catm_Current folio_10Q

Table of Contents

 

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549 

 

FORM 10-Q 

 

(Mark One)

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended September 30, 2018

 

 

or

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the transition period from    to

 

Commission File Number: 001-37820 

 


 

Cardtronics plc 

(Exact name of registrant as specified in its charter)

 

 

 

England and Wales 

98-1304627

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

 

3250 Briarpark Drive, Suite 400

77042

Houston, Texas 

(Zip Code)

(Address of principal executive offices)

 

 

Registrant’s telephone number, including area code: (832) 308-4000

 

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 ☑ No ☐ 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☑ No ☐ 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,’’ “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

Large accelerated filer            

 

Accelerated filer                    

Non-accelerated filer              

 

Smaller reporting company   

Emerging growth company    

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑ 

 

Shares outstanding as of October 30, 2018:  46,107,312 Ordinary shares, nominal value $0.01 per share.

 

 

 

 


 

Table of Contents

 

CARDTRONICS PLC

 

TABLE OF CONTENTS

 

31

 

 

 

 

 

 

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION 

 

 

Item 1. 

Financial Statements

 

3

 

Consolidated Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017

 

3

 

Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September  30, 2018 and 2017

 

4

 

Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2018 and 2017

 

5

 

Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017 

 

6

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

 

Cautionary Statement Regarding Forward-Looking Statements

 

47

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

49

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

 

78

Item 4. 

Controls and Procedures

 

80

 

 

 

 

PART II. OTHER INFORMATION 

 

 

Item 1. 

Legal Proceedings

 

82

Item 1A. 

Risk Factors

 

82

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

82

Item 3. 

Defaults Upon Senior Securities

 

82

Item 4. 

Mine Safety Disclosures

 

82

Item 5. 

Other Information

 

82

Item 6. 

Exhibits

 

83

 

Signatures

 

84

 

 

 

 

 

When we refer to “us,” “we,” “our,” “ours,” “the Company,” or “Cardtronics” we are describing Cardtronics plc and/or our subsidiaries, unless the context indicates otherwise.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CARDTRONICS PLC
CONSOLIDATED BALANCE SHEETS
(In thousands, excluding share and per share amounts)

 

 

 

 

 

 

 

 

 

    

September 30, 2018

    

December 31, 2017

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

40,428

 

$

51,370

Accounts and notes receivable, net of allowance for doubtful accounts of $3,128 and $2,001 as of September 30, 2018 and December 31, 2017, respectively

 

 

87,150

 

 

105,245

Inventory, net

 

 

15,317

 

 

14,283

Restricted cash

 

 

73,870

 

 

48,328

Prepaid expenses, deferred costs, and other current assets

 

 

106,497

 

 

96,106

Total current assets

 

 

323,262

 

 

315,332

Property and equipment, net of accumulated depreciation of $404,549 and $404,141 as of September 30, 2018 and December 31, 2017, respectively

 

 

457,350

 

 

497,902

Intangible assets, net

 

 

164,480

 

 

209,862

Goodwill

 

 

759,191

 

 

774,939

Deferred tax asset, net

 

 

7,412

 

 

6,925

Prepaid expenses, deferred costs, and other noncurrent assets

 

 

72,386

 

 

57,756

Total assets

 

$

1,784,081

 

$

1,862,716

   

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current portion of other long-term liabilities

 

$

19,690

 

$

31,370

Accounts payable

 

 

41,848

 

 

44,235

Accrued liabilities

 

 

310,754

 

 

306,945

Total current liabilities

 

 

372,292

 

 

382,550

Long-term liabilities:

 

 

 

 

 

 

Long-term debt

 

 

835,790

 

 

917,721

Asset retirement obligations

 

 

55,705

 

 

59,920

Deferred tax liability, net

 

 

48,812

 

 

37,130

Other long-term liabilities

 

 

59,744

 

 

75,002

Total liabilities

 

 

1,372,343

 

 

1,472,323

   

 

 

 

 

 

 

Commitments and contingencies (See Note 15)

 

 

 

 

 

 

   

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

Ordinary shares, $0.01 nominal value; 46,105,014 and 45,696,338 issued and outstanding as of September 30, 2018 and December 31, 2017, respectively

 

 

461

 

 

457

Additional paid-in capital

 

 

322,323

 

 

316,940

Accumulated other comprehensive loss, net

 

 

(33,336)

 

 

(33,595)

Retained earnings

 

 

122,383

 

 

106,670

Total parent shareholders' equity

 

 

411,831

 

 

390,472

Noncontrolling interests

 

 

(93)

 

 

(79)

Total shareholders’ equity

 

 

411,738

 

 

390,393

Total liabilities and shareholders’ equity

 

$

1,784,081

 

$

1,862,716

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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CARDTRONICS PLC

CONSOLIDATED STATEMENTS OF OPERATIONS 

(In thousands, excluding share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

 

2018

    

2017

    

2018

    

2017

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

ATM operating revenues

 

$

329,837

 

$

390,143

 

$

978,789

 

$

1,105,191

ATM product sales and other revenues

 

 

10,338

 

 

11,807

 

 

38,557

 

 

39,443

Total revenues

 

 

340,175

 

 

401,950

 

 

1,017,346

 

 

1,144,634

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of ATM operating revenues (excludes depreciation, accretion, and amortization of intangible assets reported separately below. See Note 1(c))  

 

 

216,849

 

 

251,136

 

 

647,692

 

 

729,547

Cost of ATM product sales and other revenues

 

 

8,680

 

 

8,920

 

 

31,528

 

 

34,671

Total cost of revenues

 

 

225,529

 

 

260,056

 

 

679,220

 

 

764,218

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general, and administrative expenses

 

 

41,896

 

 

46,132

 

 

124,564

 

 

131,551

Redomicile-related expenses

 

 

 —

 

 

22

 

 

 —

 

 

782

Restructuring expenses

 

 

1,058

 

 

