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EX-32.1 - EXHIBIT 32.1 - OUTERWALL INCa2015q3_10-qxexhibitx321.htm
EX-31.1 - EXHIBIT 31.1 - OUTERWALL INCa2015q3_10-qxexhibitx311.htm
EX-32.2 - EXHIBIT 32.2 - OUTERWALL INCa2015q3_10-qxexhibitx322.htm
EX-31.2 - EXHIBIT 31.2 - OUTERWALL INCa2015q3_10-qxexhibitx312.htm

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 September 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 October 21, 2015
Common Stock, $0.001 par value
 
17,274,464




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)
 
September 30,
2015
 
December 31,
2014
Assets

 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
195,603

 
$
242,696

Accounts receivable, net of allowances of $816 and $2,223
23,748

 
48,590

Content library
126,769

 
180,121

Prepaid expenses and other current assets
42,406

 
39,837

Total current assets
388,526

 
511,244

Property and equipment, net
341,002

 
428,468

Deferred income taxes
2,712

 
11,378

Goodwill and other intangible assets, net (Note 6)
528,138

 
623,998

Other long-term assets
6,443

 
8,231

Total assets
$
1,266,821

 
$
1,583,319

Liabilities and Stockholders’ Equity (Deficit)

 

Current Liabilities:

 

Accounts payable
$
119,148

 
$
168,633

Accrued payable to retailers
101,101

 
126,290

Other accrued liabilities
147,908

 
137,126

Current portion of long-term debt and other long-term liabilities
17,868

 
20,416

Deferred income taxes
9,501

 
21,432

Total current liabilities
395,526

 
473,897

Long-term debt and other long-term liabilities
856,275

 
973,669

Deferred income taxes
17,071

 
38,375

Total liabilities
1,268,872

 
1,485,941

Commitments and contingencies (Note 16)

 

Stockholders’ Equity (Deficit):

 

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

 

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

 

36,710,717 and 36,600,166 shares issued;

 

 17,246,475 and 18,926,242 shares outstanding;
481,281

 
473,592

Treasury stock
(1,116,205
)
 
(996,293
)
Retained earnings
631,507

 
620,389

Accumulated other comprehensive income (loss)
1,366

 
(310
)
Total stockholders’ equity (deficit)
(2,051
)
 
97,378

Total liabilities and stockholders’ equity (deficit)
$
1,266,821

 
$
1,583,319



See accompanying Notes to Consolidated Financial Statements
3



OUTERWALL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$
512,055

 
$
549,899

 
$
1,666,060

 
$
1,694,188

Expenses:
 
 
 
 
 
 
 
Direct operating(1)
340,199

 
379,442

 
1,115,002

 
1,180,818

Marketing
7,131

 
9,143

 
23,598

 
25,272

Research and development
1,514

 
2,999

 
5,637

 
9,885

General and administrative
47,818

 
47,586

 
145,157

 
148,790

Restructuring and lease termination costs (Note 11)

 

 
15,851

 
557

Depreciation and other
39,880

 
46,380

 
127,740

 
142,134

Amortization of intangible assets
3,308

 
3,665

 
9,926

 
11,347

Goodwill impairment (Note 6)

 

 
85,890

 

Total expenses
439,850

 
489,215

 
1,528,801

 
1,518,803

Operating income
72,205

 
60,684

 
137,259

 
175,385

Other expense, net:
 
 
 
 
 
 
 
Loss from equity method investments, net (Note 7)
(328
)
 
(11,352
)
 
(593
)
 
(31,261
)
Interest expense, net
(11,973
)
 
(12,465
)
 
(36,227
)
 
(35,045
)
Other, net
(1,384
)
 
(1,352
)
 
(3,088
)
 
(386
)
Total other expense, net
(13,685
)
 
(25,169
)
 
(39,908
)
 
(66,692
)
Income from continuing operations before income taxes
58,520

 
35,515

 
97,351

 
108,693

Income tax expense
(20,928
)
 
(13,392
)
 
(64,955
)
 
(35,131
)
Income from continuing operations
37,592

 
22,123

 
32,396

 
73,562

Loss from discontinued operations, net of tax (Note 12)
(256
)
 
(4,233
)
 
(5,077
)
 
(10,744
)
Net income
37,336

 
17,890

 
27,319

 
62,818

Foreign currency translation adjustment(2)
(1,651
)
 
(695
)
 
1,676

 
(156
)
Comprehensive income
$
35,685

 
$
17,195

 
$
28,995

 
$
62,662

 
 
 
 
 
 
 
 
Income from continuing operations attributable to common shares (Note 13):
 
 
 
 
 
 
 
Basic
$
36,462

 
$
21,384

 
$
31,491

 
$
71,268

Diluted
$
36,462

 
$
21,392

 
$
31,491

 
$
71,309

 
 
 
 
 
 
 
 
Basic earnings (loss) per common share (Note 13):
 
 
 
 
 
 
 
Continuing operations
$
2.12

 
$
1.14

 
$
1.77

 
$
3.43

Discontinued operations
(0.02
)
 
(0.23
)
 
(0.28
)
 
(0.52
)
Basic earnings per common share
$
2.10

 
$
0.91

 
$
1.49

 
$
2.91

 
 
 
 
 
 
 
 
Diluted earnings (loss) per common share (Note 13):
 
 
 
 
 
 
 
Continuing operations
$
2.12

 
$
1.12

 
$
1.77

 
$
3.37

Discontinued operations
(0.02
)
 
(0.22
)
 
(0.29
)
 
(0.51
)
Diluted earnings per common share
$
2.10

 
$
0.90

 
$
1.48

 
$
2.86

 
 
 
 
 
 
 
 
Weighted average common shares used in basic and diluted per share calculations (Note 13):
 
 
 
 
 
 
 
Basic
17,220

 
18,798

 
17,775

 
20,792

Diluted
17,229

 
19,021

 
17,789

 
21,186

 
 
 
 
 
 
 
 
Dividends declared per common share (Note 19)
$
0.30

 
$

 
$
0.90

 
$

(1)
“Direct operating” excludes “Depreciation and other” of $28.7 million and $86.7 million for the three and nine months ended September 30, 2015, respectively, and $31.2 million and $94.3 million for the three and nine months ended September 30, 2014, respectively.
(2)
Foreign currency translation adjustment had no tax effect for the three and nine months ended September 30, 2015 and 2014, respectively.

See accompanying Notes to Consolidated Financial Statements
4



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

 
 
 
 
 
 
 
 
 
Accumulated Other Comprehensive Income
 
 
 
Common Stock
 
Treasury
Stock
 
Retained
Earnings
 
 
 
 
Shares
 
Amount
 
 
 
 
Total
Balance, June 30, 2015
18,169,984

 
$
477,259

 
$
(1,055,447
)
 
$
599,332

 
$
3,017

 
$
24,161

Proceeds from exercise of stock options, net
950

 
54

 

 

 

 
54

Adjustments related to tax withholding for share-based compensation
(2,321
)
 
(153
)
 

 

 

 
(153
)
Share-based payments expense
16,448

 
3,588

 

 

 

 
3,588

Excess tax benefit on share-based compensation expense

 
533

 

 

 

 
533

Repurchases of common stock
(938,586
)
 

 
(60,758
)
 

 

 
(60,758
)
Net income

 

 

 
37,336

 

 
37,336

Dividends (Note 19)

 

 

 
(5,161
)
 

 
(5,161
)
Foreign currency translation adjustment(1)

 

 

 

 
(1,651
)
 
(1,651
)
Balance, September 30, 2015
17,246,475

 
$
481,281

 
$
(1,116,205
)
 
$
631,507

 
$
1,366

 
$
(2,051
)
(1)
Foreign currency translation adjustment has no tax effect for the three months ended September 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
48,992

 
2,552

 

 

 

 
2,552

Adjustments related to tax withholding for share-based compensation
(57,546
)
 
(3,852
)
 

 

 

 
(3,852
)
Share-based payments expense
169,105

 
8,298

 
3,577

 

 

 
11,875

Excess tax benefit on share-based compensation expense

 
691

 

 

 

 
691

Repurchases of common stock
(1,840,318
)
 

 
(123,489
)
 

 

 
(123,489
)
Net income

 

 

 
27,319

 

 
27,319

Dividends (Note 19)

 

 

 
(16,201
)
 

 
(16,201
)
Foreign currency translation adjustment(1)

 

 

 

 
1,676

 
1,676

Balance, September 30, 2015
17,246,475

 
$
481,281

 
$
(1,116,205
)
 
$
631,507

 
$
1,366

 
$
(2,051
)
(1)
Foreign currency translation adjustment has no tax effect for the nine months ended September 30, 2015.



See accompanying Notes to Consolidated Financial Statements
5



OUTERWALL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Operating Activities:
 
 
 
 
 
 
 
Net income
$
37,336

 
$
17,890

 
$
27,319

 
$
62,818

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
 
 
 
 
Depreciation and other
39,880

 
47,898

 
133,598

 
146,156

Amortization of intangible assets
3,308

 
3,671

 
9,970

 
11,366

Share-based payments expense
4,829

 
3,249

 
12,021

 
10,093

Windfall excess tax benefits related to share-based payments
(29
)
 
(35
)
 
(715
)
 
(1,988
)
Deferred income taxes
(21,741
)
 
(2,404
)
 
(25,680
)
 
(17,408
)
Restructuring and lease termination costs(2)

 

 
1,680

 

Loss from equity method investments, net
328

 
11,352

 
593

 
31,261

Amortization of deferred financing fees and debt discount
693

 
901

 
2,078

 
3,423

Loss from early extinguishment of debt

 
55

 

 
2,018

Goodwill impairment (Note 6)

 

 
85,890

 

Other
315

 
(313
)
 
(501
)
 
(1,477
)
Cash flows from changes in operating assets and liabilities:
 
 
 
 
 
 
 
Accounts receivable, net
9,655

 
12,133

 
24,732

 
17,464

Content library
18,546

 
1,314

 
53,205

 
48,800

Prepaid expenses and other current assets
17,188

 
1,044

 
(4,894
)
 
23,047

Other assets
84

 
611

 
406

 
1,647

Accounts payable
(28,383
)
 
(26,011
)
 
(46,080
)
 
(97,006
)
Accrued payable to retailers
(12,777
)
 
(21,099
)
 
(24,287
)
 
(27,822
)
Other accrued liabilities
16,327

 
(629
)
 
17,439

 
(5,345
)
Net cash flows from operating activities(1)
85,559

 
49,627

 
266,774

 
207,047

Investing Activities:
 
 
 
 
 
 
 
Purchases of property and equipment
(19,947
)
 
(19,295
)
 
(60,164
)
 
(72,311
)
Proceeds from sale of property and equipment
128

 
42

 
3,068

 
1,835

Cash paid for equity investments

 
(14,000
)
 

 
(24,500
)
Net cash flows used in investing activities(1)
(19,819
)
 
(33,253
)
 
(57,096
)
 
(94,976
)
Financing Activities:
 
 
 
 
 
 
 
Proceeds from issuance of senior unsecured notes

 

 

 
295,500

Proceeds from new borrowing on Credit Facility
35,000

 
130,000

 
147,000

 
635,000

Principal payments on Credit Facility
(72,813
)
 
(86,875
)
 
(258,563
)
 
(621,250
)
Financing costs associated with Credit Facility and senior unsecured notes
(9
)
 
(824
)
 
(9
)
 
(2,906
)
Settlement and conversion of convertible debt

 
(33,425
)
 

 
(51,149
)
Repurchases of common stock
(60,758
)
 
(70,598
)
 
(123,489
)
 
(545,078
)
Dividends paid (Note 19)
(5,139
)
 

 
(16,158
)
 

Principal payments on capital lease obligations and other debt
(2,660
)
 
(3,516
)
 
(8,938
)
 
(10,597
)
Windfall excess tax benefits related to share-based payments
29

 
35

 
715

 
1,988

Withholding tax paid on vesting of restricted stock net of proceeds from exercise of stock options
(45
)
 
(59
)
 
(1,246
)
 
(1,084
)
Net cash flows used in financing activities(1)
(106,395
)
 
(65,262
)
 
(260,688
)
 
(299,576
)


6


 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Effect of exchange rate changes on cash
(1,450
)
 
563

 
3,917

 
969

Change in cash and cash equivalents
(42,105
)
 
(48,325
)
 
(47,093
)
 
(186,536
)
Cash and cash equivalents:
 
 
 
 
 
 
 
Beginning of period
237,708

 
233,226

 
242,696

 
371,437

End of period
$
195,603

 
$
184,901

 
$
195,603

 
$
184,901

Supplemental disclosure of cash flow information:
 
 
 
 
 
 
 
Cash paid during the period for interest
$
12,151

 
$
12,614

 
$
34,997

 
$
29,824

Cash paid during the period for income taxes, net
$
17,551

 
$
14,594

 
$
84,447

 
$
23,783

Supplemental disclosure of non-cash investing and financing activities:
 
 
 
 
 
 
 
Purchases of property and equipment financed by capital lease obligations
$
994

 
$
1,901

 
$
1,971

 
$
7,414

Purchases of property and equipment included in ending accounts payable
$
3,422

 
$
5,869

 
$
3,422

 
$
5,869

Common stock issued on conversion of callable convertible debt
$

 
$
14,057

 
$

 
$
24,255

Non-cash debt issue costs
$

 
$

 
$

 
$
4,500

(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 nine months ended September 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 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
 
Nine Months Ended
 
Three Months Ended
 
Nine Months Ended
 
Three Months Ended
 
Nine Months Ended
In thousands, except per share data
September 30, 2014
 
September 30, 2014
 
September 30, 2014
Income from continuing operations used in basic per share calculation
$
22,123

 
$
73,562

 
$
(739
)
 
$
(2,294
)
 
$
21,384

 
$
71,268

Income from continuing operations used in diluted per share calculation
$
22,123

 
$
73,562

 
$
(731
)
 
$
(2,253
)
 
$
21,392

 
$
71,309

Weighted average shares used in basic per share calculation
18,798

 
20,792

 

 

 
18,798

 
20,792

Weighted average shares used in diluted per share calculation
19,147

 
21,372

 
(126
)
 
(186
)
 
19,021

 
21,186

Basic earnings per common share from continuing operations
$
1.18

 
$
3.54

 
$
(0.04
)
 
$
(0.11
)
 
$
1.14

 
$
3.43

Diluted earnings per common share from continuing operations
$
1.16

 
$
3.44

 
$
(0.04
)
 
$
(0.07
)
 
$
1.12

 
$
3.37

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. In August 2015, the FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (Subtopic 835-30). This ASU provides additional guidance to ASU 2015-03, which did not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. ASU 2015-15 noted that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. We are currently evaluating the impact of ASU 2015-03 and 2015-15, which are effective for us in our fiscal year beginning January 1, 2016. Early adoption is permitted.
In April 2015, the FASB issued ASU 2015-05, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change GAAP for a customer’s accounting for service contracts. We are currently evaluating the impact of ASU 2015-05, which is effective for us in our fiscal year beginning January 1, 2016, and do not expect this standard to have a material impact to our consolidated financial statements and related disclosures. Early adoption is permitted.


