Cardtronics, plc.
CARDTRONICS INC (Form: 10-Q, Received: 04/28/2016 17:16:43)

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 March 31, 2016  

 

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: 001-33864  

 


 

CARDTRONICS, INC.  

(Exact name of registrant as specified in its charter)

 

 

 

Delaware  

76-0681190  

(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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No  

 

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

 

 

 

 

 

Large accelerated filer 

Accelerated filer 

Non-accelerated filer   

Smaller reporting company   

 

 

(Do not check if a smaller reporting company)

 

 

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

 

Common Stock, par value: $0.0001 per share. Shares outsta nding on April 25 , 2016: 45,220,304

 

 

 

 


 

Table of Contents

 

CARDTRONICS, INC.

 

TABLE OF CONTENTS

 

 

 

 

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION  

 

 

Item 1.  

Financial Statements (Unaudited)

 

 

Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015

 

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2016 and 2015

 

 

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2016 and 2015

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

Cautionary Statement Regarding Forward-Looking Statements

 

34 

Item 2.  

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

 

35 

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

 

52 

Item 4.  

Controls and Procedures

 

55 

 

 

 

 

PART II. OTHER INFORMATION  

 

 

Item 1.  

Legal Proceedings

 

56 

Item 1A.  

Risk Factors

 

56 

Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

 

56 

Item 3.  

Default Upon Senior Securities

 

57 

Item 4.  

Mine Safety Disclosures

 

57 

Item 5.  

Other Information

 

57 

Item 6.  

Exhibits

 

57 

 

Signatures

 

58 

 

When we refer to “us,” “we,” “our,” or “ours,” we are describing Cardtronics, Inc. and/or our subsidiaries, depending on the context in which the statements are made.

 

2


 

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

 

 

 

 

 

 

 

 

    

March 31, 2016

    

December 31, 2015

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

25,049

 

$

26,297

Accounts and notes receivable, net of allowance of $2,401 and $2,079 as of March 31, 2 016 and December 31, 2015, respectively

 

 

73,924

 

 

72,009

Inventory, net

 

 

9,652

 

 

10,675

Restricted cash

 

 

28,591

 

 

31,565

Current portion of deferred tax asset, net

 

 

 —

 

 

16,300

Prepaid expenses, deferred costs, and other current assets

 

 

57,740

 

 

56,678

Total current assets

 

 

194,956

 

 

213,524

Property and equipment, net of accumulated depreciation of $376,050 and $360,722 as of March 31, 2016 and December 31, 2015, respectively

 

 

369,032

 

 

375,488

Intangible assets, net

 

 

140,508

 

 

150,780

Goodwill

 

 

546,392

 

 

548,936

Deferred tax asset, net

 

 

13,299

 

 

11,950

Prepaid expenses, deferred costs, and other noncurrent assets

 

 

22,989

 

 

19,257

Total assets

 

$

1,287,176

 

$

1,319,935

   

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current portion of other long-term liabilities

 

$

32,194

 

$

32,732

Accounts payable

 

 

27,117

 

 

25,850

Accrued liabilities

 

 

217,096

 

 

219,058

Total current liabilities

 

 

276,407

 

 

277,640

Long-term liabilities:

 

 

 

 

 

 

Long-term debt

 

 

540,314

 

 

568,331

Asset retirement obligations

 

 

52,009

 

 

51,685

Deferred tax liability, net

 

 

3,693

 

 

21,829

Other long-term liabilities

 

 

46,519

 

 

30,657

Total liabilities

 

 

918,942

 

 

950,142

   

 

 

 

 

 

 

Commitments and contingencies (See Note 13 )

 

 

 

 

 

 

   

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock, $0.0001 par value; 125,000,000 shares authorized; 52,524,969 and 52,129,395 shares issued as of March 31, 2016 and December 31, 2015, respectively; 45,220,304 and 44,953,620 shares outstanding as of March 31, 2016 and December  31, 2015, respectively

 

 

5

 

 

5

Additional paid-in capital

 

 

377,564

 

 

374,564

Accumulated other comprehensive loss, net

 

 

(104,083)

 

 

(88,126)

Retained earnings

 

 

201,281

 

 

185,897

Treasury stock: 7,304,665 and 7,175,775 shares at cost as of March 31, 2016 and December 31, 2015, respectively

 

 

(106,529)

 

 

(102,566)

Total parent stockholders’ equity

 

 

368,238

 

 

369,774

Noncontrolling interests

 

 

(4)

 

 

19

Total stockholders’ equity

 

 

368,234

 

 

369,793

Total liabilities and stockholders’ equity

 

$

1,287,176

 

$

1,319,935

 

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

3


 

Table of Contents

CARDTRONICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS  

(In thousands, excluding share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

Three Months Ended

 

March 31,

 

2016

    

2015

Revenues:

 

 

 

 

 

ATM operating revenues

$

292,088

 

$

260,023

ATM product sales and other revenues

 

11,159

 

 

21,878

Total revenues

 

303,247

 

 

281,901

Cost of revenues:

 

 

 

 

 

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

 

185,940

 

 

168,508

Cost of ATM product sales and other revenues

 

9,933

 

 

19,292

Total cost of revenues

 

195,873

 

 

187,800

Gross profit

 

107,374

 

 

94,101

Operating expenses:

 

 

 

 

 

Selling, general, and administrative expenses

 

37,399

 

 

30,880

Redomicile-related expense

 

6,036

 

 

 —

Acquisition and divestiture-related expenses

 

1,584

 

 

2,358

Depreciation and accretion expense

 

22,677

 

 

20,112

Amortization of intangible assets

 

9,263

 

 

9,497

Loss (gain) on disposal of assets

 

382

 

 

(533)

Total operating expenses

 

77,341

 

 

62,314

Income from operations

 

30,033

 

 

31,787

Other expense:

 

 

 

 

 

Interest expense, net

 

4,492

 

 

4,710

Amortization of deferred financing costs and note discount

 

2,782

 

 

2,779

Other (income) expense

 

(555)

 

 

1,060

Total other expense

 

6,719

 

 

8,549

Income before income taxes

 

23,314

 

 

23,238

Income tax expense

 

7,955

 

 

8,464

Net income

 

15,359

 

 

14,774

Net loss attributable to noncontrolling interests

 

(25)

 

 

(459)

Net income attributable to controlling interests and available to common stockholders

$

15,384

 

$

15,233

 

 

 

 

 

 

Net income per common share – basic

$

0.34

 

$

0.34

Net income per common share – diluted

$

0.34

 

$

0.34

 

 

 

 

 

 

Weighted average shares outstanding – basic

 

45,073,654

 

 

44,667,248

Weighted average shares outstanding – diluted

 

45,703,488

 

 

45,265,601

 

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

 

4


 

Table of Contents

CARDTRONICS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME  

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2016

    

2015

 

