OUTERWALL INC 
By BELLEVUE, Wash., May 1, 2014 /PRNewswire/ -- Outerwall Inc. (Nasdaq: OUTR) today reported financial results for the first quarter ended March 31, 2014.
(Logo: http://photos.prnewswire.com/prnh/20130701/AQ41388LOGO)
"We are off to a solid start this year as demonstrated by our first quarter 2014 results," said J. Scott Di Valerio,chief executive officer of Outerwall Inc. "As the leader in automated retail, we are focused on bringing innovative products and services to consumers. We believe we are well-positioned to execute in 2014 as we continue to leverage our core capabilities and achieve greater operational efficiencies to drive shareholder value."
2014 2013 Change
First First
Quarter Quarter %
-------- -------- ---
GAAP Results
-- Consolidated revenue $600.4 million $573.3 million 4.7%
-- Net income $23.2 million $22.6 million 2.5%
-- Income from continuing
operations $23.9 million $28.0 million (14.7)%
-- Diluted EPS from
continuing operations $0.96 $0.97 (1.0)%
-- Net cash provided by
operating activities $94.3 million $41.1 million 129.4%
Core Results*
-- Core adjusted EBITDA
from continuing
operations $117.6 million $110.2 million 6.7%
-- Core diluted EPS from
continuing operations $1.27 $1.12 13.4%
-- Free cash flow $67.6 million $7.9 million 759.4%
*Refer to Appendix A
for a discussion of
Use of Non-GAAP
Financial Measures
and Core and Non-
Core Results.
Highlights from the first quarter of 2014 include:
-- Consolidated revenue of $600.4 million, an increase of 4.7% compared
with the first quarter of 2013
-- Core diluted earnings per share from continuing operations were $1.27,
an increase of 13.4% compared with $1.12 in the first quarter of 2013
-- The company repurchased approximately 6.0 million shares for $420.8
million, including approximately 5.3 million shares of common stock
through a tender offer at a purchase price of $70.07 per share,
excluding fees and expenses related to the tender offer
-- Free cash flow increased substantially year-over-year to $67.6 million
reflecting working capital benefits, lower capital expenditures and
higher profitability compared with the first quarter of 2013
-- Mark Horak, formerly president of the Americas at Warner Bros., joined
Outerwall as president of Redbox on March 17, 2014; James Gaherity was
promoted to president of Coinstar; and Maria Stipp was appointed
president of ecoATM
"Our financial results in the first quarter of 2014 were stronger than expected," said Galen C. Smith, Outerwall's chief financial officer. "Our focus on growing the business and managing expenses resulted in higher revenues, improved Redbox and Coinstar segment operating margins and strong free cash flow in the quarter. In addition, we repurchased approximately 6.0 million shares during the quarter, reflecting our commitment to returning cash to shareholders and our confidence in the future performance of the company. As a result, we are raising our 2014 earnings guidance.
"Our second quarter 2014 guidance reflects significantly lower box office and fewer titles than the second quarter of 2013," continued Smith. "However, we continue to expect that rents and revenue per kiosk will be up year-over-year in the third and fourth quarters."
CONSOLIDATED RESULTS
Consolidated revenue for the first quarter of 2014 increased $27.1 million, or 4.7% to $600.4 million compared with $573.3 million for the first quarter of 2013. The year-over-year revenue growth was primarily due to the inclusion of the ecoATM business that the company acquired on July 23, 2013, and an increase in same store sales and newly installed and relocated kiosks in both the Redbox and Coinstar lines of business.
Operating income for the first quarter of 2014 was $58.7 million compared with operating income of $56.7 million in the first quarter of 2013. The operating margin was 9.8% in the first quarter of 2014 compared with 9.9% in the first quarter of 2013.
Income from continuing operations for the first quarter of 2014 was $23.9 million, or $0.96 earnings per diluted share from continuing operations, compared with $28.0 million, or $0.97 per diluted share, in the first quarter of 2013. The decrease in income from continuing operations in the first quarter of 2014 compared with the first quarter of 2013 was primarily due to increased interest expense related to the $350.0 million in Senior Notes issued on March 12, 2013 and an increased loss from equity method investments.
Core adjusted EBITDA from continuing operations for the first quarter of 2014 was $117.6 million, compared with $110.2 million in the first quarter of 2013. The year-over-year increase was primarily due to an increase in Redbox and Coinstar segment operating income.