10


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. See Note 12: Discontinued Operations for additional information.
Our core offerings in automated retail include our Redbox, Coinstar and ecoATM segments. Our Redbox segment consists of self-service kiosks where consumers can rent or purchase movies and video games. Our Coinstar segment consists of self-service coin-counting kiosks where consumers can convert their coins to cash or stored value products. We also offer self-service kiosks that exchange gift cards for cash under our Coinstar™ Exchange brand. Our ecoATM segment consists of self-service kiosks where consumers can sell 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 September 30, 2015, are as follows:
 
Kiosks
 
Locations
Redbox
40,790

 
33,310

Coinstar
21,110

 
19,910

ecoATM
2,210

 
1,980

All Other
110

 
110

Total
64,220

 
55,310

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 $195.6 million and $242.7 million at September 30, 2015, and December 31, 2014, respectively. Of this total, cash equivalents were $9.3 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 September 30, 2015, and December 31, 2014, were $73.6 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 September 30, 2015, and December 31, 2014, were $33.9 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.


11


Note 4: Prepaid Expenses and Other Current Assets and Other Accrued Liabilities
Prepaid expenses and other current assets:
Dollars in thousands
September 30,
2015
 
December 31,
2014
Spare parts
$
12,620

 
$
13,643

Licenses
7,840

 
5,881

Electronic devices inventory
6,057

 
5,259

Income taxes receivable
1,936

 
113

Prepaid rent
1,566

 
1,446

DVD cases and labels
1,041

 
1,330

Other
11,346

 
12,165

Total prepaid and other current assets
$
42,406

 
$
39,837


Other accrued liabilities consist of the following:
Dollars in thousands
September 30,
2015
 
December 31,
2014
Payroll related expenses
$
39,543

 
$
33,343

Studio revenue share and other content related expenses
36,146

 
23,226

Business taxes
16,668

 
21,629

Insurance
9,745

 
9,615

Deferred revenue
8,001

 
6,995

Income taxes payable
6,526

 
9,463

Accrued interest expense
6,107

 
6,974

Accrued early lease termination and sublease expenses
5,692

 

Service contract provider expenses
5,277

 
4,191

Deferred rent expense
1,642

 
6,162

Other
12,561

 
15,528

Total other accrued liabilities
$
147,908

 
$
137,126

Note 5: Property and Equipment
Dollars in thousands
September 30,
2015
 
December 31,
2014
Kiosks and components
$
1,168,956

 
$
1,165,925

Computers, servers, and software
196,396

 
200,915

Leasehold improvements
23,319

 
29,625

Office furniture and equipment
7,461

 
9,218

Vehicles
5,545

 
6,234

Property and equipment, at cost
1,401,677

 
1,411,917

Accumulated depreciation and amortization
(1,060,675
)
 
(983,449
)
Property and equipment, net
$
341,002

 
$
428,468

During the first quarter of 2015, we recognized impairment charges of $6.9 million in connection with our early lease termination. See Note 11: Restructuring for additional information.


12


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.
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 in the second quarter of 2015.

As a result of the impairment recorded, the estimated fair value of the ecoATM reporting unit equaled its carrying value as of June 30, 2015. 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 growth in kiosks, revenue and profitability measures. Additionally, fair value may be negatively impacted by changes in our strategy related to ecoATM and increased competition from companies whose primary business consists of the purchase of used electronics and with companies in other businesses who also have buyback programs.

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 September 30, 2015
$
473,417



13


A reconciliation of the beginning and ending carrying amounts of goodwill by segment is as follows:
Dollars in thousands
December 31,
2014
 
Goodwill Impairment
 
September 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

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

 
$
53,295

Accumulated amortization
 
 
(26,209
)
 
(23,200
)
Retailer relationships, net
 
 
27,086

 
30,095

Developed technology
5 years
 
34,000

 
34,000

Accumulated amortization
 
 
(14,733
)
 
(9,633
)
Developed technology, net
 
 
19,267

 
24,367

Other
1 - 40 years
 
16,800

 
16,800

Accumulated amortization
 
 
(8,432
)
 
(6,571
)
Other, net
 
 
8,368

 
10,229

Total intangible assets, net
 
 
$
54,721

 
$
64,691

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

 
$
1,358

 
$
3,009

 
$
4,429

Developed technology
1,700

 
1,700

 
5,100

 
5,100

Other
605

 
613

 
1,861

 
1,837

Total amortization of intangible assets
3,308

 
3,671

 
9,970

 
11,366

Less: amortization included in discontinued operations

 
(6
)
 
(44
)
 
(19
)
Total amortization of intangible assets from continuing operations
$
3,308

 
$
3,665

 
$
9,926

 
$
11,347

Assuming no future impairment, the expected future amortization as of September 30, 2015, is as follows:
Dollars in thousands
Retailer
Relationships
 
Developed Technology
 
Other
 
Total
Remainder of 2015
$
1,003

 
$
1,700

 
$
577

 
$
3,280

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
$
27,086

 
$
19,267

 
$
8,368

 
$
54,721



14


Note 7: Equity Method Investments

We include our equity method investments within other long-term assets on our Consolidated Balance Sheets. As of September 30, 2015, our $0.9 million investment in Pursuant Health, Inc., formerly known as SoloHealth, Inc., representing approximately 10% ownership, was our only equity method investment.
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 is composed of the following:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
Dollars in thousands
2015
 
2014
 
2015
 
2014
Proportionate share of net loss of equity method investees:
 
 
 
 
 
 
 
Joint Venture
$

 
$
(10,378
)
 
$

 
$
(28,339
)
Pursuant Health, Inc. (fka SoloHealth, Inc.)
(328
)
 
(224
)
 
(593
)
 
(672
)
Total proportionate share of net loss of equity method investees
(328
)
 
(10,602
)
 
(593
)
 
(29,011
)
Amortization of difference in carrying amount and underlying equity in Joint Venture

 
(750
)
 

 
(2,250
)
Total loss from equity method investments
$
(328
)
 
$
(11,352
)
 
$
(593
)
 
$
(31,261
)
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 September 30, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal
$
350,000

 
$
300,000

 
$
139,688

 
$
55,000

 
$
844,688

 
 
 
 
 
 
 

Discount
(3,530
)
 
(3,670
)
 
(279
)
 

 
(7,479
)
 
 
 
 
 
 
 

Total
346,470

 
296,330

 
139,409

 
55,000

 
837,209

 
$
8,177

 
$
9,497

 
$
19,260

 
$
874,143

Less: current portion

 

 
(12,188
)
 

 
(12,188
)
 
(5,680
)
 

 

 
(17,868
)
Total long-term portion
$
346,470

 
$
296,330

 
$
127,221

 
$
55,000

 
$
825,021

 
$
2,497

 
$
9,497

 
$
19,260

 
$
856,275

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unamortized deferred financing fees(1)
$
534

 
$
1,213

 
$

 
$
2,467

 
$
4,214

 
 
 
 
 
 
 
$
4,214



15


 
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
 
Nine Months Ended
September 30,
 
September 30,
2015
 
2014
 
2015
 
2014
Cash interest expense
$
11,297

 
$
11,519

 
$
34,191

 
$
29,654

Non-cash interest expense:
 
 
 
 
 
 
 
Amortization of debt discount
435

 
616

 
1,304

 
2,171

Amortization of deferred financing fees
258

 
285

 
774

 
1,252

Total non-cash interest expense
693

 
901

 
2,078

 
3,423

Total cash and non-cash interest expense
11,990

 
12,420

 
36,269

 
33,077

Loss from early extinguishment of debt

 
55

 

 
2,018

Total interest expense
$
11,990

 
$
12,475

 
$
36,269

 
$
35,095

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


16


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 September 30, 2015, the interest rate on amounts outstanding under the Credit Facility was 1.95% 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
$
2,813

2016
13,125

2017
15,000

2018
18,750

2019
90,000

Total
$
139,688

 
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 nine months ended September 30, 2015, we repurchased a total of 1,840,318 shares of our common stock, via open market repurchases and a 10b5-1 plan, with an average price per share of $67.10 for $123.5 million.
The following table presents a summary of our authorized stock repurchase balance:
Dollars in thousands
Board Authorization
Authorized repurchase - as of January 1, 2015
$
163,655

Additional board authorization
250,000

Proceeds from the exercise of stock options
2,552

Repurchase of common stock from open market
(123,489
)
Authorized repurchase - as of September 30, 2015
$
292,718



17


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
 
Nine Months Ended
 
September 30,
 
September 30,
Dollars in thousands
2015
 
2014
 
2015
 
2014
Share-based payments expense:
 
 
 
 
 
 
 
Share-based compensation - stock options
$
57

 
$
163

 
$
238

 
$
619

Share-based compensation - restricted stock
3,566

 
3,115

 
8,164

 
9,472

Share-based payments for content arrangements
1,241

 
(29
)
 
3,723

 
2

Total share-based payments expense
$
4,864

 
$
3,249

 
$
12,125

 
$
10,093

Tax benefit on share-based payments expense
$
1,888

 
$
1,246

 
$
4,696

 
$
3,873

 
September 30, 2015
Dollars in thousands
Unrecognized Share-Based Payments Expense
 
Weighted-Average Remaining Life
Unrecognized share-based payments expense:
 
 
 
Share-based compensation - stock options
$
202

 
1.2 years
Share-based compensation - restricted stock
20,656

 
2.4 years
Share-based payments for content arrangements
894

 
0.5 years
Total unrecognized share-based payments expense
$
21,752

 
 
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
(49
)
 
52.10

Canceled, expired, or forfeited
(24
)
 
53.99

Outstanding, September 30, 2015
55

 
52.40

Certain information regarding stock options outstanding as of September 30, 2015, is as follows:
 
Options
Shares and intrinsic value in thousands
Outstanding
 
Exercisable
Number
55

 
39

Weighted average per share exercise price
$
52.40

 
$
51.67

Aggregate intrinsic value
$
284

 
$
240

Weighted average remaining contractual term (in years)
6.58

 
6.34



18


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
325

 
67.04

Vested
(180
)
 
59.31

Forfeited
(201
)
 
65.22

Non-vested, September 30, 2015
553

 
65.88

Share-Based Payments for Content Arrangements
We have granted restricted stock as part of content license agreements with certain movie studios. The expense related to these agreements is included within direct operating expenses in our Consolidated Statements of Comprehensive Income and is adjusted based on the number of unvested shares and market price of our common stock each reporting period. During the first quarter of 2015, 50,000 shares of restricted stock were granted and immediately vested pursuant to a revenue sharing agreement with Paramount.
Information related to the shares of restricted stock granted as part of these agreements as of September 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.
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 $3.8 million in expense associated with the issuance of rights to receive cash for the nine months ended September 30, 2015. The expected future recognition of expense associated with the rights to receive cash as of September 30, 2015 is as follows:
Dollars in thousands
Expected Expense
Remainder of 2015
$
639

2016
2,156

2017
335

Remaining total expected expense
$
3,130




19


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.
There were no significant restructuring charges in the third 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:
 
Nine Months Ended
 
September 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 nine months ended September 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.
 
