
Continuing operations
$
(2.66
)
 
$
1.18

 
$
(0.30
)
 
$
2.30

Discontinued operations
0.10

 
(0.11
)
 
(0.27
)
 
(0.30
)
Basic earnings (loss) per common share
$
(2.56
)
 
$
1.07

 
$
(0.57
)
 
$
2.00

 
 
 
 
 
 
 
 
Diluted earnings (loss) per common share (Note 13):
 
 
 
 
 
 
 
Continuing operations
$
(2.66
)
 
$
1.15

 
$
(0.30
)
 
$
2.24

Discontinued operations
0.10

 
(0.10
)
 
(0.27
)
 
(0.29
)
Diluted earnings (loss) per common share
$
(2.56
)
 
$
1.05

 
$
(0.57
)
 
$
1.95

 
 
 
 
 
 
 
 
Weighted average common shares used in basic and diluted per share calculations (Note 13):
 
 
 
 
 
 
 
Basic
17,848

 
19,541

 
18,057

 
21,730

Diluted
17,848

 
20,048

 
18,057

 
22,298

 
 
 
 
 
 
 
 
Dividends declared per common share (Note 19)
$
0.30

 
$
—

 
$
0.60

 
$
—

(1)
“Direct operating” excludes “Depreciation and other” of $29.6 million and $58.0 million for the three and six months ended June 30, 2015, respectively, and $31.4 million and $63.1 million for the three and six months ended June 30, 2014, respectively.
(2)
Foreign currency translation adjustment had no tax effect for the three and six months ended June 30, 2015 and 2014, respectively.

See accompanying Notes to Consolidated Financial Statements
4


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

 
 
 
 
 
 
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
Common Stock
 
Treasury
Stock
 
Retained
Earnings
 
 
 
 
Shares
 
Amount
 
 
 
 
Total
Balance, March 31, 2015
18,498,978

 
$
473,225

 
$
(1,033,424
)
 
$
650,386

 
$
2,544

 
$
92,731

Proceeds from exercise of stock options, net
41,217

 
2,159

 
—

 
—

 
—

 
2,159

Adjustments related to tax withholding for share-based compensation
(2,425
)
 
(173
)
 
—

 
—

 
—

 
(173
)
Share-based payments expense
(83,249
)
 
2,048

 
—

 
—

 
—

 
2,048

Repurchases of common stock
(284,537
)
 
—

 
(22,023
)
 
—

 
—

 
(22,023
)
Net loss
—

 
—

 
—

 
(45,616
)
 
—

 
(45,616
)
Dividends (Note 19)
—

 
—

 
—

 
(5,438
)
 
—

 
(5,438
)
Foreign currency translation adjustment(1)
—

 
—

 
—

 
—

 
473

 
473

Balance, June 30, 2015
18,169,984

 
$
477,259

 
$
(1,055,447
)
 
$
599,332

 
$
3,017

 
$
24,161

(1)
Foreign currency translation adjustment has no tax effect for the three months ended June 30, 2015.
 
 
 
 
 
 
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
Common Stock
 
Treasury
Stock
 
Retained
Earnings
 
 
 
 
Shares
 
Amount
 
 
 
 
Total
Balance, December 31, 2014
18,926,242

 
$
473,592

 
$
(996,293
)
 
$
620,389

 
$
(310
)
 
$
97,378

Proceeds from exercise of stock options, net
48,042

 
2,498

 
—

 
—

 
—

 
2,498

Adjustments related to tax withholding for share-based compensation
(55,225
)
 
(3,699
)
 
—

 
—

 
—

 
(3,699
)
Share-based payments expense
152,657

 
4,710

 
3,577

 
—

 
—

 
8,287

Excess tax benefit on share-based compensation expense
—

 
158

 
—

 
—

 
—

 
158

Repurchases of common stock
(901,732
)
 
—

 
(62,731
)
 
—

 
—

 
(62,731
)
Net loss
—

 
—

 
—

 
(10,017
)
 
—

 
(10,017
)
Dividends (Note 19)
—

 
—

 
—

 
(11,040
)
 
—

 
(11,040
)
Foreign currency translation adjustment(1)
—

 
—

 
—

 
—

 
3,327

 
3,327

Balance, June 30, 2015
18,169,984

 
$
477,259

 
$
(1,055,447
)
 
$
599,332

 
$
3,017

 
$
24,161

(1)
Foreign currency translation adjustment has no tax effect for the six months ended June 30, 2015.



See accompanying Notes to Consolidated Financial Statements
5


OUTERWALL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Operating Activities:
 
 
 
 
 
 
 
Net income (loss)
$
(45,616
)
 
$
21,753

 
$
(10,017
)
 
$
44,928

Adjustments to reconcile net income (loss) to net cash flows from operating activities:
 
 
 
 
 
 
 
Depreciation and other
45,174

 
49,154

 
93,718

 
98,258

Amortization of intangible assets
3,309

 
3,847

 
6,662

 
7,695

Share-based payments expense
3,289

 
3,079

 
7,192

 
6,844

Windfall excess tax benefits related to share-based payments
(160
)
 
(243
)
 
(686
)
 
(1,953
)
Deferred income taxes
(1,392
)
 
(5,440
)
 
(3,939
)
 
(15,004
)
Restructuring and lease termination costs(2)
—

 
—

 
1,680

 
—

Loss from equity method investments, net
133

 
10,541

 
265

 
19,909

Amortization of deferred financing fees and debt discount
692

 
1,216

 
1,385

 
2,522

Loss from early extinguishment of debt
—

 
1,963

 
—

 
1,963

Goodwill impairment (Note 6)
85,890

 
—

 
85,890

 
—

Other
383

 
(1,040
)
 
(816
)
 
(1,164
)
Cash flows from changes in operating assets and liabilities:
 
 
 
 
 
 
 
Accounts receivable, net
3,254

 
11,283

 
15,077

 
5,331

Content library
24,703

 
27,505

 
34,659

 
47,486

Prepaid expenses and other current assets
(18,976
)
 
(24,952
)
 
(22,082
)
 
22,003

Other assets
154

 
599

 
322

 
1,036

Accounts payable
(20,617
)
 
(43,605
)
 
(17,697
)
 
(70,995
)
Accrued payable to retailers
6,931

 
8,762

 
(11,510
)
 
(6,723
)
Other accrued liabilities
(12,008
)
 
(1,589
)
 
1,112

 
(4,716
)
Net cash flows from operating activities(1)
75,143

 
62,833

 
181,215

 
157,420

Investing Activities:
 
 
 
 
 
 
 
Purchases of property and equipment
(19,508
)
 
(26,076
)
 
(40,217
)
 
(53,016
)
Proceeds from sale of property and equipment
2,817

 
962

 
2,940

 
1,793

Cash paid for equity investments
—

 
—

 
—

 
(10,500
)
Net cash flows used in investing activities(1)
(16,691
)
 
(25,114
)
 
(37,277
)
 
(61,723
)
Financing Activities:
 
 
 
 
 
 
 
Proceeds from issuance of senior unsecured notes
—

 
295,500

 
—

 
295,500

Proceeds from new borrowing on Credit Facility
77,000

 
230,000

 
112,000

 
505,000

Principal payments on Credit Facility
(68,875
)
 
(505,000
)
 
(185,750
)
 
(534,375
)
Financing costs associated with Credit Facility and senior unsecured notes
—

 
(2,082
)
 
—

 
(2,082
)
Settlement and conversion of convertible debt
—

 
(17,720
)
 
—

 
(17,724
)
Repurchases of common stock
(22,023
)
 
(53,413
)
 
(62,731
)
 
(474,480
)
Dividends paid (Note 19)
(5,417
)
 
—

 
(11,019
)
 
—

Principal payments on capital lease obligations and other debt
(3,033
)
 
(3,384
)
 
(6,278
)
 
(7,081
)
Windfall excess tax benefits related to share-based payments
160

 
243

 
686

 
1,953

Withholding tax paid on vesting of restricted stock net of proceeds from exercise of stock options
1,887

 
563

 
(1,201
)
 
(1,025
)
Net cash flows used in financing activities(1)
(20,301
)
 
(55,293
)
 
(154,293
)
 
(234,314
)


6

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Effect of exchange rate changes on cash
1,623

 
(746
)
 
5,367

 
406

Change in cash and cash equivalents
39,774

 
(18,320
)
 
(4,988
)
 
(138,211
)
Cash and cash equivalents:
 
 
 
 
 
 
 
Beginning of period
197,934

 
251,546

 
242,696

 
371,437

End of period
$
237,708

 
$
233,226

 
$
237,708

 
$
233,226

Supplemental disclosure of cash flow information:
 
 
 
 
 
 
 
Cash paid during the period for interest
$
10,933

 
$
3,198

 
$
22,846

 
$
17,210

Cash paid during the period for income taxes, net
$
53,905

 
$
32,853

 
$
66,896

 
$
9,189

Supplemental disclosure of non-cash investing and financing activities:
 
 
 
 
 
 
 
Purchases of property and equipment financed by capital lease obligations
$
257

 
$
2,467

 
$
977

 
$
5,513

Purchases of property and equipment included in ending accounts payable
$
2,411

 
$
1,724

 
$
4,436

 
$
1,724

Common stock issued on conversion of callable convertible debt
$
—

 
$
12,715

 
$
—

 
$
12,715

Non-cash debt issue costs
$
—

 
$
6,069

 
$
—

 
$
6,069

(1)
During the first quarter of 2015 we discontinued our Redbox operations in Canada. 2014 also includes the wind-down process of certain new ventures that were discontinued during 2013. Cash flows from these discontinued operations are not segregated from cash flows from continuing operations in all periods presented. See Note 12: Discontinued Operations for cash flow disclosures related to our discontinued Redbox operations in Canada.
(2)
The non-cash restructuring and lease termination costs in the six months ended June 30, 2015 of $1.7 million is composed of $6.9 million in impairments of lease related assets partially offset by a $5.2 million benefit resulting from the lease termination.


See accompanying Notes to Consolidated Financial Statements
7


INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




8

OUTERWALL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1: Basis of Presentation and Principles of Consolidation
The unaudited consolidated financial information included herein has been prepared by Outerwall Inc., pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited consolidated financial statements of Outerwall Inc. included herein reflect all adjustments, consisting only of normal recurring adjustments that, in the opinion of management, are necessary to present fairly our consolidated financial position, results of operations, and cash flows for the periods presented. The financial information as of December 31, 2014, is derived from our 2014 Annual Report on Form 10-K and our Form 8-K filed on May 8, 2015. The consolidated financial statements included within this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2014 Annual Report on Form 10-K and in our Form 8-K filed on May 8, 2015.
The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.
The accompanying consolidated financial statements include the accounts of Outerwall Inc. and our wholly owned subsidiaries. Investments in companies of which we may have significant influence, but not a controlling interest, are accounted for using the equity method of accounting. All significant intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
To be consistent with our 2015 reporting, the following have been retrospectively reported in our Consolidated Statements of Comprehensive Income (Loss) for all periods presented with no effect on net income, cash flows or stockholder's equity:
•
Results of our Redbox Canada operations which were discontinued during the first quarter of 2015. See Note 12: Discontinued Operations for additional information;
•
Restructuring and lease termination costs. See Note 11: Restructuring for additional information; and
•
Basic and diluted earnings per share as a result of applying the two-class method of calculating earnings per share (the “Two-Class Method”). During the first quarter of 2015, the Two-Class Method became significantly more dilutive than the previously applied treasury stock method as a result of stock repurchases increasing the average number of unvested restricted awards (“participating securities”) as a percentage of total common shares outstanding. The impact of applying the Two-Class Method on both income from continuing operations and basic and diluted weighted average shares used to calculate earnings per common share is as follows:
 
As Reported Under the Treasury Stock Method
 
Amount Allocated to Participating Securities
 
As Revised Under the Two-Class Method
 
Three Months Ended
 
Six Months Ended
 
Three Months Ended
 
Six Months Ended
 
Three Months Ended
 
Six Months Ended
In thousands, except per share data
June 30, 2014
 
June 30, 2014
 
June 30, 2014
Income from continuing operations used in basic per share calculation
$
23,833

 
$
51,439

 
$
(817
)
 
$
(1,559
)
 
$
23,016

 
$
49,880

Income from continuing operations used in diluted per share calculation
$
23,833

 
$
51,439

 
$
(797
)
 
$
(1,521
)
 
$
23,036

 
$
49,918

Weighted average shares used in basic per share calculation
19,541

 
21,730

 
—

 
—

 
19,541

 
21,730

Weighted average shares used in diluted per share calculation
20,181

 
22,488

 
(133
)
 
(190
)
 
20,048

 
22,298

Basic earnings per common share from continuing operations
$
1.22

 
$
2.37

 
$
(0.04
)
 
$
(0.07
)
 
$
1.18

 
$
2.30

Diluted earnings per common share from continuing operations
$
1.18

 
$
2.29

 
$
(0.03
)
 
$
(0.05
)
 
$
1.15

 
$
2.24

See Note 13: Earnings Per Share for additional information.



9

Accounting Pronouncements Adopted During the Current Year
In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 changes the requirements for reporting discontinued operations. Under the ASU discontinued operations is defined as a:
•
Component of an entity, or group of components, that
◦
has been disposed of, meets the criteria to be classified as held-for-sale, or has been abandoned/spun-off and
◦
represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results, or a
◦
business or nonprofit activity that, on acquisition, meets the criteria to be classified as held-for-sale.
We adopted the provisions of ASU 2014-08 during the first quarter of 2015 and applied the guidance to our disposition of our Redbox operations in Canada (“Redbox Canada”). See Note 12: Discontinued Operations for additional information.
Accounting Pronouncements Not Yet Adopted
There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on our consolidated financial statements, from those disclosed in our 2014 Annual Report on Form 10-K, except for the following:
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 sets forth a new revenue recognition model that requires identifying the contract, identifying the performance obligations, determining the transaction price, allocating the transaction price to performance obligations and recognizing the revenue upon satisfaction of performance obligations. In July 2015, the FASB deferred the effective date for annual reporting periods beginning after December 15, 2017. Early adoption is permitted to the original effective date of December 15, 2016. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. We are currently in the process of evaluating the impact of ASU 2014-09.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (Subtopic 835-30). This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, instead of as a deferred charge. We are currently evaluating the impact of ASU 2015-03, which is effective for us in our fiscal year beginning January 1, 2016. Early adoption is permitted.
Note 2: Organization and Business
Description of Business
We are a leading provider of automated retail solutions offering convenient products and services that benefit consumers and drive incremental retail traffic and revenue for retailers. During the first quarter of 2015:
•
To align with a change in how our chief operating decision maker evaluates business performance, we added ecoATM, our electronic device recycling business, as a separate reportable segment. Previously, the results of ecoATM along with those of other self-service concepts were included in our New Ventures segment. The combined results of the other self-service concepts, which include our product sampling kiosk concept SAMPLEit, are included in the All Other reporting category as they do not meet quantitative thresholds to be reported as a separate segment. See Note 14: Business Segments and Enterprise-Wide Information for additional information; and
•
We discontinued our Redbox operations in Canada as the business was not meeting our performance expectations. We have reclassified the results of Redbox Canada to discontinued operations for all periods presented in our Consolidated Statements of Comprehensive Income (Loss). See Note 12: Discontinued Operations for additional information.


10

Our core offerings in automated retail include our Redbox, Coinstar and ecoATM segments. Our Redbox segment consists of self-service kiosks where consumers can rent or purchase movies and video games. Our Coinstar segment consists of self-service coin-counting kiosks where consumers can convert their coins to cash or stored value products. We also offer self-service kiosks that exchange gift cards for cash under our Coinstar™ Exchange brand. Our ecoATM segment consists of self-service kiosks where consumers can recycle electronic devices for cash. In addition to our three reportable segments, we also conduct business activities through other self-service concepts, where we identify, evaluate, build or acquire and develop innovative new self-service retail concepts and regularly assess these concepts to determine whether continued funding or other alternatives are appropriate.
Our kiosks are located primarily in supermarkets, drug stores, mass merchants, convenience stores, financial institutions, malls and restaurants. Our kiosk and location counts as of June 30, 2015, are as follows:
 
Kiosks
 
Locations
Redbox
41,340

 
33,840

Coinstar
21,140

 
19,950

ecoATM
2,260

 
2,020

All Other
90

 
90

Total
64,830

 
55,900

Note 3: Cash and Cash Equivalents
We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. Our cash and cash equivalents were $237.7 million and $242.7 million at June 30, 2015, and December 31, 2014, respectively. Of this total, cash equivalents were $22.0 million and $0.9 million, respectively, and consisted of money market demand accounts and investment grade fixed income securities such as money market funds, certificate of deposits, and commercial paper. Our cash balances with financial institutions may exceed the deposit insurance limits.
Included in our cash and cash equivalents at June 30, 2015, and December 31, 2014, were $81.2 million and $81.7 million, respectively that we identified for settling our accrued payables to our retailer partners in relation to our Coinstar kiosks.
Separately included in our cash and cash equivalents at June 30, 2015, and December 31, 2014, were $62.6 million and $66.5 million, respectively in cash and cash equivalents held in financial institutions domestically and $13.3 million and $11.6 million, respectively in cash and cash equivalents held in foreign financial institutions.
Note 4: Prepaid Expenses and Other Current Assets and Other Accrued Liabilities
Prepaid expenses and other current assets:
Dollars in thousands
June 30,
2015
 
December 31,
2014
Spare parts
$
14,600

 
$
13,643

Licenses
6,632

 
5,881

Electronic devices inventory
6,034

 
5,259

Prepaid rent
1,126

 
1,446

DVD cases and labels
1,121

 
1,330

Income taxes receivable
19,924

 
113

Other
10,627

 
12,165

Total prepaid and other current assets
$
60,064

 
$
39,837




11

Other accrued liabilities consist of the following:
Dollars in thousands
June 30,
2015
 
December 31,
2014
Payroll related expenses
$
36,537

 
$
33,343

Studio revenue share and other content related expenses
26,528

 
23,226

Business taxes
18,043

 
21,629

Insurance
9,906

 
9,615

Deferred revenue
7,716

 
6,995

Accrued interest expense
6,970

 
6,974

Accrued early lease termination and sublease expenses
6,263

 
—

Service contract provider expenses
5,213

 
4,191

Deferred rent expense
3,925

 
6,162

Income taxes payable
267

 
9,463

Other
13,198

 
15,528

Total other accrued liabilities
$
134,566

 
$
137,126

Note 5: Property and Equipment
Dollars in thousands
June 30,
2015
 
December 31,
2014
Kiosks and components
$
1,164,339

 
$
1,165,925

Computers, servers, and software
196,280

 
200,915

Leasehold improvements
23,025

 
29,625

Office furniture and equipment
7,465

 
9,218

Vehicles
5,330

 
6,234

Property and equipment, at cost
1,396,439

 
1,411,917

Accumulated depreciation and amortization
(1,035,994
)
 
(983,449
)
Property and equipment, net
$
360,445

 
$
428,468

During the first half of 2015, we recognized impairment charges of $6.9 million in connection with our early lease termination. See Note 11: Restructuring for additional information.
Note 6: Goodwill and Other Intangible Assets
Goodwill
 
We assess goodwill for potential impairment at the reporting unit level on an annual basis as of November 30, or whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. During the three months ended June 30, 2015, it became evident that revenue and profitability trends in our ecoATM reporting unit were not being achieved as expected. For example collection rates, revenue and profitability on a per kiosk basis experienced declines versus prior periods and expected seasonal trends. As a result, we revised our internal expectations for future revenue growth and profitability lower than our previous estimates. This is primarily driven by certain challenges in an increasingly competitive industry which impact the per kiosk device collection, revenue and profitability expectations and the timing and installation of kiosks. Further, while these competitive challenges grew more acute during the second quarter, we also experienced the loss of a key executive at ecoATM. This led to an indication in the second quarter of 2015 that ecoATM’s fair value was more likely than not below its carrying value.


12

As a result, we performed the first step of the goodwill impairment test with the assistance of a third-party valuation specialist. The first step of the impairment test was completed by comparing the carrying value of ecoATM, including goodwill, to its fair value determined using a weighted combination of a discounted cash flow (“DCF”) income based approach and a guideline public company market based approach. The DCF methodology requires significant judgment in selecting appropriate inputs including the risk adjusted market cost of capital for the discount rate, the terminal growth rate and projections of future cash flows, all of which are inherently uncertain. The guideline public company method involves significant judgment in selecting the appropriate inputs including the peer company group, the selection of relevant multiples and the determination of a reasonable control premium. Due to these significant judgments, the fair value determined in connection with the goodwill impairment test may not necessarily be indicative of the actual value that would be recognized in a future transaction. Completion of the first step of the impairment test determined that the carrying amount of ecoATM exceeded its fair value and that the second step of the impairment test needed to be performed.
Under the second step of the impairment test, we completed the process of estimating the fair value of ecoATM’s assets and liabilities, including intangible assets consisting of developed technology, trade name and covenants not to compete for the purpose of deriving an estimate of the implied fair value of goodwill. The estimate of the implied fair value of goodwill was then compared to the recorded goodwill to determine the amount of the impairment. Significant assumptions used in measuring the value of these assets and liabilities included the discount rates and obsolescence rates used in valuing the intangible assets, and replacement costs for valuing the tangible assets. The inputs and assumptions used in our goodwill impairment test are classified as Level 3 inputs within the fair value hierarchy.