Core diluted earnings per share from continuing operations for the first quarter of 2014 were $1.27, compared with $1.12 per diluted share in the first quarter of 2013. Non-core adjustments for the first quarter of 2014 include restructuring costs, compensation expense for rights to receive cash issued in connection with the company's acquisition of ecoATM, loss from equity method investments, and a tax benefit from a net operating loss adjustment.
Net cash provided by operating activities in the first quarter of 2014 was $94.3 million, compared with $41.1 million in the first quarter of 2013. The increase was primarily due to an increase in net operating cash inflows from changes in working capital, including a $24.0 million cash tax refund from 2013 that was received in January 2014.
Cash capital expenditures for the first quarter of 2014 were $26.7 million compared with $33.2 million in the first quarter of 2013.
Free cash flow for the first quarter of 2014 was $67.6 million, compared with $7.9 million in the first quarter of 2013, primarily driven by higher net operating cash flow and lower capital expenditures.
SEGMENT RESULTS
Redbox
Redbox segment revenue increased $7.7 million, or 1.5%, to $515.7 million in the first quarter of 2014 from $507.9 million in the first quarter of 2013. Redbox generated approximately 200.0 million rentals in the quarter, an increase of 1.2% compared with the first quarter of 2013.
Redbox same store sales increased 1.0% in the first quarter of 2014 compared with a decrease of 11.8% in the first quarter of 2013, primarily due to a stronger movie slate release in the first quarter of 2014 and despite the Winter Olympics in February. Net revenue per rental was $2.58, an increase of $0.02, or 0.8%, from the first quarter of 2013. The increase was primarily the result of a 38.1% reduction in promotional spend as the company continued its focus on increasing promotional efficiency.
Redbox segment operating income in the first quarter of 2014 was $102.9 million, an increase of 11.7% compared with the first quarter of 2013. Segment operating margin was 20.0%, an increase of 190 basis points from the first quarter of 2013, primarily due to a $7.7 million increase in revenue and a $3.8 million decrease in general and administrative expenses resulting from the restructuring that the company announced in December 2013 and the company's focus on general and administrative expense reductions.
Coinstar
Coinstar segment revenue was $68.8 million, an increase of 5.2%, compared with $65.4 million in the first quarter of 2013. Same store sales grew 3.1% in the first quarter of 2014 compared with 0.2% in the first quarter of 2013 primarily due to the price increase for all U.S. grocery retail locations for the coin voucher product that was implemented on October 1, 2013. The average transaction size in the first quarter of 2014 increased 3.9% to $40.76 from the first quarter of 2013.
Coinstar segment operating income was $22.7 million, an increase of 22.1% compared with the first quarter of 2013, and Coinstar segment operating margin was 33.1%, an increase of 460 basis points compared with the first quarter of 2013. Both increases were primarily the result of the U.S. price increase and cost reductions across its field organization.
New Ventures
During 2013, the company discontinued the Orango, Rubi((TM)), Crisp Market((TM)) and Star Studio((TM)) ventures previously included in its New Ventures operating segment. The company reclassified the results of these four ventures to discontinued operations for all periods presented. The shutdown process was substantially complete as of March 31, 2014.
New Ventures segment revenue was $16.0 million in the first quarter of 2014, primarily due to the inclusion of the ecoATM business that the company acquired in July 2013. The segment operating loss in the first quarter of 2014 included an increase in direct operating expenses related to the ecoATM business, including the costs for servicing the kiosks and payment to the retailers for use of their space. As the company installs additional ecoATM kiosks and the existing kiosks continue to ramp, the company expects to leverage a greater share of the direct operating expenses. During the first quarter of 2014, ecoATM expanded its pilot in the mass channel and ended the quarter with more than 900 kiosks.
SHARE REPURCHASES AND CAPITAL STRUCTURE
On January 30, 2014, Outerwall's board of directors approved an additional repurchase program of up to $500.0 million of common stock plus the cash proceeds received from the exercise of stock options to its remaining authority of $201.3 million.
During the first quarter of 2014, the company repurchased approximately 6.0 million shares of its common stock for $420.8 million, including 736,000 shares at an average price of $67.93 per share under a 10b5-1 plan and approximately 5.3 million shares at a final purchase price of $70.07 per share through a modified Dutch auction tender offer. The aggregate cost of share repurchase through the Dutch auction was approximately $370.8 million, excluding related fees and expenses.
