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CARDTRONICS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Overview Cardtronics, Inc. provides convenient automated consumer financial services through its network of automated teller machines ("ATMs") and multi-function financial services kiosks. As of June 30, 2014, we were the world's largest retail ATM owner, providing services to over 83,600 devices throughout the United States ("U.S.") (including the U.S. territories of Puerto Rico and the U.S. Virgin Islands), the United Kingdom ("U.K."), Germany, Canada, and Mexico. In the U.S., certain of our 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. Also included in the number of devices in our network as of June 30, 2014 were approximately 14,700 ATMs to which we provided various forms of managed services. Under a managed services arrangement, retailers and financial institutions rely on us to handle some or all of the multiple elements that are required to operate and maintain ATMs, typically in exchange for a monthly service fee or fee per service provided. We often partner with large, nationally and regionally-known retail merchants under multi-year contracts to place our ATMs and kiosks within their store locations. In doing so, we provide our retail partners with a compelling automated financial services solution that helps attract and retain customers, and in turn increases the likelihood that our devices will be utilized. We also partner with leading national and regional financial institutions to brand certain of our ATMs and financial services kiosks within our network. As of June 30, 2014, approximately 21,300 of our ATMs were under contract with financial institutions to place their logos on those machines and to provide convenient surcharge-free access for their banking customers. In return for the branding that we provide, we generally receive monthly fees on a per ATM basis from the branding institution, while retaining our standard fee schedule for non-customers of the financial institutions who use the branded ATMs. Additionally, we own and operate the Allpoint network ("Allpoint"), the largest surcharge-free ATM network within the U.S. (based on the number of participating ATMs). Allpoint, which has more than 56,100 participating ATMs globally (including a majority of our ATMs in the U.S., U.K., Canada and Mexico), provides surcharge-free ATM access to customers of participating financial institutions, many of which lack a significant ATM network. In exchange for the surcharge-free access, member financial institutions pay us either a fixed monthly fee per cardholder or a set fee per transaction. 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 ("EBT") 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, we own and operate an electronic funds transfer ("EFT") transaction processing platform that provides transaction processing services to our network of ATMs and financial services kiosks as well as ATMs owned and operated by third parties. For additional discussion of our operations and the manner in which we derive revenues, please refer to our 2013 Form 10-K. Strategic Outlook Over the past several years, we have expanded our operations both domestically and internationally through acquisitions, continued to deploy ATMs in high-traffic locations under contracts with well-known retailers, expanded our relationships with leading financial institutions through growth of Allpoint and our bank branding programs, and made other strategic acquisitions and investments to expand and develop new product offerings and capabilities of our ATMs. Since July 2011, we have completed acquisitions of the following: (1) seven domestic ATM operators, expanding our fleet in both multi-unit regional retail chains and individual merchant ATM locations in the U.S. by approximately 31,600 ATMs, (2) two Canadian ATM operators for a total of approximately 1,400 ATMs, which allowed us to enter into and expand our international presence in Canada and (3) in August 2013, Cardpoint Limited ("Cardpoint"), an ATM service provider operating in the U.K. and Germany, which further expanded our U.K. ATM operations by approximately 7,100 ATMs, and also allowed us to enter into the German market with approximately 800 ATMs. In addition to the above ATM acquisitions, we have also made strategic acquisitions to enhance our product offerings, including: (1) Locator Search in August 2011, a leading domestic provider of location search technology deployed by financial institutions to help customers and members find the nearest, most appropriate and convenient ATM location based on the service they seek; (2) Complete Technical Services, Ltd. in January 2012, an ATM installation company in the U.K.; and (3) i-design group plc ("i-design") in March 2013, a Scotland-based provider and developer of marketing and advertising software and services for ATM owners. On July 21, 2014, we announced a definitive agreement to acquire the Welch ATM business for cash purchase consideration (to be paid at closing) of approximately $160.0 million. The completion of the transaction is subject to regulatory approvals established by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as well as the satisfaction of other customary closing conditions. The Company anticipates that the transaction will be completed during the three months ending September 30, 2014. This acquisition will expand our U.S. ATM operations with national and regional merchants as well as with financial institutions. 