Based on the result of the second step of the goodwill impairment analysis, we recognized a non-cash, non-tax deductible charge for goodwill impairment of $85.9 million related to our ecoATM business segment.

As a result of the impairment recorded, the estimated fair value of the ecoATM reporting unit equals its carrying value. The estimate of ecoATM's fair value includes key assumptions with inherent uncertainty which may change in future periods and have a negative effect on the fair value resulting in potential future impairments, the most significant of which is our estimate of future cash flows predicated on estimated kiosks, revenue and profitability measures.

Gross amount of goodwill and accumulated impairment charges that we have recorded are as follows:
Dollars in thousands
 
Goodwill
$
559,307

Accumulated impairment losses
(85,890
)
Net goodwill at June 30, 2015
$
473,417

A reconciliation of the beginning and ending carrying amounts of goodwill by segment is as follows:
Dollars in thousands
December 31,
2014
 
Goodwill Impairment
 
June 30,
2015
Redbox
$
138,743

 
$
—

 
$
138,743

Coinstar
156,351

 
—

 
156,351

ecoATM
264,213

 
(85,890
)
 
178,323

Total goodwill
$
559,307

 
$
(85,890
)
 
$
473,417



13

Other Intangible Assets
The gross amount of our other intangible assets and the related accumulated amortization were as follows:
Dollars in thousands
Amortization
Period
 
June 30,
2015
 
December 31,
2014
Retailer relationships
5 - 10 years
 
$
53,295

 
$
53,295

Accumulated amortization
 
 
(25,206
)
 
(23,200
)
Retailer relationships, net
 
 
28,089

 
30,095

Developed technology
5 years
 
34,000

 
34,000

Accumulated amortization
 
 
(13,033
)
 
(9,633
)
Developed technology, net
 
 
20,967

 
24,367

Other
1 - 40 years
 
16,800

 
16,800

Accumulated amortization
 
 
(7,827
)
 
(6,571
)
Other, net
 
 
8,973

 
10,229

Total intangible assets, net
 
 
$
58,029

 
$
64,691

Amortization expense was as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
Dollars in thousands
2015
 
2014
 
2015
 
2014
Retailer relationships
$
1,003

 
$
1,535

 
$
2,006

 
$
3,071

Developed technology
1,700

 
1,700

 
3,400

 
3,400

Other
606

 
612

 
1,256

 
1,224

Total amortization of intangible assets
3,309

 
3,847

 
6,662

 
7,695

Less: amortization included in discontinued operations
—

 
(7
)
 
(44
)
 
(13
)
Total amortization of intangible assets from continuing operations
$
3,309

 
$
3,840

 
$
6,618

 
$
7,682

Assuming no future impairment, the expected future amortization as of June 30, 2015, is as follows:
Dollars in thousands
Retailer
Relationships
 
Developed Technology
 
Other
 
Total
Remainder of 2015
$
2,006

 
$
3,400

 
$
1,182

 
$
6,588

2016
4,012

 
6,800

 
2,281

 
13,093

2017
4,012

 
6,800

 
2,281

 
13,093

2018
4,012

 
3,967

 
1,664

 
9,643

2019
4,012

 
—

 
801

 
4,813

2020
4,012

 
—

 
407

 
4,419

Thereafter
6,023

 
—

 
357

 
6,380

Total expected amortization
$
28,089

 
$
20,967

 
$
8,973

 
$
58,029



14

Note 7: Equity Method Investments

We include our equity method investments within other long-term assets on our Consolidated Balance Sheets. As of June 30, 2015, our $1.2 million investment in Pursuant Health, Inc., formerly known as SoloHealth, Inc., representing approximately 10% ownership, was our only equity method investment.
Income (Loss) from Equity Method Investments

On October 19, 2014, Redbox and Verizon Ventures IV LLC, a wholly owned subsidiary of Verizon Communications Inc., entered into an agreement whereby we would withdraw from Redbox Instant™ by Verizon (the “Joint Venture”) effective October 20, 2014. Pursuant to the Withdrawal Agreement, all of Redbox’s rights under the Joint Venture’s operating agreement were extinguished for a total of $16.8 million, paid to Redbox, and no further capital contributions were required.
Loss from equity method investments within our Consolidated Statements of Comprehensive Income (Loss) is composed of the following:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
Dollars in thousands
2015
 
2014
 
2015
 
2014
Proportionate share of net loss of equity method investees:
 
 
 
 
 
 
 
Joint Venture
$
—

 
$
(9,567
)
 
$
—

 
$
(17,961
)
Pursuant Health, Inc. (fka SoloHealth, Inc.)
(133
)
 
(224
)
 
(265
)
 
(448
)
Total proportionate share of net loss of equity method investees
(133
)
 
(9,791
)
 
(265
)
 
(18,409
)
Amortization of difference in carrying amount and underlying equity in Joint Venture
—

 
(750
)
 
—

 
(1,500
)
Total loss from equity method investments
$
(133
)
 
$
(10,541
)
 
$
(265
)
 
$
(19,909
)


15

Note 8: Debt and Other Long-Term Liabilities
 
Debt
 
Other Liabilities
 
Total
 
Senior Notes
 
Credit Facility
 
Total Debt
 
Capital Lease Obligations
 
Asset retirement obligations
 
Other long-term liabilities
 
Dollars in thousands
 Senior Unsecured Notes due 2019
 
 Senior Unsecured Notes due 2021
 
Term Loans
 
Revolving Line of Credit
 
 
 
 
 
As of June 30, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal
$
350,000

 
$
300,000

 
$
142,500

 
$
90,000

 
$
882,500

 
 
 
 
 
 
 

Discount
(3,786
)
 
(3,830
)
 
(298
)
 
—

 
(7,914
)
 
 
 
 
 
 
 

Total
346,214

 
296,170

 
$
142,202

 
90,000

 
874,586

 
$
9,876

 
$
9,577

 
$
16,526

 
$
910,565

Less: current portion
—

 
—

 
(11,250
)
 
—

 
(11,250
)
 
(7,240
)
 
—

 
—

 
(18,490
)
Total long-term portion
$
346,214

 
$
296,170

 
$
130,952

 
$
90,000

 
$
863,336

 
$
2,636

 
$
9,577

 
$
16,526

 
$
892,075

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unamortized deferred financing fees(1)
$
572

 
$
1,266

 
$
—

 
$
2,632

 
$
4,470

 
 
 
 
 
 
 
$
4,470

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

 
$
300,000

 
$
146,250

 
$
160,000

 
$
956,250

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

 
(8,783
)
 
 
 
 
 
 
 
 
Total
345,704

 
295,848

 
$
145,915

 
160,000

 
947,467

 
$
15,391

 
$
13,576

 
$
17,651

 
$
994,085

Less: current portion
—

 
—

 
(9,390
)
 
—

 
(9,390
)
 
(11,026
)
 
—

 
—

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

 
$
295,848

 
$
136,525

 
$
160,000

 
$
938,077

 
$
4,365

 
$
13,576

 
$
17,651

 
$
973,669

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Unamortized deferred financing fees(1)
$
649

 
$
1,372

 
$
—

 
$
2,965

 
$
4,986

 
 
 
 
 
 
 
$
4,986

(1)
Deferred financing fees are recorded in other long-term assets in our Consolidated Balance Sheets and are amortized on a straight line basis over the life of the related loan.
Interest Expense
Dollars in thousands
Three Months Ended
 
Six Months Ended
June 30,
 
June 30,
2015
 
2014
 
2015
 
2014
Cash interest expense
$
11,499

 
$
9,773

 
$
22,894

 
$
18,135

Non-cash interest expense:
 
 
 
 
 
 
 
Amortization of debt discount
434

 
753

 
869

 
1,555

Amortization of deferred financing fees
258

 
463

 
516

 
967

Total non-cash interest expense
692

 
1,216

 
1,385

 
2,522

Total cash and non-cash interest expense
12,191

 
10,989

 
24,279

 
20,657

Loss from early extinguishment of debt
—

 
1,963

 
—

 
1,963

Total interest expense
$
12,191

 
$
12,952

 
$
24,279

 
$
22,620

Senior Unsecured Notes Due 2019
On March 12, 2013, we and certain subsidiaries of ours, as subsidiary guarantors, entered into an indenture pursuant to which we issued $350.0 million principal amount of 6.000% Senior Notes due 2019 (the “Senior Notes due 2019”) at par for proceeds, net of expenses, of $343.8 million. The expenses were allocated between debt discount and deferred financing fees based on their nature. As of June 30, 2015, we were in compliance with the covenants of the related indenture.


16

Senior Unsecured Notes Due 2021
On June 9, 2014, we and certain subsidiaries of ours, as subsidiary guarantors, entered into an indenture pursuant to which we issued $300.0 million principal amount of 5.875% Senior Notes due 2021 (the “Senior Notes due 2021”) at par for proceeds, net of expenses, of $294.0 million. The expenses were allocated between debt discount and deferred financing fees based on their nature.
During the second quarter of 2015, we registered the Senior Notes due 2021 and related guarantees under the Securities Act of 1933, as amended (the “Securities Act”) to allow holders to exchange the notes and related guarantees for the same principal amount of a new issue and related guarantees (collectively, the “Exchange Notes”) with substantially identical terms, except that the Exchange Notes are generally freely transferable under the Securities Act. The full principal amount of the Senior Notes due 2021 was exchanged for the Exchange Notes.
As of June 30, 2015, we were in compliance with the covenants of the related indenture.
Revolving Line of Credit and Term Loan
On June 24, 2014, we entered into the Third Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) providing for a senior secured credit facility (the “Credit Facility”). The Amended and Restated Credit Agreement amended and restated in its entirety the Second Amended and Restated Credit Agreement dated as of November 20, 2007 and amended and restated as of April 29, 2009 and as of July 15, 2011 and all amendments and restatements thereto.
The New Credit Facility consists of (a) a $150.0 million amortizing term loan (the “Term Loan”) and (b) a $600.0 million revolving line of credit (the “Revolving Line”), which includes (i) a $75.0 million sublimit for the issuance of letters of credit, (ii) a $50.0 million sublimit for swingline loans and (iii) a $75.0 million sublimit for loans in certain foreign currencies available to us and certain wholly owned Company foreign subsidiaries (the “Foreign Borrowers”). We may, subject to applicable conditions and subject to obtaining commitments from lenders, request an increase in the Revolving Line of up to $200.0 million in aggregate (the “Accordion”). As of June 30, 2015, the interest rate on amounts outstanding under the Credit Facility was 1.94% and we were in compliance with the covenants of the Credit Facility.
The Amended and Restated Credit Agreement requires principal amortization payments under the Term Loan as follows:
Dollars in thousands
Repayment Amount
Remainder of 2015
$
5,625

2016
13,125

2017
15,000

2018
18,750

2019
90,000

Total
$
142,500

 
Note 9: Repurchases of Common Stock
Board Authorization
On February 3, 2015, the Board approved an additional stock repurchase authorization of up to $250.0 million of its common stock plus the cash proceeds received from the exercise of stock options by our executives, non-employee directors and employees.
Repurchases
In the six months ended June 30, 2015, we repurchased a total of 901,732 shares of our common stock, via open market repurchases and a 10b5-1 plan, with an average price per share of $69.57 for $62.7 million.


17

The following table presents a summary of our authorized stock repurchase balance:
Dollars in thousands
Board Authorization
Authorized repurchase - as of January 1, 2015
$
163,655

Additional board authorization
250,000

Proceeds from the exercise of stock options
2,498

Repurchase of common stock from open market
(62,731
)
Authorized repurchase - as of June 30, 2015
$
353,422

Note 10: Share-Based Payments
We currently grant share-based awards to our executives, non-employee directors and employees under our 2011 Incentive Plan (the “Plan”). The Plan permits the granting of stock options, restricted stock, restricted stock units, and performance-based restricted stock.
Certain information regarding our share-based payments is as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
Dollars in thousands
2015
 
2014
 
2015
 
2014
Share-based payments expense:
 
 
 
 
 
 
 
Share-based compensation - stock options
$
40

 
$
223

 
$
181

 
$
456

Share-based compensation - restricted stock
2,039

 
3,443

 
4,598

 
6,357

Share-based payments for content arrangements
1,241

 
(587
)
 
2,482

 
31

Total share-based payments expense
$
3,320

 
$
3,079

 
$
7,261

 
$
6,844

Tax benefit on share-based payments expense
$
1,289

 
$
1,182

 
$
2,807

 
$
2,627

 
June 30, 2015
Dollars in thousands
Unrecognized Share-Based Payments Expense
 
Weighted-Average Remaining Life
Unrecognized share-based payments expense:
 
 
 
Share-based compensation - stock options
$
248

 
1.4 years
Share-based compensation - restricted stock
21,968

 
2.6 years
Share-based payments for content arrangements
2,135

 
0.5 years
Total unrecognized share-based payments expense
$
24,351

 
 
Share-Based Compensation
Stock options
Shares of common stock are issued upon exercise of stock options. The following table presents a summary of stock option activity for 2015:
Shares in thousands
Options
 
Weighted Average Exercise Price
Outstanding, December 31, 2014
128

 
$
52.59

Granted
—

 
—

Exercised
(48
)
 
52.00

Canceled, expired, or forfeited
(24
)
 
53.99

Outstanding, June 30, 2015
56

 
52.48



18

Certain information regarding stock options outstanding as of June 30, 2015, is as follows:
 
Options
Shares and intrinsic value in thousands
Outstanding
 
Exercisable
Number
56

 
40

Weighted average per share exercise price
$
52.48

 
$
51.79

Aggregate intrinsic value
$
1,320

 
$
972

Weighted average remaining contractual term (in years)
6.83

 
6.59

Restricted stock and performance based restricted stock awards
Restricted stock awards are granted to eligible executives, non-employee directors and employees. Awards granted to employees and executives vest annually in equal installments over four years. Non-employee director awards vest one year after the grant date. Performance-based restricted stock awards are granted to executives only, with established performance criteria approved by the Compensation Committee of the Board of Directors. The fair value of non-performance-based awards is based on the market price on the grant date. We estimate forfeitures for restricted stock awards and recognize share-based compensation expense for only those awards expected to vest.
Awards of performance-based restricted stock made prior to 2013, once earned, vest in equal installments over three years from the date of grant. Awards of performance-based restricted stock made in and subsequent to 2013, once earned, vest in two installments over three years from the date of grant (65% of the award vests two years from the date of grant and the remaining 35% of the award vests three years from the date of grant). The restricted shares require no payment from the grantee. The fair value of performance-based awards is based on achieving specific performance conditions and is recognized over the vesting period.
The following table presents a summary of restricted stock award activity for 2015:
Shares in thousands
Restricted Stock Awards
 
Weighted Average Grant Date Fair Value
Non-vested, December 31, 2014
609

 
$
62.35

Granted
277

 
56.53

Vested
(173
)
 
59.46

Forfeited
(171
)
 
60.71

Non-vested, June 30, 2015
542

 
61.00

Share-Based Payments for Content Arrangements
We have granted restricted stock as part of content license agreements with certain movie studios. The expense related to these agreements is included within direct operating expenses in our Consolidated Statements of Comprehensive Income (Loss) and is adjusted based on the number of unvested shares and market price of our common stock each reporting period. During the first quarter of 2015, 50,000 shares of restricted stock were granted and immediately vested pursuant to a revenue sharing agreement with Paramount.
Information related to the shares of restricted stock granted as part of these agreements as of June 30, 2015, is as follows:
Whole shares
Granted
 
Vested
 
Unvested
Paramount(1)
350,000

 
350,000

 
—

(1)
Includes 95,000 shares that vested on January 1, 2015.


19

Rights to Receive Cash
As a part of the acquisition of ecoATM, we issued replacement awards for unvested restricted stock and options in ecoATM with rights to receive cash equal to the per share merger consideration for restricted stock and net of the exercise price for options. The replacement awards vest in accordance with the terms of the original replaced award. The replacement awards are considered liability classified as they represent rights to receive cash. Expense associated with the post-combination awards is recognized net of forfeitures, and cash payments are made in accordance with the awards' vesting schedule, generally on a monthly basis. We recognized $2.9 million in expense associated with the issuance of rights to receive cash for the six months ended June 30, 2015. The expected future recognition of expense associated with the rights to receive cash as of June 30, 2015 is as follows:
Dollars in thousands
Expected Expense
Remainder of 2015
$
1,708

2016
2,893

2017
510

Remaining total expected expense
$
5,111


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


20

There were no significant restructuring charges in the second quarter of 2015 or 2014. The total amount incurred for restructuring, exclusive of asset impairments incurred by reportable segment (on an allocated basis) and expense type is as follows:
 
Six Months Ended
 
June 30,
Dollars in thousands
2015
 
2014
Redbox
 
 
 
Severance
$
3,701

 
$
534

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

 
—

Total Redbox restructuring costs
8,268

 
534

Coinstar
 
 
 
Severance
492

 
23

Lease termination costs (excluding related asset impairments)
24

 
—

Total Coinstar restructuring costs
516

 
23

ecoATM
 
 
 
Severance
127

 
—

Lease termination costs (excluding related asset impairments)
—

 
—

Total ecoATM restructuring costs
127

 
—

Total restructuring costs in continuing operations
8,911

 
557

Restructuring costs in discontinued operations
522

 
590

Total restructuring costs
$
9,433

 
$
1,147


During the six months ended June 30, 2015, we recognized $16.4 million in charges in connection with our restructuring and early lease termination including $6.9 million in impairments of lease related assets, and $9.4 million in restructuring costs, which include severance and net lease termination costs.
 
Six Months Ended
 
June 30,
Dollars in thousands
2015
 
2014
Restructuring costs
$
9,433

 
$
1,147

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

 
—

Total restructuring and lease termination costs
16,373

 
1,147

Less: restructuring costs included in discontinued operations
(522
)
 
(590
)
Restructuring and lease termination costs from continuing operations
$
15,851

 
$
557

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

 
$
—

 
$
—

Costs charged to expense
4,451

 
4,669

 
313

Reclassification of deferred balances(1)
—

 
5,260

 
—

Costs paid or otherwise settled
(4,174
)
 
(3,666
)
 
(231
)
Ending Balance - June 30, 2015
$
277

 
$
6,263

 
$
82

(1)
Deferred rent liabilities related to the early lease termination that were reclassified to present the outstanding liability related to the terminated leases.



21

Note 12: Discontinued Operations
Summary Financial Information
On January 23, 2015, we made the decision to shut down our Redbox Canada operations as the business was not meeting the company's performance expectations. This represents a strategic shift which has a major effect on our operations as it represents a significant geographical area for our Redbox segment and the losses generated were significant to our total operations. On March 31, 2015, we completed the disposal of the Redbox Canada operations. As a result, we updated certain estimates used in the preparation of the financial statements and the remaining value of the content library and certain capitalized property and equipment consisting primarily of installation costs were amortized over the wind-down period ending March 31, 2015. We have reclassified the results of Redbox Canada to discontinued operations for all periods presented in our Consolidated Statements of Comprehensive Income (Loss).
In addition to Redbox Canada, discontinued operations for the six months ended June 30, 2014 included a $1.3 million pretax loss from operations and a $0.5 million income tax benefit related to the wind-down process of certain new ventures that were discontinued during 2013. Continuing cash flows from the wind-down process were not material. Total loss on discontinued operations is as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
Dollars in thousands
2015
 
2014
 
2015
 
2014
Redbox Canada
$
1,735

 
$
(2,023
)
 
$
(4,821
)
 
$
(5,743
)
Certain new ventures
—

 
(57
)
 
—

 
(768
)
Net income (loss) on discontinued operations
$
1,735

 
$
(2,080
)
 
$
(4,821
)
 
$
(6,511
)
Redbox Canada
The disposition and operating results of Redbox Canada are presented in discontinued operations in our Consolidated Statements of Comprehensive Income (Loss) for all periods presented. The following table sets forth the components of discontinued operations included in our Consolidated Statements of Comprehensive Income (Loss):

Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
Dollars in thousands
2015
 
2014
 
2015
 
2014
Major classes of line items constituting pretax loss of discontinued operations:
 
 
 
 





Revenue
$
—

 
$
2,643

 
$
1,557

 
$
5,250

Direct operating
35

 
4,325

 
4,304

 
8,918

Marketing
(17
)
 
647

 
112

 
1,251

General and administrative
35

 
378

 
154

 
614

Restructuring and lease termination costs
—

 
—

 
522

 
—

Depreciation and other
—

 
1,368

 
5,858

 
2,521

Amortization of intangible assets
—

 
7

 
44

 
13

Other income (expense), net
166

 
1,291

 
(4,329
)
 
198

Pretax income (loss) of discontinued operations related to major classes of pretax loss
113

 
(2,791
)
 
(13,766
)
 
(7,869
)
Income tax benefit(1)
1,622

 
768

 
8,945

 
2,126

Net income (loss) on discontinued operations
$
1,735

 
$
(2,023
)
 
$
(4,821
)
 
$
(5,743
)
(1)
The income tax benefit for the six months ended June 30, 2015 includes a benefit on the rate differential between the U.S. and Canada.