At March 31, 2014, there was approximately $282.5 million in authority remaining under the company's stock repurchase authorization.
The company's net leverage ratio* was 1.85x at March 31, 2014. The company continues to expect a target net leverage ratio of 1.75x to 2.25x for 2014.
GUIDANCE
A comprehensive 2014 guidance table is included in the "Earnings Release Schedules" section at the end of this release. Beginning in 2015, Outerwall will provide annual guidance only. The company believes annual guidance is a more relevant measurement of the business given its stage of growth, and full-year results capture the varying seasonal patterns of each of its businesses.
For the 2014 full year, the company expects:
-- Consolidated revenue between $2.378 billion and $2.488 billion;
-- Core adjusted EBITDA from continuing operations between $487 million and
$527 million;
-- Core diluted EPS from continuing operations between $6.68 and $7.18 on a
fully diluted basis;
-- Free cash flow between $200 million and $240 million; and
-- Average diluted shares outstanding between 21.5 million and 21.6
million**.
For the 2014 second quarter, the company expects:
-- Consolidated revenue between $546 million and $576 million;
-- Core adjusted EBITDA from continuing operations between $103 million and
$118 million;
-- Core diluted EPS from continuing operations between $1.24 and $1.44 on a
fully diluted basis; and
-- Average diluted shares outstanding between 20.4 million and 20.5
million**.
ADDITIONAL INFORMATION
Additional information regarding the company's 2014 first quarter operating and financial results and guidance are included in the company's prepared remarks and supplemental slides. These items, as well as this press release, are posted on the Investor Relations section of the corporate website at ir.outerwall.com. The Segment Supplement, which provides historical data in Excel format, is also posted on the website.
CONFERENCE CALL
The company will host a conference call today at 2:00 p.m. PDT (5:00 p.m. EDT) to discuss first quarter 2014 earnings results and second quarter 2014 guidance. The conference call will be webcast live and archived on the Investor Relations section of Outerwall's website at ir.outerwall.com. A recording of the call will be available approximately two hours after the call ends through May 15, 2014, at 1-888-843-7419 or 1-630-652-3042, passcode 3698 5543.
*Refer to Appendix A for a discussion of Use of Non-GAAP Financial Measures and Core and Non-Core Results.
**Excludes the impact of any future share repurchases for the remainder of 2014
ABOUT OUTERWALL INC.
Outerwall Inc. (Nasdaq: OUTR) has more than 20 years of experience creating some of the most profitable spaces for their retail partners. The company mission is to create a better everyday by delivering breakthrough kiosk experiences that delight consumers and generate revenue for retailers. As the company that brought consumers Redbox(®) entertainment, Coinstar(®) money services, and ecoATM(®) electronics recycling kiosks, Outerwall is leading the next generation of automated retail and paving the way for inventive, scalable businesses. Outerwall(TM) kiosks are in neighborhood grocery stores, drug stores, mass merchants, malls, and other retail locations in the United States, Canada, Puerto Rico, the United Kingdom, and Ireland. Learn more at www.outerwall.com.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
Certain statements in this press release are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The words "believe," "estimate," "expect," "intend," "will," "anticipate," "goals," variations of such words, and similar expressions identify forward-looking statements, but their absence does not mean that the statement is not forward-looking. The forward-looking statements in this release include statements regarding Outerwall Inc.'s anticipated growth and future operating results, including 2014 second quarter and full year results. Forward-looking statements are not guarantees of future performance and actual results may vary materially from the results expressed or implied in such statements. Differences may result from actions taken by Outerwall Inc. or its subsidiaries, as well as from risks and uncertainties beyond Outerwall Inc.'s control. Such risks and uncertainties include, but are not limited to,
-- competition from other entertainment providers,
-- the ability to achieve the strategic and financial objectives for our
entry into new businesses, including ecoATM, SAMPLEit and Redbox
Instant(TM) by Verizon,
-- our ability to repurchase stock and the availability of an open trading
window,
-- the termination, non-renewal or renegotiation on materially adverse
terms of our contracts with our significant retailers and suppliers,
-- payment of increased fees to retailers, suppliers and other third-party
providers, including financial service providers,
-- the timing of new DVD releases and the inability to receive delivery of
DVDs on the date of their initial release to the general public, or
shortly thereafter, or in sufficient quantity, for home entertainment
viewing,
-- the effective management of our content library,
-- the timing of the release slate and the relative attractiveness of
titles in a particular quarter or year,
-- the ability to attract new retailers, penetrate new markets and
distribution channels and react to changing consumer demands,
-- the ability to adequately protect our intellectual property, and
-- the application of substantial federal, state, local and foreign laws
and regulations specific to our business.