 —

 

 

5,534

 

 

8,243

Acquisition and divestiture-related expenses

 

 

 —

 

 

2,889

 

 

2,633

 

 

15,338

Goodwill and intangible asset impairment

 

 

 —

 

 

194,521

 

 

 —

 

 

194,521

Depreciation and accretion expense

 

 

30,647

 

 

29,807

 

 

93,453

 

 

88,683

Amortization of intangible assets

 

 

12,994

 

 

14,996

 

 

40,263

 

 

45,423

Loss on disposal and impairment of assets

 

 

466

 

 

22,307

 

 

15,583

 

 

26,170

Total operating expenses

 

 

87,061

 

 

310,674

 

 

282,030

 

 

510,711

Income (loss) from operations

 

 

27,585

 

 

(168,780)

 

 

56,096

 

 

(130,295)

Other expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

8,852

 

 

9,743

 

 

27,185

 

 

25,760

Amortization of deferred financing costs and note discount

 

 

3,397

 

 

3,195

 

 

10,060

 

 

9,317

Other income

 

 

(1,297)

 

 

(2,095)

 

 

(1,324)

 

 

(1,730)

Total other expense

 

 

10,952

 

 

10,843

 

 

35,921

 

 

33,347

Income (loss) before income taxes

 

 

16,633

 

 

(179,623)

 

 

20,175

 

 

(163,642)

Income tax expense (benefit)

 

 

7,854

 

 

(4,053)

 

 

10,409

 

 

(2,335)

Net income (loss) 

 

 

8,779

 

 

(175,570)

 

 

9,766

 

 

(161,307)

Net loss attributable to noncontrolling interests

 

 

(2)

 

 

(9)

 

 

(14)

 

 

(3)

Net income (loss) attributable to controlling interests and available to common shareholders

 

$

8,781

 

$

(175,561)

 

$

9,780

 

$

(161,304)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share – basic

 

$

0.19

 

$

(3.84)

 

$

0.21

 

$

(3.54)

Net income (loss) per common share – diluted

 

$

0.19

 

$

(3.84)

 

$

0.21

 

$

(3.54)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding – basic

 

 

46,073,739

 

 

45,662,543

 

 

45,945,728

 

 

45,597,558

Weighted average shares outstanding – diluted

 

 

46,476,787

 

 

45,662,543

 

 

46,386,523

 

 

45,597,558

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

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CARDTRONICS PLC

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2018

    

2017

    

2018

    

2017

    

Net income (loss) 

 

$

8,779

 

$

(175,570)

 

$

9,766

 

$

(161,307)

 

Unrealized gain on interest rate swap contracts, net of deferred income tax expense of $1,370 and $1,744 for the three months ended September 30, 2018 and 2017, respectively, and $7,346 and $3,639 for the nine months ended September 30, 2018 and 2017, respectively

 

 

5,192

 

 

5,190

 

 

24,583

 

 

10,779

 

Foreign currency translation adjustments, net of deferred income tax expense of $(164) and $55 for the three months ended September 30, 2018 and 2017, respectively, and $85 and ($1,256) for the nine months ended September 30, 2018 and 2017, respectively

 

 

(1,144)

 

 

17,871

 

 

(24,324)

 

 

51,142

 

Other comprehensive income

 

 

4,048

 

 

23,061

 

 

259

 

 

61,921

 

Total comprehensive income (loss)

 

 

12,827

 

 

(152,509)

 

 

10,025

 

 

(99,386)

 

Less: Comprehensive loss attributable to noncontrolling interests

 

 

(5)

 

 

(9)

 

 

(14)

 

 

(4)

 

Comprehensive income (loss) attributable to controlling interests

 

$

12,832

 

$

(152,500)

 

$

10,039

 

$

(99,382)

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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CARDTRONICS PLC

CONSOLIDATED STATEMENTS OF CASH FLOWS 

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30, 

   

    

2018

    

2017

Cash flows from operating activities:

 

 

 

 

 

 

Net income (loss) 

 

$

9,766

 

$

(161,307)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation, accretion, and amortization of intangible assets

 

 

133,716

 

 

134,106

Amortization of deferred financing costs and note discount

 

 

10,060

 

 

9,317

Share-based compensation expense

 

 

10,627

 

 

9,971

Deferred income tax (benefit)

 

 

1,895

 

 

(6,198)

Loss on disposal and impairment of assets

 

 

15,583

 

 

26,170

Other reserves and non-cash items

 

 

(753)

 

 

(1,182)

Goodwill and intangible asset impairment

 

 

 —

 

 

194,521

Changes in assets and liabilities:

 

 

 

 

 

 

Decrease (increase) in accounts and notes receivable, net

 

 

17,477

 

 

(122)

Increase in prepaid expenses, deferred costs, and other current assets

 

 

(5,210)

 

 

(23,567)

Increase in inventory, net

 

 

(3,321)

 

 

(3,619)

Decrease (increase) in other assets

 

 

4,987

 

 

(4,338)

Increase (decrease) in accounts payable

 

 

2,397

 

 

(20,951)

Increase in accrued liabilities

 

 

2,973

 

 

21,364

Decrease in other liabilities

 

 

(15,615)

 

 

(1,731)

Net cash provided by operating activities

 

 

184,582

 

 

172,434

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Additions to property and equipment

 

 

(73,357)

 

 

(111,424)

Acquisitions, net of cash acquired

 

 

 —

 

 

(484,602)

Net cash used in investing activities

 

 

(73,357)

 

 

(596,026)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from borrowings under revolving credit facility

 

 

478,023

 

 

968,365

Repayments of borrowings under revolving credit facility

 

 

(569,017)

 

 

(827,351)

Proceeds from borrowings of long-term debt

 

 

 —

 

 

300,000

Debt issuance costs

 

 

 —

 

 

(5,476)

Tax payments related to share-based compensation

 

 

(5,245)

 

 

(8,359)

Proceeds from exercises of stock options

 

 

14

 

 

105

Net cash (used in) provided by financing activities

 

 

(96,225)

 

 

427,284

   

 

 

 

 

 

 

Effect of exchange rate changes on cash, cash equivalents, and restricted cash

 

 

(404)

 

 

(4,178)

Net increase (decrease) in cash, cash equivalents, and restricted cash

 

 

14,596

 

 

(486)

   

 

 

 

 

 

 

Cash, cash equivalents, and restricted cash as of beginning of period

 

 

99,817

 

 

105,747

Cash, cash equivalents, and restricted cash as of end of period

 

$

114,413

 

$

105,261

   

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Cash paid for interest

 

$

25,754

 

$

19,284

Cash (refund) paid for income taxes

 

$

(1,240)

 

$

3,567

 

The accompanying notes are an integral part of these consolidated financial statements.