22

Significant operating and investing cash flows of Redbox Canada were as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
Dollars in thousands
2015
 
2014
 
2015
 
2014
Income (loss) on discontinued operations
$
1,735

 
$
(2,023
)
 
$
(4,821
)
 
$
(5,743
)
Adjustments to reconcile net loss to net cash flows from operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
—

 
1,375

 
5,902

 
2,534

Content library
148

 
(60
)
 
3,212

 
409

Prepaid and other current assets
690

 
(117
)
 
1,234

 
29

Accounts payable
(1,095
)
 
115

 
(2,716
)
 
(851
)
Accrued payables to retailers
—

 
150

 
(155
)
 
302

Other accrued liabilities
(585
)
 
(360
)
 
(617
)
 
(24
)
Net cash flows from (used in) operating activities
$
893

 
$
(920
)
 
$
2,039

 
$
(3,344
)
Investing activities:
 
 
 
 
 
 
 
Purchase of property, plant and equipment
—

 
(1,505
)
 
(278
)
 
(4,271
)
Total cash flows used in investing activities
$
—

 
$
(1,505
)
 
$
(278
)
 
$
(4,271
)



23

Note 13: Earnings Per Share

Beginning in the first quarter of 2015, we began applying the two-class method of calculating basic and diluted earnings per share (the “Two-Class Method”) as it became significantly more dilutive than the previously applied treasury stock method as a result of stock repurchases increasing the average number of unvested restricted awards as a percentage of total common shares outstanding.
The Two-Class Method is an earnings allocation formula that treats a participating security, as having rights to earnings that otherwise would have been available to common shareholders and assumes all earnings for the period are distributed. Our unvested restricted stock awards granted are participating securities as they entitle recipients to receive nonforfeitable dividends during the vesting period on a basis equivalent to the dividends paid to holders of common stock. Due to our net loss position for the three and six month periods ended June 30, 2015, losses are not allocated to participating shares for the purpose of calculating basic and diluted EPS as restricted stock holders are not required to fund losses.
Basic and diluted weighted average shares were the same for the three and six month periods ended June 30, 2015, as the effects of potentially dilutive securities were antidilutive due to our net loss position. Our calculation of basic and diluted earnings per share is as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
In thousands, except per share data
2015
 
2014
 
2015
 
2014
Numerator
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(47,351
)
 
$
23,833

 
$
(5,196
)
 
$
51,439

Income (loss) from discontinued operations, net of tax
1,735

 
(2,080
)
 
(4,821
)
 
(6,511
)
Net income (loss)
$
(45,616
)
 
$
21,753

 
$
(10,017
)
 
$
44,928

 
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(47,351
)
 
$
23,833

 
$
(5,196
)
 
$
51,439

Dividends and undistributed income allocated to participating shares
(121
)
 
(817
)
 
(269
)
 
(1,559
)
Income (loss) from continuing operations to common shares - basic
(47,472
)
 
23,016

 
(5,465
)
 
49,880

Effect of reallocating undistributed income from continuing operations to participating shares
—

 
20

 
—

 
38

Income (loss) from continuing operations to common shares - diluted
$
(47,472
)
 
$
23,036

 
$
(5,465
)
 
$
49,918

 
 
 
 
 
 
 
 
Denominator
 
 
 
 
 
 
 
Weighted average common shares - basic
17,848

 
19,541

 
18,057

 
21,730

Dilutive effect of share-based payment awards
—

 
98

 
—

 
108

Dilutive effect of convertible debt
—

 
409

 
—

 
460

Weighted average common shares - diluted(1)
17,848

 
20,048

 
18,057

 
22,298

 
 
 
 
 
 
 
 
Basic earnings (loss) per common share:
 
 
 
 
 
 
 
Continuing operations
$
(2.66
)
 
$
1.18

 
$
(0.30
)
 
$
2.30

Discontinued operations
0.10

 
(0.11
)
 
(0.27
)
 
(0.30
)
Basic earnings (loss) per common share
$
(2.56
)
 
$
1.07

 
$
(0.57
)
 
$
2.00

 
 
 
 
 
 
 
 
Diluted earnings (loss) per common share:
 
 
 
 
 
 
 
Continuing operations
$
(2.66
)
 
$
1.15

 
$
(0.30
)
 
$
2.24

Discontinued operations
0.10

 
(0.10
)
 
(0.27
)
 
(0.29
)
Diluted earnings (loss) per common share
$
(2.56
)
 
$
1.05

 
$
(0.57
)
 
$
1.95

 
 
 
 
 
 
 
 
Stock options and share-based awards not included in diluted EPS calculation because their effect would have be antidilutive
14

 
2

 
16

 
7

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


24

Note 14: Business Segments and Enterprise-Wide Information
Management, including our chief operating decision maker, who is our CEO, evaluates the performances of our business segments primarily on segment revenue and segment operating income (loss) before depreciation, amortization and other, and share-based compensation granted to executives, non-employee directors and employees (“segment operating income (loss)”). Segment operating income (loss) contains internally allocated costs of our shared service support functions, including but not limited to, corporate executive management, business development, sales, finance, legal, human resources, information technology and risk management. We also review depreciation and amortization allocated to each segment. Share-based payments expense related to share-based compensation granted to executives, non-employee directors and employees and expense related to the rights to receive cash issued in connection with our acquisition of ecoATM are not allocated to our segments and are included in the Corporate Unallocated column in the analysis and reconciliation below; however, share-based payments expense related to our content arrangements with certain movie studios has been allocated to our Redbox segment and is included within direct operating expenses. Our performance evaluation does not include segment assets.
Changes in our Organizational Structure
During the first quarter of 2015, we added ecoATM, our electronic device recycling business, as a separate reportable segment. Previously, the results of ecoATM along with those of other self-service concepts were included in our New Ventures segment. The combined results of the other self-service concepts, which include product sampling kiosk concept SAMPLEit, are now included in the All Other reporting category in the reconciliation below as they do not meet quantitative thresholds to be reported as a separate segment. All goodwill previously allocated to the New Ventures segment has been allocated to the ecoATM segment. See Note 6: Goodwill and Other Intangible Assets for further information.
Comparability of Segment Results
We have recast prior period results for the following:
•
Discontinued operations, consisting of our Redbox operations in Canada which we shut down during the first quarter of 2015. See Note 12: Discontinued Operations for further information; and
•
The addition of our ecoATM segment and an All Other reporting category, which we added during the first quarter of 2015.
Our analysis and reconciliation of our segment information to the consolidated financial statements that follows covers our results of operations, which consists of our Redbox, Coinstar and ecoATM segments, Corporate Unallocated expenses and All Other. All Other includes the results of other self-service concepts, which we regularly assess to determine whether continued funding or other alternatives are appropriate.
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 (Note 6)
—

 
—

 
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
)


25

Dollars in thousands
 
Three Months Ended June 30, 2014
Redbox
 
Coinstar
 
ecoATM
 
All Other
 
Corporate Unallocated
 
Total
Revenue
$
442,838

 
$
79,880

 
$
23,799

 
$
10

 
$
—

 
$
546,527

Expenses:
 
 
 
 
 
 
 
 
 
 
 
Direct operating
317,376

 
40,203

 
22,387

 
436

 
1,332

 
381,734

Marketing
5,533

 
1,557

 
927

 
220

 
899

 
9,136

Research and development
18

 
153

 
1,391

 
675

 
1,175

 
3,412

General and administrative
33,692

 
7,169

 
3,564

 
573

 
3,598

 
48,596

Segment operating income (loss)
86,219

 
30,798

 
(4,470
)
 
(1,894
)
 
(7,004
)
 
103,649

Less: depreciation, amortization and other
(38,783
)
 
(8,921
)
 
(3,812
)
 
(136
)
 
—

 
(51,652
)
Operating income (loss)
47,436

 
21,877

 
(8,282
)
 
(2,030
)
 
(7,004
)
 
51,997

Loss from equity method investments, net
—

 
—

 
—

 
—

 
(10,541
)
 
(10,541
)
Interest expense, net
—

 
—

 
—

 
—

 
(12,932
)
 
(12,932
)
Other, net
—

 
—

 
—

 
—

 
1,614

 
1,614

Income (loss) from continuing operations before income taxes
$
47,436

 
$
21,877

 
$
(8,282
)
 
$
(2,030
)
 
$
(28,863
)
 
$
30,138


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 lease termination costs (Note 11)
15,174

 
550

 
127

 
—

 
—

 
15,851

Goodwill impairment (Note 6)
—

 
—

 
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




26

Dollars in thousands
 
Six Months Ended June 30, 2014
Redbox
 
Coinstar
 
ecoATM
 
All Other
 
Corporate Unallocated
 
Total
Revenue
$
955,887

 
$
148,633

 
$
39,745

 
$
24

 
$
—

 
$
1,144,289

Expenses:
 
 
 
 
 
 
 
 
 
 
 
Direct operating
680,977

 
77,926

 
38,318

 
844

 
3,311

 
801,376

Marketing
9,993

 
2,563

 
1,595

 
381

 
1,597

 
16,129

Research and development
26

 
422

 
3,175

 
1,307

 
1,956

 
6,886

General and administrative
72,393

 
14,166

 
6,443

 
1,494

 
6,708

 
101,204

Restructuring and lease termination costs (Note 11)
534

 
23

 
—

 
—

 
—

 
557

Segment operating income (loss)
191,964

 
53,533

 
(9,786
)
 
(4,002
)
 
(13,572
)
 
218,137

Less: depreciation, amortization and other
(78,187
)
 
(17,484
)
 
(7,524
)
 
(241
)
 
—

 
(103,436
)
Operating income (loss)
113,777

 
36,049

 
(17,310
)
 
(4,243
)
 
(13,572
)
 
114,701

Loss from equity method investments, net
—

 
—

 
—

 
—

 
(19,909
)
 
(19,909
)
Interest expense, net
—

 
—

 
—

 
—

 
(22,580
)
 
(22,580
)
Other, net
—

 
—

 
—

 
—

 
966

 
966

Income (loss) from continuing operations before income taxes
$
113,777

 
$
36,049

 
$
(17,310
)
 
$
(4,243
)
 
$
(55,095
)
 
$
73,178

Significant Retailer Relationships
The following retailers accounted for 10% or more of our consolidated revenue:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Wal-Mart Stores Inc.
16.4
%
 
15.1
%
 
16.4
%
 
15.2
%
Walgreen Co.
13.5
%
 
13.7
%
 
14.0
%
 
14.0
%
The Kroger Company
10.0
%
 
9.9
%
 
9.9
%
 
9.8
%
Note 15: Fair Value
Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, we use a three-tier valuation hierarchy based upon observable and non-observable inputs:
•
Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities;
•
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; or
•
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
The factors or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.


27

Assets and Liabilities Measured and Reported at Fair Value on a Recurring Basis
The following table presents our financial assets and (liabilities) that are measured and reported at fair value in our Consolidated Balance Sheets on a recurring basis, by level within the fair value hierarchy (in thousands):
Fair Value at June 30, 2015
Level 1
 
Level 2
 
Level 3
Money market demand accounts and investment grade fixed income securities
$
22,012

 
$
—

 
$
—

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

 
$
—

 
$
—

Money Market Demand Accounts and Investment Grade Fixed Income Securities
We determine fair value for our money market demand accounts and investment grade fixed income securities based on quoted market prices. The fair value of these assets is included in cash and cash equivalents on our Consolidated Balance Sheets.
Assets and Liabilities Measured and Reported at Fair Value on a Nonrecurring Basis
We recognize or disclose the fair value of certain assets such as non-financial assets, primarily long-lived assets, goodwill, intangible assets and certain other assets in connection with impairment evaluations. All of our nonrecurring valuations use significant unobservable inputs and therefore fall under Level 3 of the fair value hierarchy.
For more information regarding the goodwill impairment charge recognized in the three months ended June 30, 2015, and the related fair value, see Note 6: Goodwill and Other Intangible Assets.
Fair Value of Other Financial Instruments
The carrying value of our term loans approximates their fair value and falls under Level 2 of the fair value hierarchy.
We estimated the fair value of our senior unsecured notes due 2019 and 2021 outstanding using quoted market prices by independent dealers. The estimated fair value of our senior unsecured notes due 2019 and 2021 was approximately $350.0 million and $300.0 million, at June 30, 2015 and December 31, 2014, respectively. The fair value estimate of our senior unsecured notes falls under Level 2 of the fair value hierarchy. We have reported the carrying value, face value less the unamortized debt discount, of our senior unsecured notes, issued at par, in our Consolidated Balance Sheets.


28

Note 16: Commitments and Contingencies
Lease Commitments
Operating Leases
During the first half of 2015, we made the following changes to our operating leases:
•
We early terminated our operating lease of certain floors of our Redbox headquarters and recognized the fair value of the ongoing lease payments and other related costs through the effective date of termination, July 31, 2016, as of the cease use date, March 31, 2015. See Note 11: Restructuring for additional information; and
•
We entered into a new operating lease of 16,085 square feet of office space in Woodland Hills, California which expires May 31, 2022.
As of June 30, 2015, our future minimum lease payments, net of sublease income are as follows:
Dollars in thousands
Operating Leases(1)
Remaining in 2015
$
8,875

2016
14,624

2017
10,718

2018
6,891

2019
6,123

Thereafter
11,682

Total minimum lease commitments
58,913

Less: sublease income
(1,955
)
Total minimum lease commitments, net
$
56,958

(1)
Includes all operating leases having an initial or remaining non-cancelable lease term in excess of one year.
Purchase commitments
Pursuant to the manufacturing and services agreement entered into as part of the NCR Asset Acquisition, Outerwall, Redbox or an affiliate were committed to purchase goods and services from NCR for a period of five years from June 22, 2012. At the end of the five-year period, if the aggregate amount paid in margin to NCR for goods and services delivered was to equal less than $25.0 million, Outerwall was to pay NCR the difference between such aggregate amount and $25.0 million. We made no purchases in the six months ended June 30, 2015. As of June 30, 2015, our remaining commitment is $15.8 million under this arrangement.
We have also entered into other certain miscellaneous purchase agreements in the normal course of business, which resulted in total purchase commitments of $41.9 million as of June 30, 2015.
Content License Agreements
On July 14, 2015, Sony elected to exercise its option to extend our existing content license agreement with them. This will extend the license period through September 30, 2016. See Note 20: Subsequent Events for additional information.
On June 5, 2015, Redbox entered into an amendment to the existing April 22, 2010, agreement with Twentieth Century Fox Home Entertainment LLC (“Fox”) that maintains a 28-day window on Blu-ray Disc® and DVD titles through June 30, 2017, and includes a revenue sharing arrangement between Redbox and Fox.
On March 26, 2015, we entered into a revenue sharing agreement with Warner Home Video, a division of Warner Bros. Home Entertainment Inc., (the “Warner Agreement”) under which Redbox agrees to license minimum quantities of theatrical and direct-to-video titles for rental through March 31, 2017. The Warner Agreement maintains a 28-day window on such titles.


29

We have entered into certain license agreements to obtain content for movie and video game rentals. A summary of the estimated commitments in relation to these agreements as of June 30, 2015, is presented in the following table:
Dollars in thousands
 
 
Years Ended December 31,
Total
 
Remaining in 2015
 
2016
 
2017
Fox
$
224,013

 
$
53,148

 
$
106,134

 
$
64,731

Warner
167,570

 
54,366

 
92,245

 
20,959

Lionsgate
91,707

 
44,225

 
47,482

 
—

Universal
45,806

 
37,952

 
7,854

 
—

Paramount
33,276

 
33,276

 
—

 
—

Sony(1)
19,821

 
19,821

 
—

 
—

Total estimated commitments
$
582,193

 
$
242,788

 
$
253,715

 
$
85,690

(1)
Subsequent to quarter end and not included in this table, Sony elected to exercise its option to extend our existing content license agreement with them. This will extend the license period through September 30, 2016. See Note 20: Subsequent Events for additional information.
Letters of Credit
As of June 30, 2015, we had five irrevocable standby letters of credit that totaled $6.4 million. These standby letters of credit, which expire at various times through May 2016, are used to collateralize certain obligations to third parties. As of June 30, 2015, no amounts were outstanding under these standby letter of credit agreements.
Legal Matters
In October 2009, an Illinois resident, Laurie Piechur, individually and on behalf of all others similarly situated, filed a putative class action complaint against our Redbox subsidiary in the Circuit Court for the Twentieth Judicial Circuit, St. Clair County, Illinois. The plaintiff alleged that, among other things, Redbox charges consumers illegal and excessive late fees in violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, and that Redbox's rental terms violate the Illinois Rental Purchase Agreement Act or the Illinois Automatic Contract Renewal Act and the plaintiff is seeking monetary damages and other relief. In November 2009, Redbox removed the case to the U.S. District Court for the Southern District of Illinois. In February 2010, the District Court remanded the case to the Circuit Court for the Twentieth Judicial Circuit, St. Clair County, Illinois. In May 2010, the court denied Redbox's motion to dismiss the plaintiff's complaint. In November 2011, the plaintiff moved for class certification, and Redbox moved for summary judgment. The court denied Redbox's motion for summary judgment in February 2012. The plaintiff filed an amended complaint on April 19, 2012, and an amended motion for class certification on June 5, 2012. The court denied Redbox's motion to dismiss the amended complaint. The amended class certification motion was briefed and argued. At the hearing on plaintiff's amended motion for class certification, the plaintiff dismissed all claims but two and is pursuing only her claims under the Illinois Rental Purchase Agreement Act and the Illinois Automatic Contract Renewal Act. On May 21, 2013, the court denied plaintiff's amended class action motion. On January 29, 2014, the Illinois Supreme Court denied plaintiff’s petition for leave to appeal the trial court’s denial of class certification. Redbox has moved to dismiss all remaining claims on mootness grounds, and the Court granted Redbox’s motion on December 11, 2014. The plaintiffs appealed on January 7, 2015. We believe that the claims against us are without merit and intend to defend ourselves vigorously in this matter. Currently, no accrual has been established as it was not possible to estimate the possible loss or range of loss because this matter had not advanced to a stage where we could make any such estimate.