 

 

 

 

 

 

Net income

 

$

15,359

 

$

14,774

Unrealized loss on interest rate swap contracts, net of deferred income tax benefit of $5,890 and $3,293 for the three months ended March 31, 2016 and 2015, respectively

 

 

(10,686)

 

 

(5,154)

Foreign currency translation adjustments, net of income tax benefit of $825 for the three months ended March 31, 2016

 

 

(5,271)

 

 

(10,916)

Other comprehensive loss

 

 

(15,957)

 

 

(16,070)

Total comprehensive loss

 

 

(598)

 

 

(1,296)

Less: comprehensive income (loss) attributable to noncontrolling interests

 

 

95

 

 

(396)

Comprehensive loss attributable to controlling interests

 

$

(693)

 

$

(900)

 

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

 

5


 

Table of Contents

CARDTRONICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS  

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

   

    

2016

    

2015

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

15,359

 

$

14,774

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation, accretion, and amortization of intangible assets

 

 

31,940

 

 

29,609

Amortization of deferred financing costs and note discount

 

 

2,782

 

 

2,779

Stock-based compensation expense

 

 

3,168

 

 

4,201

Deferred income taxes

 

 

3,076

 

 

(2,948)

Loss (gain) on disposal of assets

 

 

382

 

 

(533)

Other reserves and non-cash items

 

 

(768)

 

 

1,219

Changes in assets and liabilities:

 

 

 

 

 

 

(Increase) decrease in accounts and note receivable, net

 

 

(2,014)

 

 

9,102

(Increase) decrease in prepaid, deferred costs, and other current assets

 

 

(2,103)

 

 

2,703

Decrease (increase) in inventory

 

 

1,222

 

 

(2,477)

Decrease (increase) in other assets

 

 

1,820

 

 

(1,720)

Decrease in accounts payable

 

 

(4,573)

 

 

(23,234)

Decrease in accrued liabilities

 

 

(3,830)

 

 

(2,175)

Decrease in other liabilities

 

 

(1,807)

 

 

(428)

Net cash provided by operating activities

 

 

44,654

 

 

30,872

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Additions to property and equipment

 

 

(16,451)

 

 

(31,678)

Acquisitions, net of cash acquired

 

 

(2,743)

 

 

(15,510)

Proceeds from sale of assets and businesses

 

 

7,438

 

 

7,376

Net cash used in investing activities

 

 

(11,756)

 

 

(39,812)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from borrowings under revolving credit facility

 

 

56,494

 

 

113,400

Repayments of borrowings under revolving credit facility

 

 

(86,418)

 

 

(114,087)

Proceeds from exercises of stock options

 

 

133

 

 

448

Additional tax (expense) benefit related to stock-based compensation

 

 

(400)

 

 

416

Repurchase of capital stock

 

 

(3,850)

 

 

(3,946)

Net cash used in financing activities

 

 

(34,041)

 

 

(3,769)

   

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

(105)

 

 

(1,971)

Net decrease in cash and cash equivalents

 

 

(1,248)

 

 

(14,680)

   

 

 

 

 

 

 

Cash and cash equivalents as of beginning of period

 

 

26,297

 

 

31,875

Cash and cash equivalents as of end of period

 

$

25,049

 

$

17,195

   

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Cash paid for interest

 

$

6,904

 

$

7,327

Cash paid for income taxes

 

$

1,133

 

$

1,955

 

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

6


 

Table of Contents

CARDTRONICS, INC.

NOTES TO CONDENSED CO NSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

(1) General and Basis of Presentation  

 

General  

 

Cardtronics, Inc., along with its wholly and majority-owned subsidiaries (collectively, the “Company”), provides convenient automated consumer financial services through its network of automated teller machines (“ATMs”) and multi-function financial services kiosks. As of March 31, 2016, the Company provided services to approximately 195,000 devices across its portfolio, which included approximately 173,000 devices located in all 50 states of the United States (the “U.S.”) (including the U.S. territory of Puerto Rico), approximately 16,000 devices throughout the United Kingdom (the “U.K.”), approximately 1,100 devices throughout Germany and Poland, approximately 3,500 devices throughout Canada, and approximately 1,400 devices throughout Mexico. In the U.S., certain of the Company’s devices are multi-function financial services kiosks that, in addition to traditional ATM functions such as cash dispensing and bank account balance inquiries, perform other consumer financial services, including bill payments, check cashing, remote deposit capture (which is deposit-taking at ATMs using electronic imaging), and money transfers. The total count of approximately 195,000 devices also includes devices for which the Company provides processing only services and various forms of managed services solutions, which may include transaction processing, monitoring, maintenance, cash management, communications, and customer service.

 

Through its network, the Company provides ATM management and equipment-related services (typically under multi-year contracts) to large retail merchants of varying sizes, as well as 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 financial services solution that helps attract and retain customers, and in turn, increases the likelihood that the devices placed at their facilities will be utilized.

 

In addition to its retail merchant relationships, the Company also partners with leading national financial institutions to brand selected ATMs and financial services kiosks within its network, including BBVA Compass Bancshares, Inc. (“BBVA”), Citibank, N.A. (“Citibank”), Citizens Financial Group, Inc. (“Citizens”), Cullen/Frost Bankers, Inc. (“Cullen/Frost”), Santander Bank, N.A. (“Santander”), TD Bank, N.A. (“TD Bank”), and PNC Bank, N.A. (“PNC Bank”) in the U.S., The Bank of Nova Scotia (“Scotiabank”) and Santander in Puerto Rico, and Scotiabank, TD Bank, and Canadian Imperial Bank of Commerce (“CIBC”) in Canada. In Mexico, the Company operates Cardtronics Mexico, S.A. de C.V. (“Cardtronics Mexico”) and partners with Grupo Financiero Banorte, S.A. de C.V. (“Banorte”) and Scotiabank to place their brands on the Company’s ATMs in exchange for certain services provided by them. As of March 31, 2016, approximatel y 22,000 of the Company’s ATMs were under contract with approximately 500 fin ancial institutions to place their logos on the mach ines and to provide convenient surcharge-free access for their banking customers.  

 

The Company also owns and operates the Allpoint network (“Allpoint”), the largest surcharge-free ATM network within the U.S. (based on the number of participating ATMs). Allpoint, which has approximately 55,000 participating ATMs, provides surcharge-free ATM access to customers of approximately 1,300 participating financial institutions that may lack a significant ATM network in exchange for either a fixed monthly fee per cardholder or a set fee per transaction that is paid by the financial institutions who are members of the network. The Allpoint network includes a majority of the Company’s ATMs in the U.S. and a portion of the Company’s ATMs in the U.K., Canada, Puerto Rico, and Mexico. Allpoint also works with financial institutions that manage stored-value debit card programs on behalf of corporate entities and governmental agencies, including general purpose, payroll and electronic benefits transfer cards. Under these programs, the issuing financial institutions pay Allpoint a fee per issued stored-value card or per transaction in return for allowing the users of those cards surcharge-free access to Allpoint’s participating ATM network.