Nine Months Ended
 
September 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



20


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
(4,451
)
 
(4,237
)
 
(265
)
Ending Balance - September 30, 2015
$

 
$
5,692

 
$
48

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

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.
In addition to Redbox Canada, discontinued operations for the nine months ended September 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
 
Nine Months Ended
 
September 30,
 
September 30,
Dollars in thousands
2015
 
2014
 
2015
 
2014
Redbox Canada
$
(256
)
 
$
(4,233
)
 
$
(5,077
)
 
$
(9,976
)
Certain new ventures

 

 

 
(768
)
Loss on discontinued operations
$
(256
)
 
$
(4,233
)
 
$
(5,077
)
 
$
(10,744
)


21


Redbox Canada
The disposition and operating results of Redbox Canada are presented in discontinued operations in our Consolidated Statements of Comprehensive Income for all periods presented. The following table sets forth the components of discontinued operations included in our Consolidated Statements of Comprehensive Income:

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





Revenue
$

 
$
2,965

 
$
1,557

 
$
8,215

Direct operating
10

 
4,669

 
4,314

 
13,587

Marketing

 
619

 
112

 
1,870

General and administrative
(10
)
 
278

 
144

 
892

Restructuring and lease termination costs

 

 
522

 

Depreciation and other

 
1,516

 
5,858

 
4,037

Amortization of intangible assets

 
6

 
44

 
19

Other expense, net
(36
)
 
(1,661
)
 
(4,365
)
 
(1,463
)
Pretax loss of discontinued operations related to major classes of pretax loss
(36
)
 
(5,784
)
 
(13,802
)
 
(13,653
)
Income tax benefit (expense)(1)
(220
)
 
1,551

 
8,725

 
3,677

Net loss on discontinued operations
$
(256
)
 
$
(4,233
)
 
$
(5,077
)
 
$
(9,976
)
(1)
The income tax benefit for the nine months ended September 30, 2015 includes a benefit on the rate differential between the U.S. and Canada.
Significant operating and investing cash flows of Redbox Canada were as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
Dollars in thousands
2015
 
2014
 
2015
 
2014
Loss on discontinued operations
$
(256
)
 
$
(4,233
)
 
$
(5,077
)
 
$
(9,976
)
Adjustments to reconcile net loss to net cash flows from operating activities:
 
 
 
 
 
 
 
Depreciation and amortization

 
1,522

 
5,902

 
4,056

Content library
167

 
(768
)
 
3,379

 
(359
)
Prepaid and other current assets
(42
)
 
3

 
1,192

 
32

Accounts payable
28

 
500

 
(2,688
)
 
(351
)
Accrued payables to retailers

 
(193
)
 
(155
)
 
109

Other accrued liabilities
(57
)
 
(67
)
 
(674
)
 
(91
)
Net cash flows from (used in) operating activities
$
(160
)
 
$
(3,236
)
 
$
1,879

 
$
(6,580
)
Investing activities:
 
 
 
 
 
 
 
Purchase of property, plant and equipment
(33
)
 
291

 
(311
)
 
(3,980
)
Total cash flows used in investing activities
$
(33
)
 
$
291

 
$
(311
)
 
$
(3,980
)

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.


22


Our calculation of basic and diluted earnings per share is as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
In thousands, except per share data
2015
 
2014
 
2015
 
2014
Numerator
 
 
 
 
 
 
 
Income from continuing operations
$
37,592

 
$
22,123

 
$
32,396

 
$
73,562

Loss from discontinued operations, net of tax
(256
)
 
(4,233
)
 
(5,077
)
 
(10,744
)
Net income
$
37,336

 
$
17,890

 
$
27,319

 
$
62,818

 
 
 
 
 
 
 
 
Income from continuing operations
$
37,592

 
$
22,123

 
$
32,396

 
$
73,562

Dividends and undistributed income allocated to participating shares
(1,130
)
 
(739
)
 
(905
)
 
(2,294
)
Income from continuing operations to common shares - basic
36,462

 
21,384

 
31,491

 
71,268

Effect of reallocating undistributed income from continuing operations to participating shares

 
8

 

 
41

Income from continuing operations to common shares - diluted
$
36,462

 
$
21,392

 
$
31,491

 
$
71,309

 
 
 
 
 
 
 
 
Denominator
 
 
 
 
 
 
 
Weighted average common shares - basic
17,220

 
18,798

 
17,775

 
20,792

Dilutive effect of share-based payment awards
9

 
53

 
14

 
87

Dilutive effect of convertible debt

 
170

 

 
307

Weighted average common shares - diluted(1)
17,229

 
19,021

 
17,789

 
21,186

 
 
 
 
 
 
 
 
Basic earnings (loss) per common share:
 
 
 
 
 
 
 
Continuing operations
$
2.12

 
$
1.14

 
$
1.77

 
$
3.43

Discontinued operations
(0.02
)
 
(0.23
)
 
(0.28
)
 
(0.52
)
Basic earnings per common share
$
2.10

 
$
0.91

 
$
1.49

 
$
2.91

 
 
 
 
 
 
 
 
Diluted earnings (loss) per common share:
 
 
 
 
 
 
 
Continuing operations
$
2.12

 
$
1.12

 
$
1.77

 
$
3.37

Discontinued operations
(0.02
)
 
(0.22
)
 
(0.29
)
 
(0.51
)
Diluted earnings per common share
$
2.10

 
$
0.90

 
$
1.48

 
$
2.86

 
 
 
 
 
 
 
 
Stock options and share-based awards not included in diluted EPS calculation because their effect would have be antidilutive
12

 
226

 
1

 
16

(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.


23


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 September 30, 2015
Redbox
 
Coinstar
 
ecoATM
 
All Other
 
Corporate Unallocated
 
Total
Revenue
$
395,372

 
$
85,677

 
$
30,965

 
$
41

 
$

 
$
512,055

Expenses:
 
 
 
 
 
 
 
 
 
 
 
Direct operating
269,022

 
41,249

 
28,583

 
786

 
559

 
340,199

Marketing
4,180

 
1,439

 
1,134

 
262

 
116

 
7,131

Research and development

 

 
1,201

 

 
313

 
1,514

General and administrative
31,788

 
8,502

 
3,105

 
933

 
3,490

 
47,818

Segment operating income (loss)
90,382

 
34,487

 
(3,058
)
 
(1,940
)
 
(4,478
)
 
115,393

Less: depreciation, amortization and other
(27,754
)
 
(7,942
)
 
(6,788
)
 
(704
)
 

 
(43,188
)
Operating income (loss)
62,628

 
26,545

 
(9,846
)
 
(2,644
)
 
(4,478
)
 
72,205

Loss from equity method investments, net

 

 

 

 
(328
)
 
(328
)
Interest expense, net

 

 

 

 
(11,973
)
 
(11,973
)
Other, net

 

 

 

 
(1,384
)
 
(1,384
)
Income (loss) from continuing operations before income taxes
$
62,628

 
$
26,545

 
$
(9,846
)
 
$
(2,644
)
 
$
(18,163
)
 
$
58,520



24


Dollars in thousands
 
Three Months Ended September 30, 2014
Redbox
 
Coinstar
 
ecoATM
 
All Other
 
Corporate Unallocated
 
Total
Revenue
$
435,083

 
$
85,074

 
$
29,733

 
$
9

 
$

 
$
549,899

Expenses:
 
 
 
 
 
 
 
 
 
 
 
Direct operating
308,123

 
42,428

 
26,411

 
577

 
1,903

 
379,442

Marketing
5,419

 
1,834

 
973

 
239

 
678

 
9,143

Research and development
15

 
64

 
1,360

 
728

 
832

 
2,999

General and administrative
33,249

 
7,313

 
3,027

 
858

 
3,139

 
47,586

Segment operating income (loss)
88,277

 
33,435

 
(2,038
)
 
(2,393
)
 
(6,552
)
 
110,729

Less: depreciation, amortization and other
(36,685
)
 
(8,989
)
 
(4,297
)
 
(74
)
 

 
(50,045
)
Operating income (loss)
51,592

 
24,446

 
(6,335
)
 
(2,467
)
 
(6,552
)
 
60,684

Loss from equity method investments, net

 

 

 

 
(11,352
)
 
(11,352
)
Interest expense, net

 

 

 

 
(12,465
)
 
(12,465
)
Other, net

 

 

 

 
(1,352
)
 
(1,352
)
Income (loss) from continuing operations before income taxes
$
51,592

 
$
24,446

 
$
(6,335
)
 
$
(2,467
)
 
$
(31,721
)
 
$
35,515


Dollars in thousands
 
Nine Months Ended September 30, 2015
Redbox
 
Coinstar
 
ecoATM
 
All Other
 
Corporate Unallocated
 
Total
Revenue
$
1,353,881

 
$
235,286

 
$
76,776

 
$
117

 
$

 
$
1,666,060

Expenses:
 
 
 
 
 
 
 
 
 
 
 
Direct operating
913,401

 
117,870

 
78,616

 
3,055

 
2,060

 
1,115,002

Marketing
13,271

 
3,849

 
5,013

 
840

 
625

 
23,598

Research and development

 

 
4,206

 
(84
)
 
1,515

 
5,637

General and administrative
99,859

 
24,065

 
7,167

 
6,084

 
7,982

 
145,157

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)
312,176

 
88,952

 
(104,243
)
 
(9,778
)
 
(12,182
)
 
274,925

Less: depreciation, amortization and other
(92,424
)
 
(24,197
)
 
(18,995
)
 
(2,050
)
 

 
(137,666
)
Operating income (loss)
219,752

 
64,755

 
(123,238
)
 
(11,828
)
 
(12,182
)
 
137,259

Loss from equity method investments, net

 

 

 

 
(593
)
 
(593
)
Interest expense, net

 

 

 

 
(36,227
)
 
(36,227
)
Other, net

 

 

 

 
(3,088
)
 
(3,088
)
Income (loss) from continuing operations before income taxes
$
219,752

 
$
64,755

 
$
(123,238
)
 
$
(11,828
)
 
$
(52,090
)
 
$
97,351




25


Dollars in thousands
 
Nine Months Ended September 30, 2014
Redbox
 
Coinstar
 
ecoATM
 
All Other
 
Corporate Unallocated
 
Total
Revenue
$
1,390,970

 
$
233,707

 
$
69,478

 
$
33

 
$

 
$
1,694,188

Expenses:
 
 
 
 
 
 
 
 
 
 
 
Direct operating
989,100

 
120,354

 
64,729

 
1,421

 
5,214

 
1,180,818

Marketing
15,412

 
4,397

 
2,568

 
620

 
2,275

 
25,272

Research and development
41

 
486

 
4,535

 
2,035

 
2,788

 
9,885

General and administrative
105,642

 
21,479

 
9,470

 
2,352

 
9,847

 
148,790

Restructuring and lease termination costs (Note 11)
534

 
23

 

 

 

 
557

Segment operating income (loss)
280,241

 
86,968

 
(11,824
)
 
(6,395
)
 
(20,124
)
 
328,866

Less: depreciation, amortization and other
(114,872
)
 
(26,473
)
 
(11,821
)
 
(315
)
 

 
(153,481
)
Operating income (loss)
165,369

 
60,495

 
(23,645
)
 
(6,710
)
 
(20,124
)
 
175,385

Loss from equity method investments, net

 

 

 

 
(31,261
)
 
(31,261
)
Interest expense, net

 

 

 

 
(35,045
)
 
(35,045
)
Other, net

 

 

 

 
(386
)
 
(386
)
Income (loss) from continuing operations before income taxes
$
165,369

 
$
60,495

 
$
(23,645
)
 
$
(6,710
)
 
$
(86,816
)
 
$
108,693

Significant Retailer Relationships
The following retailers accounted for 10% or more of our consolidated revenue:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Wal-Mart Stores Inc.
16.6
%
 
15.4
%
 
16.5
%
 
15.3
%
Walgreen Co.
12.9
%
 
13.2
%
 
13.6
%
 
13.8
%
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.


26


Assets and Liabilities Measured and Reported at Fair Value on a Recurring Basis
The following table presents our financial assets and liabilities that are measured and reported at fair value in our Consolidated Balance Sheets on a recurring basis, by level within the fair value hierarchy (in thousands):
Fair Value at September 30, 2015
Level 1
 
Level 2
 
Level 3
Money market demand accounts and investment grade fixed income securities
$
9,278

 
$

 
$

 
 
 
 
 
 
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 September 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.


27


Note 16: Commitments and Contingencies
Lease Commitments
Operating Leases
During 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 September 30, 2015, our future minimum lease payments, net of sublease income are as follows:
Dollars in thousands
Operating Leases(1)
Remaining in 2015
$
4,298

2016
15,420

2017
10,601

2018
7,109

2019
6,152

Thereafter
10,435

Total minimum lease commitments
54,015

Less: sublease income
(1,689
)
Total minimum lease commitments, net
$
52,326

(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 nine months ended September 30, 2015, and we made $2.1 million in purchases in the nine months ended September 30, 2014, that reduced this commitment. As of September 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 $35.2 million as of September 30, 2015.
Content License Agreements
On October 16, 2015, Paramount elected to exercise its option to extend our existing content license agreement. This will extend the license period through December 31, 2016, with no further options to renew, and require us to issue 50,000 shares of additional restricted stock to Paramount during the first quarter of 2016. See Note 20: Subsequent Events for additional information.
On July 14, 2015, Sony elected to exercise its option to extend our existing content license agreement. This extended the license period through September 30, 2016, with no further options to renew, and required us to issue 25,000 shares of additional restricted stock to Sony during the fourth quarter of 2015.
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.


28


We have entered into certain license agreements to obtain content for movie and video game rentals. Total estimated movie content commitments as of September 30, 2015, is presented in the following table:
Dollars in thousands
 
 
Years Ended December 31,
Total
 
Remaining in 2015
 
2016
 
2017
Total estimated movie content commitments(1)
$
575,585

 
$
155,439

 
$
333,835

 
$
86,311

(1)
Subsequent to quarter end and not included in this table, Paramount elected to exercise its option to extend our existing content license agreement. This will extend the license period through December 31, 2016. See Note 20: Subsequent Events for additional information.
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. Oral argument is scheduled for November 10, 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.