30

Note 17: Guarantor Subsidiaries
Certain of our wholly owned subsidiaries have, jointly and severally, fully and unconditionally guaranteed the Senior Notes. Pursuant to SEC regulations, we have presented in columnar format the condensed consolidating financial information for Outerwall Inc., the guarantor subsidiaries on a combined basis, and all non-guarantor subsidiaries on a combined basis in the following tables:
CONSOLIDATING BALANCE SHEETS
(unaudited)
 
As of June 30, 2015
(in thousands)
Outerwall Inc.
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Eliminations and Consolidation Reclassifications
 
Total
Assets
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
171,245

 
$
23,961

 
$
42,502

 
$
—

 
$
237,708

Accounts receivable, net of allowances
3,558

 
29,103

 
771

 
—

 
33,432

Content library
—

 
146,348

 
208

 
—

 
146,556

Prepaid expenses and other current assets
36,874

 
26,083

 
1,129

 
(4,022
)
 
60,064

Intercompany receivables
30,171

 
541,671

 
428

 
(572,270
)
 
—

Total current assets
241,848

 
767,166

 
45,038

 
(576,292
)
 
477,760

Property and equipment, net
112,823

 
231,284

 
16,338

 
—

 
360,445

Deferred income taxes
—

 
4,890

 
2,480

 
(4,890
)
 
2,480

Goodwill and other intangible assets, net
249,709

 
281,737

 
—

 
—

 
531,446

Other long-term assets
5,828

 
985

 
285

 
—

 
7,098

Investment in related parties
916,223

 
30,486

 
—

 
(946,709
)
 
—

Total assets
$
1,526,431

 
$
1,316,548

 
$
64,141

 
$
(1,527,891
)
 
$
1,379,229

Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
10,845

 
$
136,143

 
$
221

 
$
—

 
$
147,209

Accrued payable to retailers
69,668

 
32,295

 
12,852

 
—

 
114,815

Other accrued liabilities
57,665

 
72,296

 
2,064

 
2,541

 
134,566

Current portion of long-term debt and other long-term liabilities
18,116

 
—

 
374

 
—

 
18,490

Deferred income taxes
—

 
32,239

 
—

 
(6,563
)
 
25,676

Intercompany payables
445,218

 
109,170

 
17,882

 
(572,270
)
 
—

Total current liabilities
601,512

 
382,143

 
33,393

 
(576,292
)
 
440,756

Long-term debt and other long-term liabilities
873,656

 
18,182

 
237

 
—

 
892,075

Deferred income taxes
27,102

 
—

 
25

 
(4,890
)
 
22,237

Total liabilities
1,502,270

 
400,325

 
33,655

 
(581,182
)
 
1,355,068

Commitments and contingencies
 
 
 
 
 
 
 
 
 
Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
Preferred stock
—

 
—

 
—

 
—

 
—

Common stock
591,772

 
234,729

 
18,393

 
(367,635
)
 
477,259

Treasury stock
(1,055,447
)
 
—

 
—

 
—

 
(1,055,447
)
Retained earnings
488,055

 
681,494

 
8,857

 
(579,074
)
 
599,332

Accumulated other comprehensive income (loss)
(219
)
 
—

 
3,236

 
—

 
3,017

Total stockholders’ equity
24,161

 
916,223

 
30,486

 
(946,709
)
 
24,161

Total liabilities and stockholders’ equity
$
1,526,431

 
$
1,316,548

 
$
64,141

 
$
(1,527,891
)
 
$
1,379,229



31

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

 
$
17,939

 
$
43,868

 
$
—

 
$
242,696

Accounts receivable, net of allowances
3,203

 
43,874

 
1,513

 
—

 
48,590

Content library
—

 
176,490

 
3,631

 
—

 
180,121

Prepaid expenses and other current assets
21,442

 
23,923

 
1,030

 
(6,558
)
 
39,837

Intercompany receivables
40,762

 
467,181

 
—

 
(507,943
)
 
—

Total current assets
246,296

 
729,407

 
50,042

 
(514,501
)
 
511,244

Property and equipment, net
133,923

 
263,412

 
31,133

 
—

 
428,468

Deferred income taxes
—

 
—

 
11,378

 
—

 
11,378

Goodwill and other intangible assets, net
249,717

 
374,281

 
—

 
—

 
623,998

Other long-term assets
6,665

 
1,231

 
335

 
—

 
8,231

Investment in related parties
917,234

 
(5,114
)
 
—

 
(912,120
)
 
—

Total assets
$
1,553,835

 
$
1,363,217

 
$
92,888

 
$
(1,426,621
)
 
$
1,583,319

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

 
$
153,260

 
$
2,474

 
$
—

 
$
168,633

Accrued payable to retailers
69,189

 
42,977

 
14,124

 
—

 
126,290

Other accrued liabilities
59,770

 
74,536

 
2,820

 
—

 
137,126

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

 
—

 
396

 
—

 
20,416

Deferred income taxes
—

 
27,961

 
29

 
(6,558
)
 
21,432

Intercompany payables
309,932

 
121,015

 
76,996

 
(507,943
)
 
—

Total current liabilities
471,810

 
419,749

 
96,839

 
(514,501
)
 
473,897

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

 
22,946

 
1,135

 
—

 
973,669

Deferred income taxes
35,058

 
3,288

 
29

 
—

 
38,375

Total liabilities
1,456,456

 
445,983

 
98,003

 
(514,501
)
 
1,485,941

Commitments and contingencies
 
 
 
 
 
 
 
 
 
Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
Preferred stock
—

 
—

 
—

 
—

 
—

Common stock
588,105

 
225,729

 
12,393

 
(352,635
)
 
473,592

Treasury stock
(996,293
)
 
—

 
—

 
—

 
(996,293
)
Retained earnings
506,360

 
691,505

 
(17,991
)
 
(559,485
)
 
620,389

Accumulated other comprehensive income (loss)
(793
)
 
—

 
483

 
—

 
(310
)
Total stockholders’ equity
97,379

 
917,234

 
(5,115
)
 
(912,120
)
 
97,378

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

 
$
1,363,217

 
$
92,888

 
$
(1,426,621
)
 
$
1,583,319



32

CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
 
Three Months Ended June 30, 2015
(in thousands)
Outerwall Inc.
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Eliminations and Consolidation Reclassifications
 
Total
Revenue
$
68,687

 
$
465,039

 
$
11,643

 
$
—

 
$
545,369

Expenses:
 
 
 
 
 
 
 
 
 
Direct operating
35,397

 
328,952

 
5,270

 
—

 
369,619

Marketing
1,477

 
6,543

 
27

 
—

 
8,047

Research and development
1

 
2,038

 
—

 
—

 
2,039

General and administrative
11,767

 
36,820

 
196

 
—

 
48,783

Depreciation and other
8,051

 
36,063

 
1,060

 
—

 
45,174

Amortization of intangible assets
4

 
3,305

 
—

 
—

 
3,309

Goodwill impairment (Note 6)
—

 
85,890

 
—

 
—

 
85,890

Total expenses
56,697

 
499,611

 
6,553

 
—

 
562,861

Operating income (loss)
11,990

 
(34,572
)
 
5,090

 
—

 
(17,492
)
Other income (expense), net:
 
 
 
 
 
 
 
 
 
Loss from equity method investments, net
(133
)
 
—

 
—

 
—

 
(133
)
Interest income (expense), net
(12,485
)
 
317

 
(15
)
 
—

 
(12,183
)
Other, net
3,142

 
80

 
(2,580
)
 
—

 
642

Total other income (expense), net
(9,476
)
 
397

 
(2,595
)
 
—

 
(11,674
)
Income (loss) from continuing operations before income taxes
2,514

 
(34,175
)
 
2,495

 
—

 
(29,166
)
Income tax benefit (expense)
5,981

 
(23,736
)
 
(430
)
 
—

 
(18,185
)
Income (loss) from continuing operations
8,495

 
(57,911
)
 
2,065

 
—

 
(47,351
)
Income (loss) from discontinued operations, net of tax
(856
)
 
1,221

 
1,370

 
—

 
1,735

Equity in income (loss) of subsidiaries
(53,255
)
 
3,435

 
—

 
49,820

 
—

Net income (loss)
(45,616
)
 
(53,255
)
 
3,435

 
49,820

 
(45,616
)
Foreign currency translation adjustment(1)
638

 
—

 
(165
)
 
—

 
473

Comprehensive income (loss)
$
(44,978
)
 
$
(53,255
)
 
$
3,270

 
$
49,820

 
$
(45,143
)
(1)
Foreign currency translation adjustment had no tax effect for the three months ended June 30, 2015.



33

CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
 
Three Months Ended June 30, 2014
(in thousands)
Outerwall Inc.
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Eliminations and Consolidation Reclassifications
 
Total
Revenue
$
68,085

 
$
466,639

 
$
11,803

 
$
—

 
$
546,527

Expenses:
 
 
 
 
 
 
 
 
 
Direct operating
35,401

 
340,591

 
5,742

 
—

 
381,734

Marketing
1,651

 
7,351

 
134

 
—

 
9,136

Research and development
832

 
2,580

 
—

 
—

 
3,412

General and administrative
10,365

 
37,995

 
236

 
—

 
48,596

Depreciation and other
9,469

 
37,221

 
1,122

 
—

 
47,812

Amortization of intangible assets
536

 
3,304

 
—

 
—

 
3,840

Total expenses
58,254

 
429,042

 
7,234

 
—

 
494,530

Operating income
9,831

 
37,597

 
4,569

 
—

 
51,997

Other income (expense), net:
 
 
 
 
 
 
 
 
 
Loss from equity method investments, net
(224
)
 
(10,317
)
 
—

 
—

 
(10,541
)
Interest income (expense), net
(12,971
)
 
91

 
(52
)
 
—

 
(12,932
)
Other, net
4,114

 
58

 
(2,558
)
 
—

 
1,614

Total other expense, net
(9,081
)
 
(10,168
)
 
(2,610
)
 
—

 
(21,859
)
Income from continuing operations before income taxes
750

 
27,429

 
1,959

 
—

 
30,138

Income tax benefit (expense)
920

 
(6,935
)
 
(290
)
 
—

 
(6,305
)
Income from continuing operations
1,670

 
20,494

 
1,669

 
—

 
23,833

Loss from discontinued operations, net of tax
(94
)
 
(58
)
 
(1,928
)
 
—

 
(2,080
)
Equity in income (loss) of subsidiaries
20,177

 
(259
)
 
—

 
(19,918
)
 
—

Net income (loss)
21,753

 
20,177

 
(259
)
 
(19,918
)
 
21,753

Foreign currency translation adjustment(1)
297

 
—

 
(633
)
 
—

 
(336
)
Comprehensive income (loss)
$
22,050

 
$
20,177

 
$
(892
)
 
$
(19,918
)
 
$
21,417

(1)
Foreign currency translation adjustment had no tax effect for the three months ended June 30, 2014.







34

CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
 
Six Months Ended June 30, 2015
(in thousands)
Outerwall Inc.
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Eliminations and Consolidation Reclassifications
 
Total
Revenue
$
127,497

 
$
1,004,320

 
$
22,188

 
$
—

 
$
1,154,005

Expenses:
 
 
 
 
 
 
 
 
 
Direct operating
69,123

 
695,363

 
10,317

 
—

 
774,803

Marketing
2,991

 
13,449

 
27

 
—

 
16,467

Research and development
(83
)
 
4,206

 
—

 
—

 
4,123

General and administrative
23,823

 
73,115

 
401

 
—

 
97,339

Restructuring and lease termination costs
551

 
15,300

 
—

 
—

 
15,851

Depreciation and other
12,700

 
73,046

 
2,114

 
—

 
87,860

Amortization of intangible assets
7

 
6,611

 
—

 
—

 
6,618

Goodwill impairment (Note 6)
—

 
85,890

 
—

 
—

 
85,890

Total expenses
109,112

 
966,980

 
12,859

 
—

 
1,088,951

Operating income
18,385

 
37,340

 
9,329

 
—

 
65,054

Other income (expense), net:
 
 
 
 
 
 
 
 
 
Loss from equity method investments, net
(265
)
 
—

 
—

 
—

 
(265
)
Interest income (expense), net
(24,881
)
 
692

 
(65
)
 
—

 
(24,254
)
Other, net
5,578

 
64

 
(7,346
)
 
—

 
(1,704
)
Total other income (expense), net
(19,568
)
 
756

 
(7,411
)
 
—

 
(26,223
)
Income (loss) from continuing operations before income taxes
(1,183
)
 
38,096

 
1,918

 
—

 
38,831

Income tax benefit (expense)
5,433

 
(49,046
)
 
(414
)
 
—

 
(44,027
)
Income (loss) from continuing operations
4,250

 
(10,950
)
 
1,504

 
—

 
(5,196
)
Income (loss) from discontinued operations, net of tax
668

 
(27,833
)
 
22,344

 
—

 
(4,821
)
Equity in income (loss) of subsidiaries
(14,935
)
 
23,848

 
—

 
(8,913
)
 
—

Net income (loss)
(10,017
)
 
(14,935
)
 
23,848

 
(8,913
)
 
(10,017
)
Foreign currency translation adjustment(1)
574

 
—

 
2,753

 
—

 
3,327

Comprehensive income (loss)
$
(9,443
)
 
$
(14,935
)
 
$
26,601

 
$
(8,913
)
 
$
(6,690
)
(1)
Foreign currency translation adjustment had no tax effect for the six months ended June 30, 2015.


35

CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
 
Six Months Ended June 30, 2014
(in thousands)
Outerwall Inc.
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Eliminations and Consolidation Reclassifications
 
Total
Revenue
$
126,262

 
$
995,633

 
$
22,394

 
$
—

 
$
1,144,289

Expenses:
 
 
 
 
 
 
 
 
 
Direct operating
68,469

 
721,692

 
11,215

 
—

 
801,376

Marketing
2,778

 
13,161

 
190

 
—

 
16,129

Research and development
1,728

 
5,158

 
—

 
—

 
6,886

General and administrative
20,617

 
80,147

 
440

 
—

 
101,204

Restructuring and lease termination costs
23

 
534

 
—

 
—

 
557

Depreciation and other
18,571

 
74,961

 
2,222

 
—

 
95,754

Amortization of intangible assets
1,072

 
6,610

 
—

 
—

 
7,682

Total expenses
113,258

 
902,263

 
14,067

 
—

 
1,029,588

Operating income
13,004

 
93,370

 
8,327

 
—

 
114,701

Other income (expense), net:
 
 
 
 
 
 
 
 
 
Loss from equity method investments, net
(448
)
 
(19,461
)
 
—

 
—

 
(19,909
)
Interest income (expense), net
(22,602
)
 
123

 
(101
)
 
—

 
(22,580
)
Other, net
5,721

 
122

 
(4,877
)
 
—

 
966

Total other expense, net
(17,329
)
 
(19,216
)
 
(4,978
)
 
—

 
(41,523
)
Income (loss) from continuing operations before income taxes
(4,325
)
 
74,154

 
3,349

 
—

 
73,178

Income tax benefit (expense)
3,248

 
(24,450
)
 
(537
)
 
—

 
(21,739
)
Income (loss) from continuing operations
(1,077
)
 
49,704

 
2,812

 
—

 
51,439

Loss from discontinued operations, net of tax
(803
)
 
(205
)
 
(5,503
)
 
—

 
(6,511
)
Equity in income (loss) of subsidiaries
46,808

 
(2,691
)
 
—

 
(44,117
)
 
—

Net income (loss)
44,928

 
46,808

 
(2,691
)
 
(44,117
)
 
44,928

Foreign currency translation adjustment(1)
30

 
—

 
509

 
—

 
539

Comprehensive income (loss)
$
44,958

 
$
46,808

 
$
(2,182
)
 
$
(44,117
)
 
$
45,467

(1)
Foreign currency translation adjustment had no tax effect for the six months ended June 30, 2014.








36

CONSOLIDATING STATEMENTS OF CASH FLOWS
(unaudited)
 
Six Months Ended June 30, 2015
(in thousands)
Outerwall Inc.
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Eliminations and Consolidation Reclassifications
 
Total
Operating Activities:
 
 
 
 
 
 
 
 
 
Net income (loss)
$
(10,017
)
 
$
(14,935
)
 
$
23,848

 
$
(8,913
)
 
$
(10,017
)
Adjustments to reconcile net income (loss) to net cash flows from (used in) operating activities:
 
 
 
 
 
 
 
 
 
Depreciation and other
12,700

 
74,892

 
6,126

 
—

 
93,718

Amortization of intangible assets
7

 
6,611

 
44

 
—

 
6,662

Share-based payments expense
3,681

 
3,511

 
—

 
—

 
7,192

Windfall excess tax benefits related to share-based payments
(686
)
 
—

 
—

 
—

 
(686
)
Deferred income taxes
(8,029
)
 
(3,903
)
 
7,993

 
—

 
(3,939
)
Restructuring and lease termination costs
136

 
1,544

 
—

 
—

 
1,680

Loss from equity method investment, net
265

 
—

 
—

 
—

 
265

Amortization of deferred financing fees and debt discount
1,385

 
—

 
—

 
—

 
1,385

Goodwill impairment (Note 6)
—

 
85,890

 
—

 
—

 
85,890

Other
(265
)
 
176

 
(727
)
 
—

 
(816
)
Equity in (income) losses of subsidiaries
14,935

 
(23,848
)
 
—

 
8,913

 
—

Cash flows from changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
Accounts receivable, net
(357
)
 
14,773

 
661

 
—

 
15,077

Content library
—

 
31,236

 
3,423

 
—

 
34,659

Prepaid expenses and other current assets
(17,957
)
 
(4,455
)
 
330

 
—

 
(22,082
)
Other assets
47

 
245

 
30

 
—

 
322

Accounts payable
(2,022
)
 
(13,438
)
 
(2,237
)
 
—

 
(17,697
)
Accrued payable to retailers
479

 
(10,682
)
 
(1,307
)
 
—

 
(11,510
)
Other accrued liabilities
1,674

 
426

 
(988
)
 
—

 
1,112

Net cash flows from (used in) operating activities(1)
(4,024
)
 
148,043

 
37,196

 
—

 
181,215

Investing Activities:
 
 
 
 
 
 
 
 
 
Purchases of property and equipment
(13,869
)
 
(25,818
)
 
(530
)
 
—

 
(40,217
)
Proceeds from sale of property and equipment
17

 
2,923

 
—

 
—

 
2,940

Investments in and advances to affiliates
161,753

 
(119,126
)
 
(42,627
)
 
—

 
—

Net cash flows from (used in) investing activities(1)
147,901

 
(142,021
)
 
(43,157
)
 
—

 
(37,277
)
Financing Activities:
 
 
 
 
 
 
 
 
 
Proceeds from new borrowing of Credit Facility
112,000

 
—

 
—

 
—

 
112,000

Principal payments on Credit Facility
(185,750
)
 
—

 
—

 
—

 
(185,750
)
Repurchases of common stock
(62,731
)
 
—

 
—

 
—

 
(62,731
)
Dividends paid (Note 19)
(11,019
)
 
—

 
—

 
—

 
(11,019
)
Principal payments on capital lease obligations and other debt
(6,080
)
 
—

 
(198
)
 
—

 
(6,278
)
Windfall excess tax benefits related to share-based payments
686

 
—

 
—

 
—

 
686

Withholding tax paid on vesting of restricted stock net of proceeds from exercise of stock options
(1,201
)
 
—

 
—

 
—

 
(1,201
)
Net cash flows from (used in) financing activities(1)
(154,095
)
 
—

 
(198
)
 
—

 
(154,293
)
Effect of exchange rate changes on cash
574

 
—

 
4,793

 
—

 
5,367

Increase (decrease) in cash and cash equivalents
(9,644
)
 
6,022

 
(1,366
)
 
—

 
(4,988
)
Cash and cash equivalents:
 
 
 
 
 
 
 
 
 
Beginning of period
180,889

 
17,939

 
43,868

 
—

 
242,696

End of period
$
171,245

 
$
23,961

 
$
42,502

 
$
—

 
$
237,708

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


37

CONSOLIDATING STATEMENTS OF CASH FLOWS
(unaudited)
 
Six Months Ended June 30, 2014
(in thousands)
Outerwall Inc.
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Eliminations and Consolidation Reclassifications
 
Total
Operating Activities:
 
 
 
 
 
 
 
 
 
Net income (loss)
$
44,928

 
$
46,808

 
$
(2,691
)
 
$
(44,117
)
 
$
44,928

Adjustments to reconcile net income (loss) to net cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Depreciation and other
18,554

 
75,912

 
3,792

 
—

 
98,258

Amortization of intangible assets
1,072

 
6,623

 
—

 
—

 
7,695

Share-based payments expense
5,451

 
1,393

 
—

 
—

 
6,844

Windfall excess tax benefits related to share-based payments
(1,953
)
 
—

 
—

 
—

 
(1,953
)
Deferred income taxes
(2,451
)
 
(10,855
)
 
(1,698
)
 
—

 
(15,004
)
Loss from equity method investments, net
448

 
19,461

 
—

 
—

 
19,909

Amortization of deferred financing fees and debt discount
2,522

 
—

 
—

 
—

 
2,522

Loss from early extinguishment of debt
1,963

 
—

 
—

 
—

 
1,963

Other
(1,011
)
 
(180
)
 
27

 
—

 
(1,164
)
Equity in (income) losses of subsidiaries
(46,808
)
 
2,691

 
—

 
44,117

 
—

Cash flows from changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
Accounts receivable, net
528

 
4,514

 
289

 
—

 
5,331

Content library
36

 
47,037

 
413

 
—

 
47,486

Prepaid expenses and other current assets
20,618

 
1,105

 
98

 
182

 
22,003

Other assets
42

 
979

 
15

 
—

 
1,036

Accounts payable
(3,201
)
 
(67,218
)
 
(576
)
 
—

 
(70,995
)
Accrued payable to retailers
4,146

 
(13,460
)
 
2,591

 
—

 
(6,723
)
Other accrued liabilities
(3,874
)
 
(978
)
 
318

 
(182
)
 
(4,716
)
Net cash flows from (used in) operating activities(1)
41,010

 
113,832

 
2,578

 
—

 
157,420

Investing Activities:
 
 
 
 
 
 
 
 
 
Purchases of property and equipment
(17,458
)
 
(31,412
)
 
(4,146
)
 
—

 
(53,016
)
Proceeds from sale of property and equipment
750

 
1,043

 
—

 
—

 
1,793

Cash paid for equity investments
—

 
(10,500
)
 
—

 
—

 
(10,500
)
Investments in and advances to affiliates
69,392

 
(71,176
)
 
1,784

 
—

 
—

Net cash flows from (used in) investing activities(1)
52,684

 
(112,045
)
 
(2,362
)
 
—

 
(61,723
)
Financing Activities:
 
 
 
 
 
 
 
 
 
Proceeds from issuance of senior unsecured notes
295,500

 
—

 
—

 
—

 
295,500

Proceeds from new borrowing on Credit Facility
505,000

 
—

 
—

 
—

 
505,000

Principal payments on Credit Facility
(534,375
)
 
—

 
—

 
—

 
(534,375
)
Financing costs associated with Credit Facility and senior unsecured notes
(2,082
)
 
—

 
—

 
—

 
(2,082
)
Settlement and conversion of convertible debt
(17,724
)
 
—

 
—

 
—

 
(17,724
)
Repurchases of common stock
(474,480
)
 
—

 
—

 
—

 
(474,480
)
Principal payments on capital lease obligations and other debt
(6,863
)
 
(3
)
 
(215
)
 
—

 
(7,081
)
Windfall excess tax benefits related to share-based payments
1,953

 
—

 
—

 
—

 
1,953

Withholding tax paid on vesting of restricted stock net of proceeds from exercise of stock options
(1,025
)
 
—

 
—

 
—

 
(1,025
)
Net cash flows from (used in) financing activities(1)
(234,096
)
 
(3
)
 
(215
)
 
—

 
(234,314
)


38

(in thousands)
Outerwall Inc.
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Eliminations and Consolidation Reclassifications
 
Total
Effect of exchange rate changes on cash
5

 
—

 
401

 
—

 
406

Increase (decrease) in cash and cash equivalents
(140,397
)
 
1,784

 
402

 
—

 
(138,211
)
Cash and cash equivalents:
 
 
 
 
 
 
 
 
 
Beginning of period
315,250

 
9,639

 
46,548

 
—

 
371,437

End of period
$
174,853

 
$
11,423

 
$
46,950

 
$
—

 
$
233,226

(1)
2014 includes the wind-down process of certain new ventures that were discontinued during 2013. Cash flows from these discontinued operations were not significant and are not segregated from cash flows from continuing operations in all periods presented.