 

Finally, the Company owns and operates an electronic funds transfer (“EFT”) transaction processing platform that provides transaction processing services to its network of ATMs and financial services kiosks as well as other ATMs under managed services arrangements. Additionally, through its acquisition of Columbus Data Services, L.L.C. (“CDS”) in 2015,

7


 

Table of Contents

the Company provides leading-edge ATM processing solutions to ATM sales and service organizations and financial institutions.

 

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 Securities and Exchange Commission (“SEC”) applicable to interim financial information. Because 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 United States (“U.S. 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, 2015 (as amended, the “2015 Form 10-K”), which includes a summary of the Company's significant accounting policies and other disclosures.

 

The financial statements as of March 31, 2016 and for the three months ended March 31, 2016 and 2015 are unaudited. The Consolidated Balance Sheet as of December 31, 2015 was derived from the audited balance sheet filed in the 2015 Form 10-K with certain retroactive adjustments. We have adopted the provisions of ASU No. 2015-03, “ Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs”  (“ASU 2015-03”) and ASU No. 2015-15, “Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting” (“ASU 2015-15”). These updates require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset and clarify the treatment of debt issuance costs related to a line-of-credit arrangement. As retrospective application is required by these standards updates, December 31, 2015 has been adjusted with no material impact. In addition, we have adopted early ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”), applying its provisions prospectively. ASU 2015-17 eliminates the requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet and requires organizations to classify all deferred tax assets and liabilities as noncurrent.

 

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 months ended March 31, 2016 and 2015 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year.

 

The unaudited interim consolidated financial statements include the accounts of the Company and its wholly and majority-owned subsidiaries. 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, thus this entity is reflected as a consolidated subsidiary in the accompanying consolidated financial statements, with the remaining ownership interests not held by the Company being reflected as noncontrolling interests.

 

The preparation of financial statements in conformity 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 the financial statements 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.

 

Restricted Cash

 

The balance characterized as restricted cash consists of amounts collected on behalf of, but not yet remitted to, certain of the Company’s merchant customers or third-party service providers. The amounts include deposits held by the Company for transactions processed by its customers, as well as surcharge and interchange fees earned by the Company’s customers on transactions processed. These balances are classified as Restricted cash in the Current assets or Noncurrent assets line item on the Company’s Consolidated Balance Sheets based on when the Company expects this cash to be paid.   The Company held $28.6 million and $31.6 million of Restricted cash in the Current assets line items in the accompanying Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015, respectively .  

 

8


 

Table of Contents

Inventory

 

Inventory consists principally of ATMs, ATM spare parts, and ATM supplies and is stated at the lower of cost or market. Cost is determined using the average cost method. The following table is a breakdown of the Company’s primary inventory components:

 

 

 

 

 

 

 

 

 

    

March 31, 2016

 

December 31, 2015

 

 

 

(In thousands)

ATMs

 

$

1,863

 

$

2,568

ATM parts and supplies

 

 

8,303

 

 

8,400

Total

 

 

10,166

 

 

10,968

Less: Inventory reserves

 

 

(514)

 

 

(293)

Inventory, net

 

$

9,652

 

$

10,675

 

 

Cost of ATM Operating Revenues and Gross Profit Presentation  

 

The Company presents Cost of ATM operating revenues and Gross profit within its Consolidated Statements of Operations exclusive of depreciation, accretion, and amortization of intangible assets related to ATMs and ATM-related assets. The following table sets forth the amounts excluded from Cost of ATM operating revenues and Gross profit for the periods indicated:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2016

    

2015

 

 

(In thousands)

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

 

$

18,123

 

$

15,382

Amortization of intangible assets

 

 

9,263

 

 

9,497

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

 

$

27,386

 

$

24,879

 

 

 

(2) Acquisitions and Divestitures  

 

On July 1, 2015, the Company completed the divestiture of its retail cash-in-transit operation in the U.K. This business was primarily engaged in the collection of cash from retail locations and was originally acquired through the Sunwin Services Group (“Sunwin”) acquisition completed in November 2014. The Company recognized the divestiture proceeds at their estimated fair value of approximately $39 million in 2015. Of this amount, approximately $31 million was collected during the year ended December 31, 2015, and the remainder was collected during the three months ended March 31, 2016. The net pre-tax gain recognized on this transaction of $16.6 million was recognized entirely in 2015. During the three months ended March 31, 2016, there were no further adjustments to the estimated fair value of the consideration or the cumulative net pre-tax gain.

 

On July 1, 2015, the Company completed the acquisition of CDS for a total purchase price of approximately $80.6 million. CDS is a leading independent transaction processor for ATM deployers and payment card issuers, providing leading-edge solutions to ATM sales and service organizations and financial institutions.

 

The total purchase consideration for CDS was allocated to the assets acquired and liabilities assumed, including identifiable tangible and intangible assets, based on their respective fair values estimated at the date of acquisition. The estimated fair values of the intangible assets included the acquired customer relationships valued at $16.5 million, technology valued at $7.8 million, and other intangible assets valued at $1.7 million. Intangible values were estimated utilizing primarily a discounted cash flow approach, with the assistance of an independent appraisal firm. The fair values of the tangible assets acquired included property, plant, and equipment and were valued at $4.6 million and estimated utilizing the market and cost approaches. The purchase price allocation resulted in goodwill of $52.7 million. This goodwill has been assigned to the Company's North America reporting segment and is primarily attributable to expected synergies

9


 

Table of Contents

that will be realized by the North America segment. The Company completed the purchase accounting for CDS in January 2016 recognizing no additional adjustments to the preliminary opening balance sheet. All of the goodwill and intangible asset amounts are expected to be deductible for income tax purposes.

 

(3) Stock-Based Compensation  

 

The Company accounts for its stock-based compensation by recognizing the grant date fair value of stock-based awards, net of estimated forfeitures, as compensation expense over the underlying requisite service periods of the related awards. The grant date fair value is based upon the Company’s stock price on the date of grant. The following table reflects the total stock-based compensation expense amounts included in the accompanying Consolidated Statements of Operations:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2016

    

2015

 

 

(In thousands)

Cost of ATM operating revenues

 

$

117

 

$

334

Selling, general, and administrative expenses

 

 

3,051

 

 

3,867

Total stock-based compensation expense

 

$

3,168

 

$

4,201

 

The comparative decrease in stock-based compensation expense was largely due to the timing and amount of grants made during preceding periods and adjustments in the forfeitures in the 2015 period . All grants during the periods above were made under the Company's Second Amended and Restated 2007 Stock Incentive Plan (the “2007 Plan”).