29


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 September 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
$
139,233

 
$
14,453

 
$
41,917

 
$

 
$
195,603

Accounts receivable, net of allowances
2,484

 
20,459

 
805

 

 
23,748

Content library

 
126,769

 

 

 
126,769

Prepaid expenses and other current assets
23,577

 
25,021

 
797

 
(6,989
)
 
42,406

Intercompany receivables
31,137

 
563,167

 
428

 
(594,732
)
 

Total current assets
196,431

 
749,869

 
43,947

 
(601,721
)
 
388,526

Property and equipment, net
106,173

 
219,614

 
15,215

 

 
341,002

Deferred income taxes

 
6,331

 
2,712

 
(6,331
)
 
2,712

Goodwill and other intangible assets, net
249,706

 
278,432

 

 

 
528,138

Other long-term assets
5,232

 
1,017

 
194

 

 
6,443

Investment in related parties
942,221

 
30,105

 

 
(972,326
)
 

Total assets
$
1,499,763

 
$
1,285,368

 
$
62,068

 
$
(1,580,378
)
 
$
1,266,821

Liabilities and Stockholders’ Equity (Deficit)
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
12,168

 
$
106,782

 
$
198

 
$

 
$
119,148

Accrued payable to retailers
62,765

 
26,517

 
11,819

 

 
101,101

Other accrued liabilities
66,040

 
77,712

 
2,336

 
1,820

 
147,908

Current portion of long-term debt and other long-term liabilities
17,530

 

 
338

 

 
17,868

Deferred income taxes

 
18,310

 

 
(8,809
)
 
9,501

Intercompany payables
484,166

 
93,511

 
17,055

 
(594,732
)
 

Total current liabilities
642,669

 
322,832

 
31,746

 
(601,721
)
 
395,526

Long-term debt and other long-term liabilities
835,771

 
20,315

 
189

 

 
856,275

Deferred income taxes
23,373

 

 
28

 
(6,330
)
 
17,071

Total liabilities
1,501,813

 
343,147

 
31,963

 
(608,051
)
 
1,268,872

Commitments and contingencies
 
 
 
 
 
 
 
 
 
Stockholders’ Equity (Deficit):
 
 
 
 
 
 
 
 
 
Preferred stock

 

 
3,000

 
(3,000
)
 

Common stock
595,795

 
234,729

 
18,393

 
(367,636
)
 
481,281

Treasury stock
(1,116,205
)
 

 

 

 
(1,116,205
)
Retained earnings
519,027

 
707,492

 
6,679

 
(601,691
)
 
631,507

Accumulated other comprehensive income (loss)
(667
)
 

 
2,033

 

 
1,366

Total stockholders’ equity (deficit)
(2,050
)
 
942,221

 
30,105

 
(972,327
)
 
(2,051
)
Total liabilities and stockholders’ equity (deficit)
$
1,499,763

 
$
1,285,368

 
$
62,068

 
$
(1,580,378
)
 
$
1,266,821



30


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 (Deficit)
 
 
 
 
 
 
 
 
 
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 (Deficit):
 
 
 
 
 
 
 
 
 
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 (deficit)
97,379

 
917,234

 
(5,115
)
 
(912,120
)
 
97,378

Total liabilities and stockholders’ equity (deficit)
$
1,553,835

 
$
1,363,217

 
$
92,888

 
$
(1,426,621
)
 
$
1,583,319



31


CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
 
Three Months Ended September 30, 2015
(in thousands)
Outerwall Inc.
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Eliminations and Consolidation Reclassifications
 
Total
Revenue
$
72,992

 
$
426,337

 
$
12,726

 
$

 
$
512,055

Expenses:
 
 
 
 
 
 
 
 
 
Direct operating
36,657

 
297,857

 
5,685

 

 
340,199

Marketing
1,592

 
5,414

 
125

 

 
7,131

Research and development

 
1,514

 

 

 
1,514

General and administrative
11,745

 
35,843

 
230

 

 
47,818

Depreciation and other
7,573

 
31,236

 
1,071

 

 
39,880

Amortization of intangible assets
3

 
3,305

 

 

 
3,308

Total expenses
57,570

 
375,169

 
7,111

 

 
439,850

Operating income
15,422

 
51,168

 
5,615

 

 
72,205

Other income (expense), net:
 
 
 
 
 
 
 
 
 
Loss from equity method investments, net
(328
)
 

 

 

 
(328
)
Interest income (expense), net
23,448

 
(35,164
)
 
(257
)
 

 
(11,973
)
Other, net
3,412

 
8

 
(4,804
)
 

 
(1,384
)
Total other income (expense), net
26,532

 
(35,156
)
 
(5,061
)
 

 
(13,685
)
Income from continuing operations before income taxes
41,954

 
16,012

 
554

 

 
58,520

Income tax benefit (expense)
(31,826
)
 
10,604

 
294

 

 
(20,928
)
Income from continuing operations
10,128

 
26,616

 
848

 

 
37,592

Income (loss) from discontinued operations, net of tax
6

 
(235
)
 
(27
)
 

 
(256
)
Equity in income (loss) of subsidiaries
27,202

 
821

 

 
(28,023
)
 

Net income
37,336

 
27,202

 
821

 
(28,023
)
 
37,336

Foreign currency translation adjustment(1)
(448
)
 

 
(1,203
)
 

 
(1,651
)
Comprehensive income (loss)
$
36,888

 
$
27,202

 
$
(382
)
 
$
(28,023
)
 
$
35,685

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



32


CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
 
Three Months Ended September 30, 2014
(in thousands)
Outerwall Inc.
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Eliminations and Consolidation Reclassifications
 
Total
Revenue
$
71,616

 
$
464,814

 
$
13,469

 
$

 
$
549,899

Expenses:
 
 
 
 
 
 
 
 
 
Direct operating
36,930

 
335,780

 
6,732

 

 
379,442

Marketing
1,945

 
7,059

 
139

 

 
9,143

Research and development
861

 
2,138

 

 

 
2,999

General and administrative
10,789

 
36,558

 
239

 

 
47,586

Depreciation and other
8,173

 
36,983

 
1,224

 

 
46,380

Amortization of intangible assets
358

 
3,307

 

 

 
3,665

Total expenses
59,056

 
421,825

 
8,334

 

 
489,215

Operating income
12,560

 
42,989

 
5,135

 

 
60,684

Other income (expense), net:
 
 
 
 
 
 
 
 
 
Loss from equity method investments, net
(224
)
 
(11,128
)
 

 

 
(11,352
)
Interest income (expense), net
(12,570
)
 
163

 
(58
)
 

 
(12,465
)
Other, net
1,941

 
344

 
(3,637
)
 

 
(1,352
)
Total other expense, net
(10,853
)
 
(10,621
)
 
(3,695
)
 

 
(25,169
)
Income from continuing operations before income taxes
1,707

 
32,368

 
1,440

 

 
35,515

Income tax benefit (expense)
(1,915
)
 
(10,957
)
 
(520
)
 

 
(13,392
)
Income from continuing operations
(208
)
 
21,411

 
920

 

 
22,123

Loss from discontinued operations, net of tax

 
(176
)
 
(4,057
)
 

 
(4,233
)
Equity in income (loss) of subsidiaries
18,098

 
(3,137
)
 

 
(14,961
)
 

Net income (loss)
17,890

 
18,098

 
(3,137
)
 
(14,961
)
 
17,890

Foreign currency translation adjustment(1)
(680
)
 

 
(15
)
 

 
(695
)
Comprehensive income (loss)
$
17,210

 
$
18,098

 
$
(3,152
)
 
$
(14,961
)
 
$
17,195

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







33


CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
 
Nine Months Ended September 30, 2015
(in thousands)
Outerwall Inc.
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Eliminations and Consolidation Reclassifications
 
Total
Revenue
$
200,489

 
$
1,430,657

 
$
34,914

 
$

 
$
1,666,060

Expenses:
 
 
 
 
 
 
 
 
 
Direct operating
105,780

 
993,220

 
16,002

 

 
1,115,002

Marketing
4,583

 
18,863

 
152

 

 
23,598

Research and development
(83
)
 
5,720

 

 

 
5,637

General and administrative
35,568

 
108,958

 
631

 

 
145,157

Restructuring and lease termination costs
551

 
15,300

 

 

 
15,851

Depreciation and other
20,273

 
104,282

 
3,185

 

 
127,740

Amortization of intangible assets
10

 
9,916

 

 

 
9,926

Goodwill impairment (Note 6)

 
85,890

 

 

 
85,890

Total expenses
166,682

 
1,342,149

 
19,970

 

 
1,528,801

Operating income
33,807

 
88,508

 
14,944

 

 
137,259

Other income (expense), net:
 
 
 
 
 
 
 
 
 
Loss from equity method investments, net
(593
)
 

 

 

 
(593
)
Interest income (expense), net
(1,433
)
 
(34,472
)
 
(322
)
 

 
(36,227
)
Other, net
8,990

 
72

 
(12,150
)
 

 
(3,088
)
Total other income (expense), net
6,964

 
(34,400
)
 
(12,472
)
 

 
(39,908
)
Income from continuing operations before income taxes
40,771

 
54,108

 
2,472

 

 
97,351

Income tax expense
(26,393
)
 
(38,442
)
 
(120
)
 

 
(64,955
)
Income from continuing operations
14,378

 
15,666

 
2,352

 

 
32,396

Income (loss) from discontinued operations, net of tax
674

 
(28,068
)
 
22,317

 

 
(5,077
)
Equity in income (loss) of subsidiaries
12,267

 
24,669

 

 
(36,936
)
 

Net income
27,319

 
12,267

 
24,669

 
(36,936
)
 
27,319

Foreign currency translation adjustment(1)
126

 

 
1,550

 

 
1,676

Comprehensive income
$
27,445

 
$
12,267

 
$
26,219

 
$
(36,936
)
 
$
28,995

(1)
Foreign currency translation adjustment had no tax effect for the nine months ended September 30, 2015.


34


CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
 
Nine Months Ended September 30, 2014
(in thousands)
Outerwall Inc.
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Eliminations and Consolidation Reclassifications
 
Total
Revenue
$
197,878

 
$
1,460,447

 
$
35,863

 
$

 
$
1,694,188

Expenses:
 
 
 
 
 
 
 
 
 
Direct operating
105,399

 
1,057,472

 
17,947

 

 
1,180,818

Marketing
4,723

 
20,220

 
329

 

 
25,272

Research and development
2,589

 
7,296

 

 

 
9,885

General and administrative
31,406

 
116,705

 
679

 

 
148,790

Restructuring and lease termination costs
23

 
534

 

 

 
557

Depreciation and other
26,744

 
111,944

 
3,446

 

 
142,134

Amortization of intangible assets
1,430

 
9,917

 

 

 
11,347

Total expenses
172,314

 
1,324,088

 
22,401

 

 
1,518,803

Operating income
25,564

 
136,359

 
13,462

 

 
175,385

Other income (expense), net:
 
 
 
 
 
 
 
 
 
Loss from equity method investments, net
(672
)
 
(30,589
)
 

 

 
(31,261
)
Interest income (expense), net
(35,172
)
 
286

 
(159
)
 

 
(35,045
)
Other, net
7,662

 
466

 
(8,514
)
 

 
(386
)
Total other expense, net
(28,182
)
 
(29,837
)
 
(8,673
)
 

 
(66,692
)
Income (loss) from continuing operations before income taxes
(2,618
)
 
106,522

 
4,789

 

 
108,693

Income tax benefit (expense)
1,333

 
(35,407
)
 
(1,057
)
 

 
(35,131
)
Income (loss) from continuing operations
(1,285
)
 
71,115

 
3,732

 

 
73,562

Loss from discontinued operations, net of tax
(803
)
 
(381
)
 
(9,560
)
 

 
(10,744
)
Equity in income (loss) of subsidiaries
64,906

 
(5,828
)
 

 
(59,078
)
 

Net income (loss)
62,818

 
64,906

 
(5,828
)
 
(59,078
)
 
62,818

Foreign currency translation adjustment(1)
(650
)
 

 
494

 

 
(156
)
Comprehensive income (loss)
$
62,168

 
$
64,906

 
$
(5,334
)
 
$
(59,078
)
 
$
62,662

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








35


CONSOLIDATING STATEMENTS OF CASH FLOWS
(unaudited)
 
Nine Months Ended September 30, 2015
(in thousands)
Outerwall Inc.
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Eliminations and Consolidation Reclassifications
 
Total
Operating Activities:
 
 
 
 
 
 
 
 
 
Net income
$
27,319

 
$
12,267

 
$
24,669

 
$
(36,936
)
 
$
27,319

Adjustments to reconcile net income to net cash flows from (used in) operating activities:
 
 
 
 
 
 
 
 
 
Depreciation and other
20,273

 
106,127

 
7,198

 

 
133,598

Amortization of intangible assets
10

 
9,916

 
44

 

 
9,970

Share-based payments expense
6,500

 
5,521

 

 

 
12,021

Windfall excess tax benefits related to share-based payments
(715
)
 

 

 

 
(715
)
Deferred income taxes
(13,932
)
 
(19,271
)
 
7,523

 

 
(25,680
)
Restructuring and lease termination costs
136

 
1,544

 

 

 
1,680

Loss from equity method investment, net
593

 

 

 

 
593

Amortization of deferred financing fees and debt discount
2,078

 

 

 

 
2,078

Goodwill impairment (Note 6)

 
85,890

 

 

 
85,890

Other
(409
)
 
636

 
(728
)
 

 
(501
)
Equity in (income) losses of subsidiaries
(12,267
)
 
(24,669
)
 