32 -------------------------------------------------------------------------------- While we will continue to explore potential acquisition opportunities in the future as a way to grow our business, we also expect to continue launching new products and services that will allow us to further leverage our existing ATM and financial services kiosk network. In particular, we see opportunities to expand our operations through the following: · Increase the Number of Deployed Devices with Existing and New Merchant Relationships. We believe that there are significant opportunities to deploy additional ATMs with our existing retail customers in locations that currently do not have ATMs. Furthermore, many of our retail customers continue to expand their number of active store locations, either through acquisitions or through new store openings, thus providing us with additional ATM deployment opportunities. Additionally, we are actively pursuing opportunities to deploy ATMs with new retailers, including retailers that currently do not have ATMs, as well as those that have existing ATM programs but that are looking for a new ATM provider. We believe our expertise, broad geographic footprint, strong record of customer service, and significant scale position us to successfully market to, and enter into long-term contracts with, additional leading merchants. In addition, we believe our existing relationships with leading U.S.- and U.K.-based retailers position us to expand in international locations where these existing partners have operations. · Expand our Relationships with Leading Financial Institutions. Through our merchant relationships as well as our diverse product and service offerings, we believe we can provide our existing financial institution customers with convenient solutions to fulfill their growing ATM and automated consumer financial services requirements. Further, we believe we can leverage these offerings to attract additional financial institutions as customers. Our services currently offered to financial institutions include branding our ATMs with their logos, on-screen advertising and content management, providing remote deposit capture, providing surcharge-free access to their customers through our Allpoint network, and providing managed services for their ATM portfolios. Our EFT transaction processing capabilities provide us with the ability to provide customized control over the content of the information appearing on the screens of our ATMs and ATMs we process for financial institutions, which increases the types of products and services that we are able to offer to financial institutions. We also plan to continue to grow the number of machines and financial institutions participating in our Allpoint network which drives higher transaction counts and profitability on our existing ATMs and increases our value to retailers where our ATMs are located. · Work with Non-Traditional Financial Institutions and Card Issuers to Further Leverage our Extensive ATM and Financial Services Kiosk Network. We believe that there are opportunities to develop or expand relationships with non-traditional financial institutions and card issuers, such as reloadable prepaid card issuers and alternative payment networks, which are seeking an extensive and convenient ATM network to complement their new card offerings. Additionally, we believe that many of the prepaid debit card issuers that exist today in the U.S. can benefit by providing their cardholders with access to our ATM network on a discounted or fee-free basis. For example, through our Allpoint network, we have sold access to our ATM network to issuers of stored-value prepaid debit cards, providing the customers of these issuers with convenient and surcharge-free access to cash. · Increase Transaction Levels at our Existing Locations. We believe that there are opportunities to increase the number of transactions that are occurring at our existing ATM locations today. On average, only a small fraction of the customers that enter our retail customers' locations utilize our ATMs and financial services kiosks. In addition to our existing initiatives that tend to drive additional transaction volumes to our ATMs, such as bank branding and our Allpoint surcharge-free network, we are working on developing new initiatives aimed at driving incremental transactions at our existing ATM locations. Examples of this effort are our 2011 acquisition of Locator Search, which helps consumers find our ATMs, and our FeeAlert product, which enables financial institutions to help their customers save money by steering them toward nearby in-network ATMs and away from ATM fees. Additionally, we have existing programs and are working to develop additional and broader programs to steer the cardholders of our existing financial institution partners and members of our Allpoint network to visit our ATMs in convenient retail locations. These programs may include incentives to cardholders such as coupons, rewards, and other offers that tend to motivate customers to visit our ATMs within our existing retail footprint. Although we are still in the early stages of developing and implementing many of these programs, we believe that these programs, when properly structured, will benefit each party (i.e. the retailer, the financial institution, and the cardholder). As a result, we expect to gain additional transaction volumes through these efforts. · Develop and Provide Additional Services at our Existing ATMs. The number and types of services offered at ATMs continue to evolve over time. Certain ATM models are capable of providing numerous automated consumer financial services, including bill payments, check cashing, remote deposit capture, money transfer, and stored-value card reload services, and certain of our devices are capable of, and currently provide, these types of services. We believe these additional consumer financial services offered by our devices, and other machines that we or others may develop, could provide a compelling and cost-effective solution for financial institutions and stored-value prepaid debit card issuers looking to provide convenient services to their customers at well-known retail locations. We also allow advertisers to place their messages on our ATMs equipped with advertising software in both the U.S. and the U.K. Offering additional services like advertising at our devices, allows us to create new revenue streams from assets that have already been deployed, in addition to providing value to our customers through beneficial offers and convenient services. We plan to continue to develop additional products and services that can be delivered through our existing ATM network. 