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CARDTRONICS PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(1) General and Basis of Presentation 

 

(a) General 

 

Cardtronics plc, together with its wholly and majority-owned subsidiaries (collectively, the “Company”), provides convenient automated financial related services to consumers through its network of automated teller machines and multi-function financial services kiosks (collectively referred to as “ATMs”). As of September 30, 2018, the Company was the world’s largest ATM owner/operator, providing services to approximately 230,000 ATMs.

 

During the three months ended September 30, 2018, 61% of the Company’s revenues were derived from operations in North America (including its ATM operations in the U.S., Canada, and Mexico), 30% of the Company’s revenues were derived from operations in Europe and Africa (including its ATM operations in the U.K., Ireland, Germany, Spain, and South Africa), and 9% of the Company’s revenues were derived from the Company’s operations in Australia and New Zealand. As of September 30, 2018, the Company provided processing only services or various forms of managed services solutions to approximately 140,000 ATMs. Under a managed services arrangement, retailers, financial institutions, and ATM distributors rely on Cardtronics to handle some or all of the operational aspects associated with operating and maintaining ATMs, typically in exchange for a monthly service fee, fee per transaction, or fee per service provided.

 

Through its network, the Company delivers financial related services to cardholders and provides ATM management and ATM equipment-related services (typically under multi-year contracts) to large retail merchants, smaller retailers, and operators of facilities such as shopping malls, airports, and train stations. In doing so, the Company provides its retail partners with a compelling automated solution that helps attract and retain customers, and in turn, increases the likelihood that the ATMs placed at their facilities will be utilized. The Company also owns and operates electronic funds transfer (“EFT”) transaction processing platforms that provide transaction processing services to its network of ATMs, as well as to other ATMs under managed services arrangements. Additionally, the Company provides processing services for issuers of debit cards.

 

In addition to its retail merchant relationships, the Company also partners with leading financial institutions to brand selected ATMs within its network, including BBVA Compass Bancshares, Inc. (“BBVA”), Citibank, N.A. (“Citibank”), Citizens Financial Group, Inc. (“Citizens”), Cullen/Frost Bankers, Inc. (“Cullen/Frost”), Discover Bank (“Discover”), PNC Bank, N.A. (“PNC Bank”), Santander Bank, N.A. (“Santander”), and TD Bank, N.A. (“TD Bank”) in the U.S.; BMO Bank of Montreal (“BMO”), the Bank of Nova Scotia (“Scotiabank”), Canadian Imperial Bank Commerce (“CIBC”), DirectCash Bank and TD Bank in Canada; and the Bank of Queensland Limited (“BOQ”) and HSBC Holdings plc (“HSBC”) in Australia. In Mexico, the Company partners with Scotiabank and Banco Multiva. As of September 30, 2018, approximately 20,000 of the Company’s ATMs were under contract with approximately 500 financial institutions to place their logos on the ATMs, and to provide convenient surcharge-free access for their banking customers. 

 

The Company owns and operates the Allpoint network (“Allpoint”), the largest surcharge-free ATM network (based on the number of participating ATMs). Allpoint, which has approximately 55,000 participating ATMs, provides surcharge-free ATM access to over 1,100 participating credit unions, banks, and stored-value debit card issuers. For participants, Allpoint provides scale, density, and convenience of surcharge-free ATMs that surpasses the largest banks in the U.S. Allpoint earns either a fixed monthly fee per cardholder or a fixed fee per transaction that is paid by the participants. The Allpoint network includes a majority of the Company’s ATMs in the U.S. and certain ATMs in the U.K., Canada, Mexico, Puerto Rico, and Australia. Allpoint also provides services to organizations that manage stored-value debit card programs on behalf of corporate entities and governmental agencies, including general purpose, payroll, and electronic benefits transfer (“EBT”) cards. Under these programs, the issuing organizations pay Allpoint a fee per issued stored-value debit card or per transaction in return for allowing the users of those cards surcharge-free access to Allpoint’s participating ATM network.

 

The Company’s revenues are generally recurring in nature, and historically have been derived largely from convenience transaction fees, which are paid by cardholders, as well as other transaction-based fees, including interchange fees, which

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are paid by the cardholder’s financial institution for the use of the ATMs serving their customers and connectivity to the applicable EFT network that transmits data between the ATM and the cardholder’s financial institution. Other revenue sources include: (i) fees from financial institutions that participate in the Allpoint surcharge-free network, (ii) fees for branding ATMs with the logos of financial institutions and providing financial institution cardholders with surcharge-free access, (iii) revenues earned by providing managed services (including transaction processing services) solutions to retailers and financial institutions, (iv) fees earned from foreign currency exchange transactions at the ATM, known as dynamic currency conversion, and (v) revenues from the sale of ATMs and ATM-related equipment and other ancillary services.

 

(b) Basis of Presentation

 

This Quarterly Report on Form 10-Q (this “Form 10-Q”) has been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) applicable to interim financial information. As this is an interim period filing presented using a condensed format, it does not include all of the disclosures required by accounting principles generally accepted in the U.S. (“U.S. GAAP” or “GAAP”), although the Company believes that the disclosures are adequate to make the information not misleading. You should read this Form 10-Q along with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Form 10-K”), which includes a summary of the Company’s significant accounting policies and other disclosures.