 
36,936

 

Cash flows from changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
Accounts receivable, net
717

 
23,416

 
599

 

 
24,732

Content library

 
49,573

 
3,632

 

 
53,205

Prepaid expenses and other current assets
(1,693
)
 
(3,394
)
 
193

 

 
(4,894
)
Other assets
56

 
214

 
136

 

 
406

Accounts payable
(2,677
)
 
(41,218
)
 
(2,185
)
 

 
(46,080
)
Accrued payable to retailers
(6,423
)
 
(16,460
)
 
(1,404
)
 

 
(24,287
)
Other accrued liabilities
10,391

 
7,509

 
(461
)
 

 
17,439

Net cash flows from (used in) operating activities(1)
29,957

 
197,601

 
39,216

 

 
266,774

Investing Activities:
 
 
 
 
 
 
 
 
 
Purchases of property and equipment
(18,837
)
 
(40,123
)
 
(1,204
)
 

 
(60,164
)
Proceeds from sale of property and equipment
17

 
3,051

 

 

 
3,068

Investments in and advances to affiliates
207,470

 
(164,015
)
 
(43,455
)
 

 

Net cash flows from (used in) investing activities(1)
188,650

 
(201,087
)
 
(44,659
)
 

 
(57,096
)
Financing Activities:
 
 
 
 
 
 
 
 
 
Proceeds from new borrowing of Credit Facility
147,000

 

 

 

 
147,000

Principal payments on Credit Facility
(258,563
)
 

 

 

 
(258,563
)
Repurchases of common stock
(123,489
)
 

 

 

 
(123,489
)
Dividends paid (Note 19)
(16,158
)
 

 

 

 
(16,158
)
Principal payments on capital lease obligations and other debt
(8,640
)
 

 
(298
)
 

 
(8,938
)
Financing costs associated with Credit Facility and senior unsecured notes
(9
)
 

 

 

 
(9
)
Windfall excess tax benefits related to share-based payments
715

 

 

 

 
715

Withholding tax paid on vesting of restricted stock net of proceeds from exercise of stock options
(1,246
)
 

 

 

 
(1,246
)
Net cash flows from (used in) financing activities(1)
(260,390
)
 

 
(298
)
 

 
(260,688
)
Effect of exchange rate changes on cash
127

 

 
3,790

 

 
3,917

Increase (decrease) in cash and cash equivalents
(41,656
)
 
(3,486
)
 
(1,951
)
 

 
(47,093
)
Cash and cash equivalents:
 
 
 
 
 
 
 
 
 
Beginning of period
180,889

 
17,939

 
43,868

 

 
242,696

End of period
$
139,233

 
$
14,453

 
$
41,917

 
$

 
$
195,603

(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.


36


CONSOLIDATING STATEMENTS OF CASH FLOWS
(unaudited)
 
Nine Months Ended September 30, 2014
(in thousands)
Outerwall Inc.
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Eliminations and Consolidation Reclassifications
 
Total
Operating Activities:
 
 
 
 
 
 
 
 
 
Net income (loss)
$
62,818

 
$
64,906

 
$
(5,828
)
 
$
(59,078
)
 
$
62,818

Adjustments to reconcile net income (loss) to net cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Depreciation and other
26,728

 
113,408

 
6,020

 

 
146,156

Amortization of intangible assets
1,430

 
9,936

 

 

 
11,366

Share-based payments expense
8,227

 
1,866

 

 

 
10,093

Windfall excess tax benefits related to share-based payments
(1,988
)
 

 

 

 
(1,988
)
Deferred income taxes
5,746

 
(13,965
)
 
(3,105
)
 
(6,084
)
 
(17,408
)
Loss from equity method investments, net
672

 
30,589

 

 

 
31,261

Amortization of deferred financing fees and debt discount
3,423

 

 

 

 
3,423

Loss from early extinguishment of debt
2,018

 

 

 

 
2,018

Other
(1,149
)
 
(368
)
 
40

 

 
(1,477
)
Equity in (income) losses of subsidiaries
(64,906
)
 
5,828

 

 
59,078

 

Cash flows from changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
Accounts receivable, net
395

 
16,157

 
912

 

 
17,464

Content library
36

 
48,988

 
(224
)
 

 
48,800

Prepaid expenses and other current assets
16,024

 
1,026

 
(87
)
 
6,084

 
23,047

Other assets
55

 
1,546

 
46

 

 
1,647

Accounts payable
(2,427
)
 
(94,130
)
 
(449
)
 

 
(97,006
)
Accrued payable to retailers
(11,177
)
 
(15,003
)
 
(1,642
)
 

 
(27,822
)
Other accrued liabilities
(5,049
)
 
(331
)
 
35

 

 
(5,345
)
Net cash flows from (used in) operating activities(1)
40,876

 
170,453

 
(4,282
)
 

 
207,047

Investing Activities:
 
 
 
 
 
 
 
 
 
Purchases of property and equipment
(24,933
)
 
(41,663
)
 
(5,715
)
 

 
(72,311
)
Proceeds from sale of property and equipment
750

 
1,085

 

 

 
1,835

Cash paid for equity investments

 
(24,500
)
 

 

 
(24,500
)
Investments in and advances to affiliates
98,892

 
(101,884
)
 
2,992

 

 

Net cash flows from (used in) investing activities(1)
74,709

 
(166,962
)
 
(2,723
)
 

 
(94,976
)
Financing Activities:
 
 
 
 
 
 
 
 
 
Proceeds from issuance of senior unsecured notes
295,500

 

 

 

 
295,500

Proceeds from new borrowing on Credit Facility
635,000

 

 

 

 
635,000

Principal payments on Credit Facility
(621,250
)
 

 

 

 
(621,250
)
Financing costs associated with Credit Facility and senior unsecured notes
(2,906
)
 

 

 

 
(2,906
)
Settlement and conversion of convertible debt
(51,149
)
 

 

 

 
(51,149
)
Repurchases of common stock
(545,078
)
 

 

 

 
(545,078
)
Principal payments on capital lease obligations and other debt
(10,263
)
 
(3
)
 
(331
)
 

 
(10,597
)
Windfall excess tax benefits related to share-based payments
1,988

 

 

 

 
1,988

Withholding tax paid on vesting of restricted stock net of proceeds from exercise of stock options
(1,084
)
 

 

 

 
(1,084
)
Net cash flows from (used in) financing activities(1)
(299,242
)
 
(3
)
 
(331
)
 

 
(299,576
)


37


(in thousands)
Outerwall Inc.
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Eliminations and Consolidation Reclassifications
 
Total
Effect of exchange rate changes on cash
(650
)
 

 
1,619

 

 
969

Increase (decrease) in cash and cash equivalents
(184,307
)
 
3,488

 
(5,717
)
 

 
(186,536
)
Cash and cash equivalents:
 
 
 
 
 
 
 
 
 
Beginning of period
315,250

 
9,639

 
46,548

 

 
371,437

End of period
$
130,943

 
$
13,127

 
$
40,831

 
$

 
$
184,901

(1)
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.



38


Note 18: Income Taxes From Continuing Operations
Our effective tax rate from continuing operations was 35.8% and 37.7% for the three months ended September 30, 2015 and 2014, respectively, and 66.7% and 32.3% for the nine months ended September 30, 2015 and 2014, respectively.
Our effective tax rate for both the three months ended September 30, 2015 and September 30, 2014, was higher than the U.S. Federal statutory rate of 35.0% primarily due to state income taxes, partially offset by the domestic production activities deduction.
Our effective tax rate for the nine months ended September 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 nine months ended September 30, 2014, was lower than the U.S. Federal statutory rate of 35.0% primarily due to the domestic production activities deduction and discrete benefits, partially offset by state income taxes.
Note 19: Dividends

On July 28, 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 August 28, 2015. The dividend was paid on September 15, 2015, and totaled $5.1 million, including $0.2 million paid to recipients of unvested restricted stock awards, which participate in earnings on a basis equivalent to the dividends paid to holders of common stock.

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.
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
Studio Agreement
On October 16, 2015, Paramount elected to exercise its option to extend our existing content license agreement. This will extend the license period through December 31, 2016, with no further options to renew, and require us to issue 50,000 shares of additional restricted stock to Paramount during the first quarter of 2016. After accounting for this extension, our total commitment to purchase content from Paramount was approximately $112.8 million.
Dividend
On October 27, 2015, the Board declared a quarterly cash dividend of $0.30 per share expected to be paid on December 8, 2015, to all stockholders of record as of the close of business on November 23, 2015.
Asset Acquisition from Gazelle, Inc.
On October 29, 2015, Outerwall Inc. entered into an asset purchase agreement (the "Agreement") with Gazelle, Inc., a Delaware corporation ("Gazelle") that provides consumers an on-line solution for the sale and purchase of used mobile phones, computers and tablets.
Under the Agreement, we will buy certain assets and liabilities of Gazelle. The total purchase price is approximately $18.0 million subject to certain adjustments including for net inventory at the closing date.
The transaction is expected to close during the fourth quarter and is subject to customary closing conditions. Upon closing, the transaction will be accounted for as a business combination.





39


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 and services 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 64,220 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 cash 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 sell 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.


40


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 to manage profitability in our Redbox business. We are focused on profitably managing 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, expanding the availability and depth of new generation video game content 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. Video games drive revenue by providing Redbox users a low cost access point of $3.00 per night, which is a significant discount to the related purchase price of the new release content. 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 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 secular decline in the physical 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 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.


41


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 October 16, 2015, Paramount elected to exercise its option to extend our existing content license agreement. This will extend the license period through December 31, 2016, with no further options to renew, and require us to issue 50,000 shares of additional restricted stock to Paramount during the first quarter of 2016. See Note 20: Subsequent Events in our Notes to Consolidated Financial Statements for additional information.
On October 27, 2015, the Board declared a quarterly cash dividend of $0.30 per share expected to be paid on December 8, 2015, to all stockholders of record as of the close of business on November 23, 2015.
On October 29, 2015, Outerwall Inc. entered into an asset purchase agreement (the "Agreement") with Gazelle, Inc., a Delaware corporation ("Gazelle") that provides consumers an on-line solution for the sale and purchase of used mobile phones, computers and tablets. Under the Agreement, we will buy certain assets and liabilities of Gazelle. The total purchase price is approximately $18.0 million subject to certain adjustments including for net inventory at the closing date. The transaction is expected to close during the fourth quarter and is subject to customary closing conditions. Upon closing, the transaction will be accounted for as a business combination.
Q3 2015 Events
On September 15, 2015, we paid a cash dividend of $0.30 per outstanding share of our common stock totaling approximately $5.1 million.
On July 14, 2015, Sony elected to exercise its option to extend our existing content license agreement. This extended the license period through September 30, 2016, with no further options to renew, and required us to issue 25,000 shares of additional restricted stock to Sony during the fourth quarter of 2015; and
During the three months ended September 30, 2015, we repurchased 938,586 shares of our common stock at an average price per share of $64.73 for $60.8 million.
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;
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; and


42


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;
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
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
September 30,
 
Change
 
September 30,
 
Change
Dollars in thousands, except per share amounts
2015
 
2014
 
$
 
%
 
2015
 
2014
 
$
 
%
Revenue
$
512,055

 
$
549,899

 
$
(37,844
)
 
(6.9
)%
 
$
1,666,060

 
$
1,694,188

 
$
(28,128
)
 
(1.7
)%
Operating income
$
72,205

 
$
60,684

 
$
11,521

 
19.0
 %
 
$
137,259

 
$
175,385

 
$
(38,126
)
 
(21.7
)%
Income from continuing operations
$
37,592

 
$
22,123

 
$
15,469

 
69.9
 %
 
$
32,396

 
$
73,562

 
$
(41,166
)
 
(56.0
)%
Diluted earnings from continuing operations per common share
$
2.12

 
$
1.12

 
$
1.00

 
89.3
 %
 
$
1.77

 
$
3.37

 
$
(1.60
)
 
(47.5
)%
Comparing three months ended September 30, 2015 to three months ended September 30, 2014
Revenue decreased $37.8 million, or 6.9%, primarily due to:
$39.7 million decrease from our Redbox segment primarily due to a 8.4% 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 impacted primarily by lower total box office (representing titles with North American box office receipts of at least $5.0 million per title) of movie titles released which was 45.3% lower than the prior period including seven fewer titles, the timing of the release slate, a higher impact from the secular decline in the physical market and lower demand from price-sensitive customers following the price increases which is heightened in periods of weak content. This was partially offset by
$1.2 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, primarily due to a lower mix of higher value devices and lower collections of value devices per kiosk; and
$0.6 million increase from our Coinstar segment, primarily due to the increase in number of Coinstar Exchange kiosks installed and higher volume in U.S. Coinstar kiosks.