39

Note 18: Income Taxes From Continuing Operations
Our effective tax rate from continuing operations was (62.4)% and 20.9% for the three months ended June 30, 2015 and 2014, respectively, and 113.4% and 29.7% for the six months ended June 30, 2015 and 2014, respectively.
Our effective tax rate for the three months ended June 30, 2015, was higher than the U.S. Federal statutory rate of 35.0% primarily due to an $85.9 million non-tax deductible goodwill impairment charge that was recorded in the second quarter of 2015 and state income taxes, partially offset by the domestic production activities deduction and a net decrease in valuation allowances related to capital loss carryforwards and state tax credit carryforwards.
Our effective tax rate for the three months ended June 30, 2014, was lower than the U.S. Federal statutory rate of 35.0% primarily due to a worthless stock deduction and the domestic production activities deduction, partially offset by state income taxes.
Our effective tax rate for the six months ended June 30, 2015, was higher than the U.S. Federal statutory rate of 35.0% primarily due to an $85.9 million non-tax deductible goodwill impairment charge that was recorded in the second quarter of 2015 and state income taxes, partially offset by the domestic production activities deduction.
Our effective tax rate for the six months ended June 30, 2014, was lower than the U.S. Federal statutory rate of 35.0% primarily due to a worthless stock deduction and the domestic production activities deduction, partially offset by state income taxes.
Note 19: Dividends

On May 5, 2015, the Board declared a quarterly cash dividend of $0.30 per share of common stock to shareholders of record at the close of business on June 9, 2015. The dividend was paid on June 23, 2015, and totaled $5.4 million including 0.1 million paid to recipients of unvested restricted stock awards, which participate in earnings on a basis equivalent to the dividends paid to holders of common stock.
On February 3, 2015, the Board declared a quarterly cash dividend of $0.30 per share of common stock to shareholders of record at the close of business on March 3, 2015. The dividend was paid on March 18, 2015, and totaled $5.6 million including $0.2 million paid to recipients of unvested restricted stock awards. See Note 13: Earnings Per Share for additional information.
Note 20: Subsequent Events

On July 14, 2015, Sony elected to exercise its option to extend our existing content license agreement with them. This will extend the license period through September 30, 2016, with no further options to renew, and require us to issue 25,000 shares of additional restricted stock to Sony during the fourth quarter of 2015. After accounting for this extension, our total commitment to purchase content from Sony was approximately $157.8 million.

On July 28, 2015, the Board of directors declared a quarterly cash dividend of $0.30 per share expected to be paid on September 15, 2015, to all stockholders of record as of the close of business on August 28, 2015.



40

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. Except for the consolidated historical information, the following discussion contains forward-looking statements that involve risks and uncertainties, such as our objectives, expectations and intentions. Our actual results could differ materially from results that may be anticipated by such forward-looking statements and discussed elsewhere herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and those discussed under “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q and in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 (our “2014 Form 10-K”). Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made in this report and in our other reports filed with the SEC that attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations.
Overview
We are a leading provider of automated retail solutions offering convenient products and services that benefit consumers and drive incremental retail traffic and revenue for retailers. Our automated retail business model leverages technology advancements that allow delivery of new and innovative consumer products in a compact, automated format. We believe this model positions us to address retailers’ increasing need to provide more in less space driven by increased urbanization and consumers’ increasing expectation of instant gratification. Our products and services can be found at approximately 64,830 kiosks in leading supermarkets, drug stores, mass merchants, financial institutions, convenience stores, malls and restaurants. While we are focused on four consumer sectors: Entertainment, Money, Electronics, and Beauty & Consumer Packaged Goods, we also have an investment within the Health sector.
Core Offerings
We have three core businesses:
•
Our Redbox business segment (“Redbox”), where consumers can rent or purchase movies and video games from self-service kiosks, is focused on the entertainment consumer sector.
•
Our Coinstar business segment (“Coinstar”) is focused on the money consumer sector and provides self-service kiosks where consumers can convert their coins to cash and convert coins and paper bills to stored value products. We also offer self-service kiosks that exchange gift cards for cash under our Coinstar™ Exchange brand.
•
Our ecoATM business segment (“ecoATM”) is focused on the consumer electronics sector and provides self-service kiosks where consumers can recycle certain electronic devices for cash and generates revenue through the sale of devices collected at our kiosks to third parties.
Other Self-Service Concepts
In addition to our three reportable segments, we also conduct business activities through other self-service concepts, where we identify, evaluate, build or acquire and develop innovative new self-service concepts in the automated retail space. Currently, we are exploring in the marketplace our consumer product sampling kiosk concept SAMPLEit, in the Beauty and Consumer Packaged Goods sector. We regularly assess the performance of our concepts to determine whether continued funding or other alternatives are appropriate. The combined results of these concepts are included in the All Other reporting category as they do not meet quantitative thresholds to be reported as a separate segment.
Strategic Investments
On occasion, we make strategic investments in external companies that provide automated self-service kiosk solutions. For example, in the Health sector we have invested in Pursuant Health, Inc., formerly known as SoloHealth, Inc.
See Note 7: Equity Method Investments in our Notes to Consolidated Financial Statements for more information.


41

Strategy
Our strategy is based upon leveraging our core competencies in the automated retail space to provide the consumer with convenience and value and to help retailers drive incremental traffic and revenue. Our competencies include success in building strong consumer and retailer relationships, and in deploying, scaling and managing kiosk businesses. We build strong retailer relationships by providing retailers with turnkey solutions that complement their businesses without significant outlays of time and financial resources. We believe we have significant opportunities to continue to grow our revenues, profitability and cash flow by capitalizing on our strengths and favorable industry trends through the execution of the following strategies:

•
Continue growing our Redbox business profitably. We are focused on profitably growing Redbox through increased revenue generation and improved kiosk-operations efficiency.

We expect to grow revenue by attracting new customers, testing pricing strategies, improving the Blu-ray rental mix, and utilizing our customer management tools. Blu-ray drives revenue growth by shifting rentals to its higher revenue price point, $2.00 per night, and generates higher margin dollars per rental. Further, our customer management tools enable us to provide personalized recommendations and promotions to our customers, which helps us generate incremental revenue.

While we have substantially completed the build out of our Redbox network in the U.S., we believe we can improve financial performance by redeploying underperforming kiosks to lower kiosk density or higher consumer-traffic areas. We also have retrofitted a significant percentage of our existing kiosks to provide increased capacity, which enables Redbox to retain discs in the kiosks longer without a material increase in product cost thereby allowing us to provide greater title selection and copy depth to generate incremental rentals. We also continuously improve our proprietary algorithms allowing Redbox to more accurately predict daily title availability and demand at individual kiosk locations. From a financial perspective, we expect these strategies to help offset the expected secular decline in the physical rental market.

•
Optimize and grow revenues from our Coinstar business. As with Redbox, we believe we can improve financial performance in our Coinstar business through kiosk optimization. We continue to focus on finding attractive locations for our kiosks, including through redeployment of underperforming kiosks to lower-kiosk-density or higher-consumer-traffic areas. Further, the Coinstar business continues to develop consumer-oriented products and services, such as Coinstar Exchange, and to expand into other channels, such as financial institutions, where we can leverage our Coinstar platform.

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

•
Use our expertise to continue to develop our existing businesses and new innovative automated retail solutions. Through Redbox and Coinstar, we have demonstrated our ability to profitably scale automated retail solutions. We also leverage those core competencies to identify, evaluate, build or acquire, and develop new automated retail concepts through both organic and inorganic opportunities. For example, in the third quarter of 2013, we acquired ecoATM, one of our previous strategic investments. Further, we continue to make modest investments to test our product sampling kiosk concept, SAMPLEit. We are committed to addressing the changing needs and preferences of our consumers, including through strategic investments.


42

Comparability of Results
We have recast prior period results to reflect the following:
•
Discontinued operations, consisting of our Redbox operations in Canada (“Redbox Canada”), which we shut down during the first quarter of 2015. See Note 12: Discontinued Operations in our Notes to Consolidated Financial Statements for additional information;
•
Added ecoATM, our electronic device recycling business, as a separate reportable segment. Previously, the results of ecoATM along with those of other self-service concepts were included in our New Ventures segment. The combined results of the other self-service concepts, which include our product sampling kiosk concept SAMPLEit, are now included in the All Other reporting category as they do not meet quantitative thresholds to be reported as a separate segment. See Note 14: Business Segments and Enterprise-Wide Information in our Notes to Consolidated Financial Statements for additional information; and
•
Calculated basic and diluted earnings per share under the two-class method (the “Two-Class Method”). During the first quarter of 2015, the Two-Class Method became significantly more dilutive than the previously applied treasury stock method as a result of stock repurchases increasing the average number of unvested restricted awards as a percentage of total common shares outstanding. See Note 13: Earnings Per Share in our Notes to Consolidated Financial Statements for additional information.
Recent Events
Subsequent Events
•
On July 14, 2015, Sony elected to exercise its option to extend our existing content license agreement with them. This will extend the license period through September 30, 2016, with no further options to renew, and require us to issue 25,000 shares of additional restricted stock to Sony during the fourth quarter of 2015. See Note 20: Subsequent Events in our Notes to Consolidated Financial Statements for additional information.
•
On July 28, 2015, the Board of directors declared a quarterly cash dividend of $0.30 per share expected to be paid on September 15, 2015, to all stockholders of record as of the close of business on August 28, 2015.
Q2 2015 Events
•
On June 23, 2015, we paid a cash dividend of $0.30 per outstanding share of our common stock totaling approximately $5.4 million;
•
On June 5, 2015, Redbox entered into an amendment to the existing April 22, 2010, agreement with Twentieth Century Fox Home Entertainment LLC (“Fox”) that maintains a 28-day window on Blu-ray Disc® and DVD titles through June 30, 2017, and includes a revenue sharing arrangement between Redbox and Fox; and
•
During the three months ended June 30, 2015, we repurchased 284,537 shares of our common stock at an average price per share of $77.40 for $22.0 million.  
•
During the three months ended June 30, 2015, we recognized a goodwill impairment charge of $85.9 million related to our ecoATM business segment. See Note 6: Goodwill and Other Intangible Assets in our Notes to Consolidated Financial Statements and the ecoATM results section below for additional information.
Q1 2015 Events
•
On March 31, 2015, we completed the shutdown of the Redbox Canada operations as the business was not meeting performance expectations. The value of the content library and certain capitalized property and equipment consisting primarily of installation costs were amortized over the wind-down period ending on the disposal date of March 31, 2015. See Note 12: Discontinued Operations in our Notes to Consolidated Financial Statements for additional information;
•
On March 31, 2015, we reduced the size of our Redbox headquarters facility in Oakbrook Terrace, Illinois through early termination of operating leases for certain floors. See Redbox results discussion and Note 11: Restructuring in our Notes to Consolidated Financial Statements for additional information;


43

•
On March 26, 2015, we entered into a revenue sharing agreement with Warner Home Video, a division of Warner Bros. Home Entertainment Inc., (the “Warner Agreement”) under which Redbox agrees to license minimum quantities of theatrical and direct-to-video titles for rental through March 31, 2017. The Warner Agreement maintains a 28-day window on such titles.
•
On March 18, 2015, we paid a cash dividend of $0.30 per outstanding share of our common stock totaling approximately $5.6 million; and
•
During the three months ended March 31, 2015, we repurchased 617,195 shares of our common stock at an average price of $65.96 per share for $40.7 million.  
Consolidated Results
The discussion and analysis that follows covers our results from continuing operations:
 
Three Months Ended
 
 
 
 
 
Six Months Ended
 
 
 
 
 
June 30,
 
Change
 
June 30,
 
Change
Dollars in thousands, except per share amounts
2015
 
2014
 
$
 
%
 
2015
 
2014
 
$
 
%
Revenue
$
545,369

 
$
546,527

 
$
(1,158
)
 
(0.2
)%
 
$
1,154,005

 
$
1,144,289

 
$
9,716

 
0.8
 %
Operating income (loss)
$
(17,492
)
 
$
51,997

 
$
(69,489
)
 
(133.6
)%
 
$
65,054

 
$
114,701

 
$
(49,647
)
 
(43.3
)%
Income (loss) from continuing operations
$
(47,351
)
 
$
23,833

 
$
(71,184
)
 
(298.7
)%
 
$
(5,196
)
 
$
51,439

 
$
(56,635
)
 
(110.1
)%
Diluted earnings (loss) from continuing operations per common share
$
(2.66
)
 
$
1.15

 
$
(3.81
)
 
(331.3
)%
 
$
(0.30
)
 
$
2.24

 
$
(2.54
)
 
(113.4
)%
Comparing three months ended June 30, 2015 to three months ended June 30, 2014
Revenue decreased $1.2 million, or 0.2%, primarily due to:
•
$3.9 million decrease from our Redbox segment primarily due to a 0.6% decrease in same store sales driven by a decline in rentals and the removal of underperforming kiosks, partially offset by price increases for movie content implemented in December 2014. Movie rentals were also impacted by the relative strength of content and the timing of the release slate;
•
$2.3 million increase from our ecoATM segment primarily due to the increase in number of kiosks installed partially offset by a decrease in the average selling prices of value devices sold; and
•
$0.4 million increase from our Coinstar segment, primarily due to the increase in number of Coinstar Exchange kiosks installed partially offset by lower volume in U.S. Coinstar kiosks.
Operating income (loss) decreased $69.5 million, or 133.6%, primarily due to:
•
$90.9 million increase in operating loss within our ecoATM segment, primarily due to the $85.9 million goodwill impairment charge recognized in 2015. Excluding the $85.9 million goodwill impairment charge, operating loss increased $5.0 million for our ecoATM segment primarily due to an increase in direct operating expenses and depreciation associated with the increase in the installed kiosk base; partially offset by
•
$18.4 million increase in operating income within our Redbox segment primarily due to:
◦
$15.9 million decrease in direct operating expenses driven primarily by lower product costs and rental volume; and
◦
$5.7 million decrease in depreciation and amortization primarily from lower kiosk related depreciation; partially offset by
◦
$3.9 million decrease in revenue.
•
$3.9 million decrease in share based expense not allocated to our segments primarily due to the continued vesting of rights to receive cash we issued as replacement awards for unvested restricted stock as part of our acquisition of ecoATM in the third quarter of 2013; and
•
$1.6 million increase in operating income within our Coinstar segment primarily due to a $0.4 million increase in revenue and lower operating expenses including depreciation and amortization, direct operating and research and development offset by general administrative, restructuring and marketing expenses.


44

Income (loss) from continuing operations decreased $71.2 million, or 298.7%, primarily due to:
•
$69.5 million decrease in operating income as described above; and
•
$11.9 million increase in income tax expense; partially offset by
•
$10.4 million lower losses from equity method investments due to our withdrawal from Redbox Instant by Verizon during the fourth quarter of 2014.
Comparing six months ended June 30, 2015 to six months ended June 30, 2014
Revenue increased $9.7 million, or 0.8% primarily due to:
•
$6.1 million increase from our ecoATM segment primarily due to the increase in number of kiosks installed partially offset by a decrease in the average selling prices of value devices sold;
•
$2.6 million increase from our Redbox segment primarily due to a 0.5% increase in same store sales driven by the benefit of price increases on the first six months of 2015, substantially offset by a decline in rentals during the first half of 2015 and the removal of underperforming kiosks. Movie rentals were also impacted by the relative strength of content and the timing of the release slate; and
•
$1.0 million increase from our Coinstar segment, primarily due to the increase in number of Coinstar Exchange kiosks installed partially offset by lower transactions in U.S. Coinstar kiosks.
Operating income decreased $49.6 million, or 43.3%, primarily due to:
•
$96.1 million increase in operating loss within our ecoATM segment, primarily due to the $85.9 million goodwill impairment charge recognized in 2015. Excluding the $85.9 million goodwill impairment charge, operating loss increased $10.2 million for our ecoATM segment primarily due to an increase in direct operating expenses and depreciation associated with the increase in the installed kiosk base; partially offset by
•
$43.3 million increase in operating income within our Redbox segment primarily due to:
◦
$36.6 million decrease in direct operating expenses driven primarily by lower product costs and rental volume;
◦
$13.5 million decrease in depreciation and amortization primarily from lower kiosk related depreciation;
◦
$4.3 million decrease in general and administrative expenses driven by ongoing cost reduction initiatives; and
◦
$2.6 million in revenue growth; partially offset by
◦
$14.6 million increase in restructuring and lease termination costs related mainly to early lease termination of certain floors at our Redbox headquarters and severance costs.
•
$5.9 million decrease in share based expense not allocated to our segments primarily due to the continued vesting of rights to receive cash we issued as replacement awards for unvested restricted stock as part of our acquisition of ecoATM in the third quarter of 2013; and
•
$2.2 million increase in operating income within our Coinstar segment primarily due to a $1.0 million increase in revenue and lower operating expenses including depreciation and amortization, direct operating and research and development offset by general administrative, restructuring and marketing expenses.
Income (loss) from continuing operations decreased $56.6 million, or 110.1%, primarily due to:
•
$49.6 million decrease in operating income as described above;
•
$22.3 million increase in income tax expense;
•
$2.7 million increase in other expenses primarily related to foreign exchange; and
•
$1.7 million increase in interest expense primarily due to a shift in the composition of our debt to higher fixed rate debt, partially offset by lower borrowings; partially offset by
•
$19.6 million lower losses from equity method investments due to our withdrawal from Redbox Instant by Verizon during the fourth quarter of 2014.


45

Share-Based Payments and Rights to Receive Cash
Our share-based payments consist of share-based compensation granted to executives, non-employee directors and employees and share-based payments granted to movie studios as part of content agreements. We grant stock options, restricted stock and performance-based restricted stock to executives and non-employee directors and restricted stock to our employees. In connection with our acquisition of ecoATM, we also granted certain rights to receive cash. The expense associated with the grants to movie studios is allocated to our Redbox segment and included within direct operating expenses. The expenses associated with share-based compensation to our executives, non-employee directors, employees and related to the rights to receive cash issued in connection with our acquisition of ecoATM are part of our shared services support function and are not allocated to our segments. The components of our unallocated share-based compensation expense are presented in the following table.
Unallocated Share-Based Compensation and Rights to Receive Cash Expense
 
Three Months Ended
 
 
 
 
 
Six Months Ended
 
 
 
 
 
June 30,
 
Change
 
June 30,
 
Change
Dollars in thousands
2015
 
2014
 
$
 
%
 
2015
 
2014
 
$
 
%
Direct operating
$
512

 
$
1,332

 
$
(820
)
 
(61.6
)%
 
$
1,501

 
$
3,311

 
$
(1,810
)
 
(54.7
)%
Marketing
142

 
899

 
(757
)
 
(84.2
)%
 
509

 
1,597

 
(1,088
)
 
(68.1
)%
Research and development
489

 
1,175

 
(686
)
 
(58.4
)%
 
1,202

 
1,956

 
(754
)
 
(38.5
)%
General and administrative
1,941

 
3,598

 
(1,657
)
 
(46.1
)%
 
4,492

 
6,708

 
(2,216
)
 
(33.0
)%
Total
$
3,084

 
$
7,004

 
$
(3,920
)
 
(56.0
)%
 
$
7,704

 
$
13,572

 
$
(5,868
)
 
(43.2
)%
*
Not Meaningful

Unallocated share-based compensation expense decreased $3.9 million, or 56.0% and $5.9 million, or 43.2% during the three and six months ended June 30, 2015, primarily due to the continued vesting of rights to receive cash we issued as replacement awards for unvested restricted stock as part of our acquisition of ecoATM in the third quarter of 2013 and changes in the fair value of restricted stock awards granted. See Note 10: Share-Based Payments in our Notes to Consolidated Financial Statements for more information.