 

Restricted Stock Awards . The number of the Company's outstanding Restricted Stock Awards (“RSAs”) as of March 31, 2016, and changes during the three months ended March 31, 2016, are presented below:

 

 

 

 

 

 

 

 

    

Number of Shares

    

Weighted Average Grant Date Fair Value

RSAs outstanding as of January 1, 2016

 

47,235

 

$

27.36

Vested

 

(22,750)

 

$

26.30

RSAs outstanding as of March 31, 2016

 

24,485

 

$

28.35

 

As of March 31, 2016, the unrecognized compensation expense associated with all outstanding RSAs was $0.4  million, which will be recognized on a straight-line basis over a remaining weighted average vesting period of approximately 1  year.

 

Restricted Stock Units. The Company grants restricted stock units (“RSUs”) under its Long-term Incentive Plan (“LTIP”), which is an annual equity award program under the 2007 Plan. The ultimate number of RSUs to be earned and outstanding are approved by the Compensation Committee of the Company's Board of Directors (the “Committee”) on an annual basis, and are based on the Company's achievement of certain performance levels during the calendar year of its grant. The majority of these grants have both a performance-based and a service-based vesting schedule (“Performance-RSUs”), and the Company recognizes the related compensation expense based on the estimated performance levels that management believes will ultimately be met. A portion of the awards have only a service-based vesting schedule (“Time-RSUs”), for which the associated expense is recognized ratably over four years. Performance-RSUs and Time-RSUs are convertible into the Company’s common stock after the passage of the vesting periods, which are 24 ,   36 , and 48 months from January 31 of the grant year, at the rate of 50% ,   25% , and 25% , respectively. Performance-RSUs will be earned only if the Company achieves certain performance levels. Although the Performance-RSUs are not considered to be earned and outstanding until at least the minimum performance metrics are met, the Company recognizes the related compensation expense over the requisite service period (or to an employee’s qualified retirement date, if earlier) using a graded vesting methodology. RSUs are also granted outside of LTIPs, with or without performance-based vesting requirements.

 

10


 

Table of Contents

The number of the Company's non-vested RSUs as of March 31, 2016, and changes during the three months ended March 31, 2016, are presented below:

 

 

 

 

 

 

 

 

    

Number of Shares

    

Weighted Average Grant Date Fair Value

Non-vested RSUs as of January 1, 2016

 

891,439

 

$

37.85

Granted

 

466,528

 

$

37.13

Vested

 

(382,964)

 

$

34.97

Forfeited

 

(13,179)

 

$

36.27

Non-vested RSUs as of March 31, 2016

 

961,824

 

$

38.67

 

The above table only includes earned RSUs; therefore, the Performance-RSUs granted in 2016 but not yet earned are not included. The number of Performance-RSUs granted at target in 2016, net of forfeitures, was 189,815 units with a grant date fair value of $35.65 per unit. Time-RSUs are included as granted.

 

As of March 31, 2016, the unrecognized compensation expense associated with earned RSUs was $18.4 million, which will be recognized using a graded vesting schedule for Performance-RSUs and a straight-line vesting schedule for Time-RSUs, over a remaining weighted average vesting period of approximately 2.3 years .  

 

Options. The number of the Company's outstanding stock options as of March 31, 2016, and changes during the three months ended March 31, 2016, are presented below:

 

 

 

 

 

 

 

 

    

Number of Shares

    

Weighted Average Exercise Price

Options outstanding as of January 1,  2016

 

77,901

 

$

10.11

Exercised

 

(12,610)

 

$

10.55

Options outstanding as of March 31, 2016

 

65,291

 

$

10.03

 

 

 

 

 

 

Options vested and exercisable as of March 31, 2016

 

65,291

 

$

10.03

 

As of March 31, 2016, the Company had no unrecognized compensation expense associated with outstanding options.

 

(4) Earnings per Share  

 

The Company reports its earnings per share under the two-class method. Under this method, potentially dilutive securities are excluded from the calculation of diluted earnings per share (as well as their related impact on the net income available to common stockholders) when their impact on net income available to common stockholders is anti-dilutive. Potentially dilutive securities for the three months ended March 31, 2016 and 2015 included all outstanding stock options, RSAs, and RSUs, which were included in the calculation of diluted earnings per share for these periods, if dilutive. The potentially   dilutive effect of outstanding warrants and the underlying shares exercisable under the Company’s $287.5 million of 1.00% convertible senior notes due December 2020 (“Convertible Notes”)  were excluded from diluted shares outstanding because the exercise price exceeded the average market price of the Company’s common stock. The effect of the note   hedge the Company purchased to offset the underlying conversion option embedded in its Convertible Notes was   also excluded,   as the effect is anti-dilutive.

 

Additionally, the shares of restricted stock issued by the Company under RSAs have a non-forfeitable right to cash dividends, if and when declared by the Company. Accordingly, restricted shares issued under RSAs are considered to be participating securities and, as such, the Company has allocated the undistributed earnings for the three months ended March 31, 2016 and 2015 among the Company's outstanding shares of common stock and issued but unvested restricted shares, as follows:

 

11


 

Table of Contents

Earnings per Share (in thousands, excluding share and per share amounts):  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2016

 

Three Months Ended March 31, 2015

 

 

    

Income  

    

Weighted Average Shares Outstanding

    

Earnings Per Share  

    

Income  

    

Weighted Average Shares Outstanding

    

Earnings Per Share  

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to controlling interests and available to common stockholders

 

$

15,384

 

 

 

 

 

 

$

15,233

 

 

 

 

 

 

Less: Undistributed earnings allocated to unvested restricted shares

 

 

(12)

 

 

 

 

 

 

 

(25)

 

 

 

 

 

 

Net income available to common stockholders

 

$

15,372

 

45,073,654

 

$

0.34

 

$

15,208

 

44,667,248

 

$

0.34

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Add: Undistributed earnings allocated to restricted shares

 

$

12

 

 

 

 

 

 

$

25

 

 

 

 

 

 

Stock options added to the denominator under the treasury stock method

 

 

 

 

33,691

 

 

 

 

 

 

 

78,795

 

 

 

 

RSUs added to the denominator under the treasury stock method

 

 

 

 

596,143

 

 

 

 

 

 

 

519,558

 

 

 

 

Less: Undistributed earnings reallocated to restricted shares

 

 

(12)

 

 

 

 

 

 

 

(25)

 

 

 

 

 

 

Net income available to common stockholders and assumed conversions

 

$

15,372

 

45,703,488

 

$

0.34

 

$

15,208

 

45,265,601

 

$

0.34

 

 

 

The computation of diluted earnings per share excluded potentially dilutive common shares related to restricted stock issued by the Company under RSAs of 17,476 and 32,185 shares for the three months ended March 31, 2016 and 2015, respectively, because the effect of including these shares in the computation would have been anti-dilutive.