43


Operating income increased $11.5 million, or 19.0%, primarily due to:
$11.0 million increase in operating income within our Redbox segment primarily due to:
$39.1 million decrease in direct operating expenses driven primarily by lower product costs due to lower spending on movie content and other lower direct expenses primarily from lower contractual fees paid to our retail partners due to lower revenue and lower credit card fees driven by lower rental volume; and
$8.9 million decrease in depreciation and amortization primarily from lower kiosk related depreciation; partially offset by
$39.7 million decrease in revenue.
$2.1 million increase in operating income within our Coinstar segment primarily due to higher revenue and lower operating expenses including direct operating, depreciation and amortization, and marketing, partially offset by an increase in general and administrative expenses; and
$2.1 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; partially offset by
$3.5 million increase in operating loss within our ecoATM segment, primarily due to an increase in direct operating expenses and depreciation associated with the increase in the installed kiosk base.
Income from continuing operations increased $15.5 million, or 69.9%, primarily due to:
$11.5 million increase in operating income as described above; and
$11.0 million lower losses from equity method investments due to our withdrawal from Redbox Instant by Verizon during the fourth quarter of 2014; partially offset by
$7.5 million increase in income tax expense primarily due to higher pre-tax income partially offset by higher permanent tax benefits.
Comparing nine months ended September 30, 2015 to nine months ended September 30, 2014
Revenue decreased $28.1 million, or 1.7% primarily due to:
$37.1 million decrease from our Redbox segment primarily due to a 2.3% 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 impacted primarily by lower total box office of movie titles released which was 19.4% lower than the prior period including twelve fewer titles, the timing of the release slate, a higher impact from the secular decline in the physical market and lower demand from price-sensitive customers following the price increases which is heightened in periods of weak content. This was partially offset by
$7.3 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 primarily due to a lower mix of higher value devices and lower collections of value devices per kiosk; and
$1.6 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 $38.1 million, or 21.7%, primarily due to:
$99.6 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 $13.7 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
$54.4 million increase in operating income within our Redbox segment primarily due to:
$75.7 million decrease in direct operating expenses driven primarily by lower product costs due to lower spending on movie content and other lower direct expenses primarily from lower credit card fees driven by lower rental volume and lower contractual fees paid to our retail partners due to lower revenue;
$22.4 million decrease in depreciation and amortization primarily from lower kiosk related depreciation;


44


$5.8 million decrease in general and administrative expenses driven by ongoing cost reduction initiatives; partially offset by
$37.1 million decrease in revenue; and
$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.
$7.9 million decrease in share based expense not allocated to our segments primarily due to the lower expense from 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
$4.3 million increase in operating income within our Coinstar segment primarily due to a $1.6 million increase in revenue and lower operating expenses including direct operating, depreciation and amortization, marketing, and research and development, partially offset by an increase in general and administrative and restructuring expenses.
Income from continuing operations decreased $41.2 million, or 56.0%, primarily due to:
$38.1 million decrease in operating income as described above;
$29.8 million increase in income tax expense primarily due to higher pre-tax income excluding the non-tax deductible goodwill impairment charge and reduced permanent tax benefits;
$2.7 million increase in other expenses primarily related to foreign exchange; and
$1.2 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
$30.7 million lower losses from equity method investments due to our withdrawal from Redbox Instant by Verizon during the fourth quarter of 2014.
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
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
September 30,
 
Change
 
September 30,
 
Change
Dollars in thousands
2015
 
2014
 
$
 
%
 
2015
 
2014
 
$
 
%
Direct operating
$
559

 
$
1,903

 
$
(1,344
)
 
(70.6
)%
 
$
2,060

 
$
5,214

 
$
(3,154
)
 
(60.5
)%
Marketing
116

 
678

 
(562
)
 
(82.9
)%
 
625

 
2,275

 
(1,650
)
 
(72.5
)%
Research and development
313

 
832

 
(519
)
 
(62.4
)%
 
1,515

 
2,788

 
(1,273
)
 
(45.7
)%
General and administrative
3,490

 
3,139

 
351

 
11.2
 %
 
7,982

 
9,847

 
(1,865
)
 
(18.9
)%
Total
$
4,478

 
$
6,552

 
$
(2,074
)
 
(31.7
)%
 
$
12,182

 
$
20,124

 
$
(7,942
)
 
(39.5
)%
*
Not Meaningful

Unallocated share-based compensation expense decreased $2.1 million, or 31.7% and $7.9 million, or 39.5% during the three and nine months ended September 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.


45


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.




46


Redbox
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
Dollars in thousands, except net revenue per rental amounts
September 30,
 
Change
 
September 30,
 
Change
2015
 
2014
 
$
 
%
 
2015
 
2014
 
$
 
%
Revenue
$
395,372

 
$
435,083

 
$
(39,711
)
 
(9.1
)%
 
$
1,353,881

 
$
1,390,970

 
$
(37,089
)
 
(2.7
)%
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Direct operating
269,022

 
308,123

 
(39,101
)
 
(12.7
)%
 
913,401

 
989,100

 
(75,699
)
 
(7.7
)%
Marketing
4,180

 
5,419

 
(1,239
)
 
(22.9
)%
 
13,271

 
15,412

 
(2,141
)
 
(13.9
)%
Research and development

 
15

 
(15
)
 
(100.0
)%
 

 
41

 
(41
)
 
(100.0
)%
General and administrative
31,788

 
33,249

 
(1,461
)
 
(4.4
)%
 
99,859

 
105,642

 
(5,783
)
 
(5.5
)%
Restructuring and lease termination costs (Note 11)

 

 

 
 %
 
15,174

 
534

 
14,640

 
NM*

Segment operating income
90,382

 
88,277

 
2,105

 
2.4
 %
 
312,176

 
280,241

 
31,935

 
11.4
 %
Less: depreciation and amortization
(27,754
)
 
(36,685
)
 
8,931

 
(24.3
)%
 
(92,424
)
 
(114,872
)
 
22,448

 
(19.5
)%
Operating income
$
62,628

 
$
51,592

 
$
11,036

 
21.4
 %
 
$
219,752

 
$
165,369

 
$
54,383

 
32.9
 %
Operating income as a percentage of revenue
15.8
 %
 
11.9
 %
 
 
 
 
 
16.2
 %
 
11.9
 %
 
 
 
 
Same store sales growth (decline)
(8.4
)%
 
(11.8
)%
 
 
 
 
 
(2.3
)%
 
(6.1
)%
 
 
 
 
Effect on change in revenue from same store sales growth (decline)
$
(35,837
)
 
$
(57,076
)
 


 


 
$
(31,264
)
 
$
(89,237
)
 


 


Ending number of kiosks
40,790

 
42,400

 
(1,610
)
 
(3.8
)%
 
40,790

 
42,400

 
(1,610
)
 
(3.8
)%
Total rentals (in thousands)
132,645

 
170,763

 
(38,118
)
 
(22.3
)%
 
451,739

 
537,655

 
(85,916
)
 
(16.0
)%
Net revenue per rental
$
2.96

 
$
2.54

 
$
0.42

 
16.5
 %
 
$
2.99

 
$
2.58

 
$
0.41

 
15.9
 %
*
Not Meaningful
The comparable performance of our content library is continually affected by the ongoing secular decline in the physical market, seasonality, the timing of the release slate and the relative attractiveness of titles available for rent in a particular quarter or year, which may have lingering effects in subsequent periods. Compared with prior periods when kiosk installations were increasing and helping drive growth, Redbox revenue and other operating results may be more affected by these factors.
Q3 2015 Events
On July 14, 2015, Sony elected to exercise its option to extend our existing content license agreement. This extended the license period through September 30, 2016, with no further options to renew, and requires us to issue 25,000 shares of additional restricted stock to Sony during the fourth quarter of 2015.
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


47


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.
Comparing three months ended September 30, 2015 to three months ended September 30, 2014
Revenue decreased $39.7 million, or 9.1%, primarily due to the following:
$35.8 million decrease from a 8.4% decrease in same store sales primarily due to:
22.3% decline in total disc rentals primarily driven by the lower total box office (representing titles with North American box office receipts of at least $5.0 million per title) of movie titles released which was 45.3% lower than the prior period including seven fewer titles, the timing of the release slate, a higher impact from the secular decline in the physical market, lower demand from price-sensitive customers following the price increases discussed below which is heightened in periods of weak content and a decline in video game rentals due to consumer transition to new generation platforms and the limited new release titles available for the new platforms.
The negative impact on revenue from the decline in rentals was partially 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. During the fourth quarter of 2015 the comparative period benefit to revenue from the price increases will phase out as we lap the price increases.
$3.9 million decrease in revenue from kiosks removed subsequent to the third quarter of 2014 due to continued efforts to optimize our network by removing underperforming kiosks.
We continue to invest in customer-specific promotional offerings to lessen the negative impact on demand driven by the price increases and the secular decline in the physical market.
Net revenue per rental increased $0.42 to $2.96 primarily due to the following:
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;
A decrease in Blu-ray revenue primarily as a result of fewer Blu-ray releases, lower demand from price-sensitive customers and the higher impact from the secular decline in the physical market. Blu-ray revenue represented 16.9% of total revenue and 13.2% of total disc rentals during the third quarter of 2015 as compared with 17.6% and 15.1% during the comparative period; and
A decrease in video game revenue primarily as a result of consumer transition to new generation platforms, a lack of new release content availability due to the transition and seasonality of publisher release schedules and lower demand from price-sensitive customers. Video games represented 2.8% of total revenue and 1.4% of total disc rentals during the third quarter of 2015 as compared with 4.5% and 2.1% during the prior year.
We announced plans to expand new generation content across the kiosk network and began investing more in video games in the last month of the third quarter. We expect to continue to invest in the fourth quarter of 2015 to expand the availability and depth of new generation game content to all kiosks nationwide as additional new release titles become available for new generation platforms.
Operating income increased $11.0 million, or 21.4%, primarily due to the following:
$39.1 million decrease in direct operating expenses, which were 68.0% of revenue during the third quarter of 2015 as compared with 70.8% during the prior year primarily as a result of:
$23.1 million decrease in product costs to $162.9 million primarily due to lower spending on movie content in the third quarter of 2015 due to fewer movie releases and weak content, lower games purchases due to the consumer transition to new generation platforms, and lower cost per title driven by studio mix which, when combined with the revenue impacts discussed above, increased gross margin 1.5% to 58.8% for the third quarter of 2015; and


48


$16.0 million decrease in other direct operating expenses primarily due to lower contractual fees paid to our retail partners due to lower revenue, lower credit card fees driven by lower rental volume, 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.
$8.9 million decrease in depreciation and amortization expenses primarily due to an increase in our fully depreciated asset base, 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;
$1.5 million decrease in general and administrative expenses primarily as a result of ongoing cost reduction initiatives and lower variable expenses associated with technology infrastructure including temporary staffing and lower data facilities costs; and
$1.2 million decrease in marketing expenses due to cost containment measures; partially offset by
$39.7 million decrease in revenue as described above.
Comparing nine months ended September 30, 2015 to nine months ended September 30, 2014
Revenue decreased $37.1 million, or 2.7%, primarily due to the following:
$31.3 million decrease from a 2.3% decrease in same store sales primarily due to:
A 16.0% decline in rentals for the first nine months of 2015 primarily driven by the lower total box office of movie titles released which was 19.4% lower than the prior period including twelve fewer titles, the timing of the release slate, a higher impact from the secular decline in the physical market, lower demand from price-sensitive customers following the price increases discussed below which is heightened in periods of weak content and a decline in video game rentals due to consumer transition to new generation platforms and the limited new release titles available for the new platforms.
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 June, which created competition when a significant portion of our box office was released.
The negative impact on revenue from the decline in rentals was substantially offset by the price increases discussed above. During the fourth quarter of 2015 the comparative period benefit to revenue from the price increases will phase out as we lap the price increases.
$5.8 million decrease in revenue from kiosks removed subsequent to the third quarter of 2014 due to continued efforts to optimize our network by removing underperforming kiosks.
We continue to invest in customer-specific promotional offerings to lessen the negative impact on demand driven by the price increases and the secular decline in the physical market.
Net revenue per rental increased $0.41 to $2.99 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;
Blu-ray revenue represented 17.8% of total revenue and 14.0% of total disc rentals during the first nine months of 2015 as compared with 17.3% and 14.8% during the prior year. Blu-ray revenue benefited compared to the first nine months of 2014 primarily due to the price increase discussed above that offset a decline in rental volume. Blu-ray rentals were negatively impacted by fewer Blu-ray releases compared to the prior year, lower demand as compared to the prior year from price-sensitive customers, and the higher impact from the secular decline in the physical market; and
A decrease in video game revenue which represented 2.7% of total revenue and 1.1% of total disc rentals during the first nine months of 2015 as compared with 3.9% and 1.8% 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.


49


Operating income increased $54.4 million, or 32.9%, primarily due to the following:
$75.7 million decrease in direct operating expenses, which were 67.5% of revenue during the first nine months of 2015 as compared with 71.1% during the prior year primarily as a result of:
$42.4 million decrease in product costs to $559.6 million primarily due to lower spending on content in the first nine months of 2015 due to fewer movie releases, a lower average cost per disc in the first and third quarters of 2015 due to the mix of content and lower games purchases primarily due to consumer transition to new generation platforms that combined with the revenue impacts discussed above increased gross margin 2.0% to 58.7% for the first nine months of 2015; and
$33.3 million decrease in other direct operating expenses primarily due to 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, lower contractual fees paid to our retail partners due to the lower revenue and lower costs due to cost containment initiatives related to our field service operations and third party fees for customer service.
$22.4 million decrease in depreciation and amortization expenses primarily due to an increase in our fully depreciated asset base, 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;
$5.8 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 including temporary staffing and lower data facilities costs; and
$2.1 million decrease in marketing spend due to cost containment measures; partially offset by
$37.1 million decrease in revenue as described above; and
$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.