The foregoing list of risks and uncertainties is illustrative, but by no means exhaustive. For more information on factors that may affect future performance, please review "Risk Factors" described in our most recent Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission. These forward-looking statements reflect Outerwall Inc.'s expectations as of the date of this press release. Outerwall Inc. undertakes no obligation to update the information provided herein.
OUTERWALL INC.
EARNINGS RELEASE SCHEDULES
Quarter Ended March 31, 2014
-- Consolidated Statements of Comprehensive Income
-- Consolidated Balance Sheets
-- Consolidated Statements of Cash Flows
-- Business Segment and Enterprisewide Information
-- 2014 Second Quarter and Full Year Guidance
-- APPENDIX A
-- Use of Non-GAAP Financial Measures
-- Core and Non-Core Results
-- Core Adjusted EBITDA From Continuing Operations
-- Core Diluted EPS From Continuing Operations
-- Free Cash Flow
-- Net Debt and Net Leverage Ratio
OUTERWALL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
Three Months
Ended
March 31,
---------
2014 2013
---- ----
Revenue $600,369 $573,307
Expenses:
Direct operating 424,645 404,895
Marketing 7,597 7,386
Research and development 3,474 2,307
General and administrative 52,991 53,461
Depreciation and other 49,095 46,580
Amortization of intangible
assets 3,848 2,017
----- -----
Total expenses 541,650 516,646
------- -------
Operating income 58,719 56,661
Other income (expense), net:
Loss from equity method
investments, net (9,368) (7,025)
Interest expense, net (9,645) (5,533)
Other, net (1,744) 59
------ ---
Total other expense, net (20,757) (12,499)
------- -------
Income from continuing
operations before income
taxes 37,962 44,162
Income tax expense (14,076) (16,155)
------- -------
Income from continuing
operations 23,886 28,007
Loss from discontinued
operations, net of tax (711) (5,403)
---- ------
Net income 23,175 22,604
------ ------
Foreign currency translation
adjustment 875 (1,914)
Comprehensive income $24,050 $20,690
======= =======
Basic earnings (loss) per share:
Continuing operations $1.00 $1.02
Discontinued operations (0.03) (0.20)
Basic earnings per share $0.97 $0.82
===== =====
Diluted earnings (loss) per share:
Continuing operations $0.96 $0.97
Discontinued operations (0.02) (0.19)
Diluted earnings per share $0.94 $0.78
===== =====
Weighted average shares used
in basic per share
calculations 23,944 27,493
Weighted average shares used
in diluted per share
calculations 24,775 28,937
OUTERWALL INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
March 31, December 31,
2014 2013
---- ----
Assets
Current Assets:
Cash and cash equivalents $251,546 $371,437
Accounts receivable, net of allowances of $1,710 and $1,826 56,223 50,296
Content library 179,887 199,868
Prepaid expenses and other current assets 46,665 84,709
------ ------
Total current assets 534,321 706,310
Property and equipment, net 501,127 520,865
Deferred income taxes 7,952 6,443
Goodwill and other intangible assets 634,842 638,690
Other long-term assets 24,330 24,392
------ ------
Total assets $1,702,572 $1,896,700
======== ==========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $209,219 $236,018
Accrued payable to retailers 118,558 134,140
Other accrued liabilities 146,775 134,127
Current callable convertible debt 50,245 49,702
Current portion of long-term debt and other long-term liabilities 44,531 42,190
Current portion of capital lease obligations 11,989 11,997
Deferred income taxes 25,612 23,143
------ ------
Total current liabilities 606,929 631,317
Long-term debt and other long-term liabilities 920,763 677,356
Capital lease obligations 8,712 9,364
Deferred income taxes 44,039 58,528
------ ------
Total liabilities 1,580,443 1,376,565
Commitments and contingencies
Debt conversion feature 899 1,446
Stockholders' Equity:
Preferred stock, $0.001 par value - 5,000,000 shares authorized; no shares issued or outstanding - -
Common stock, $0.001 par value - 60,000,000 authorized;
36,623,708 and 36,356,357 shares issued;
20,390,589 and 26,150,900 shares outstanding; 485,537 482,481
Treasury stock (901,361) (476,796)
Retained earnings 536,946 513,771
Accumulated other comprehensive income (loss) 108 (767)
--- ----
Total stockholders' equity 121,230 518,689
------- -------
Total liabilities and stockholders' equity $1,702,572 $1,896,700
======== ==========
OUTERWALL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months