 

In management’s opinion, all normal recurring adjustments necessary for a fair presentation of the Company’s interim and prior period results have been made. The results of operations for the three and nine months ended September 30, 2018 and 2017 are not necessarily indicative of results of operations that may be expected for any other interim period or for the full fiscal year.

 

The unaudited interim financial statements include the accounts of the Company. All material intercompany accounts and transactions have been eliminated in consolidation. The Company owns a majority (95.7%) interest in, and realizes a majority of the earnings and/or losses of, Cardtronics Mexico, S.A. de C.V., thus this entity is reflected as a consolidated subsidiary in the financial statements, with the remaining ownership interests not held by the Company being reflected as noncontrolling interests.

 

The preparation of the unaudited interim financial statements to conform with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of this Form 10-Q and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates, and these differences could be material to the financial statements.

 

(c) Cost of ATM Operating Revenues Presentation 

 

The Company presents the Cost of ATM operating revenues in the accompanying Consolidated Statements of Operations exclusive of depreciation, accretion, and amortization of intangible assets related to ATMs and ATM-related assets.

 

The following table reflects the amounts excluded from the Cost of ATM operating revenues line in the accompanying Consolidated Statements of Operations for the periods presented:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2018

    

2017

    

2018

    

2017

 

 

(In thousands)

Depreciation and accretion expenses related to ATMs and ATM-related assets

 

$

22,462

 

$

22,180

 

$

68,874

 

$

66,488

Amortization of intangible assets

 

 

12,994

 

 

14,996

 

 

40,263

 

 

45,423

Total depreciation, accretion, and amortization of intangible assets excluded from Cost of ATM operating revenues

 

$

35,456

 

$

37,176

 

$

109,137

 

$

111,911

 

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(d) Redomicile to the U.K. 

 

On July 1, 2016, the Cardtronics group of companies changed the location of incorporation of the parent company from Delaware to the U.K. Cardtronics plc, a public limited company organized under English law (“Cardtronics plc”), became the new publicly traded corporate parent of the Cardtronics group of companies following the completion of the merger between Cardtronics, Inc., a Delaware corporation (“Cardtronics Delaware”), and one of its subsidiaries.

 

Any references to “the Company” (as defined above) or any similar references relating to periods before the redomicile to the U.K. (“Redomicile Transaction”), completed pursuant to the Agreement and Plan of Merger, dated April 27, 2016, the adoption of which was approved by Cardtronics Delaware’s Shareholders on June 28, 2016, shall be construed as references to Cardtronics Delaware being the previous parent company of the Cardtronics group of companies, and/or its subsidiaries depending on the context. The Redomicile Transaction was accounted for as an internal reorganization of entities under common control and, therefore, the Cardtronics Delaware assets and liabilities have been accounted for at their historical cost basis and not revalued in the transaction.

 

(e) Restructuring Expenses

 

During 2017, the Company initiated a global corporate reorganization and cost reduction initiative (the “Restructuring Plan”), intended to improve its cost structure and operating efficiency. The Restructuring Plan included workforce reductions, facilities closures, contract terminations, and other cost reduction measures. The Company incurred $8.2 million and $10.4 million of pre-tax expenses related to its Restructuring Plan during the nine and twelve months ended September 30, 2017 and December 31, 2017, respectively. During the three and nine months ended September 30, 2018, the Company implemented additional workforce reductions in an effort to continue its cost reduction initiative and incurred $1.1 million and $5.5 million of pre-tax expenses, respectively. During the remainder of 2018, its Restructuring Plan activities may include additional workforce reductions and other cost reduction measures.  

 

The following tables reflect the amounts recorded in the Restructuring expenses line  in the accompanying Consolidated Statements of Operations for the periods presented:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 

 

 

September 30, 

 

    

2018

    

2017

    

2018

    

2017

 

 

(In thousands)

 

(In thousands)

North America

 

$

942

 

$

 —

 

$

3,072

 

$

3,668

Europe & Africa

 

 

116

 

 

 —

 

 

1,292

 

 

831

Corporate

 

 

 —

 

 

 —

 

 

1,170

 

 

3,744

Total restructuring expenses

 

 

1,058

 

 

 —

 

 

5,534

 

 

8,243

 

 

As of September 30, 2018, $2.6 million of unpaid employee severance and lease termination costs were presented within the Accrued liabilities and Other long-term liabilities lines  in the accompanying Consolidated Balance Sheets. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2018

 

    

North America

    

Europe & Africa

    

Corporate

    

Total

 

 

(In thousands)

Accrued liabilities

 

 

 —

 

 

806

 

 

1,663

 

 

2,469

Other long-term liabilities

 

 

 —

 

 

124

 

 

 —

 

 

124

Total restructuring liabilities

 

$

 —

 

$

930

 

$

1,663

 

$

2,593

 

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The changes in the Company’s restructuring liabilities consisted of the following:

 

 

 

 

 

 

 

(In thousands)

Restructuring liabilities as of December 31, 2017

   

$

5,383

Restructuring expenses

 

 

5,534

Payments

 

 

(8,324)

Restructuring liabilities as of September 30, 2018

 

$

2,593

 

(f) Goodwill and Intangible Assets

 