50


Coinstar
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
Dollars in thousands, except average transaction size
September 30,
 
Change
 
September 30,
 
Change
2015
 
2014
 
$
 
%
 
2015
 
2014
 
$
 
%
Revenue
$
85,677

 
$
85,074

 
$
603

 
0.7
 %
 
$
235,286

 
$
233,707

 
$
1,579

 
0.7
 %
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Direct operating
41,249

 
42,428

 
(1,179
)
 
(2.8
)%
 
117,870

 
120,354

 
(2,484
)
 
(2.1
)%
Marketing
1,439

 
1,834

 
(395
)
 
(21.5
)%
 
3,849

 
4,397

 
(548
)
 
(12.5
)%
Research and development

 
64

 
(64
)
 
(100.0
)%
 

 
486

 
(486
)
 
(100.0
)%
General and administrative
8,502

 
7,313

 
1,189

 
16.3
 %
 
24,065

 
21,479

 
2,586

 
12.0
 %
Restructuring and lease termination costs (Note 11)

 

 

 
 %
 
550

 
23

 
527

 
NM*

Segment operating income
34,487

 
33,435

 
1,052

 
3.1
 %
 
88,952

 
86,968

 
1,984

 
2.3
 %
Less: Depreciation and amortization
(7,942
)
 
(8,989
)
 
1,047

 
(11.6
)%
 
(24,197
)
 
(26,473
)
 
2,276

 
(8.6
)%
Operating income
$
26,545

 
$
24,446

 
$
2,099

 
8.6
 %
 
$
64,755

 
$
60,495

 
$
4,260

 
7.0
 %
Operating income as a percentage of revenue
31.0
%
 
28.7
%
 
 
 
 
 
27.5
%
 
25.9
%
 
 
 
 
Same store sales growth
3.2
%
 
5.8
%
 
 
 
 
 
2.0
%
 
5.2
%
 
 
 
 
Ending number of kiosks
21,110

 
21,210

 
(100
)
 
(0.5
)%
 
21,110

 
21,200

 
(90
)
 
(0.4
)%
Total transactions (in thousands)
19,166

 
19,601

 
(435
)
 
(2.2
)%
 
53,282

 
55,039

 
(1,757
)
 
(3.2
)%
Average transaction size
$
43.50

 
$
41.92

 
$
1.58

 
3.8
 %
 
$
43.05

 
$
41.36

 
$
1.69

 
4.1
 %
*
Not Meaningful
Comparing three months ended September 30, 2015 to three months ended September 30, 2014
Revenue increased $0.6 million, or 0.7%, primarily due to an increase in the number of Coinstar Exchange kiosks and transactions and higher revenue for Coinstar in the U.S. due to increased volume. Coinstar revenue in the U.K. and Canada was negatively impacted by unfavorable exchange rates due to the strengthening of the U.S. dollar versus the British pound and Canadian dollar compared to the prior year. 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. Same store sales growth was 3.2% as a result of these factors.
The average Coinstar transaction size increased on a year over year basis while the number of transactions has declined, reflecting 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 $2.1 million, or 8.6%, primarily due to the following:
$1.2 million decrease in direct operating expenses primarily 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 savings from efficiencies in the transportation and processing of coin;
$1.0 million decrease in depreciation and amortization expenses primarily due to an increase in our fully depreciated asset base and intangible assets related to customer contracts being fully amortized in August 2014;
$0.6 million increase in revenue as described above; and
$0.4 million decrease in marketing expenses due to an expected shift in timing of spend to the fourth quarter of 2015; partially offset by
$1.2 million increase in general and administrative expenses primarily due to an increase in technology costs, partially offset by lower costs as a result of ongoing cost containment initiatives.
Comparing nine months ended September 30, 2015 to nine months ended September 30, 2014
Revenue increased $1.6 million, or 0.7%, primarily due to an increase 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. Coinstar revenue in the U.K. and Canada was negatively impacted by unfavorable exchange rates due to the strengthening of the U.S. dollar versus the British pound and Canadian dollar compared to the prior year. 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. Same store sales growth was 2.0% as a result of these factors.


51


The average Coinstar transaction size increased while the number of transactions declined, reflecting larger pours and less frequent visits and a slight decrease in the U.S. kiosk base as a result of continued optimization efforts.
Operating income increased $4.3 million, or 7.0%, primarily due to the following:
$2.5 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 a reduction in selling and customer service costs, partially offset by increased revenue sharing costs from the growth of Coinstar Exchange;
$2.3 million decrease in depreciation and amortization expenses primarily due to intangible assets related to customer contracts being fully amortized in August 2014 and an increase in our fully depreciated asset base;
$1.6 million increase in revenue as described above;
$0.5 million decrease in marketing expenses due to an expected shift in timing of marketing spend to later in 2015; and
$0.5 million decrease in research and development expenses; partially offset by
$2.6 million increase in general and administrative expenses primarily due to an increase in technology costs and costs to support Coinstar Exchange growth, partially offset by lower costs as a result of ongoing cost containment initiatives; and
$0.5 million increase in restructuring expenses related to the subleasing of certain corporate facilities and severance expense from our ongoing cost containment initiatives.



52


ecoATM
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
Dollars in thousands, except average selling price of value devices sold
September 30,
 
Change
 
September 30,
 
Change
2015
 
2014
 
$
 
%
 
2015
 
2014
 
$
 
%
Revenue
$
30,965

 
$
29,733

 
$
1,232

 
4.1
 %
 
$
76,776

 
$
69,478

 
$
7,298

 
10.5
 %
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Direct operating
28,583

 
26,411

 
2,172

 
8.2
 %
 
78,616

 
64,729

 
13,887

 
21.5
 %
Marketing
1,134

 
973

 
161

 
16.5
 %
 
5,013

 
2,568

 
2,445

 
95.2
 %
Research and development
1,201

 
1,360

 
(159
)
 
(11.7
)%
 
4,206

 
4,535

 
(329
)
 
(7.3
)%
General and administrative
3,105

 
3,027

 
78

 
2.6
 %
 
7,167

 
9,470

 
(2,303
)
 
(24.3
)%
Restructuring and lease termination costs (Note 11)

 

 

 
 %
 
127

 

 
127

 
NM*

Goodwill impairment (Note 6)

 

 

 
 %
 
85,890

 

 
85,890

 
NM*

Segment operating loss
(3,058
)
 
(2,038
)
 
(1,020
)
 
50.0
 %
 
(104,243
)
 
(11,824
)
 
(92,419
)
 
781.6
 %
Less: depreciation and amortization
(6,788
)
 
(4,297
)
 
(2,491
)
 
58.0
 %
 
(18,995
)
 
(11,821
)
 
(7,174
)
 
60.7
 %
Operating loss
$
(9,846
)
 
$
(6,335
)
 
$
(3,511
)
 
55.4
 %
 
$
(123,238
)
 
$
(23,645
)
 
$
(99,593
)
 
421.2
 %
Ending number of kiosks
2,210

 
1,510

 
700

 
46.4
 %
 
2,210

 
1,510

 
700

 
46.4
 %
Average selling price of value devices sold
$
59.15

 
$
75.95

 
$
(16.80
)
 
(22.1
)%
 
$
60.29

 
$
84.75

 
$
(24.46
)
 
(28.9
)%
Number of value devices sold
505,314

 
373,981

 
131,333

 
35.1
 %
 
1,231,779

 
790,890

 
440,889

 
55.7
 %
Number of overall devices sold
735,781

 
531,265

 
204,516

 
38.5
 %
 
1,958,864

 
1,097,585

 
861,279

 
78.5
 %
*
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 September 30, 2015 to three months ended September 30, 2014
Our key revenue drivers are the total devices collected, the number of those devices that are value devices, the mix of those value devices, as well as the average selling price that we receive when reselling the devices.
Revenue increased $1.2 million, or 4.1%, primarily due to the following:
Increased collections during the quarter with a 38.5% increase in overall devices sold and a 35.1% increase in the number of value devices sold. The increased collections were driven mainly by an increase in the number of ecoATM installed kiosks. Also, as a result of our optimization efforts in the third quarter of 2015, we removed approximately 250 underperforming kiosks, primarily from the grocery channel, and redeployed approximately 180 kiosks into retailer locations, with the majority in the mall and mass merchant channels. We are continuing to evaluate the grocery


53


channel where kiosks have ramped at a slower rate and have lower collections than mass merchant and mall channels. The increased collections were partially offset by
A $16.80 lower average selling price of value devices primarily due to a lower mix of higher value devices and lower collections of value devices per kiosk compared to the prior year primarily due to sustained carrier marketing of alternative recycling options.
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 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 $3.5 million primarily due to the following;
$2.5 million increase in depreciation and amortization expense primarily from depreciation on our increased installed ecoATM kiosk base; and
$2.2 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; partially offset by
$1.2 million increase in revenue described above.
Comparing nine months ended September 30, 2015 to nine months ended September 30, 2014
Revenue increased $7.3 million, or 10.5%, primarily due to the following:
Increased collections during the year with a 78.5% increase in the number of overall devices sold and a 55.7% increase in the number of value devices sold. The increased collections were driven mainly by an increase in the number of ecoATM installed kiosks. Also, as a result of our optimization efforts during 2015, we removed approximately 340 underperforming kiosks, primarily from the grocery channel, and redeployed approximately 250 kiosks into retailer locations, with the majority in the mall and mass merchant channels. We are continuing to evaluate the grocery channel where kiosks have ramped at a slower rate and have lower collections than mass merchant and mall channels. The increased collections were partially offset by;
A $24.46 lower average selling price of value devices primarily due to a lower mix of higher value devices and lower collections of value devices per kiosk compared to the prior year primarily due to sustained carrier marketing of alternative recycling options.
Operating loss increased $99.6 million primarily due to the $85.9 million goodwill impairment charge recognized in 2015 and the following;
$13.9 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;
$7.2 million increase in depreciation and amortization expense from depreciation on our increased installed ecoATM kiosk base; and
$2.4 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
$7.3 million increase in revenue described above; and
$2.3 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.


54


Loss from Equity Method Investments
Comparing three months ended September 30, 2015 to three months ended September 30, 2014
For the three months ended September 30, 2015, our loss from our equity method investments was $0.3 million compared to $11.4 million during the same period of 2014. The decrease in equity method losses is a result of our withdrawal from Redbox Instant by Verizon on October 20, 2014.
Comparing nine months ended September 30, 2015 to nine months ended September 30, 2014
For the nine months ended September 30, 2015, our loss from our equity method investments was $0.6 million compared to $31.3 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
 
 
 
 
 
Nine Months Ended
 
 
 
 
September 30,
 
Change
 
September 30,
 
Change
2015
 
2014
 
$
 
%
 
2015
 
2014
 
$
 
%
Cash interest expense
$
11,297

 
$
11,519

 
$
(222
)
 
(1.9
)%
 
$
34,191

 
$
29,654

 
$
4,537

 
15.3
 %
Non-cash interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization of debt discount
435

 
616

 
(181
)
 
(29.4
)%
 
1,304

 
2,171

 
(867
)
 
(39.9
)%
Amortization of deferred financing fees
258

 
285

 
(27
)
 
(9.5
)%
 
774

 
1,252

 
(478
)
 
(38.2
)%
Total non-cash interest expense
693

 
901

 
(208
)
 
(23.1
)%
 
2,078

 
3,423

 
(1,345
)
 
(39.3
)%
Loss from early extinguishment of debt

 
55

 
(55
)
 
(100.0
)%
 

 
2,018

 
(2,018
)
 
(100.0
)%
Total cash and non-cash interest expense
11,990

 
12,475

 
(485
)
 
(3.9
)%
 
36,269

 
35,095

 
1,174

 
3.3
 %
Interest income
(17
)
 
(10
)
 
(7
)
 
70.0
 %
 
(42
)
 
(50
)
 
8

 
(16.0
)%
Interest expense, net
$
11,973

 
$
12,465

 
$
(492
)
 
(3.9
)%
 
$
36,227

 
$
35,045

 
$
1,182

 
3.4
 %
Comparing three months ended September 30, 2015 to three months ended September 30, 2014
Interest expense, net decreased $0.5 million, or 3.9%, primarily due to lower borrowings.
Comparing nine months ended September 30, 2015 to nine months ended September 30, 2014
Interest expense, net increased $1.2 million, or 3.4%, 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
 
 
 
 
 
Nine Months Ended
 
 
 
 
September 30,
 
Change
 
September 30,
 
Change
2015
 
2014
 
$
 
%
 
2015
 
2014
 
$
 
%
Other, net
$
(1,384
)
 
$
(1,352
)
 
$
(32
)
 
2.4
%
 
$
(3,088
)
 
$
(386
)
 
$
(2,702
)
 
700.0
%
Comparing nine months ended September 30, 2015 to nine months ended September 30, 2014

Other income (expense), net decreased by $2.7 million, primarily due to the impact of the Canadian dollar exchange rates on our Coinstar operations.


55


Income Tax Expense
Comparing three months ended September 30, 2015 to three months ended September 30, 2014
Our effective tax rate from continuing operations was 35.8% and 37.7% for the three months ended September 30, 2015 and 2014, respectively. Our effective tax rate for both the three months ended September 30, 2015 and September 30, 2014, was higher than the U.S. Federal statutory rate of 35.0% primarily due to state income taxes, partially offset by the domestic production activities deduction.
Comparing nine months ended September 30, 2015 to nine months ended September 30, 2014
Our effective tax rate from continuing operations was 66.7% and 32.3% for the nine months ended September 30, 2015 and 2014, respectively. Our effective tax rate for the nine months ended September 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 nine months ended September 30, 2014 was lower than the U.S. Federal statutory rate of 35.0% primarily due to the domestic production activities deduction and discrete benefits, partially offset by state income taxes.
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.