Ended
March 31,
---------
2014
2013
----
Operating Activities:
Net income $23,175 $22,604
Adjustments to reconcile net income
to net cash flows from operating
activities:
Depreciation and other 49,104 46,892
Amortization of intangible
assets and deferred
financing fees 4,607 2,577
Share-based payments expense 3,765 4,837
Excess tax benefits on
share-based payments (1,710) (2,069)
Deferred income taxes (9,564) 10,416
Impairment expense - 2,546
Loss from equity method
investments, net 9,368 7,025
Non-cash interest on
convertible debt 547 1,663
Other (124) 609
Cash flows from changes in
operating assets and
liabilities 15,137 (55,998)
------ -------
Net cash flows from
operating activities 94,305 41,102
Investing Activities:
Purchases of property and
equipment (26,658) (33,231)
Proceeds from sale of
property and equipment 831 132
Purchases of short term
investments - (53,000)
Receipt of note receivable
principal - 95
Cash paid for equity
investments (10,500) (14,000)
------- -------
Net cash flows used in
investing activities (36,327) (100,004)
Financing Activities:
Proceeds from issuance of
senior unsecured notes - 343,769
Proceeds from new borrowing
on Credit Facility 275,000 -
Principal payments on Credit
Facility (29,375) (3,281)
Financing costs associated
with Credit Facility and
senior unsecured notes - (302)
Repurchase of convertible
debt (4) (62,455)
Repurchases of common stock (421,067) (46,482)
Principal payments on
capital lease obligations
and other debt (3,697) (3,251)
Excess tax benefits related
to share-based payments 1,710 2,069
Withholding tax paid on
vesting of restricted stock
net of proceeds from
exercise of stock options (1,588) 1,093
------ -----
Net cash flows from (used
in) financing activities (179,021) 231,160
Effect of exchange rate
changes on cash 1,152 (1,700)
----- ------
Increase (decrease) in cash
and cash equivalents (119,891) 170,558
Cash and cash equivalents:
Beginning of period 371,437 282,894
End of period $251,546 $453,452
======== ========
OUTERWALL INC.
BUSINESS SEGMENT AND ENTERPRISEWIDE INFORMATION
(unaudited)
The analysis and reconciliation of the company's segment information to the consolidated financial statements that follows covers the company's results of operations, which consists of the Redbox, Coinstar and New Ventures segments. Unallocated general and administrative expenses relate to share-based compensation and expense related to the rights to receive cash issued in connection with our acquisition of ecoATM.
Dollars in
thousands
Three Months New Corporate
Ended March Ventures Unallocated
31, 2014 Redbox Coinstar Total
------ ------- -------- ----------- -----
Revenue $515,656 $68,753 $15,960 $ - $600,369
Expenses:
Direct
operating 368,604 37,723 16,339 1,979 424,645
Marketing 5,064 1,006 829 698 7,597
Research and
development 8 269 2,416 781 3,474
General and
administrative 39,061 7,020 3,800 3,110 52,991
------ ----- ----- ----- ------
Segment
operating
income
(loss) 102,919 22,735 (7,424) (6,568) 111,662
Less:
depreciation,
amortization
and other (40,563) (8,563) (3,817) - (52,943)
------- ------ ------ --- -------
Operating
income
(loss) 62,356 14,172 (11,241) (6,568) 58,719
Loss from
equity
method
investments,
net - - - (9,368) (9,368)
Interest
expense,
net - - - (9,645) (9,645)
Other, net - - - (1,744) (1,744)
--- --- --- ------ ------
Income
(loss) from
continuing
operations
before
income
taxes $62,356 $14,172 $(11,241) $(27,325) $37,962
======= ======= ======= ======== =======
Dollars in
thousands
Three Months New Corporate
Ended March Ventures Unallocated
31, 2013 Redbox Coinstar Total
------ ------- -------- ----------- -----
Revenue $507,920 $65,383 $4 $ - $573,307
Expenses:
Direct
operating 366,681 37,656 217 341 404,895
Marketing 6,199 1,053 67 67 7,386
Research and
development 4 1,768 455 80 2,307
General and
administrative 42,862 6,289 1,606 2,704 53,461
------ ----- ----- ----- ------
Segment
operating
income
(loss) 92,174 18,617 (2,341) (3,192) 105,258
Less:
depreciation,
amortization
and other (40,377) (8,184) (36) - (48,597)
------- ------ --- --- -------
Operating
income
(loss) 51,797 10,433 (2,377) (3,192) 56,661
Loss from
equity
method
investments,
net - - - (7,025) (7,025)
Interest
expense,
net - - - (5,533) (5,533)
Other, net - - - 59 59
--- --- --- --- ---
Income
(loss) from
continuing
operations
before
income
taxes $51,797 $10,433 $(2,377) $(15,691) $44,162
======= ======= ======= ======== =======
OUTERWALL INC.