 

12


 

Table of Contents

(5) Accumulated Other Comprehensive Loss, Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5) Accumulated Other Comprehensive Loss, Net

 

Accumulated other comprehensive loss, net is displayed as a separate component of Stockholders' equity in the accompanying Consolidated Balance Sheets. The following tables present the changes in the balances of each component of Accumulated other comprehensive loss, net for the three months ended March 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

    

Foreign currency translation adjustments

    

Unrealized (losses) gains on interest rate swap contracts

    

Total

 

 

(In thousands)

Total accumulated other comprehensive loss, net as of January 1, 2016

 

$

(45,886)

(1)

$

(42,240)

(2)

$

(88,126)

Other comprehensive loss before reclassification

 

 

(5,271)

(3)

 

(18,014)

(4)

 

(23,285)

Amounts reclassified from accumulated other comprehensive loss, net

 

 

 —

 

 

7,328

(4)

 

7,328

Net current period other comprehensive loss

 

 

(5,271)

 

 

(10,686)

 

 

(15,957)

Total accumulated other comprehensive loss, net as of March 31, 2016

 

$

(51,157)

(1)

$

(52,926)

(2)

$

(104,083)

 

(1)

Net of income tax benefit of $2,390 and $1,565 as of March 31, 2016 and January 1, 2016, respectively.

(2)

Net of deferred income tax benefit of $8,849 and $2,959 as of March 31, 2016 and January 1, 2016, respectively.

(3)

Net of deferred income tax benefit of $825 as of March 31, 2016.

(4)

Net of deferred income tax (benefit) expense of $(9,929) and $4,039 for Other Comprehensive Income (Loss) before reclassification and amounts reclassified from Accumulated other comprehensive loss, net, respectively. See Note 11. Derivative Financial Instruments .  

 

The Company records unrealized gains and losses related to its interest rate swaps net of estimated taxes in the Accumulated other comprehensive loss, net line item in the accompanying Consolidated Balance Sheets since it is more likely than not that the Company will be able to realize the benefits associated with its net deferred tax asset positions in the future. The amounts reclassified from Accumulated other comprehensive loss, net are recognized in the Cost of ATM operating revenues line item on the accompanying Consolidated Statements of Operations.

 

The Company has elected the portfolio approach for the deferred tax asset of the unrealized losses related to the interest rate swaps in the Accumulated other comprehensive loss, net line item on the accompanying Consolidated Balance Sheets. Under the portfolio approach, the disproportionate tax effect created when the valuation allowance was appropriately released as a tax benefit into continuing operations in 2010, will reverse out of other comprehensive income and into continuing operations as a tax expense when the Company ceases to hold any interest rate swaps. As of March 31, 2016, the disproportionate tax effect is approximately $14.4 million.

 

The Company currently believes that the unremitted earnings of its foreign subsidiaries will be reinvested for an indefinite period of time. Accordingly, no deferred taxes have been provided for the differences between the Company's book basis and underlying tax basis in these subsidiaries or on the foreign currency translation adjustment amounts.

 

13


 

Table of Contents

(6) Intangible Assets  

 

Intangible Assets with Indefinite Lives  

 

The following table presents the net carrying amount of the Company's intangible assets with indefinite lives as well as the changes in the net carrying amounts for the three months ended March 31, 2016, by segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

    

North America (1)

    

Europe (2)

    

Total

 

 

(In thousands)  

Balance as of January 1, 2016:

 

 

 

 

 

 

 

 

 

Gross balance

 

$

452,270

 

$

146,669

 

$

598,939

Accumulated impairment loss

 

 

 —

 

 

(50,003)

 

 

(50,003)

 

 

$

452,270

 

$

96,666

 

$

548,936

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

142

 

 

(2,686)

 

 

(2,544)

 

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2016:

 

 

 

 

 

 

 

 

 

Gross balance

 

$

452,412

 

$

143,983

 

$

596,395

Accumulated impairment loss

 

 

 —

 

 

(50,003)

 

 

(50,003)

 

 

$

452,412

 

$

93,980

 

$

546,392

 

(1)

The North America segment is comprised of the Company’s operations in the U.S., Canada, Mexico, and Puerto Rico.

(2)

The Europe segment is comprised of the Company’s operations in the U.K., Germany, and Poland.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade Name: indefinite-lived

 

    

North America (1)

    

Europe (2)

    

Corporate & Other (3)

    

Total

 

 

(In thousands)

Balance as of January 1, 2016:

 

$

200

 

$

416

 

$

1,700

 

$

2,316

Reclassification to definite-lived trade name

 

 

 —

 

 

 —

 

 

(1,700)

 

 

(1,700)

Foreign currency translation adjustments

 

 

 —

 

 

72

 

 

 —

 

 

72

Balance as of March 31, 2016

 

$

200

 

$

488

 

$

 —

 

$

688

 

(1)

The North America segment is comprised of the Company’s operations in the U.S., Canada, Mexico, and Puerto Rico.

(2)

The Europe segment is comprised of the Company’s operations in the U.K., Germany, and Poland.

(3)

The Corporate & Other segment is comprised of the Company’s transaction processing activities and the Company’s corporate general and administrative functions.

 

14


 

Table of Contents

Intangible Assets with Definite Lives  

 

The following is a summary of the Company's intangible assets that were subject to amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

December 31, 2015

 

 

Gross

 

 

 

Net

 

Gross

 

 

 

Net

 

 

Carrying

 

Accumulated

 

Carrying

 

Carrying

 

Accumulated

 

Carrying

 

    

Amount

    

Amortization

    

Amount

    

Amount

    

Amortization

    

Amount

 

 

(In thousands)

 

(In thousands)

Customer and branding contracts/relationships

 

$

349,055

 

$

(227,274)

 

$

121,781

 

$

350,211

 

$

(219,498)

 

$

130,713

Deferred financing costs

 

 

2,896

 

 

(1,745)

 

 

1,151

 

 

2,896

 

 

(1,452)

 

 

1,444

Non-compete agreements

 

 

4,464

 

 

(4,031)

 

 

433

 

 

4,454

 

 

(3,935)

 

 

519

Technology

 

 

10,742

 

 

(4,189)

 

 

6,553

 

 

10,751

 

 

(3,750)

 

 

7,001

Trade name: definite-lived

 

 

13,109

 

 

(3,207)

 

 

9,902

 

 

11,646

 

 

(2,859)

 

 

8,787

Total

 

$

380,266

 

$

(240,446)

 

$

139,820

 

$

379,958

 

$

(231,494)

 

$

148,464

 

 

 

 

(7) Accrued Liabilities  

 

The Company’s accrued liabilities consisted of the following:

 

 

 

 

 

 

 

 

 

    

March 31, 2016

    

December 31, 2015

 

 

(In thousands)

Accrued merchant settlement

 

$

59,587

 

$

60,218

Accrued merchant fees

 