46

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

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




47

Redbox
 
Three Months Ended
 
 
 
 
 
Six Months Ended
 
 
 
 
Dollars in thousands, except net revenue per rental amounts
June 30,
 
Change
 
June 30,
 
Change
2015
 
2014
 
$
 
%
 
2015
 
2014
 
$
 
%
Revenue
$
438,976

 
$
442,838

 
$
(3,862
)
 
(0.9
)%
 
$
958,509

 
$
955,887

 
$
2,622

 
0.3
 %
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Direct operating
301,444

 
317,376

 
(15,932
)
 
(5.0
)%
 
644,379

 
680,977

 
(36,598
)
 
(5.4
)%
Marketing
4,266

 
5,533

 
(1,267
)
 
(22.9
)%
 
9,091

 
9,993

 
(902
)
 
(9.0
)%
Research and development
—

 
18

 
(18
)
 
(100.0
)%
 
—

 
26

 
(26
)
 
(100.0
)%
General and administrative
34,336

 
33,692

 
644

 
1.9
 %
 
68,071

 
72,393

 
(4,322
)
 
(6.0
)%
Restructuring and lease termination costs (Note 11)
—

 
—

 
—

 
—
 %
 
15,174

 
534

 
14,640

 
NM*

Segment operating income
98,930

 
86,219

 
12,711

 
14.7
 %
 
221,794

 
191,964

 
29,830

 
15.5
 %
Less: depreciation and amortization
(33,063
)
 
(38,783
)
 
5,720

 
(14.7
)%
 
(64,670
)
 
(78,187
)
 
13,517

 
(17.3
)%
Operating income
$
65,867

 
$
47,436

 
$
18,431

 
38.9
 %
 
$
157,124

 
$
113,777

 
$
43,347

 
38.1
 %
Operating income as a percentage of revenue
15.0
 %
 
10.7
 %
 
 
 
 
 
16.4
%
 
11.9
 %
 
 
 
 
Same store sales growth (decline)
(0.6
)%
 
(7.8
)%
 
 
 
 
 
0.5
%
 
(3.3
)%
 
 
 
 
Effect on change in revenue from same store sales growth (decline)
$
(2,663
)
 
$
(36,876
)
 
$
34,213

 
(92.8
)%
 
$
4,573

 
$
(32,161
)
 
$
36,734

 
(114.2
)%
Ending number of kiosks
41,340

 
42,550

 
(1,210
)
 
(2.8
)%
 
41,340

 
42,550

 
(1,210
)
 
(2.8
)%
Total rentals (in thousands)
146,047

 
168,122

 
(22,075
)
 
(13.1
)%
 
319,094

 
366,892

 
(47,798
)
 
(13.0
)%
Net revenue per rental
$
3.00

 
$
2.63

 
$
0.37

 
14.1
 %
 
$
3.00

 
$
2.60

 
$
0.40

 
15.4
 %
*
Not Meaningful
The comparable performance of our content library is continually affected by seasonality, the timing of the release slate and the relative attractiveness of titles available for rent in a particular quarter or year which may have lingering effects in subsequent periods and the ongoing secular decline in the market. Compared with prior periods when kiosk installations were increasing and helping drive growth, Redbox revenue and other operating results may be more affected by these factors.
Q2 2015 Events
•
On June 12, 2015, Redbox announced plans to expand the availability of new generation games to all kiosks nationwide in 2015; and
•
On June 5, 2015, Redbox entered into an amendment to the April 22, 2010, agreement with Fox that maintains a 28-day window on Blu-ray Disc and DVD titles through June 30, 2017, and includes a revenue sharing arrangement between Redbox and Fox.
Q1 2015 Events
•
During the first quarter of 2015, we made the decision to shut down our Redbox Canada operations as the business was not meeting the company's performance expectations. The results of Redbox Canada have been presented as discontinued operations on our Consolidated Statements of Comprehensive Income and are no longer included in segment operating results presented above. See Note 12: Discontinued Operations in our Notes to Consolidated Financial Statements for additional information;
•
On March 31, as part of restructuring efforts, we reduced the size of our Redbox headquarters facility in Oakbrook Terrace, Illinois through early termination of operating leases for certain floors. In accordance with accounting for exit and disposal activities, we recorded pre-tax charges totaling $11.0 million at the cease use date, March 31, 2015. These charges include $4.4 million for the estimated fair value of our remaining lease obligations including an early termination penalty and $6.6 million in impairments of lease related assets. We have included these costs in restructuring and lease termination costs in our Consolidated Statements of Comprehensive Income; and
•
On March 26, 2015, we entered into the Warner Agreement under which Redbox agrees to license minimum quantities of theatrical and direct-to-video titles for rental through March 31, 2017. The Warner Agreement maintains a 28-day window on such titles.



48

Comparing three months ended June 30, 2015 to three months ended June 30, 2014
Revenue decreased $3.9 million, or 0.9%, primarily due to the following:
•
$2.7 million decrease from a 0.6% decrease in same store sales primarily due to:
◦
A 13.1% decline in total disc rentals primarily driven by a decline in video game rentals from a consumer transition to new generation platforms, lower demand from price-sensitive customers following the price increases discussed below and the expected secular decline in the market. Movie rentals were also impacted by the relative attractiveness of titles available for rent and the timing of the release slate.
▪
While the total box office (representing titles with North American box office receipts of at least $5.0 million) of titles released during the second quarter of 2015 increased 53.9% as compared to the second quarter of 2014, there was a higher percentage of total content released later in the current period therefore having a shorter period to generate revenue. During the second quarter of 2015, 38.2% of the titles and 45.6% of the total box office for titles released during the quarter were released in the last month. By comparison, during the second quarter of 2014, 12.9% of the titles and 9.5% of the total box office for titles released during the quarter were released in the last month.
▪
Demand was also negatively affected by an increase in competition for viewer time due to several significant theatrical releases during the second quarter of 2015 particularly in the last month of the period which created competition when a significant portion of our box office was released.
◦
We continue to invest in customer-specific promotional offerings to lessen the negative impact on demand driven by the price increase and secular decline.
◦
The negative impact on revenue from the decline in rentals was substantially offset by price increases. We implemented a 30 cent increase in the rental price for DVDs to $1.50 per day, effective December 2, 2014, a 50 cent increase in the rental price for Blu-ray Discs to $2.00 per day, effective December 2, 2014, and a $1.00 increase in the rental price for video games to $3.00 per day, effective January 6, 2015. Revenue from movie rentals increased 0.7% as the net result of the impacts discussed above.
•
$1.2 million decrease in revenue from kiosks removed subsequent to the second quarter of 2014 due to continued efforts to optimize our network by removing underperforming kiosks.
Net revenue per rental increased $0.37 to $3.00 primarily due to:
•
The impact of the increase in daily rental prices discussed above partially offset by an expected increase in single night rental activity as a result of the price increases; and
•
An increase in Blu-ray revenue which represented 18.1% of total revenue and 14.1% of total disc rentals during the second quarter of 2015 as compared with 16.7% and 14.0% during the prior year. Blu-ray revenue increased 7.8% compared to the second quarter of 2014 primarily due to the price increase discussed above; partially offset by
•
A decrease in video game revenue which represented 2.4% of total revenue and 0.9% of total disc rentals during the second quarter of 2015 as compared with 3.9% and 1.8% during the prior year primarily due to consumer transition to new generation platforms as the number of discs we stocked in our kiosks was down 47.1% in the second quarter of 2015 as compared to the prior year. As indicated above, we expect to invest more in video games later in the year to expand the availability of new generation games to all kiosks nationwide as additional titles become available for new generation platforms. Video games also were impacted by lower demand from price-sensitive customers and an expected increase in single night rental activity driven by the price change.
Operating income increased $18.4 million, or 38.9%, primarily due to the following:
•
$15.9 million decrease in direct operating expenses, which were 68.7% of revenue during the second quarter of 2015 as compared with 71.7% during the prior year primarily as a result of:
◦
$5.5 million decrease in product costs to $186.4 million primarily due to lower spending on content in the second quarter of 2015 specifically in the games category in response to consumer transition to new generation platforms that combined with the revenue impacts discussed above increased gross margin 0.8% to 57.5% during the second quarter of 2015; and
◦
Direct operating expenses were also impacted by lower credit card fees driven by the lower volume of rentals, lower wireless network charges tied to data usage under new contracts starting in January 2015 and cost containment initiatives related to third party fees for customer service.


49

•
$5.7 million decrease in depreciation and amortization expenses primarily due to the benefit from kiosk assets that are depreciated over three to five years becoming fully depreciated, partially offset by higher depreciation expense as a result of continued investment in our corporate technology infrastructure and additional depreciation for newly installed or replaced kiosks; and
•
$1.3 million decrease in marketing spend due to cost containment measures; partially offset by
•
$3.9 million decrease in revenue as described above.
Comparing six months ended June 30, 2015 to six months ended June 30, 2014
Revenue increased $2.6 million, or 0.3%, primarily due to the following:
•
$4.6 million increase from a 0.5% increase in same store sales primarily due to:
◦
The benefit from the price increases on the first six months of 2015 as discussed above; partially offset by
◦
A 13.0% decline in rentals for the first six months of 2015 primarily driven by a decline in video game rentals from a consumer transition to new generation platforms, lower demand from price-sensitive customers following the price increases and the expected secular decline in the market. Movie rentals were also impacted by the relative attractiveness of titles available for rent and the timing of the release slate.
▪
Total box office of titles released during the first six months of 2015 decreased 6.6% compared to the first six months of 2014 with a higher percentage of total content released later in the current period therefore having a shorter period to generate revenue. During the first six months of 2015, 18.3% of the titles and 20.5% of the total box office for titles released during the period were released in the last month. By comparison, during the first six months of 2014, 5.3% of the titles and 2.6% of the total box office for titles released during the period were released in the last month.
▪
Demand was also negatively affected by an increase in competition for viewer time due to several significant theatrical releases during the first six months of 2015, particularly in the last month of the period which created competition when a significant portion of our box office was released.
◦
We continued investment in customer-specific promotional offerings throughout the first six months of 2015 to lessen the negative impact on demand driven by the price increase and secular decline.
◦
Revenue from movie rentals increased 1.4% primarily due to the price increases despite the negative impacts on demand.
•
$2.0 million decrease in revenue from kiosks removed subsequent to the second half of 2014 due to continued efforts to optimize our network by removing underperforming kiosks.
Net revenue per rental increased $0.40 to $3.00 primarily due to:
•
The impact of the increase in daily rental prices discussed above partially offset by an expected increase in single night rental activity as a result of the price increases; and
•
An increase in Blu-ray revenue which represented 18.2% of total revenue and 14.3% of total disc rentals during the first six months of 2015 as compared with 17.2% and 14.7% during the prior year. Blu-ray revenue increased 6.1% compared to the first six months of 2014 primarily due to the price increase discussed above. Blu-ray rentals were negatively impacted by lower demand from price-sensitive customers as discussed above, fewer releases and a resulting lower availability of recent Blu-ray content in the first quarter of 2015 compared to the prior year and the secular decline in the market; partially offset by
•
A decrease in video game revenue which represented 2.7% of total revenue and 1.1% of total disc rentals during the first six months of 2015 as compared with 3.6% and 1.6% during the prior year primarily due to consumer transition to new generation platforms and under performance of titles released in the fourth quarter of 2014. Video games also were impacted by lower demand from price-sensitive customers and an expected increase in single night rental activity driven by the price change.
Operating income increased $43.3 million, or 38.1%, primarily due to the following:
•
$36.6 million decrease in direct operating expenses, which were 67.2% of revenue during the first six months of 2015 as compared with 71.2% during the prior year primarily as a result of:
◦
$19.3 million decrease in product costs to $396.8 million primarily due to lower spending on content in the first six months of 2015 due to fewer movie releases primarily in January, a lower average cost per disc in the


50

first quarter of 2015 due to the mix of content and lower games purchases primarily in the second quarter of 2015 in response to consumer transition to new generation platforms that combined with the revenue impacts discussed above increased gross margin 2.1% to 58.6% during the first six months of 2015; and
◦
Direct operating expenses were also impacted by lower credit card fees driven by the lower volume of rentals, lower wireless network charges tied to data usage under new contracts starting in January 2015 and lower costs due to cost containment initiatives related to the field and third party fees for customer service.
•
$13.5 million decrease in depreciation and amortization expenses primarily due to the benefit from kiosk assets that are depreciated over three to five years becoming fully depreciated, partially offset by higher depreciation expense as a result of continued investment in our corporate technology infrastructure and additional depreciation for newly installed or replaced kiosks;
•
$4.3 million decrease in general and administrative expenses primarily as a result of ongoing cost reduction initiatives and lower variable expenses associated with IT infrastructure costs, temporary staffing, legal and professional fees;
•
$2.6 million increase in revenue as described above; and
•
$0.9 million decrease in marketing spend due to cost containment measures; partially offset by
•
$15.2 million of restructuring and lease termination charges incurred in the first quarter of 2015, which included restructuring efforts surrounding our Redbox facility as discussed above and severance related expenses.



51

Coinstar
 
Three Months Ended
 
 
 
 
 
Six Months Ended
 
 
 
 
Dollars in thousands, except average transaction size
June 30,
 
Change
 
June 30,
 
Change
2015
 
2014
 
$
 
%
 
2015
 
2014
 
$
 
%
Revenue
$
80,279

 
$
79,880

 
$
399

 
0.5
 %
 
$
149,609

 
$
148,633

 
$
976

 
0.7
 %
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Direct operating
39,358

 
40,203

 
(845
)
 
(2.1
)%
 
76,621

 
77,926

 
(1,305
)
 
(1.7
)%
Marketing
1,232

 
1,557

 
(325
)
 
(20.9
)%
 
2,410

 
2,563

 
(153
)
 
(6.0
)%
Research and development
—

 
153

 
(153
)
 
(100.0
)%
 
—

 
422

 
(422
)
 
(100.0
)%
General and administrative
7,768

 
7,169

 
599

 
8.4
 %
 
15,563

 
14,166

 
1,397

 
9.9
 %
Restructuring and lease termination costs (Note 11)
—

 
—

 
—

 
—
 %
 
550

 
23

 
527

 
NM*

Segment operating income
31,921

 
30,798

 
1,123

 
3.6
 %
 
54,465

 
53,533

 
932

 
1.7
 %
Less: Depreciation and amortization
(8,437
)
 
(8,921
)
 
484

 
(5.4
)%
 
(16,255
)
 
(17,484
)
 
1,229

 
(7.0
)%
Operating income
$
23,484

 
$
21,877

 
$
1,607

 
7.3
 %
 
$
38,210

 
$
36,049

 
$
2,161

 
6.0
 %
Operating income as a percentage of revenue
29.3
%
 
27.4
%
 
 
 
 
 
25.5
%
 
24.3
%
 
 
 
 
Same store sales growth
1.9
%
 
6.7
%
 
 
 
 
 
1.4
%
 
4.9
%
 
 
 
 
Ending number of kiosks
21,140

 
21,200

 
(60
)
 
(0.3
)%
 
21,140

 
21,200

 
(60
)
 
(0.3
)%
Total transactions (in thousands)
18,200

 
18,850

 
(650
)
 
(3.4
)%
 
34,116

 
35,438

 
(1,322
)
 
(3.7
)%
Average transaction size
$
43.03

 
$
41.32

 
$
1.71

 
4.1
 %
 
$
42.78

 
$
41.19

 
$
1.59

 
3.9
 %
*
Not Meaningful
Comparing three months ended June 30, 2015 to three months ended June 30, 2014
Revenue increased $0.4 million, or 0.5%, primarily due to growth in the number of Coinstar Exchange kiosks and transactions partially offset by decreased revenue for Coinstar in the U.S. due to a reduction in volume. The impact of the increased coin voucher product transaction fee from 8.9% to 9.9% implemented in the U.K. in August 2014 was primarily offset by the unfavorable exchange rate impact on U.K. revenue due to the strengthening of the U.S. dollar versus the British pound compared to the prior year. Same store sales growth was 1.9% as a result of these factors.
The average Coinstar transaction size increased on a year over year basis while the number of transactions have declined. The decline in transactions is the result of larger pours and less frequent visits and a slight decrease in the U.S. kiosk base year over year as a result of continued optimization efforts.
Operating income increased $1.6 million, or 7.3%, primarily due to the following:
•
$0.8 million decrease in direct operating expenses due to lower wireless charges tied to data usage under new contracts in 2015, lower vehicle fleet expenses including fuel cost savings from reduced gas prices, and reduction in selling and customer service costs, partially offset by increased revenue sharing costs;
•
$0.5 million decrease in depreciation and amortization expense primarily due to intangible assets related to customer contracts being fully amortized in August 2014;
•
$0.4 million increase in revenue as described above; and
•
$0.3 million decrease in marketing expense due to an expected shift in timing of marketing expenses to the second half of 2015 compared to the prior year period; partially offset by
•
$0.6 million increase in general and administrative expenses primarily due to an increase in technology costs, partially offset by lower shared services costs related to professional fees, business taxes, temporary staffing and facilities expenses as a result of an overall reduction in organization costs.
Comparing six months ended June 30, 2015 to six months ended June 30, 2014
Revenue increased $1.0 million, or 0.7%, primarily due to growth in the number of Coinstar Exchange kiosks and transactions partially offset by decreased revenue for Coinstar in the U.S. due to a reduction in volume. The impact of the increased coin voucher product transaction fee from 8.9% to 9.9% implemented in the U.K. in August 2014 was primarily offset by the unfavorable exchange rate impact on U.K. revenue due to the strengthening of the U.S. dollar versus the British pound compared to the prior year. Same store sales growth was 1.4% as a result of these factors.


52

The average Coinstar transaction size increased on a year over year basis while the number of transactions have declined. The decline in transactions is the result of larger pours and less frequent visits and a slight decrease in the U.S. kiosk base year over year as a result of continued optimization efforts.
Operating income increased $2.2 million, or 6.0%, primarily due to the following:
•
$1.3 million decrease in direct operating expenses due to lower wireless charges tied to data usage under new contracts in 2015, lower vehicle fleet expenses including fuel cost savings from reduced gas prices, reduction in selling and customer service costs, partially offset by increased revenue sharing costs;
•
$1.2 million decrease in depreciation and amortization expense primarily due to intangible assets related to customer contracts being fully amortized in August 2014;
•
$1.0 million increase in revenue as described above; and
•
$0.4 million decrease in research and development expense; partially offset by
•
$1.4 million increase in general and administrative expenses primarily due to an increase in technology costs, partially offset by a lower shared services costs related to professional fees, business taxes, temporary staffing and facilities expenses as a result of an overall reduction in organization costs; and
•
$0.5 million increase in allocated restructuring expenses related to the subleasing of certain corporate facilities and severance expense from our ongoing cost saving initiatives.