Included within the Company’s assets are goodwill balances that have been recognized in conjunction with its purchase accounting for completed business combinations. Under U.S. GAAP, goodwill is not amortized but is evaluated periodically for impairment. The Company performs this evaluation annually as of December 31 or more frequently if there are indicators that suggest the fair value of a reporting unit may be below its carrying value. The Company initially assesses qualitative factors to determine whether it is necessary to perform a quantitative goodwill impairment analysis. The qualitative and quantitative evaluations are performed at a reporting unit level, which have been determined based on a number of factors, including: (i) whether or not the group has any recorded goodwill, (ii) the availability of discrete financial information, and (iii) how business unit performance is measured and reported. The Company has identified seven separate reporting units for its goodwill assessments: (i) the U.S. operations, (ii) the U.K. operations, (iii) the Australia & New Zealand operations, (iv) the Canada operations, (v) the South African operations, (vi) the German operations, and (vii) the Mexico operations. Based on a qualitative assessment, if it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value, the Company performs a quantitative goodwill impairment analysis, and uses the two-step approach to test goodwill for potential impairment. Step One of the quantitative approach compares the estimated fair value of a reporting unit to its carrying value. If the carrying value exceeds the estimated fair value, then a Step Two impairment calculation is performed. Step Two compares the carrying value of the reporting unit to the fair value of all of the assets and liabilities of the reporting unit, as if the reporting unit was newly acquired in a business combination. If the carrying value of a reporting unit’s goodwill exceeds the implied fair value of its goodwill, an impairment loss is recognized. In connection with the determination of potential impairment triggering events, the long-lived assets held by the reporting units may, on the basis of a qualitative and quantitative analysis, be determined to have carrying values that are not recoverable and in excess of their associated fair values, in which case an impairment would also be recognized related to these intangible and fixed assets.

 

During the three and nine months ended September 30, 2017, the Company performed a qualitative and quantitative analysis on the Australia and New Zealand reporting unit in response to its impairment indicators and determined the goodwill intangible assets recognized were impaired by approximately $194.5 million.  No impairment indicators were noted during the three and nine months ended September 30, 2018 based on the Company’s assessment of qualitative factors.   For additional information on its Goodwill and intangible asset impairments recognized in 2017, see Note 1. Basis of Presentation and Summary of Significant Accounting Policies in its 2017 Form 10-K.

 

(g) Loss on Disposal and Impairment of Assets

 

During the three and nine months ended September 30, 2018, the Company recognized losses of $0.5 million and $15.6 million, respectively, related to the disposal and impairment of assets. The losses on disposal and impairment of assets were largely recognized during the six months ended June 30, 2018 upon the decision of the Company to not redeploy certain ATM models. Although many ATMs in the Company’s U.S. operations that were impaired were deployable, a combination of many factors, including the size, functionality, estimated upgrade costs, and availability of suitable placements resulted in a change of plans relative to certain models such that the units not currently in service were deemed not likely to be deployed. These ATM assets, with a net book value of approximately $7 million, were written down to their estimated net realizable value during the three months ended June 30, 2018. The remaining losses during the nine months ended September 30, 2018 resulted from other ATM asset disposals in the ordinary course of business and disposals related to the exit from a leased facility in the U.K.

 

During the three and nine months ended September 30, 2017, the Company recognized losses of $22.3 million  and $26.2 million, respectively, related to the disposal and impairment of assets. The Company recognized approximately $19 

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million of long-lived asset impairment losses during the three months ended September 30, 2017, responsive to the impairment indicators associated with its Australia & New Zealand reporting unit. The remaining losses were a result of other ATM asset disposals in the ordinary course of business.  For additional information on the long-lived asset impairments recognized in 2017, see Note 1. Basis of Presentation and Summary of Significant Accounting Policies in its 2017 Form 10-K.

 

(h) Cash, Cash Equivalents, and Restricted Cash

 

For purposes of reporting financial condition, cash and cash equivalents include cash in bank and short-term deposit sweep accounts. Additionally, the Company maintains cash on deposit with banks that is pledged for a particular use or restricted to support a liability. These balances are classified as Restricted cash in the Current assets or Noncurrent assets lines in the accompanying Consolidated Balance Sheets based on when the Company expects this cash to be paid. Current restricted cash largely consists of amounts collected on behalf of, but not yet remitted to, certain of the Company’s merchant customers or third-party service providers. These assets are offset by corresponding liability balances in the Accrued liabilities line in the accompanying Consolidated Balance Sheets.  For purpose of reporting cash flows, the following table provides a reconciliation of the ending cash, cash equivalents, and restricted cash balances as of September 30, 2018 and 2017.

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

 

(in thousands)

Cash and cash equivalents

 

$

40,428

 

$

61,498

Current and long-term restricted cash

 

 

73,985

 

 

43,763

Total cash, cash equivalents, and restricted cash in the Consolidated Statements of Cash Flows

 

$

114,413

 

$

105,261

 

(i) Inventory, net

 

The Company’s inventory is determined using the average cost method. The Company periodically assesses its inventory, and as necessary, adjusts the carrying values to the lower of cost or net realizable value.

 

The following table reflects the Company’s primary inventory components:

 

 

 

 

 

 

 

 

 

   

September 30, 2018

 

December 31, 2017

 

 

(In thousands)

ATMs

 

$

2,245

 

$

3,181

ATM spare parts and supplies

 

 

13,245

 

 

12,935

Total inventory

 

 

15,490

 

 

16,116

Less: Inventory reserves

 

 

(173)

 

 

(1,833)

Inventory, net

 

$

15,317

 

$

14,283

 

.

 

 

 

(2) New Accounting Pronouncements

 

Adoption of New Accounting Pronouncements

Revenue from Contracts with Customers. On January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, using the modified retrospective adoption method, for contracts that were not completed as of January 1, 2018. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening retained earnings. The comparative information in prior periods has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company expects the impact of the adoption of the new revenue standard to be immaterial to net income on an ongoing basis.

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On January 1, 2018, the Company recorded a net credit to opening retained earnings of approximately $5.9 million, representing the cumulative impact of adopting the new revenue standard. This adjustment was entirely related to the deferral of contract acquisition costs, consisting of sales commissions and other directly related costs totaling approximately $7.5 million, net of the related tax impact of approximately $1.6 million. During the three and nine months ended September 30, 2018, the Company recognized sales commission expense and other directly related costs as a result of amortizing the amounts deferred. The incremental expenses recognized during the periods were not material.