2014 SECOND QUARTER AND FULL YEAR GUIDANCE
(as of May 1, 2014)
(in millions, except per share
amounts)
2014 SECOND QUARTER GUIDANCE RANGE
---------------------------- -----
Consolidated revenue $546 to $576
Core adjusted EBITDA from
continuing operations $103 to $118
Core diluted EPS from continuing
operations(1) $1.24 to $1.44
Average diluted shares
outstanding(1) 20.4 to 20.5
2014 FULL YEAR GUIDANCE
-----------------------
Consolidated results:
Revenue $2,378 to $2,488
Core adjusted EBITDA from
continuing operations $487 to $527
Core diluted EPS from continuing
operations(1) $6.68 to $7.18
Free cash flow $200 to $240
Average diluted shares
outstanding(1) 21.5 to 21.6
Effective tax rate 38.5% to 39.5%
Segment revenue:
Redbox $1,949 to $2,044
Coinstar $307 to $312
New Ventures $122 to $132
Capital expenditures:
Redbox CAPEX $22 to $27
Kiosk, software and other $7 to $9
Maintenance $15 to $18
Coinstar CAPEX $15 to $19
New $11 to $14
Maintenance $4 to $5
New Ventures $35 to $44
Corporate $28 to $35
--- ---
Total CAPEX $100 to $125
==== ====
Net kiosk installations:
Redbox (50) to (450)
U.S. (500) to (700)
Canada 250 to 450
Coinstar 250 to 450
New Ventures 1,000 to 1,300
------------ ----- --- -----
(1) Excludes the impact
of any future share
repurchases for the
remainder of 2014
APPENDIX A
Use of 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 include i) restructuring costs associated with actions to reduce costs in our continuing operations primarily through workforce reductions across the Company, ii) compensation expense for rights to receive cash issued in conjunction with our acquisition of ecoATM and attributable to post-combination services as they are fixed amount acquisition related awards and not indicative of the directly controllable future business results, iii) income or loss from equity method investments, which represents our share of income or loss from entities we do not consolidate or control, and iv) a tax benefit related to a net operating loss adjustment ("Non-Core Adjustments").
We believe investors should consider our core results because they are more indicative of our ongoing performance and trends, are more consistent with how management evaluates our operational results and trends, provide meaningful supplemental information to investors through the exclusion of certain expenses which are either non-recurring or may not be indicative of our directly controllable business operating results, allow for greater transparency in assessing our performance, help investors better analyze the results of our business and assist in forecasting future periods.
Core Adjusted EBITDA from continuing operations
Our non-GAAP financial measure core adjusted EBITDA from continuing operations is defined as earnings from continuing operations before depreciation, amortization and other; interest expense, net; income taxes; share-based payments expense; and Non-Core Adjustments.
A reconciliation of core adjusted EBITDA from continuing operations to net income from continuing operations, the most comparable GAAP financial measure, is presented in the following table:
Three Months
Ended
March 31,
---------
Dollars in thousands 2014 2013
---- ----
Net income from continuing
operations $23,886 $28,007
Depreciation, amortization
and other 52,943 48,597
Interest expense, net 9,645 5,533
Income taxes 14,076 16,155
Share-based payments
expense(1) 3,765 4,837
----- -----
Adjusted EBITDA from
continuing operations 104,315 103,129
Non-Core Adjustments:
Restructuring costs 469 -
Rights to receive cash
issued in connection with
the acquisition of ecoATM 3,421 -
Loss from equity method
investments 9,368 7,025
Core adjusted EBITDA from
continuing operations $117,573 $110,154
====== ======
(1) Includes both non-cash
share-based compensation
for executives, non-
employee directors and
employees as well as share-
based payments for content
arrangements.