53

ecoATM
 
Three Months Ended
 
 
 
 
 
Six Months Ended
 
 
 
 
Dollars in thousands, except average selling price of value devices sold
June 30,
 
Change
 
June 30,
 
Change
2015
 
2014
 
$
 
%
 
2015
 
2014
 
$
 
%
Revenue
$
26,062

 
$
23,799

 
$
2,263

 
9.5
 %
 
$
45,811

 
$
39,745

 
$
6,066

 
15.3
 %
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Direct operating
27,227

 
22,387

 
4,840

 
21.6
 %
 
50,033

 
38,318

 
11,715

 
30.6
 %
Marketing
2,149

 
927

 
1,222

 
131.8
 %
 
3,879

 
1,595

 
2,284

 
143.2
 %
Research and development
1,549

 
1,391

 
158

 
11.4
 %
 
3,005

 
3,175

 
(170
)
 
(5.4
)%
General and administrative
2,094

 
3,564

 
(1,470
)
 
(41.2
)%
 
4,062

 
6,443

 
(2,381
)
 
(37.0
)%
Restructuring and lease termination costs (Note 11)
—

 
—

 
—

 
—
 %
 
127

 
—

 
127

 
NM*

Goodwill impairment (Note 6)
85,890

 
—

 
85,890

 
NM*

 
85,890

 
—

 
85,890

 
NM*

Segment operating loss
(92,847
)
 
(4,470
)
 
(88,377
)
 
NM*

 
(101,185
)
 
(9,786
)
 
(91,399
)
 
NM*

Less: depreciation and amortization
(6,305
)
 
(3,812
)
 
(2,493
)
 
65.4
 %
 
(12,207
)
 
(7,524
)
 
(4,683
)
 
62.2
 %
Operating loss
$
(99,152
)
 
$
(8,282
)
 
$
(90,870
)
 
NM*

 
$
(113,392
)
 
$
(17,310
)
 
$
(96,082
)
 
NM*

Ending number of kiosks
2,260

 
980

 
1,280

 
130.6
 %
 
2,260

 
980

 
1,280

 
130.6
 %
Average selling price of value devices sold
$
61.72

 
$
91.55

 
$
(29.83
)
 
(32.6
)%
 
$
61.09

 
$
92.66

 
$
(31.57
)
 
(34.1
)%
Number of value devices sold
409,331

 
249,969

 
159,362

 
63.8
 %
 
726,465

 
416,909

 
309,556

 
74.3
 %
Number of overall devices sold
704,450

 
325,321

 
379,129

 
116.5
 %
 
1,223,083

 
566,320

 
656,763

 
116.0
 %
*
Not Meaningful
Q2 2015 Events
During the second quarter of 2015, we recognized a goodwill impairment charge of $85.9 million related to ecoATM. The goodwill was originally recognized as part of our acquisition of ecoATM in 2013. During the three months ended June 30, 2015, it became evident that revenue and profitability trends in our ecoATM reporting unit were not being achieved as expected. For example collection rates, revenue and profitability on a per kiosk basis experienced declines versus prior periods and expected seasonal trends. As a result, we revised our internal expectations for future revenue growth and profitability lower than our previous estimates. This is primarily driven by certain challenges in an increasingly competitive industry which impact the per kiosk device collection, revenue and profitability expectations and the timing and installation of kiosks. Further, while these competitive challenges grew more acute during the second quarter, we also experienced the loss of a key executive at ecoATM. See Note 6: Goodwill and Other Intangible Assets in our Notes to Consolidated Financial Statements for additional information.
Q1 2015 Events
During the first quarter of 2015, we added ecoATM, our electronic device recycling business, as a separate reportable segment. Previously, the results of ecoATM along with those of other self-service concepts were included in our New Ventures segment. The combined results of the other self-service concepts, previously included in our New Ventures segment, are included in All Other as they do not meet quantitative thresholds to be reported as a separate segment. All goodwill previously allocated to the New Ventures segment has been allocated to the ecoATM segment.
Comparing three months ended June 30, 2015 to three months ended June 30, 2014
Revenue increased $2.3 million, or 9.5%, primarily due to the increase in the number of ecoATM installed kiosks, offset by a lower average selling price on value devices due to a lower mix of higher value devices and lower collections per kiosk compared to the prior year. A majority of ecoATM installs in the quarter were in the mass merchant channel. We are evaluating the grocery channel where we have seen kiosks ramp at a slower rate and have lower collections than mass merchant and mall channel kiosks. During the quarter, ecoATM redeployed approximately 70 underperforming kiosks in the grocery channel to the mall and mass merchant channels to optimize the profitability of the ecoATM kiosk network.
Our key revenue drivers are devices collected, the percentage of those devices that are value devices, as well as the average selling price that we receive when reselling the devices. We experienced increased collections during the quarter with a 116.5% increase in overall devices sold and a 63.8% increase in the number of value devices sold. However, collection of value devices on a per kiosk basis were down compared to the prior year as a result of lower transactions at our kiosks, primarily due to


54

sustained marketing of alternative recycling options from carriers. Carrier marketing also impacted the number of higher value devices that we collected impacting the mix of overall value devices and was the primary reason for the decline in our average selling price of value devices compared to the prior year.
While increased competition from carriers and others impacted ecoATM collection rates during the second quarter, we expect ecoATM collection rates to increase over time through competitive pricing, targeted marketing and deployment of a new user interface that will improve the user experience. Additionally, as we continue to expand our ecoATM installed kiosk base to the mall and mass merchant channels, and selected groceries locations, we expect ecoATM revenue to grow from newly installed kiosks and the continued ramping of previously installed kiosks. We expect ecoATM total expenses to increase due to operating these additional kiosks, but expect expenses as a percentage of revenue to decrease as the business scales. We continually review performance and the impact of device recycling trends such as value devices collected and the average selling price on those devices, as well as kiosk installations and other developments on long term projections for purposes of assessing whether the reporting unit goodwill may be at risk of future impairment.
Operating loss increased $90.9 million primarily due to the $85.9 million goodwill impairment charge recognized in 2015 and the following;
•
$4.8 million increase in direct operating expenses mainly due to costs associated with our increased installed ecoATM kiosk base, including the acquisition, transportation and processing of electronic devices, servicing of kiosks and payments to retailers. As we install additional kiosks and existing kiosks continue to ramp, we expect to leverage the fixed cost portions of our direct operating expenses;
•
$2.5 million increase in depreciation and amortization expense primarily from depreciation on our increased installed ecoATM kiosk base; and
•
$1.2 million increase in marketing costs primarily due to costs to promote the ecoATM brand and raise awareness to the consumer combined with additional headcount to support our installed ecoATM kiosk base; partially offset by
•
$2.3 million increase in revenue described above; and
•
$1.5 million decrease in general and administrative expense primarily from a reduction in headcount, lower data facilities costs, and lower temp staffing as a result of an overall reduction in organization costs.
Comparing six months ended June 30, 2015 to six months ended June 30, 2014
Revenue increased $6.1 million, or 15.3%, primarily due to the increase in the number of ecoATM installed kiosks, offset by lower average selling price on our value devices due to a lower mix of higher value devices, lower collections per kiosk and lower pricing in the secondary market compared to the prior year. A majority of the growth in installs occurred during the second half of 2014 in the mass merchant and grocery channel. Overall collections increased year over year, with a 116.0% increase in the number of overall devices sold and a 74.3% increase in the number of value devices sold. However, collections of value devices on a per kiosk basis for the six months of the current year were down compared to the prior year as a result of lower transactions at our kiosks, primarily due to sustained marketing of alternative recycling options from carriers. This also impacted the mix of value devices collected and was the primary reason for the decline in our average selling price of value devices compared to the prior year.
Operating loss increased $96.1 million primarily due to the $85.9 million goodwill impairment charge recognized in 2015 and the following;
•
$11.7 million increase in direct operating expenses mainly due to costs associated with our increased installed ecoATM kiosk base, including the acquisition, transportation and processing of electronic devices, servicing of kiosks and payments to retailers. As we install additional kiosks and existing kiosks continue to ramp, we expect to leverage the fixed cost portions of our direct operating expenses;
•
$4.7 million increase in depreciation and amortization expense from depreciation on our increased installed ecoATM kiosk base; and
•
$2.3 million increase in marketing costs primarily due to costs to promote the ecoATM brand and raise awareness to the consumer combined with additional headcount to support our installed ecoATM kiosk base; partially offset by
•
$6.1 million increase in revenue described above; and
•
$2.4 million decrease in general and administrative expense primarily from a reduction in headcount, lower data facilities costs, and lower temp staffing as a result of an overall reduction in organization costs.


55

Loss from Equity Method Investments
Comparing three months ended June 30, 2015 to three months ended June 30, 2014
For the three months ended June 30, 2015, our loss from our equity method investments was $0.1 million compared to $10.5 million during the same period of 2014. The decrease in equity method losses is a result of our withdrawal from Redbox Instant by Verizon on October 20, 2014.
Comparing six months ended June 30, 2015 to six months ended June 30, 2014
For the six months ended June 30, 2015, our loss from our equity method investments was $0.3 million compared to $19.9 million during the same period of 2014. The decrease in equity method losses is a result of our withdrawal from Redbox Instant by Verizon on October 20, 2014.
Additional financial information about our equity method investments is provided in Note 7: Equity Method Investments in our Notes to Consolidated Financial Statements.
Interest Expense, Net
Dollars in thousands
Three Months Ended
 
 
 
 
 
Six Months Ended
 
 
 
 
June 30,
 
Change
 
June 30,
 
Change
2015
 
2014
 
$
 
%
 
2015
 
2014
 
$
 
%
Cash interest expense
$
11,499

 
$
9,773

 
$
1,726

 
17.7
 %
 
$
22,894

 
$
18,135

 
$
4,759

 
26.2
 %
Non-cash interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization of debt discount
434

 
753

 
(319
)
 
(42.4
)%
 
869

 
1,555

 
(686
)
 
(44.1
)%
Amortization of deferred financing fees
258

 
463

 
(205
)
 
(44.3
)%
 
516

 
967

 
(451
)
 
(46.6
)%
Total non-cash interest expense
692

 
1,216

 
(524
)
 
(43.1
)%
 
1,385

 
2,522

 
(1,137
)
 
(45.1
)%
Loss from early extinguishment of debt
—

 
1,963

 
(1,963
)
 
(100.0
)%
 
—

 
1,963

 
(1,963
)
 
(100.0
)%
Total cash and non-cash interest expense
12,191

 
12,952

 
(761
)
 
(5.9
)%
 
24,279

 
22,620

 
1,659

 
7.3
 %
Interest income
(8
)
 
(20
)
 
12

 
(60.0
)%
 
(25
)
 
(40
)
 
15

 
(37.5
)%
Interest expense, net
$
12,183

 
$
12,932

 
$
(749
)
 
(5.8
)%
 
$
24,254

 
$
22,580

 
$
1,674

 
7.4
 %
Comparing three months ended June 30, 2015 to three months ended June 30, 2014
Interest expense, net decreased $0.7 million, or 5.8%, primarily due to a loss from early extinguishment of debt recognized in 2014, partially offset by a shift in the composition of our debt to higher fixed rate debt.
Comparing six months ended June 30, 2015 to six months ended June 30, 2014
Interest expense, net increased $1.7 million, or 7.4%, primarily due to a shift in the composition of our debt to higher fixed rate debt and, partially offset by a loss from early extinguishment of debt recognized in 2014 and lower borrowings.
See Note 8: Debt and Other Long-Term Liabilities in our Notes to Consolidated Financial Statements for more information.
Other Income (Expense), Net
Dollars in thousands
Three Months Ended
 
 
 
 
 
Six Months Ended
 
 
 
 
June 30,
 
Change
 
June 30,
 
Change
2015
 
2014
 
$
 
%
 
2015
 
2014
 
$
 
%
Other income (expense), net
$
642

 
$
1,614

 
$
(972
)
 
(60.2
)%
 
$
(1,704
)
 
$
966

 
$
(2,670
)
 
(276.4
)%
Comparing three months ended June 30, 2015 to three months ended June 30, 2014

Other income (expense), net decreased by $1.0 million or 60.2%, primarily due to the impact of the Canadian dollar exchange rates on our Coinstar operations.


56

Comparing six months ended June 30, 2015 to six months ended June 30, 2014

Other income (expense), net decreased by $2.7 million or 276.4%, primarily due to the impact of the Canadian dollar exchange rates on our Coinstar operations.
Income Tax Expense
Comparing three months ended June 30, 2015 to three months ended June 30, 2014
Our effective tax rate from continuing operations was (62.4)% and 20.9% for the three months ended June 30, 2015 and 2014, respectively. Our effective tax rate for the three months ended June 30, 2015, was higher than the U.S. Federal statutory rate of 35.0% primarily due to an $85.9 million non-tax deductible goodwill impairment charge that was recorded in the second quarter of 2015 and state income taxes, partially offset by the domestic production activities deduction and a net decrease in valuation allowances related to capital loss carryforwards and state tax credit carryforwards. Our effective tax rate for the three months ended June 30, 2014 was lower than the U.S. Federal statutory rate of 35.0% primarily due to a worthless stock deduction and the domestic production activities deduction, partially offset by state income taxes.
Comparing six months ended June 30, 2015 to six months ended June 30, 2014
Our effective tax rate from continuing operations was 113.4% and 29.7% for the six months ended June 30, 2015 and 2014, respectively. Our effective tax rate for the six months ended June 30, 2015, was higher than the U.S. Federal statutory rate of 35.0% primarily due to an $85.9 million non-tax deductible goodwill impairment charge that was recorded in the second quarter of 2015 and state income taxes, partially offset by the domestic production activities deduction. Our effective tax rate for the six months ended June 30, 2014 was lower than the U.S. Federal statutory rate of 35.0% primarily due to a worthless stock deduction and the domestic production activities deduction, partially offset by state income taxes.


57

Non-GAAP Financial Measures
Non-GAAP measures may be provided as a complement to results provided in accordance with United States generally accepted accounting principles (“GAAP”).
We use the following non-GAAP financial measures to evaluate our financial results:
•
Core adjusted EBITDA from continuing operations;
•
Core diluted earnings per share (“EPS”) from continuing operations;
•
Free cash flow; and
•
Net debt and net leverage ratio.
These measures, the definitions of which are presented below, are non-GAAP because they exclude certain amounts which are included in the most directly comparable measure calculated and presented in accordance with GAAP. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for our GAAP financial measures and may not be comparable with similarly titled measures of other companies.
Core and Non-Core Results
We distinguish our core activities, those associated with our primary operations which we directly control, from non-core activities. Non-core activities are primarily nonrecurring events or events we do not directly control. Our non-core adjustments for the periods presented include i) goodwill impairment, ii) restructuring costs (including severance and early lease termination costs and related impairment of assets) associated with actions to reduce costs in our continuing operations across the Company, iii) compensation expense for rights to receive cash issued in conjunction with our acquisition of ecoATM and attributable to post-combination services as they are fixed amount acquisition related awards and not indicative of the directly controllable future business results, iv) income or loss from equity method investments, which represents our share of income or loss from entities we do not consolidate or control, v) tax benefits related to a net operating loss adjustment, and vi) tax benefit related to worthless stock deduction (“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.


58

Core Adjusted EBITDA from continuing operations
Our non-GAAP financial measure core adjusted EBITDA from continuing operations is defined as earnings from continuing operations before depreciation, amortization and other; interest expense, net; income taxes; share-based payments expense; and Non-Core Adjustments.
A reconciliation of core adjusted EBITDA from continuing operations to net income from continuing operations, the most comparable GAAP financial measure, is presented in the following table:
 
Three Months Ended
 
 
 
 
 
Six Months Ended
 
 
 
 
 
June 30,
 
Change
 
June 30,
 
Change
Dollars in thousands
2015
 
2014
 
$
 
%
 
2015
 
2014
 
$
 
%
Net income (loss) from continuing operations
$
(47,351
)
 
$
23,833

 
$
(71,184
)
 
(298.7
)%
 
$
(5,196
)
 
$
51,439

 
$
(56,635
)
 
(110.1
)%
Depreciation, amortization and other
48,483

 
51,652

 
(3,169
)
 
(6.1
)%
 
94,478

 
103,436

 
(8,958
)
 
(8.7
)%
Interest expense, net
12,183

 
12,932

 
(749
)
 
(5.8
)%
 
24,254

 
22,580

 
1,674

 
7.4
 %
Income taxes
18,185

 
6,305

 
11,880

 
188.4
 %
 
44,027

 
21,739

 
22,288

 
102.5
 %
Share-based payments expense(1)
3,320

 
3,079

 
241

 
7.8
 %
 
7,261

 
6,844

 
417

 
6.1
 %
Adjusted EBITDA from continuing operations
34,820

 
97,801

 
(62,981
)
 
(64.4
)%
 
164,824

 
206,038

 
(41,214
)
 
(20.0
)%
Non-Core Adjustments:
 
 
 
 

 

 
 
 
 
 
 
 
 
Goodwill impairment
85,890

 
—

 
85,890

 
NM*

 
85,890

 
—

 
85,890

 
NM*

Restructuring costs
—

 
—

 
—

 
—
 %
 
15,851

 
469

 
15,382

 
NM*

Rights to receive cash issued in connection with the acquisition of ecoATM
1,005

 
3,338

 
(2,333
)
 
(69.9
)%
 
2,925

 
6,759

 
(3,834
)
 
(56.7
)%
Loss from equity method investments, net
133

 
10,541

 
(10,408
)
 
(98.7
)%
 
265

 
19,909

 
(19,644
)
 
(98.7
)%
Core adjusted EBITDA from continuing operations
$
121,848

 
$
111,680

 
$
10,168

 
9.1
 %
 
$
269,755

 
$
233,175

 
$
36,580

 
15.7
 %
 *
Not Meaningful
(1) Includes both non-cash share-based compensation for executives, non-employee directors and employees as well as share-based payments for content arrangements.
Comparing three months ended June 30, 2015 to three months ended June 30, 2014
The increase in our core adjusted EBITDA from continuing operations was primarily due to increased segment operating income in our Redbox segment. The other significant components of core adjusted EBITDA from continuing operations have been discussed previously in the Results of Operations section above.
Comparing six months ended June 30, 2015 to six months ended June 30, 2014
The increase in our core adjusted EBITDA from continuing operations was primarily due to increased segment operating income in our Redbox segment. The other significant components of core adjusted EBITDA from continuing operations have been discussed previously in the Results of Operations section above.





59

Core Diluted EPS from continuing operations
Our non-GAAP financial measure core diluted EPS from continuing operations is defined as diluted earnings per share from continuing operations utilizing the treasury stock method excluding non-core adjustments, net of applicable taxes.
A reconciliation of core diluted EPS from continuing operations to diluted EPS from continuing operations, the most comparable GAAP financial measure, is presented in the following table:
 
Three Months Ended
 
 
 
 
 
Six Months Ended
 
 
 
 
June 30,
 
Change
 
June 30,
 
Change
 
2015
 
2014
 
$
 
%
 
2015
 
2014
 
$
 
%
Diluted EPS from continuing operations per common share (two-class method)
$
(2.66
)
 
$
1.15

 
$
(3.81
)
 
(331.3
)%
 
$
(0.30
)
 
$
2.24

 
$
(2.54
)
 
(113.4
)%
Adjustment from participating securities allocation and share differential to treasury stock method(1)
0.03

 
0.03

 
—

 
—
 %
 
0.01

 
0.05

 
(0.04
)
 
(80.0
)%
Diluted EPS from continuing operations (treasury stock method)
(2.63
)
 
1.18

 
(3.81
)
 
(322.9
)%
 
(0.29
)
 
2.29

 
(2.58
)
 
(112.7
)%
Non-Core Adjustments, net of tax:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill impairment
4.77

 
—

 
4.77

 
NM*

 
4.71


—

 
4.71

 
NM*

Restructuring costs
—

 
—

 
—

 
—
 %
 
0.53

 
0.01

 
0.52

 
NM*

Rights to receive cash issued in connection with the acquisition of ecoATM
0.04

 
0.13

 
(0.09
)
 
(69.2
)%
 
0.11

 
0.23

 
(0.12
)
 
(52.2
)%
Loss from equity method investments, net
0.01

 
0.32

 
(0.31
)
 
(96.9
)%
 
0.01

 
0.53

 
(0.52
)
 
(98.1
)%
Tax benefit from net operating loss adjustment
—

 
—

 
—

 
—
 %
 
—

 
(0.04
)
 
0.04

 
(100.0
)%
Tax benefit of worthless stock deduction
—

 
(0.11
)
 
0.11

 
(100.0
)%
 
—

 
(0.10
)
 
0.10

 
(100.0
)%
Core diluted EPS from continuing operations
$
2.19

 
$
1.52

 
$
0.67

 
44.1
 %
 
$
5.07

 
$
2.92

 
$
2.15

 
73.6
 %
 *
Not Meaningful
(1) Non-Core Adjustments are presented after-tax using the applicable effective tax rate for the respective periods.
A reconciliation of amounts used in calculating core diluted EPS from continuing operations in the table above is presented in the following table:
 
Three Months Ended
 
Six Months Ended
June 30,
 
June 30,
In thousands
2015
 
2014
 
2015
 
2014
Income (loss) from continuing operations attributable to common shares
$
(47,472
)
 
$
23,036

 
$
(5,465
)
 
$
49,918

Add: income from continuing operations allocated to participating securities
121

 
797

 
269

 
1,521

Income (loss) from continuing operations
$
(47,351
)
 
$
23,833

 
$
(5,196
)
 
$
51,439

 
 
 
 
 
 
 
 
Weighted average diluted common shares
17,848

 
20,048

 
18,057

 
22,298

Add: diluted common equivalent shares of participating securities
127

 
133

 
181

 
190

Add: dilutive securities under treasury stock method
14

 
—

 
16

 
—

Weighted average diluted shares (treasury stock method)
17,989

 
20,181

 
18,254

 
22,488



60

Free Cash Flow
Our non-GAAP financial measure free cash flow is defined as net cash provided by operating activities after capital expenditures. We believe free cash flow is an important non-GAAP measure as it provides additional information to users of the financial statements regarding our ability to service, incur or pay down indebtedness and repurchase our securities. A reconciliation of free cash flow to net cash provided by operating activities, the most comparable GAAP financial measure, is presented in the following table:
 
Three Months Ended
 
 
 
 
 
Six Months Ended
 
 
 
 
 