 

The cumulative effect of the changes made to the January 1, 2018 Consolidated Balance Sheet for the adoption were as follows:

 

 

 

 

 

 

 

 

 

 

December 31, 2017 as Reported

 

Adjustments Due to Topic 606

 

January 1, 2018 Upon Adoption

 

 

(In thousands)

Assets

 

 

 

 

 

 

Prepaid expenses, deferred costs, and other current assets

$

96,106

$

2,919

$

99,025

Prepaid expenses, deferred costs, and other noncurrent assets

 

57,756

 

4,593

 

62,349

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Deferred tax liability, net

$

37,130

$

1,579

$

38,709

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

Retained earnings

$

106,670

$

5,933

$

112,603

 

Statement of Cash Flows. On January 1, 2018, the Company adopted Accounting Standards Updates (“ASU”) No. 2016-18, Statement of Cash Flows pertaining to the presentation of restricted cash (Topic 230) and the classification of certain cash receipts and cash payments (the “classification guidance”).  In accordance with this guidance, the Company now presents restricted cash together with cash and cash equivalents when presenting the Consolidated Statements of Cash Flows and has applied the changes retrospectively. Also related to the classification guidance, when they occur, the Company will recognize contingent consideration payments up to the amount of the acquisition date liability in financing activities and any excess payments in operating activities.

 

Other Guidance Adopted in 2018. Effective January 1, 2018, the Company adopted  ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. This guidance clarifies what constitutes a modification of a share-based payments award. Upon adoption, this guidance had no impact on the Company’s consolidated financial statements.

 

Effective January 1, 2018, the Company adopted ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This guidance clarifies the definition of a business applicable to the recognition and reporting of an acquisition, divestiture, or disposal. It also clarifies the definition of a business applicable when assessing goodwill for impairment and when assessing if certain entities should be consolidated. Upon adoption, this guidance had no impact on the Company’s consolidated financial statements.

 

In February 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (AOCI”), which was intended to eliminate the stranded tax effects within AOCI resulting from the Tax Cuts and Jobs Act (“the “Tax Act”) that was enacted on December 22, 2017. This guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years with early adoption permitted. Cardtronics elected to early adopt this guidance effective January 1, 2018. The impact of adoption on the Company’s consolidated financial statements was not material.

 

In March 2018, the FASB issued ASU No. 2018-05, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, to add various SEC paragraphs to ASC 740 Income Taxes. This guidance was issued by the SEC in December 2017 to provide immediate guidance for accounting implications of U.S. tax reform under the Tax Act.

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The Company has applied this guidance to its consolidated financial statements and related disclosures for the period ended September 30, 2018.

 

Accounting Pronouncements Issued But Not Yet Adopted

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous U.S. GAAP. In addition, in July 2018, the FASB issued ASU No. 2018-10 and ASU No. 2018-11 to correct, clarify and provide targeted improvements to Topic 842 (the “Lease Standard”). The Lease Standard requires that a lessee recognize a liability to make lease payments (the lease liability) and a right-to-use asset representing its right to use the underlying asset for the lease term on the balance sheet. This guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, using a modified retrospective approach and early adoption is permitted. The Company is working to complete its evaluation of the transition practical expedients available under the Lease Standard and calculate the impact that this guidance will ultimately have on its consolidated financial statements. The Company currently plans to apply the Lease Standard retrospectively at the beginning of the period of adoption and anticipates that its adoption of the Lease Standard will result in the recognition of significant right-to-use assets and lease liabilities related to its operating leases as well as certain of its ATM placement agreements that contain fixed payments and are deemed to contain an operating lease under the Lease Standard. The Company does not believe the adoption will have any material impact on its currently outstanding indebtedness or its ability to continue borrowing under its revolving credit facility.

 

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory. This guidance requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments eliminate the exception for an intra-entity transfer of an asset other than inventory. This guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This guidance eliminates Step 2 from the goodwill impairment test and the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those years, and early adoption is permitted. The Company is currently evaluating this guidance and has not yet concluded whether it will early adopt in the remainder of 2018 or in 2019. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

 

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This guidance is intended to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. This guidance is effective for fiscal years beginning after December 15, 2018, and early adoption is permitted. The Company is currently evaluating this guidance and has not yet concluded whether it will early adopt in the remainder of 2018.

 

In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement which modifies the disclosure requirements on fair value measurements. This guidance is effective for fiscal years beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating this guidance and has not concluded whether it will early adopt in the remainder of 2018 or in 2019 or determined the expected impact on the Company’s consolidated financial statements.  

 

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. This guidance aligns the requirements for capitalizing implementation costs incurred in a hosting

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arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). This guidance is effective for fiscal years beginning after December 15, 2019, and early adoption is permitted. The Company has not yet concluded whether it will early adopt in the remainder of 2018 or in 2019. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

 

(3)  Revenue Recognition

 

Disaggregated Revenues

 

The following tables detail the revenue of the Company’s reportable segments disaggregated by financial statement line and component:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

 

(In thousands)

 

 

North America

 

Europe & Africa

 

Australia & New Zealand

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Surcharge revenues

 

$

92,572

 

$

34,134

 

$

22,358

 

$

 

$

149,064

Interchange revenues

 

 

36,620

 

 

66,039

 

 

1,650

 

 

 

 

104,309

Bank-branding and surcharge-free network revenues

 

 

45,128

 

 

 

 

 

 

 

 

45,128

Managed services revenues

 

 

12,240

 

 

 

 

4,108

 

 

 

 

16,348

Other revenues

 

 

13,921

 

 

2,646

 

 

1,301

 

 

(2,880)

 

 

14,988

Total ATM operating revenues

 

$

200,481

 

$

102,819

 

$

29,417

 

$

(2,880)

 

$

329,837

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ATM product sales

 

$

7,587

 

$

557

 

$

20

 