Core Diluted EPS from continuing operations
Our non-GAAP financial measure core diluted EPS from continuing operations is defined as diluted earnings per share from continuing operations excluding Non-Core Adjustments, net of applicable taxes.
A reconciliation of core diluted EPS from continuing operations to diluted EPS from continuing operations, the most comparable GAAP financial measure, is presented in the following table:
Three
Months
Ended
March 31,
---------
2014
2013
----
Diluted EPS from continuing
operations $0.96 $0.97
Non-Core Adjustments, net
of tax:(1)
Restructuring costs 0.01 -
Rights to receive cash
issued in connection with
the acquisition of ecoATM 0.11 -
Loss from equity method
investments 0.23 0.15
Tax benefit from net
operating loss adjustment (0.04) -
Core diluted EPS from
continuing operations $1.27 $1.12
===== ===
(1) Non-Core Adjustments are
presented after-tax
using the applicable
effective tax rate for
the respective periods.
Free Cash Flow
Our non-GAAP financial measure free cash flow is defined as net cash provided by operating activities after capital expenditures. We believe free cash flow is an important non-GAAP measure as it provides additional information to users of the financial statements regarding our ability to service, incur or pay down indebtedness and repurchase our securities.
A reconciliation of free cash flow to net cash provided by operating activities, the most comparable GAAP financial measure, is presented in the following table:
Three Months
Ended
March 31,
---------
Dollars in thousands 2014 2013
---- ----
Net cash provided by
operating activities $94,305 $41,102
Purchase of property and
equipment (26,658) (33,231)
------- -------
Free cash flow $67,647 $7,871
======= ======
Net Debt and Net Leverage Ratio
Our non-GAAP financial measure net debt is defined as the total face value of outstanding debt, including capital leases, less cash and cash equivalents held in financial institutions domestically. Our non-GAAP financial measure net leverage ratio is defined as net debt divided by core adjusted EBITDA from continuing operations for the last twelve months (LTM). We believe net debt and net leverage ratio are important non-GAAP measures because they:
-- are used to assess the degree of leverage by management;
-- provide additional information to users of the financial statements
regarding our ability to service, incur or pay down indebtedness and
repurchase our securities as well as additional information about our
capital structure; and
-- are reported quarterly to support covenant compliance under our credit
agreement.
A reconciliation of net debt to total outstanding debt including capital leases, the most comparable GAAP financial measure, is presented in the following table:
March
31,
December
31,
Dollars in thousands 2014 2013
---- ----
Senior unsecured notes $350,000 $350,000
Term loans 335,000 344,375
Revolving line of credit 255,000 -
Convertible debt(1) 51,144 51,148
Capital leases 20,701 21,361
Total principal value of
outstanding debt
including capital
leases 1,011,845 766,884
Less domestic cash and
cash equivalents held
in financial
institutions (90,863) (199,027)
-------
Net debt 920,982 567,857
LTM Core adjusted EBITDA
from continuing
operations(2) $499,071 $491,652
Net leverage ratio 1.85 1.15
(1) The Convertible debt
balance on our
Consolidated Balance
Sheets as of March 31,
2014 and December 31,
2013 included $0.9
million and $1.4
million, respectively,
in associated debt
discount.
(2) LTM Core Adjusted EBITDA
from continuing
operations for the
twelve months ended
March 31, 2014 and
December 31, 2013 was
determined as follows:
Dollars in thousands
Core adjusted EBITDA
from continuing
operations for the
three months ended
March 31, 2014 $117,573
Add: Core adjusted
EBITDA from continuing
operations for the
twelve months ended
December 31, 2013(A) 491,652
Less: Core adjusted
EBITDA from continuing
operations for the
three months ended
March 31, 2013 (110,154)
LTM Core adjusted EBITDA
from continuing
operations for the
twelve months ended
March 31, 2014 $499,071
========
(A) Core adjusted EBITDA
from continuing
operations for the
twelve months ended
December 31, 2013 is
obtained from our
Annual Report on Form
10-K for the period
ended December 31,
2013, where it is
reconciled to net
income from
continuing
operations, the most
comparable GAAP
financial measure,
and represents the
LTM core adjusted
EBITDA from
continuing operations
we use in our
calculation of net
leverage ratio as of
December 31, 2013.
SOURCE Outerwall Inc.