56


Core Adjusted EBITDA from continuing operations
Our non-GAAP financial measure core adjusted EBITDA from continuing operations is defined as earnings from continuing operations before depreciation, amortization and other; interest expense, net; income taxes; share-based payments expense; and Non-Core Adjustments.
A reconciliation of core adjusted EBITDA from continuing operations to net income from continuing operations, the most comparable GAAP financial measure, is presented in the following table:
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
September 30,
 
Change
 
September 30,
 
Change
Dollars in thousands
2015
 
2014
 
$
 
%
 
2015
 
2014
 
$
 
%
Net income from continuing operations
$
37,592

 
$
22,123

 
$
15,469

 
69.9
 %
 
$
32,396

 
$
73,562

 
$
(41,166
)
 
(56.0
)%
Depreciation, amortization and other
43,188

 
50,045

 
(6,857
)
 
(13.7
)%
 
137,666

 
153,481

 
(15,815
)
 
(10.3
)%
Interest expense, net
11,973

 
12,465

 
(492
)
 
(3.9
)%
 
36,227

 
35,045

 
1,182

 
3.4
 %
Income taxes
20,928

 
13,392

 
7,536

 
56.3
 %
 
64,955

 
35,131

 
29,824

 
84.9
 %
Share-based payments expense(1)
4,864

 
3,249

 
1,615

 
49.7
 %
 
12,125

 
10,093

 
2,032

 
20.1
 %
Adjusted EBITDA from continuing operations
118,545

 
101,274

 
17,271

 
17.1
 %
 
283,369

 
307,312

 
(23,943
)
 
(7.8
)%
Non-Core Adjustments:
 
 
 
 

 

 
 
 
 
 
 
 
 
Goodwill impairment

 

 

 
 %
 
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
854

 
3,274

 
(2,420
)
 
(73.9
)%
 
3,779

 
10,033

 
(6,254
)
 
(62.3
)%
Loss from equity method investments, net
328

 
11,352

 
(11,024
)
 
(97.1
)%
 
593

 
31,261

 
(30,668
)
 
(98.1
)%
Core adjusted EBITDA from continuing operations
$
119,727

 
$
115,900

 
$
3,827

 
3.3
 %
 
$
389,482

 
$
349,075

 
$
40,407

 
11.6
 %
 *
Not Meaningful
(1)    Includes both non-cash share-based compensation for executives, non-employee directors and employees as well as share-based payments for content arrangements.
Comparing three months ended September 30, 2015 to three months ended September 30, 2014
The increase in our core adjusted EBITDA from continuing operations was primarily due to increased segment operating income in our Redbox and Coinstar segments. The other significant components of core adjusted EBITDA from continuing operations have been discussed previously in the Results of Operations section above.
Comparing nine months ended September 30, 2015 to nine months ended September 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.





57


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
 
 
 
 
 
Nine Months Ended
 
 
 
 
September 30,
 
Change
 
September 30,
 
Change
 
2015
 
2014
 
$
 
%
 
2015
 
2014
 
$
 
%
Diluted EPS from continuing operations per common share (two-class method)
$
2.12

 
$
1.12

 
$
1.00

 
89.3
 %
 
$
1.77

 
$
3.37

 
$
(1.60
)
 
(47.5
)%
Adjustment from participating securities allocation and share differential to treasury stock method(1)
0.04

 
0.04

 

 
 %
 
0.03

 
0.07

 
(0.04
)
 
(57.1
)%
Diluted EPS from continuing operations (treasury stock method)
2.16

 
1.16

 
1

 
86.2
 %
 
1.80

 
3.44

 
(1.64
)
 
(47.7
)%
Non-Core Adjustments, net of tax:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill impairment

 

 

 
 %
 
4.78



 
4.78

 
NM*

Restructuring costs

 

 

 
 %
 
0.54

 
0.01

 
0.53

 
NM*

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

 
0.14

 
(0.10
)
 
(71.4
)%
 
0.14

 
0.37

 
(0.23
)
 
(62.2
)%
Loss from equity method investments, net
0.01

 
0.36

 
(0.35
)
 
(97.2
)%
 
0.02

 
0.89

 
(0.87
)
 
(97.8
)%
Tax benefit from net operating loss adjustment

 

 

 
 %
 

 
(0.04
)
 
0.04

 
(100.0
)%
Tax benefit of worthless stock deduction

 
0.01

 
(0.01
)
 
(100.0
)%
 

 
(0.10
)
 
0.10

 
(100.0
)%
Core diluted EPS from continuing operations
$
2.21

 
$
1.67

 
$
0.54

 
32.3
 %
 
$
7.28

 
$
4.57

 
$
2.71

 
59.3
 %
 *
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
 
Nine Months Ended
September 30,
 
September 30,
In thousands
2015
 
2014
 
2015
 
2014
Income from continuing operations attributable to common shares
$
36,462

 
$
21,392

 
$
31,491

 
$
71,309

Add: income from continuing operations allocated to participating securities
1,130

 
731

 
905

 
2,253

Income from continuing operations
$
37,592

 
$
22,123

 
$
32,396

 
$
73,562

 
 
 
 
 
 
 
 
Weighted average diluted common shares
17,229

 
19,021

 
17,789

 
21,186

Add: diluted common equivalent shares of participating securities
142

 
126

 
182

 
186

Weighted average diluted shares (treasury stock method)
17,371

 
19,147

 
17,971

 
21,372



58


Free Cash Flow
Our non-GAAP financial measure free cash flow is defined as net cash provided by operating activities after capital expenditures. We believe free cash flow is an important non-GAAP measure as it provides additional information to users of the financial statements regarding our ability to service, incur or pay down indebtedness and repurchase our securities. A reconciliation of free cash flow to net cash provided by operating activities, the most comparable GAAP financial measure, is presented in the following table:
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
September 30,
 
Change
 
September 30,
 
Change
Dollars in thousands
2015
 
2014
 
$
 
%
 
2015
 
2014
 
$
 
%
Net cash provided by operating activities
$
85,559

 
$
49,627

 
$
35,932

 
72.4
%
 
$
266,774

 
$
207,047

 
$
59,727

 
28.8
 %
Purchase of property and equipment
(19,947
)
 
(19,295
)
 
(652
)
 
3.4
%
 
(60,164
)
 
(72,311
)
 
12,147

 
(16.8
)%
Free cash flow
$
65,612

 
$
30,332

 
$
35,280

 
116.3
%
 
$
206,610

 
$
134,736

 
$
71,874

 
53.3
 %
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:
 
September 30,
2015
 
December 31,
2014
 
Change
Dollars in thousands
 
 
$
 
%
Senior unsecured notes(1)
$
650,000

 
$
650,000

 
$

 
 %
Term loans(1)
139,688

 
146,250

 
(6,562
)
 
(4.5
)%
Revolving line of credit
55,000

 
160,000

 
(105,000
)
 
(65.6
)%
Capital leases
8,177

 
15,391

 
(7,214
)
 
(46.9
)%
Total principal value of outstanding debt including capital leases
852,865

 
971,641

 
(118,776
)
 
(12.2
)%
Less domestic cash and cash equivalents held in financial institutions
(33,909
)
 
(66,546
)
 
32,637

 
(49.0
)%
Net debt
818,956

 
905,095

 
(86,139
)
 
(9.5
)%
LTM Core adjusted EBITDA from continuing operations(2)
$
537,227

 
$
496,820

 
$
40,407

 
8.1
 %
Net leverage ratio
1.52

 
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 September 30, 2015 and December 31, 2014 was determined as follows:
Dollars in thousands
 
Core adjusted EBITDA from continuing operations for the nine months ended September 30, 2015
$
389,482

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 nine months ended September 30, 2014
(349,075
)
LTM Core adjusted EBITDA from continuing operations for the twelve months ended September 30, 2015
$
537,227

(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.


59


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 $59.7 million primarily due to the following:
$35.5 million change in net non-cash income and expense included in net income primarily due to changes in goodwill impairment, loss from equity method investments, depreciation and other, and deferred income taxes; and
$59.7 million decrease in net cash outflows from changes in working capital primarily due to changes in accounts payable, prepaid expenses and other current assets, other accrued liabilities, accounts receivable, content library, and accrued payable to retailers, partially offset by
$35.5 million decrease in net income.
Net Cash used in Investing Activities
We used $57.1 million of net cash in our investing activities primarily due to:
$60.2 million for the purchases of property and equipment for kiosks and corporate infrastructure; partially offset by
$3.1 million for proceeds from the sale of property and equipment.
Net Cash used in Financing Activities
We used $260.7 million of net cash from financing activities primarily due to:
$123.5 million for repurchases of our common stock;
$111.6 million in net payments for borrowings from our Credit Facility;
$16.2 million for dividends paid;
$8.9 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 September 30, 2015, our cash and cash equivalent balance was $195.6 million, of which $73.6 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.


60


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

 
$
300,000

 
$
139,688

 
$
55,000

 
$
844,688

Discount
(3,530
)
 
(3,670
)
 
(279
)
 

 
(7,479
)
Total
346,470

 
296,330

 
139,409

 
55,000

 
837,209

Less: current portion

 

 
(12,188
)
 

 
(12,188
)
Total long-term portion
$
346,470

 
$
296,330

 
$
127,221

 
$
55,000

 
$
825,021

Senior Unsecured Notes Due 2019
On March 12, 2013, we and certain subsidiaries of ours, as subsidiary guarantors, entered into an indenture pursuant to which we issued $350.0 million principal amount of 6.000% Senior Notes due 2019 (the “Senior Notes due 2019”) at par for proceeds, net of expenses, of $343.8 million. The expenses were allocated between debt discount and deferred financing fees based on their nature. As of September 30, 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 September 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 September 30, 2015, the interest rate on amounts outstanding under the Credit Facility was 1.95% 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
$
2,813

2016
13,125

2017
15,000

2018
18,750

2019
90,000

Total
$
139,688

 


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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 October 16, 2015, Paramount elected to exercise its option to extend our existing content license agreement. This will extend the license period through December 31, 2016. See Note 20: Subsequent Events in our Notes to Consolidated Financial Statements for additional information.
On July 14, 2015, Sony elected to exercise its option to extend our existing content license agreement. This extended the license period through September 30, 2016.
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 September 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)
$
844,688

 
$
57,813

 
$
28,125

 
$
458,750

 
$
300,000

Contractual interest on long-term debt
174,844

 
9,656

 
77,250

 
61,500

 
26,438

Capital lease obligations
8,590

 
3,352

 
4,165

 
757

 
316

Operating lease obligations, net(2)
52,326

 
4,033

 
25,127

 
12,731

 
10,435

Purchase obligations(3)(4)
35,215

 
22,037

 
13,178

 

 

Asset retirement obligations
10,292

 

 

 

 
10,292

Total estimated movie content commitments(3)
575,585

 
155,439

 
420,146

 

 

Retailer revenue share obligations
2,820

 
455

 
2,234

 
131

 

Total
$
1,704,360

 
$
252,785

 
$
570,225

 
$
533,869

 
$
347,481

(1) 
See Note 8: Debt and Other Long-Term Liabilities in our Notes to Consolidated Financial Statements.
(2) 
Net of sublease income of $1.7 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 September 30, 2015, the remaining commitment is $15.8 million under this agreement.




62


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 in the second quarter of 2015.


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As a result of the impairment recorded, the estimated fair value of the ecoATM reporting unit equaled its carrying value as of June 30, 2015. 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 growth in kiosks, revenue and profitability measures. Additionally, fair value may be negatively impacted by changes in our strategy related to ecoATM and increased competition from companies whose primary business consists of the purchase of used electronics and with companies in other businesses who also have buyback programs.

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 September 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


64


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. Oral argument is scheduled for November 10, 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 September 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)
7/1/15 - 7/31/15
43,866

 
$
76.65

 
43,000

 
$
350,124

8/1/15 - 8/31/15
863,635

 
$
64.26

 
863,086

 
$
294,662

9/1/15 - 9/30/15
33,406

 
$
61.44

 
32,500

 
$
292,718

 
940,907

 
 
 
938,586

 
 
(1)
Includes 2,321 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.


65


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*
  
Offer Letter, dated July 28, 2015, between Outerwall Inc. and Erik E. Prusch. (1)
 
 
 
10.2*
  
Employment Agreement, executed on July 29, 2015, between Outerwall Inc. and Erik E. Prusch. (1)
 
 
 
10.3*
  
Form of Notice of Restricted Stock Award and Form of Restricted Stock Award Agreement under the 2011 Incentive Plan for Awards made to Erik E. Prusch. (1)
 
 
 
10.4*
  
Form of Notice of Restricted Stock Award and Form of Restricted Stock Award Agreement under the 2011 Incentive Plan for Performance-Based Awards made to Erik E. Prusch. (1)
 
 
 
10.5*
 
Change of Control Agreement, executed on July 29, 2015, between Outerwall Inc. and Erik E. Prusch. (1)
 
 
 
31.1
  
Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2
  
Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1
  
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.2
  
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.INS
  
XBRL Instance Document.
 
 
 
101.SCH
  
XBRL Taxonomy Extension Schema.
 
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase.
 
 
 
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase.
 
 
 
101.LAB
  
XBRL Taxonomy Extension Label Linkbase.
 
 
 
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase.
* Indicates a management contract or compensatory plan or arrangement.


(1) Incorporated by reference to the Registrant's Form 8-K filed on July 30, 2015 (File Number 000-22555).



66


SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
OUTERWALL INC.
 
 
 
 
By:
 
/s/ Galen C. Smith
 
 
 
Galen C. Smith
 
 
 
Chief Financial Officer
 
 
 
October 29, 2015




67