 

45,618

 

 

43,005

Accrued taxes

 

 

33,809

 

 

29,372

Accrued cash management fees

 

 

9,930

 

 

8,780

Accrued maintenance

 

 

9,805

 

 

8,012

Accrued compensation

 

 

7,043

 

 

15,929

Accrued processing costs

 

 

6,942

 

 

7,636

Accrued armored

 

 

6,490

 

 

5,922

Accrued purchases

 

 

5,570

 

 

7,222

Accrued interest

 

 

3,611

 

 

6,094

Accrued interest on interest rate swaps

 

 

2,491

 

 

2,708

Accrued telecommunications costs

 

 

2,227

 

 

1,772

Other accrued expenses

 

 

23,973

 

 

22,388

Total

 

$

217,096

 

$

219,058

 

 

 

 

 

 

 

 

 

 

 

15


 

Table of Contents

(8) Long-Term Debt  

 

The carrying value of the Company’s long-term debt consisted of the following:

 

 

 

 

 

 

 

 

 

    

March 31, 2016

    

December 31, 2015

 

 

(In thousands)

Revolving credit facility, including swingline credit facility (weighted average combined interest rate of 2.3% and 2.0% as of March 31, 2016 and December  31, 2015, respectively)

 

$

60,149

 

$

90,835

5.125% Senior notes due August 2022, net of capitalized debt issuance costs

 

 

246,887

 

 

246,742

1.00% Convertible senior notes due December 2020, net of unamortized discount and capitalized debt issuance costs

 

 

233,278

 

 

230,754

Total long-term debt

 

$

540,314

 

$

568,331

 

As indicated in Note 1. General and Basis of Presentation , the Company has adopted the new accounting guidance applicable to the classification of capitalized debt issuance costs and now presents these costs as a direct deduction from the carrying amount of the related debt liabilities. As a result the 5.125% senior notes due 2022 (the “2022 Notes”) with a face value of $250.0 million are presented net of capitalized debt issuance costs of $3.1 million and $3.3 million as of March 31, 2016 and December 31, 2015, respectively. The Convertible Notes with a face value of $287.5 million are presented net of unamortized discount and capitalized debt issuance costs of $54.2 million and $56.7 million as of March 31, 2016 and December 31, 2015, respectively.

 

Revolving Credit Facility  

 

On May 26, 2015, the Company entered into a second amendment (the “Second Amendment”) to its amended and restated credit agreement (the “Credit Agreement”). The Credit Agreement provides for a $375.0 million revolving credit facility and includes an accordion feature that will allow the Company to increase the available borrowings under the revolving credit facility to $500.0 million, subject to the approval of one or more existing lenders or one or more lenders that become party to the Credit Agreement. Under the Second Amendment, a new $75.0 million tranche (the “European Commitments”) was created under which Cardtronics Europe Limited (“Cardtronics Europe”), a subsidiary of the Company, can borrow directly from the existing lenders in different currencies. The Second Amendment provides for sub-limits under the European Commitments of $15.0 million for swingline loans and $15.0 million for letters of credit. In addition, the Second Amendment reduces the commitments of the lending parties to make loans to the Company (the “U.S. Commitments”) from $375.0 million to $300.0 million and reduced the alternative currency sub-limit to $75.0 million, from $125.0 million under the Credit Agreement. The letter of credit sub-limit and the swingline sub-limit under the U.S. Commitments remain at $30.0 million and $25.0 million, respectively, under the Second Amendment. The Credit Agreement expires in April 2019.

 

Borrowings (not including swingline loans and alternative currency loans) under the revolving credit facility accrue interest at the Company’s option at either the Alternate Base Rate (as defined in the Credit Agreement) or the Adjusted LIBO Rate (as defined in the Credit Agreement) plus a margin depending on the Company’s most recent Total Net Leverage Ratio (as defined in the Credit Agreement). The margin for Alternative Base Rate loans varies between 0% and 1.25% and the margin for Adjusted LIBO Rate loans varies between 1.00% and 2.25%. Swingline loans denominated in U.S. dollars bear interest at the Alternate Base Rate plus a margin as described above and swingline loans denominated in alternative currencies bear interest at the Overnight LIBO Rate (as defined in the Credit Agreement) plus the applicable margin for the Adjusted LIBO Rate. The alternative currency loans bear interest at the Adjusted LIBO Rate for the relevant currency as described above. Substantially all of the Company’s domestic assets, including the stock of its wholly-owned domestic subsidiaries and 66.0% of the stock of the Company’s first-tier foreign subsidiaries, are pledged as collateral to secure borrowings made under the revolving credit facility. Furthermore, each of the Company’s material wholly-owned domestic subsidiaries has guaranteed the full and punctual payment of the obligations under the revolving credit facility. The European Commitments are also secured by the assets of the Company’s foreign subsidiaries, which do not guarantee the obligations of the Company’s domestic subsidiaries. There are currently no restrictions on the ability of the Company’s subsidiaries to declare and pay dividends to the Company.

 

16


 

Table of Contents

The Credit Agreement contains representations, warranties and covenants that are customary for similar credit arrangements, including, among other things, covenants relating to: (i) financial reporting and notification, (ii) payment of obligations, (iii) compliance with applicable laws, and (iv) notification of certain events. Financial covenants in the Credit Agreement require the Company to maintain: (i) as of the last day of any fiscal quarter, a Senior Secured Net Leverage Ratio (as defined in the Credit Agreement) of no more than 2.25 to 1.00; (ii) as of the last day of any fiscal quarter, a Total Net Leverage Ratio of no more than 4.00 to 1.00; and (iii) as of the last day of any fiscal quarter, a Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of no less than 1.50 to 1.0. Additionally, the Company is limited on the amount of restricted payments, including dividends, which it can make pursuant to the terms of the Credit Agreement; however, the Company may generally make restricted payments so long as no event of default exists at the time of such payment and the total net leverage ratio is less than 3.0 to 1.0 at the time such restricted payment is made.

 

As of March 31, 2016, the Company was in compliance with all applicable covenants and ratios under the Credit Agreement.

 

As of March 31, 2016, the Company’s outstanding balance on the revolving credit facility was $60.1 million, of which $59.0 million was outstanding under the U.S. Commitments and $1.1 million was outstanding under the European Commitments. The available borrowing capacity under the revolving credit facility totaled $314.9 million, of which $241.0 million is available to the U.S. and $73.9 million is available to Cardtronics Europe.

 

$250.0 Million 5.125% Senior Notes Due 2022

 

On July 28, 2014, in a private placement offering, the Company issued $250.0 million in aggregate principal amount of the 2022 Notes pursuant to an indenture dated July 28, 2014 (the “Indenture”) among the Company, its subsidiary guarantors (the “Guarantors”) and Wells Fargo Bank, National Association, as trustee. Interest on the 2022 Notes is payable semi-annually in cash in arrears on February 1 and August 1 of each year, and commenced on February 1, 2015.