33 -------------------------------------------------------------------------------- · Pursue Additional Managed Services Opportunities. Over the last several years, the number of ATMs that are operated under our managed services arrangements has significantly increased. Under this arrangement, retailers and financial institutions generally pay us a fixed management fee per cardholder or a set fee per transaction in exchange for us handling some or all of the operational aspects associated with operating and maintaining their ATM fleets. Surcharge and interchange fees are generally earned by the retailer or the financial institution. As a result, in this arrangement type, our revenues are partly protected from fluctuations in transaction levels of these machines and changes in network interchange rates. Additionally, in the U.K. where we have our own engineering, cash-in-transit (i.e., armored courier), and installation organizations, we believe that opportunities exist to offer some (or all) of these services on a managed services basis to both retailers and financial institutions. We plan to continue pursuing additional managed services opportunities with leading merchants and financial institutions in markets in which we operate. · Pursue Additional Acquisition Opportunities. We have historically grown through acquisitions and expect to continue to pursue select acquisition opportunities in the future. As noted in the Overview section above, we have completed several acquisitions since 2011 and expect to continue to pursue acquisition opportunities that we believe we can leverage to create long-term growth in shareholder value. · Pursue International Growth Opportunities. We have invested significant amounts of capital in the infrastructure of our U.K., Canada, and Mexico operations, and we plan to continue to grow our operations in these markets, as well as in the recently-entered German market, applying many of the aforementioned strategies. Additionally, we may expand our operations into other select international markets where we believe we can leverage our operational expertise, EFT transaction processing platform, and scale advantages. Our future international expansion, if any, will depend on a number of factors, including the estimated economic opportunity to us, the business and regulatory environment in the international market, our ability to identify suitable business partners in the market, and other risks associated with international expansion. Recent Events and Trends Over the last several years, we have grown our business through a combination of organic growth through the strategies described above and with acquisitions. Since 2010, our compounded annual growth rate is 18%, which reflects a mix of growth from internal initiatives and acquisitions added. During the first half of 2014, our revenues grew by 25% over the prior year, reflecting approximately 17% growth from acquisitions and 8% organic growth. Withdrawal Transaction and Revenue Trends - United States. For the three and six months ended June 30, 2014, total same-store cash withdrawal transactions conducted on our domestic ATMs increased by 0.5% and 0.4%, respectively, over the comparable periods in 2013. We define same-store ATMs as all ATMs that were continuously transacting for both the current period and the comparable period in the prior year to ensure the exclusion of any new growth or mid-month installations. The growth rate is impacted by a number of factors, including consumer behavior and preferences, economic factors, weather, and also company-specific initiatives, such as bank branding, growth in Allpoint (our surcharge free network), pricing and other products and services we may deploy. This growth rate has varied somewhat over recent years but has typically fallen within a range of flat up to 5%. Over the last several years, some of the large U.S. banks serving the market for consumer banking services have begun to aggressively compete for market share, and part of their competitive strategy has been to increase their number of customer touch points, including the establishment of an ATM network to provide convenient, surcharge-free access to cash for their customers. As a result, in certain situations, we have faced direct competition from large U.S. banks for large ATM placement opportunities. While a large owned-ATM network would be a key strategic asset for a bank, we believe it would be uneconomical for all but the largest banks to build and operate an extensive ATM network. Bank branding of our ATMs and participation in our surcharge-free network allow financial institutions to rapidly increase surcharge-free ATM access for their customers at substantially lower cost than building their own ATM networks. We also believe there is an opportunity for a large non-bank ATM and financial services kiosk operator such as ourselves, with lower costs and an established operating history, to contract with financial institutions and retailers to manage their ATM networks. Such an outsourcing arrangement could reduce a financial institution's operational costs while extending its customer service. Furthermore, we believe there are opportunities to provide selected services on an outsourced basis, such as transaction processing services, to other independent owners and operators of ATMs and financial services kiosks. These factors have led to an increase in bank branding, participation in surcharge-free networks, and managed services arrangements, and we believe that there are opportunities