$

 

$

8,164

Other revenues

 

 

680

 

 

1,462

 

 

32

 

 

 

 

2,174

ATM product sales and other revenues

 

 

8,267

 

 

2,019

 

 

52

 

 

 

 

10,338

Total revenues

 

$

208,748

 

$

104,838

 

$

29,469

 

$

(2,880)

 

$

340,175

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

(In thousands)

 

 

 

North America

 

Europe & Africa

 

Australia & New Zealand

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Surcharge revenues

 

$

272,372

 

$

91,191

 

$

69,107

 

$

 

$

432,670

Interchange revenues

 

 

108,259

 

 

205,910

 

 

3,839

 

 

 

 

318,008

Bank-branding and surcharge-free network revenues

 

 

133,565

 

 

 

 

 

 

 

 

133,565

Managed services revenues

 

 

38,331

 

 

 

 

12,318

 

 

 

 

50,649

Other revenues

 

 

40,873

 

 

7,708

 

 

3,814

 

 

(8,498)

 

 

43,897

Total ATM operating revenues

 

$

593,400

 

$

304,809

 

$

89,078

 

$

(8,498)

 

$

978,789

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ATM product sales

 

$

30,163

 

$

1,741

 

$

85

 

$

 

$

31,989

Other revenues

 

 

1,863

 

 

4,582

 

 

123

 

 

 

 

6,568

ATM product sales and other revenues

 

 

32,026

 

 

6,323

 

 

208

 

 

 

 

38,557

Total revenues

 

$

625,426

 

$

311,132

 

$

89,286

 

$

(8,498)

 

$

1,017,346

 

Revenue is recognized when obligations under the terms of a contract with a customer are satisfied. Revenue is recorded in ATM operating revenues and ATM product sales and other revenues line items in the accompanying Consolidated Statements of Operations.

 

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ATM operating revenues are recognized daily as the associated transactions are processed or monthly on a per ATM or per cardholder basis. For customer contracts that provide for up-front fees that do not pertain to a distinct performance obligation, such fees are recognized over the term of the underlying agreement on a straight-line basis. ATM product sales and other revenues are recognized when the related performance obligations are fulfilled largely via a transfer of goods or services to the customer. 

   

ATM operating revenues. The Company presents revenues from automated consumer financial services, bank-branding and surcharge-free network offerings, managed services and other services in the ATM operating revenues line in the accompanying Consolidated Statements of Operations. The Company’s ATM operating revenues consist of the following:

   

·

Surcharge revenue. Surcharge revenues are received in the form of a fee paid by a cardholder who has made a cash withdrawal from an ATM. Surcharge fees can vary widely based on the location of the ATM and the nature of the contracts negotiated with our merchants. In the U.S. and Canada, the Company does not receive surcharge fees from cardholders whose financial institutions participate in a surcharge-free network or have branded a location; instead, the Company receives interchange and bank-branding or surcharge-free network-branding revenues, which are discussed below. For certain ATMs, primarily those owned and operated by merchants, the Company does not receive any portion of the surcharge but rather the entire surcharge fee is earned by the merchant. In the U.K., ATM deployers operate their ATMs on either a free-to-use (surcharge-free) or a pay-to-use (surcharging) basis. On free-to-use ATMs in the U.K., the Company earns interchange revenue on withdrawal and certain other transactions. These fees are paid by the cardholder’s financial institution. On pay-to-use ATMs in the U.K., the Company only earns a surcharge fee paid by the cardholder on withdrawal transactions, and interchange is only paid by the cardholder’s financial institution on other non-withdrawal transaction types. In Germany, Australia, and Mexico, the Company collects surcharge fees on withdrawal transactions but generally does not receive interchange revenue. In South Africa, the Company generally earns interchange revenues only, the amount of which varies by transaction type and customer arrangement. Surcharge revenues, as described above, are recognized daily as the associated transactions are processed.

   

·

Interchange revenue. An interchange fee is a fee paid by the cardholder’s financial institution for its customer’s use of an ATM that is owned by another operator and for the fee the EFT network charges to transmit data between the ATM and the cardholder’s financial institution. The Company typically receives a majority of the interchange fee paid by the cardholder’s financial institution, net of the amount retained by the EFT network and the Company recognizes the net amount received from the network as revenue. In some markets in which the Company operates, interchange fees are earned not only on cash withdrawal transactions but also on other ATM transactions, including balance inquiries and balance transfers. Interchange revenues are subject to variable terms and are recognized daily as the associated transactions are processed.

   

·

Bank-branding and surcharge-free network revenues. Under a bank-branding arrangement, ATMs that are Company-owned and operated are branded with the logo of the branding financial institution. In exchange for a monthly per ATM fee, the financial institution’s customers gain access to use these bank-branded ATMs without paying a surcharge. Under the Company’s surcharge-free network arrangements, financial institutions that participate pay either a fixed monthly fee per cardholder or a fixed fee per transaction so that cardholders gain surcharge-free access to our large network of ATMs. Bank-branding and surcharge-free network revenues are generally recognized monthly on a per ATM or per cardholder basis, except for transaction-based fee arrangements which are recognized daily as they occur. Any up-front fees associated with these arrangements are recognized ratably over the life of the arrangement.

 

·

Managed services revenue. Under a managed service arrangement, the Company offers ATM-related services depending on the needs of our customers, including monitoring, maintenance, cash management, cash delivery, customer service, transaction processing, and other services. Under a managed services arrangement, all of the surcharge and interchange fees are generally earned by the customer, whereas the Company typically receives a fixed management fee per ATM and/or a fixed fee per transaction in return for providing the agreed-upon operating services. The managed services fees are recognized as the related services are provided.  

   

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·

Other revenue. Other revenues include ATM operating revenues from transaction processing for third-party ATM operators. The Company also earns ATM operating revenues related to advertising and other services. The Company typically recognizes these revenues as the related services are provided.