 

The 2022 Notes and Guarantees (as defined in the Indenture) rank: (i) equally in right of payment with all of the Company’s and the Guarantors’ existing and future senior indebtedness, (ii) effectively junior to secured debt to the extent of the collateral securing such debt, including debt under the Company’s revolving credit facility, and (iii) structurally junior to existing and future indebtedness of the Company’s non-guarantor subsidiaries. The 2022 Notes and Guarantees rank senior in right of payment to any of the Company’s and the Guarantors’ existing and future subordinated indebtedness.

 

The 2022 Notes contain covenants that, among other things, limit the Company’s ability and the ability of certain of its restricted subsidiaries to incur or guarantee additional indebtedness, make certain investments or pay dividends or distributions on the Company’s capital stock or repurchase capital stock or make certain other restricted payments, consolidate or merge with or into other companies, conduct asset sales, restrict dividends or other payments by restricted subsidiaries, engage in transactions with affiliates or related persons, and create liens.

 

Obligations under its 2022 Notes are fully and unconditionally and jointly and severally guaranteed on a senior unsecured basis by the Company’s current 100% owned domestic subsidiaries and certain of the Company’s future domestic subsidiaries, with the exception of the Company’s immaterial subsidiaries. There are no significant restrictions on the ability of the Company to obtain funds from the Guarantors by dividend or loan. None of the Guarantors’ assets represent restricted assets pursuant to Rule 4-08(e)(3) of Regulation S-X. The 2022 Notes include registration rights, and as required under the terms of the Notes, the Company completed an exchange offer for these Notes in June 2015 whereby participating holders received registered Notes.

 

The 2022 Notes are subject to certain automatic customary releases, including the sale, disposition, or transfer of the capital stock or substantially all of the assets of a Guarantor, designation of a Guarantor as unrestricted in accordance with the Indenture, exercise of the legal defeasance option or the covenant defeasance option, liquidation or dissolution of the Guarantor and a Guarantor ceasing to both guarantee other Company debt and to be an obligor under the revolving credit facility. The Guarantors may not sell or otherwise dispose of all or substantially all of their properties or assets to, or consolidate with or merge into, another company if such a sale would cause a default under the Indenture.

 

 

17


 

Table of Contents

$287.5 Million 1.00% Convertible Senior Notes Due 2020 and Related Equity Instruments

 

On November 19, 2013, the Company issued the Convertible Notes at par value. The Company received $254.2 million in net proceeds from the offering after deducting underwriting fees paid to the initial purchasers and a repurchase of 665,994 shares of its outstanding common stock concurrent with the offering. The Company used a portion of the net proceeds from the offering to fund the net cost of the convertible note hedge transaction, as described below. The convertible note hedge and warrant transactions were entered into   concurrent with the pricing of the Convertible Notes. The Company pays interest semi-annually (payable in arrears) on June 1st and December 1st of each year. Under U.S. GAAP, certain convertible debt instruments that may be settled in cash (or other assets) upon conversion are required to be separately accounted for as liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. The Company, with assistance from a valuation professional, determined that the fair value of the debt component was $215.8 million and the fair value of the embedded option was $71.7 million as of the issuance date. The Company recognizes effective interest expense on the debt component and that interest expense effectively accretes the debt component to the total principal amount due at maturity of $287.5 million. The effective rate of interest to accrete the debt balance is approximately 5.26%, which corresponded to the Company’s estimated conventional debt instrument borrowing rate at the date of issuance.

 

The Convertible Notes have an initial conversion price of $52.35 per share, which equals an initial conversion rate of 19.1022 shares of common stock per $1,000 principal amount of notes, for a total of approximately 5.5 million shares of our common stock initially underlying the debt. The conversion rate, however, is subject to adjustment under certain circumstances. Conversion can occur: (i) any time on or after September 1, 2020, (ii) after March 31, 2014, during any calendar quarter that follows a calendar quarter in which the price of the Company’s common stock exceeds 135% of the conversion price for at least 20 days during the 30 consecutive trading-day period ending on the last trading day of the quarter, (iii) during the ten consecutive trading-day period following any five consecutive trading-day period in which the trading price of the Convertible Notes is less than 98% of the closing price of the Company’s common stock multiplied by the applicable conversion rate on each such trading day, (iv) upon specified distributions to the Company’s shareholders upon recapitalizations, reclassifications or changes in stock, and (v) upon a make-whole fundamental change. A fundamental change is defined as any one of the following: (i) any person or group that acquires 50.0% or more of the total voting power of all classes of common equity that is entitled to vote generally in the election of the Company’s directors, (ii) the Company engages in any recapitalization, reclassification or changes of common stock as a result of which the common stock would be converted into or exchanged for, stock, other securities, or other assets or property, (iii) the Company engages in any share exchange, consolidation or merger where the common stock is converted into cash, securities or other property, (iv) the Company engages in any sales, lease or other transfer of all or substantially all of the consolidated assets, or (v) the Company’s stock is not listed for trading on any U.S. national securities exchange.

 

As of March 31, 2016, none of the contingent conversion thresholds described above were met in order for the Convertible Notes to be convertible at the option of the note holders. As a result, the Convertible Notes have been classified in the Long-term debt line item on the Company’s Consolidated Balance Sheets at March 31, 2016. In future financial reporting periods, the classification of the Convertible Notes may change depending on whether any of the above contingent criteria have been subsequently satisfied.

 

Upon conversion, holders of the Convertible Notes are entitled to receive cash, shares of the Company’s common stock or a combination of cash and common stock, at the Company’s election. In the event of a change in control, as defined in the indenture under which the Convertible Notes have been issued, holders can require the Company to purchase all or a portion of their Convertible Notes for 100% of the notes' par value plus any accrued and unpaid interest.