June 30,
 
Change
 
June 30,
 
Change
Dollars in thousands
2015
 
2014
 
$
 
%
 
2015
 
2014
 
$
 
%
Net cash provided by operating activities
$
75,143

 
$
62,833

 
$
12,310

 
19.6
 %
 
$
181,215

 
$
157,420

 
$
23,795

 
15.1
 %
Purchase of property and equipment
(19,508
)
 
(26,076
)
 
6,568

 
(25.2
)%
 
(40,217
)
 
(53,016
)
 
12,799

 
(24.1
)%
Free cash flow
$
55,635

 
$
36,757

 
$
18,878

 
51.4
 %
 
$
140,998

 
$
104,404

 
$
36,594

 
35.1
 %
An analysis of our net cash from operating activities and used in investing and financing activities is provided below.
Net Debt and Net Leverage Ratio
Our non-GAAP financial measure net debt is defined as the total face value of outstanding debt, including capital leases, less cash and cash equivalents held in financial institutions domestically. Our non-GAAP financial measure net leverage ratio is defined as net debt divided by core adjusted EBITDA from continuing operations for the last twelve months (LTM). We believe net debt and net leverage ratio are important non-GAAP measures because they:
•
are used to assess the degree of leverage by management;
•
provide additional information to users of the financial statements regarding our ability to service, incur or pay down indebtedness and repurchase our securities as well as additional information about our capital structure; and
•
are reported quarterly to support covenant compliance under our credit agreement.
A reconciliation of net debt to total outstanding debt including capital leases, the most comparable GAAP financial measure, is presented in the following table:
 
June 30,
2015
 
December 31,
2014
 
Change
Dollars in thousands
 
 
$
 
%
Senior unsecured notes(1)
$
650,000

 
$
650,000

 
$
—

 
—
 %
Term loans(1)
142,500

 
146,250

 
(3,750
)
 
(2.6
)%
Revolving line of credit
90,000

 
160,000

 
(70,000
)
 
(43.8
)%
Capital leases
9,876

 
15,391

 
(5,515
)
 
(35.8
)%
Total principal value of outstanding debt including capital leases
892,376

 
971,641

 
(79,265
)
 
(8.2
)%
Less domestic cash and cash equivalents held in financial institutions
(62,609
)
 
(66,546
)
 
3,937

 
(5.9
)%
Net debt
829,767

 
905,095

 
(75,328
)
 
(8.3
)%
LTM Core adjusted EBITDA from continuing operations(2)
$
533,400

 
$
496,820

 
$
36,580

 
7.4
 %
Net leverage ratio
1.56

 
1.82

 


 


(1)
See debt section of Liquidity and Capital Resources below and Note 8: Debt and Other Long-Term Liabilities in our Notes to Consolidated Financial Statements for detail of associated debt discount.
(2)    LTM Core Adjusted EBITDA from continuing operations for the twelve months ended June 30, 2015 and December 31, 2014 was determined as follows:
Dollars in thousands
 
Core adjusted EBITDA from continuing operations for the six months ended June 30, 2015
$
269,755

Add: Core adjusted EBITDA from continuing operations for the twelve months ended December 31, 2014 (1)
496,820

Less: Core adjusted EBITDA from continuing operations for the six months ended June 30, 2014
(233,175
)
LTM Core adjusted EBITDA from continuing operations for the twelve months ended June 30, 2015
$
533,400

(1) Core adjusted EBITDA from continuing operations for the twelve months ended December 31, 2014 is obtained from our Form 8-K filed on May 8, 2015 for the period ended December 31, 2014, where it is reconciled to net income from continuing operations, the most comparable GAAP financial measure, and represents the LTM core adjusted EBITDA from continuing operations we use in our calculation of net leverage ratio as of December 31, 2014.


61

Liquidity and Capital Resources
We believe our existing cash, cash equivalents and amounts available to us under our Credit Facility will be sufficient to fund our cash requirements and capital expenditure needs for at least the next 12 months. After that time, the extent of additional financing needed, if any, will depend on the success of our business. If we significantly increase kiosk installations beyond planned levels or if our Redbox, Coinstar or ecoATM kiosks generate lower than anticipated revenue or operating results, then our cash needs may increase. Furthermore, our future capital requirements will depend on a number of factors, including consumer use of our services, the timing and number of machine installations, the number of available installable kiosks, the type and scope of service enhancements, the cost of developing potential new product service offerings, and enhancements, and cash required to fund potential future acquisitions, investment or capital returns to shareholders such as through share repurchases.
The following is an analysis of our year-to-date cash flows:
Net Cash from Operating Activities
Our net cash from operating activities increased by $23.8 million primarily due to the following:
•
$72.3 million change in net non-cash income and expense included in net income; and
•
$6.5 million decrease in net cash outflows from changes in working capital primarily due to changes in prepaid expenses and other current assets, content library, accounts payable, other accrued liabilities, accrued payable to retailers, and accounts receivable, partially offset by
•
$54.9 million decrease in net income to a loss of $10.0 million.
Net Cash used in Investing Activities
We used $37.3 million of net cash in our investing activities primarily due to:
•
    $40.2 million for the purchases of property and equipment for kiosks and corporate infrastructure; partially offset by
•
$2.9 million for proceeds from the sale of property and equipment.
Net Cash used in Financing Activities
We used $154.3 million of net cash from financing activities primarily due to:
•
$73.8 million in net payments for borrowings from our Credit Facility;
•
$62.7 million for repurchases of our common stock;
•
$11.0 million for dividends paid;
•
$6.3 million to pay capital lease obligations and other debt; and
•
$1.2 million for withholding tax paid on vesting of restricted stock net of proceeds from exercise of stock options.
Cash and Cash Equivalents
A portion of our business involves collecting and processing large volumes of cash, most of it in the form of coins. As of June 30, 2015, our cash and cash equivalent balance was $237.7 million, of which $81.2 million was identified for settling our accrued payable to our retailer partners in relation to our Coinstar kiosks. The remaining balance of our cash and cash equivalents was available for use to support our liquidity needs.


62

Debt
Debt comprises the following:
 
Senior Notes
 
Credit Facility
 
Total Debt
Dollars in thousands
 Senior Unsecured Notes due 2019
 
 Senior Unsecured Notes due 2021
 
Term Loans
 
Revolving Line of Credit
 
As of June 30, 2015
 
 
 
 
 
 
 
 
 
Principal
$
350,000

 
$
300,000

 
$
142,500

 
$
90,000

 
$
882,500

Discount
(3,786
)
 
(3,830
)
 
(298
)
 
—

 
(7,914
)
Total
346,214

 
296,170

 
142,202

 
90,000

 
874,586

Less: current portion
—

 
—

 
(11,250
)
 
—

 
(11,250
)
Total long-term portion
$
346,214

 
$
296,170

 
$
130,952

 
$
90,000

 
$
863,336

Senior Unsecured Notes Due 2019
On March 12, 2013, we and certain subsidiaries of ours, as subsidiary guarantors, entered into an indenture pursuant to which we issued $350.0 million principal amount of 6.000% Senior Notes due 2019 (the “Senior Notes due 2019”) at par for proceeds, net of expenses, of $343.8 million. The expenses were allocated between debt discount and deferred financing fees based on their nature. As of June 30, 2015, we were in compliance with the covenants of the related indenture.
Senior Unsecured Notes Due 2021
On June 9, 2014, we and certain subsidiaries of ours, as subsidiary guarantors, entered into an indenture pursuant to which we issued $300.0 million principal amount of 5.875% Senior Notes due 2021 (the “Senior Notes due 2021”) at par for proceeds, net of expenses, of $294.0 million. The expenses were allocated between debt discount and deferred financing fees based on their nature.
During the second quarter of 2015, we registered the Senior Notes due 2021 and related guarantees under the Securities Act of 1933, as amended (the “Securities Act”) to allow holders to exchange the notes and related guarantees for the same principal amount of a new issue and related guarantees (collectively, the “Exchange Notes”) with substantially identical terms, except that the Exchange Notes are generally freely transferable under the Securities Act. The full principal amount of the Senior Notes due 2021 was exchanged for the Exchange Notes.
As of June 30, 2015, we were in compliance with the covenants of the related indenture.
Revolving Line of Credit and Term Loan
On June 24, 2014, we entered into the Third Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) providing for a senior secured credit facility (the “Credit Facility”). The Amended and Restated Credit Agreement amended and restated in its entirety the Second Amended and Restated Credit Agreement dated as of November 20, 2007 and amended and restated as of April 29, 2009 and as of July 15, 2011 and all amendments and restatements thereto.
The Credit Facility consists of (a) a $150.0 million amortizing term loan (the “Term Loan”) and (b) a $600.0 million revolving line of credit (the “Revolving Line”), which includes (i) a $75.0 million sublimit for the issuance of letters of credit, (ii) a $50.0 million sublimit for swingline loans and (iii) a $75.0 million sublimit for loans in certain foreign currencies available to us and certain wholly owned Company foreign subsidiaries (the “Foreign Borrowers”). We may, subject to applicable conditions and subject to obtaining commitments from lenders, request an increase in the Revolving Line of up to $200.0 million in aggregate (the “Accordion”). As of June 30, 2015, the interest rate on amounts outstanding under the Credit Facility was 1.94% and we were in compliance with the covenants of the Credit Facility.
The Amended and Restated Credit Agreement requires principal amortization payments under the Term Loan as follows:
Dollars in thousands
Repayment Amount
Remainder of 2015
$
5,625

2016
13,125

2017
15,000

2018
18,750

2019
90,000

Total
$
142,500

 


63

Letters of Credit
As of June 30, 2015, we had five irrevocable standby letters of credit that totaled $6.4 million. These standby letters of credit, which expire at various times through May 2016, are used to collateralize certain obligations to third parties. As of June 30, 2015, no amounts were outstanding under these standby letter of credit agreements.
Other Contingencies
Contractual Payment Obligations
During 2015 the following significant changes occurred to our contractual obligations:
Operating Lease Obligations
•
We early terminated operating leases for certain floors of our Redbox headquarters and recognized the fair value of the ongoing lease payments and other related costs through the effective date of termination, July 31, 2016, as of the cease use date, March 31, 2015. See Note 11: Restructuring for additional information; and
•
We entered into a new operating lease of 16,085 square feet of office space in Woodland Hills, California which expires May 31, 2022.
Content Agreement Obligations
•
On July 14, 2015, Sony elected to exercise its option to extend our existing content license agreement with them. This will extend the license period through September 30, 2016. See Note 20: Subsequent Events in our Notes to Consolidated Financial Statements for additional information.
•
On June 5, 2015, Redbox entered into an amendment to the April 22, 2010, agreement with Fox that maintains a 28-day window on Blu-ray Disc and DVD titles through June 30, 2017; and
•
On March 26, 2015, we entered into the Warner Agreement under which Redbox agrees to license minimum quantities of theatrical and direct-to-video titles for rental through March 31, 2017. The Warner Agreement maintains a 28-day window on such titles.
As of June 30, 2015, our contractual payment obligations are as follows:
Dollars in thousands
Total
 
Remaining in 2015
 
2016 &
2017
 
2018 &
2019
 
2020 &
Beyond
Long-term debt and other(1)
$
882,500

 
$
95,625

 
$
28,125

 
$
458,750

 
$
300,000

Contractual interest on long-term debt
184,500

 
19,313

 
77,250

 
61,500

 
26,437

Capital lease obligations
10,265

 
5,595

 
3,971

 
562

 
137

Operating lease obligations, net(2)
56,958

 
8,344

 
23,918

 
13,014

 
11,682

Purchase obligations(3)(4)
41,901

 
30,308

 
11,593

 
—

 
—

Asset retirement obligations
10,433

 
—

 
—

 
—

 
10,433

Content agreement obligations(3)(5)
582,193

 
242,788

 
339,405

 
—

 
—

Retailer revenue share obligations
4,983

 
1,677

 
3,143

 
163

 
—

Total
$
1,773,733

 
$
403,650

 
$
487,405

 
$
533,989

 
$
348,689

(1) 
See Note 8: Debt and Other Long-Term Liabilities in our Notes to Consolidated Financial Statements.
(2) 
Net of sublease income of $2.0 million. See Note 16: Commitments and Contingencies in our Notes to Consolidated Financial Statements.
(3) 
See Note 16: Commitments and Contingencies in our Notes to Consolidated Financial Statements.
(4) 
Excludes any amounts associated with the manufacturing and services agreement entered into as part of the NCR Asset Acquisition, pursuant to which Outerwall, Redbox or an affiliate will purchase goods and services from NCR for a period of five years from June 22, 2012. At the end of the five-year period, if the aggregate amount paid in margin to NCR for goods and services delivered equals less than $25.0 million, Outerwall will pay NCR the difference between such aggregate amount and $25.0 million. As of June 30, 2015, the remaining commitment is $15.8 million under this agreement.
(5) 
Subsequent to quarter end and not included in this table, Sony elected to exercise its option to extend our existing content license agreement with them. This will extend the license period through September 30, 2016. See Note 20: Subsequent Events in our Notes to Consolidated Financial Statements for additional information.



64

CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements have been prepared in accordance with US GAAP. Preparation of these statements requires management to make judgments and estimates. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the present circumstances. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our 2014 Form 10-K at Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in our Form 8-K filed on May 8, 2015.
There have been no material changes to the critical accounting policies previously disclosed in our 2014 Form 10-K and in our Form 8-K filed on May 8, 2015, except for the following:
Goodwill
Goodwill represents the excess purchase price of an acquired enterprise or assets over the estimated fair value of identifiable net assets acquired. We assess goodwill for potential impairment at the reporting unit level on an annual basis as of November 30, or whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We may assess qualitative factors to make this determination, or bypass such a qualitative assessment and proceed directly to testing goodwill for impairment using a two-step process. Qualitative factors we may consider include, but are not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for our products and services, regulatory and political developments and entity specific factors such as strategies and financial performance. If, after completing such assessment, it is determined more likely than not that the fair value of a reporting unit is less than its carrying value, we proceed to a two-step impairment test, whereby the first step is comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the test is not performed. The second step of the impairment test is performed when the carrying amount of the reporting unit exceeds the fair value, then the implied fair value of the reporting unit goodwill is compared with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to the excess.

During the three months ended June 30, 2015, it became evident that revenue and profitability trends in our ecoATM reporting unit were not being achieved as expected. For example collection rates, revenue and profitability on a per kiosk basis experienced declines versus prior periods and expected seasonal trends. As a result, we revised our internal expectations for future revenue growth and profitability lower than our previous estimates. This is primarily driven by certain challenges in an increasingly competitive industry which impact the per kiosk device collection, revenue and profitability expectations and the timing and installation of kiosks. Further, while these competitive challenges grew more acute during the second quarter, we also experienced the loss of a key executive at ecoATM. This led to an indication in the second quarter of 2015 that ecoATM’s fair value was more likely than not below its carrying value.
As a result, we performed the first step of the goodwill impairment test with the assistance of a third-party valuation specialist. The first step of the impairment test was completed by comparing the carrying value of ecoATM, including goodwill, to its fair value determined using a weighted combination of a discounted cash flow (“DCF”) income based approach and a guideline public company market based approach. The DCF methodology requires significant judgment in selecting appropriate inputs including the risk adjusted market cost of capital for the discount rate, the terminal growth rate and projections of future cash flows, all of which are inherently uncertain. The guideline public company method involves significant judgment in selecting the appropriate inputs including the peer company group, the selection of relevant multiples and the determination of a reasonable control premium. Due to these significant judgments, the fair value determined in connection with the goodwill impairment test may not necessarily be indicative of the actual value that would be recognized in a future transaction. Completion of the first step of the impairment test determined that the carrying amount of ecoATM exceeded its fair value and that the second step of the impairment test needed to be performed.
Under the second step of the impairment test, we completed the process of estimating the fair value of ecoATM’s assets and liabilities, including intangible assets consisting of developed technology, trade name and covenants not to compete for the purpose of deriving an estimate of the implied fair value of goodwill. The estimate of the implied fair value of goodwill was then compared to the recorded goodwill to determine the amount of the impairment. Significant assumptions used in measuring the value of these assets and liabilities included the discount rates and obsolescence rates used in valuing the intangible assets, and replacement costs for valuing the tangible assets.

Based on the result of the second step of the goodwill impairment analysis, we recognized a non-cash, non-tax deductible charge for goodwill impairment of $85.9 million related to our ecoATM business segment.


65


As a result of the impairment recorded, the estimated fair value of the ecoATM reporting unit equals its carrying value. The estimate of ecoATM's fair value includes key assumptions with inherent uncertainty which may change in future periods and have a negative effect on the fair value resulting in potential future impairments, the most significant of which is our estimate of future cash flows predicated on estimated kiosks, revenue and profitability measures.

For additional information see Note 6: Goodwill and Other Intangible Assets in our Notes to Consolidated Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our reported market risks and risk management policies since the filing of our 2014 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report and has determined that such disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
We also maintain a system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). No changes in our internal control over financial reporting occurred during the year-to-date period ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


66

PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS

In October 2009, an Illinois resident, Laurie Piechur, individually and on behalf of all others similarly situated, filed a putative class action complaint against our Redbox subsidiary in the Circuit Court for the Twentieth Judicial Circuit, St. Clair County, Illinois. The plaintiff alleged that, among other things, Redbox charges consumers illegal and excessive late fees in violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, and that Redbox's rental terms violate the Illinois Rental Purchase Agreement Act or the Illinois Automatic Contract Renewal Act and the plaintiff is seeking monetary damages and other relief. In November 2009, Redbox removed the case to the U.S. District Court for the Southern District of Illinois. In February 2010, the District Court remanded the case to the Circuit Court for the Twentieth Judicial Circuit, St. Clair County, Illinois. In May 2010, the court denied Redbox's motion to dismiss the plaintiff's complaint. In November 2011, the plaintiff moved for class certification, and Redbox moved for summary judgment. The court denied Redbox's motion for summary judgment in February 2012. The plaintiff filed an amended complaint on April 19, 2012, and an amended motion for class certification on June 5, 2012. The court denied Redbox's motion to dismiss the amended complaint. The amended class certification motion was briefed and argued. At the hearing on plaintiff's amended motion for class certification, the plaintiff dismissed all claims but two and is pursuing only her claims under the Illinois Rental Purchase Agreement Act and the Illinois Automatic Contract Renewal Act. On May 21, 2013, the court denied plaintiff's amended class action motion. On January 29, 2014, the Illinois Supreme Court denied plaintiff’s petition for leave to appeal the trial court’s denial of class certification. Redbox has moved to dismiss all remaining claims on mootness grounds, and the Court granted Redbox’s motion on December 11, 2014. The plaintiffs appealed on January 7, 2015. We believe that the claims against us are without merit and intend to defend ourselves vigorously in this matter. Currently, no accrual has been established as it was not possible to estimate the possible loss or range of loss because this matter had not advanced to a stage where we could make any such estimate.
ITEM 1A. RISK FACTORS
There have been no material changes from risk factors previously disclosed in our 2014 Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY, SECURITIES, AND USE OF PROCEEDS
The following table summarizes information regarding shares repurchased during the quarter ended June 30, 2015:
 
Total Number of
Shares
Repurchased(1)
 
Average Price
Paid per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Repurchase Plans or
Programs
 
Maximum Approximate
Dollar Value (in thousands) of Shares that May Yet be
Purchased Under the Plans or Programs(2)
4/1/15 - 4/30/15
1,306

 
$
67.08

 
—

 
$
373,286

5/1/15 - 5/31/15
70,774

 
$
78.18

 
70,325

 
$
369,924

6/1/15 - 6/30/15
214,882

 
$
77.14

 
214,212

 
$
353,422

 
286,962

 
 
 
284,537

 
 
(1)
Includes 2,425 shares tendered for tax withholding on vesting of restricted stock awards, none of which are included against the dollar value of shares that may be purchased under programs approved by our Board of Directors.
(2)
On February 3, 2015, our Board of Directors approved an additional repurchase program of up to $250.0 million of our common stock plus the cash proceeds received from the exercise of stock options by our executives, non-employee directors and employees.



67

ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The following exhibits are filed herewith and this list is intended to constitute the exhibit index.
Exhibit Number
  
Description of Document
 
 
 
10.1*
 
2015 Incentive Compensation Plan for Line of Business Leaders.
 
 
 
31.1
  
Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2
  
Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1
  
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.2
  
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.INS
  
XBRL Instance Document.
 
 
 
101.SCH
  
XBRL Taxonomy Extension Schema.
 
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase.
 
 
 
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase.
 
 
 
101.LAB
  
XBRL Taxonomy Extension Label Linkbase.
 
 
 
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase.
* Indicates a management contract or compensatory plan or arrangement.




68

SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
OUTERWALL INC.
 
 
 
 
By:
 
/s/ Galen C. Smith
 
 
 
Galen C. Smith
 
 
 
Chief Financial Officer
 
 
 
July 30, 2015




69

OUTERWALL INC Reports

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