 

ATM product sales and services. The Company presents revenues from other product sales and services in the ATM product sales and services line in the accompanying Consolidated Statements of Operations. 

 

The Company earns revenues from the sale of ATMs and ATM-related equipment as well as the delivery of other non-transaction-based services. Revenues related to these activities are recognized when the equipment is delivered to the customer and the Company has completed all required installation and set-up procedures. With respect to the sale of ATMs to Value-Added-Resellers (“VARs”), the Company recognizes revenues related to such sales when the equipment is delivered to the VAR.

 

Contract Balances

 

As of September 30, 2018, the Company has recognized no significant contract assets apart from accounts receivables that relate to completed performance obligations. Contract liabilities totaled $5.9 million and $5.7 million at September 30, 2018 and December 31, 2017, respectively. These amounts represent deferred revenues for advance consideration received largely in relation to bank-branding and surcharge-free network arrangements. The revenue recognized during the three and nine months ended September 30, 2018 on previously recognized deferred revenues was not material.  The Company expects to recognize the revenue associated with its contract liabilities ratably over various periods extending over the next 36 months.

 

Contract Cost

 

The Company expects that the incremental commissions paid to sales personnel, together with other associated costs, are recoverable, and therefore, the Company capitalizes these amounts as deferred contract acquisition costs. Upon adoption of the new revenue standard on January 1, 2018, the Company recognized deferred sales commissions of $7.5 million, and as of September 30, 2018, the deferred sales commissions totaled $7.2 million. Sales commissions capitalized are generally amortized over a 4  -  5 year period corresponding with the related placement agreements. Similarly, and consistent with past practice, the costs incurred to fulfill a contract, largely consisting of prepaid merchant commissions and other consideration paid or provided to merchant partners, are capitalized and recognized over the duration of the related contract.

 

Practical Expedients and Other Disclosures 

 

In order to adopt and subsequently apply the new revenue standard, the Company utilized various practical expedients. The Company elected not to re-examine contracts modified prior to its adoption using the modified retrospective adoption method and elected to utilize a portfolio approach to assess and apply the impact of the new revenue standard.  Furthermore, the Company has elected not to disclose information about remaining performance obligations that have original expected durations of one year or less. Similarly, the Company does not defer the costs of obtaining a contract if the associated contract is one year or less.

 

The Company’s bank-branding, surcharge-free network, and managed services arrangements result in the Company providing a series of distinct services that have the same pattern of transfer to the customer. As a result, these arrangements create singular performance obligations that are satisfied over-time (generally 3 - 5 years) for which the Company has a right to consideration that corresponds directly with the value of the entity’s performance completed to date. In conjunction with these arrangements, the Company recognizes revenue in the amount it has a right to receive. Variable consideration may exist in these arrangements and is recognized only to the extent a significant reversal is not probable.

 

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(4) Acquisitions

 

DirectCash Payments Inc. Acquisition

 

On January 6, 2017, the Company completed the acquisition of DirectCash Payments Inc. (“DCPayments”), whereby DCPayments became a wholly-owned indirect subsidiary of the Company. In connection with the closing of the acquisition, the Company acquired each DCPayments common share for $19.00 Canadian Dollars in cash and repaid DCPayments outstanding third-party indebtedness. The combined aggregate of consideration totaled approximately $658 million Canadian Dollars (approximately $495 million U.S. dollars at the acquisition date foreign exchange rate). The total amount paid for the acquisition at closing was financed with cash-on-hand and borrowings under the Company’s revolving credit facility.

 

As a result of the DCPayments acquisition, the Company significantly increased the size of its Canada, Mexico, and U.K. operations and entered into the Australia and New Zealand markets. With this acquisition, the Company added approximately 25,000 ATMs to its global ATM count.

 

The DCPayments acquisition was accounted for as a business combination using the purchase method of accounting under the provisions of ASC Topic 805, Business Combinations. In accordance with this guidance, all assets acquired and liabilities assumed have been recorded at their estimated fair value as of the acquisition date and any excess of the purchase consideration over the fair value of the identifiable assets acquired and liabilities assumed has been recognized as goodwill. In conjunction with the transaction, the Company recognized current and other noncurrent assets of $50.4 million, property and equipment of $68.8 million, goodwill of $300.3 million, intangible assets of $182.1 million, current and other long-term liabilities of $74.0 million, Asset Retirement Obligations (“ARO”) of $8.9 million, and a deferred tax liability of $23.2 million.

 

Spark ATM Systems Pty Ltd Acquisition

 

On January 31, 2017, the Company completed the acquisition of Spark ATM Systems Pty Ltd. (“Spark”), an independent ATM operator in South Africa, with a  network of approximately 2,300 ATMs. The initial purchase consideration of approximately $19.5 million was paid in cash. In addition to the initial consideration, the total purchase price also includes potential additional contingent consideration up to $56.7 million at the September 30, 2018 foreign currency exchange rate. The contingent consideration will vary based upon performance relative to certain agreed upon earnings targets in 2019 and 2020 and would be payable to the previous investors in 2020 and 2021, respectively. The recognized acquisition date fair value of the contingent consideration was $34.8 million, at the January 31, 2017 foreign currency exchange rate, as determined with the assistance of an independent appraisal firm using forecasted future financial projections and other Level 3 inputs (for additional information related to the Company’s fair value estimates, see Note 14. Fair Value Measurements).  In conjunction with the transaction, the Company also recognized property and equipment of $5.3 million, goodwill of $48.2 million, intangible assets of $2.8 million, ARO of $0.4 million, and other net liabilities of $1.5 million.

 

(5) Share-based Compensation 

 

The Company accounts for its share-based compensation by recognizing the grant date fair value of share-based awards, net of estimated forfeitures, as share-based compensation expense over the underlying requisite service periods of the related awards.

 

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The following table reflects the total share-based compensation expense amounts reported in the accompanying Consolidated Statements of Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2018

    

2017

    

2018

    

2017