 

18


 

Table of Contents

Interest expense related to the Convertible Notes consisted of the following:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2016

    

2015

 

 

(In thousands)

Cash interest per contractual coupon rate

 

$

719

 

$

719

Amortization of note discount

 

 

2,374

 

 

2,253

Amortization of deferred financing costs

 

 

150

 

 

134

Total interest expense related to Convertible Notes

 

$

3,243

 

$

3,106

 

 

The carrying value of the Convertible Notes consisted of the following:

 

 

 

 

 

 

 

 

 

    

March 31, 2016

    

December 31, 2015

 

 

(In thousands)

Principal balance

 

$

287,500

 

$

287,500

Unamortized discount and capitalized debt issuance costs

 

 

(54,222)

 

 

(56,746)

Net carrying amount of Convertible Notes

 

$

233,278

 

$

230,754

 

In connection with the issuance of the Convertible Notes, the Company entered into separate convertible note hedge and warrant transactions to reduce the potential dilutive impact upon the conversion of the Convertible Notes. The net effect of these transactions effectively raised the price at which dilution would occur from the $52.35 initial conversion price of the Convertible Notes to $73.29. Pursuant to the convertible note hedge, the Company purchased call options granting to the Company the right to acquire up to approximately 5.5 million shares of its common stock with an initial strike price of $52.35. The call options automatically become exercisable upon conversion of the Convertible Notes, and will terminate on the second scheduled trading day immediately preceding December 1, 2020. The Company also sold to the initial purchasers warrants to acquire up to approximately 5.5 million shares of its common stock with a strike price of $73.29. The warrants will expire incrementally on a series of expiration dates subsequent to the maturity date of the Convertible Notes through August 30, 2021. If the conversion price of the Convertible Notes remains between the strike prices of the call options and warrants, the Company’s shareholders will not experience any dilution in connection with the conversion of the Convertible Notes; however, to the extent that the price of the Company’s common stock exceeds the strike price of the warrants on any or all of the series of related expiration dates of the warrants, the Company would be required to issue additional shares of its common stock to the warrant holders. The amounts allocated to both the note hedge and warrants were recorded in Stockholders’ equity, in the accompanying Consolidated Balance Sheets.

 

(9) Asset Retirement Obligations  

 

Asset retirement obligations consist primarily of costs to deinstall the Company's ATMs and restore the ATM sites to their original condition, which are estimated based on current market rates. In most cases, the Company is contractually required to perform this deinstallation and in some cases, site restoration work. For each group of similar ATM type, the Company has recognized the estimated fair value of the asset retirement obligation as a liability on its balance sheet and capitalized that cost as part of the cost basis of the related asset. The related assets are depreciated on a straight-line basis over five years, which is the estimated average time period that an ATM is installed in a location before being deinstalled, and the related liabilities are accreted to their full value over the same period of time.

 

19


 

Table of Contents

The following table presents a summary of the changes in the Company’s asset retirement obligation liability for the three months ended March 31, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2016

    

$

54,727

Additional obligations

 

 

1,006

Accretion expense

 

 

469

Payments

 

 

(751)

Foreign currency translation adjustments

 

 

(429)

Balance as of March 31, 2016

 

 

55,022

Less: current portion

 

 

3,013

Balance as of March 31, 2016, excluding current portion

 

$

52,009

 

See Note 12. Fair Value Measurements for additional disclosures on the Company's asset retirement obligations with respect to its fair value measurements.

 

(10) Other Liabilities  

 

The following is a summary of the components of the Company’s other liabilities:

 

 

 

 

 

 

 

 

 

    

March 31, 2016

    

December 31, 2015

 

 

(In thousands)

Current Portion of Other Long-Term Liabilities:

 

 

 

 

 

 

Interest rate swaps

 

$

24,001

 

$

23,327

Obligations associated with acquired unfavorable contracts

 

 

545

 

 

656

Deferred revenue

 

 

1,321

 

 

2,313

Asset retirement obligations

 

 

3,013

 

 

3,042

Other

 

 

3,314

 

 

3,394

Total

 

$

32,194

 

$

32,732

 

 

 

 

 

 

 

Other Long-Term Liabilities:

 

 

 

 

 

 

Interest rate swaps

 

$

37,773

 

$

21,872

Obligations associated with acquired unfavorable contracts

 

 

767

 

 

882

Deferred revenue

 

 

1,270

 

 

1,217

Other

 

 

6,709

 

 

6,686

Total

 

$

46,519

 

$

30,657

 

 

 

 

 

(11) Derivative Financial Instruments  

 

Cash Flow Hedging Strategy  

 

The Company is exposed to certain risks relating to its ongoing business operations, including interest rate risk associated with its vault cash rental obligations and, to a lesser extent, borrowings under its revolving credit facility. The Company is also exposed to foreign currency exchange rate risk with respect to its investments in its foreign subsidiaries. While the Company does not currently utilize derivative instruments to hedge its foreign currency exchange rate risk, it does utilize interest rate swap contracts to manage the interest rate risk associated with its vault cash rental obligations in the U.S. and the U.K. The Company does not utilize derivative instruments to manage the interest rate risk associated with borrowings outstanding under its revolving credit facility.  

 

The interest rate swap contracts entered into with respect to the Company's vault cash rental obligations serve to mitigate the Company's exposure to interest rate risk by converting a portion of the Company's monthly floating rate vault cash rental obligations to a fixed rate. The Company has contracts in varying notional amounts through December 31, 2020 for the Company's U.S. and U.K. vault cash rental obligations. By converting such amounts to a fixed rate, the impact of

20


 

Table of Contents

future interest rate changes (both favorable and unfavorable) on the Company's monthly vault cash rental expense amounts has been reduced. The interest rate swap contracts typically involve the receipt of floating rate amounts from the Company's counterparties that match, in all material respects, the floating rate amounts required to be paid by the Company to its vault cash providers for the portions of the Company's outstanding vault cash obligations that have been hedged. In return, the Company typically pays the interest rate swap counterparties a fixed rate amount per month based on the same notional amounts outstanding. At no point is there an exchange of the underlying principal or notional amounts associated with the interest rate swaps. Additionally, none of the Company's existing interest rate swap contracts contain credit-risk-related contingent features.  

 

For each derivative instrument that is designated and qualifies as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of Accumulated other comprehensive loss (“OCI”) and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedge transaction affects earnings. Gains and losses on the derivative instrument representing either hedge ineffectiveness or hedge components that are excluded from the assessment of effectiveness are recognized in earnings. However, because the Company currently only utilizes fixed-for-floating interest rate swaps in which the underlying pricing terms agree, in all material respects, with the pricing terms of the Company’s vault cash rental obligations, the amount of ineffectiveness associated with such interest rate swap contracts has historically been immaterial. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in the Consolidated Statements of Operations during the current period.

 

During the three months ended March 31, 2016, the Company entered into new forward-starting interest rate swap agreements with an aggregate notional amount of £550.0 million. These swap agreements begin on January 1, 2017, with £250.0 million terminating  December 31, 2019 and £300.0 million terminating December 31, 2020. The notional amounts, weighted average fixed rates, and terms associated with the Company's interest rate swap contracts accounted for as cash flow hedges that are currently in place (as of the date of the issuance of these financial statements) are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional Amounts

 

Weighted Average Fixed Rate

 

Notional Amounts

    

Weighted Average Fixed Rate

 

 

U.S.

 

U.S.

 

U.K.

 

U.K.

    

Term  

(In millions)

 

 

 

 

(In millions)

 

 

 

 

 

$

1,300

 

2.74

%  

 

£

 —

 

 —

%  

 

April 1, 2016 – December 31, 2016

$

1,000

 

2.53

%  

 

£

550

 

0.82

%  

 

January 1, 2017 – December 31, 2017

$

750

 

2.54

%  

 

£