for continued growth under these types of arrangements. Withdrawal Transaction and Revenue Trends - United Kingdom. In recent periods, we have installed more free-to-use ATMs as opposed to surcharging "pay-to-use" ATMs in the U.K. As a result of this mix shift, our overall withdrawal transactions in the U.K. (excluding the effect of the Cardpoint acquisition) have increased. Although we earn less revenue per cash withdrawal transaction on a free-to-use machine, the increase in the number of transactions conducted on free-to-use machines has generally translated into higher overall revenues. Financial Regulatory Reform - United Kingdom. In March 2013, the U.K. Treasury department (the "Treasury") issued a formal recommendation to further regulate the U.K. payments industry, including LINK, the nation's formal ATM scheme. In October 2013, the U.K. government responded by establishing the new Payment Systems Regulator ("PSR") to oversee any payment system and its participants operating in the U.K. The ultimate impact of the establishment of the PSR will not be known until it is officially formed. 34 -------------------------------------------------------------------------------- In July 2013, the European Commission put forward a new draft directive to regulate payment service providers operating in the European Union ("PSD2"). Broadly, PSD2 seeks to harmonize rules for the licensing of payment institutions and introduces certain common rules affecting all payment service providers ("PSPs") throughout the European Union. PSD2 sets out the rights and obligations of payment service users and PSPs together with transparency and security requirements to facilitate safe, efficient payment transactions. Whereas the current Payment Services Directive exempts independent ATM deployers, PSD2 (as currently drafted) will apply to businesses of this nature. PSD2 as currently drafted is still in Committee stage in the European Parliament and has not yet been properly considered by the Council. We anticipate that the draft Directive will not be finalized until 2015 and that it will take up to an additional two years for member states to transpose it into domestic law. In parallel with PSD2, the European Commission has introduced a new Regulation ("MIF Regulation") aimed at reducing the level of interchange fees charged by card schemes for Point-of-Sale (" POS ") transactions, as well as altering certain of the business rules contained in card scheme rulebooks. The fee caps in the MIF Regulation do not apply to cash withdrawal transactions at ATMs, but certain of the other provisions in the MIF Regulation could apply to ATM operators (although their precise effects are currently uncertain). The MIF Regulation is also currently in Committee stage at the European Parliament and therefore at this time we cannot predict its final form, effective date, nor to what extent, if any, such regulation will impact ATM operators. Europay, MasterCard, Visa ("EMV"). The EMV standard provides for the security and processing of information contained on microchips embedded in certain debit and credit cards, known as "smart cards." This standard has already been adopted in the U.K., Germany, Mexico, and Canada, and our ATMs in those markets are in compliance. In the U.S., MasterCard implemented a liability shift in April 2013 from the issuers of these cards to the party that has not made the investment in EMV equipment (the acquirer) for fraudulent counterfeit International Maestro (MasterCard) cross-border transactions. While the majority of our U.S. ATMs are not currently EMV-compliant, this liability shift has not had a significant impact on our business or results, as Maestro transactions comprise less than 0.2% of our U.S. transaction volume. In response to the Maestro liability shift date of April 2013, we implemented additional fraud monitoring methods to minimize fraud losses and to date we have seen minimal fraud losses. In February 2013, Visa announced plans for a liability shift to occur in October 2017 for all transactions types on domestic or international EMV-issued cards. MasterCard has also announced that liability shift for its domestic ATM transactions on EMV-issued cards will occur in October 2016. At this time, neither MasterCard nor Visa are requiring mandatory upgrades to ATM equipment; however, increased fraudulent activity on ATMs in the future or the shifting of liability for fraudulent activity on all ATM transactions without EMV readers, or other business or regulatory factors could cause us to upgrade or replace a significant portion of our existing U.S. ATM fleet. We continue to closely monitor the migration toward the EMV standard, and all of our recent ATM deployments have been with ATMs that are EMV-ready. At this time, through a combination of ordinary replacement of equipment, routine scheduled maintenance visits to our ATMs, and evolving technology to meet compliance, we do not expect the EMV migration to have a significant impact on our future capital investments and results from operations. However, we currently estimate that the incremental potential cost to make our entire current Company-owned U.S. ATM fleet fully compliant with the EMV standard is approximately $30 million to $35 million, a portion of which will be incurred during 2014. With the increased capital investments required as a direct result of EMV, our depreciation expense may increase in the future. Additionally, there is a possibility that we could incur asset write-offs or accelerated depreciation expense on certain ATM units. Furthermore, we could experience a higher rate of unit count attrition for our merchant-owned ATMs in the future as a result of certain merchants electing to not comply with this standard. Capital Investments. In the next twelve to twenty-four months, we are expecting a somewhat higher rate of capital investment than our recent run-rate but do not expect that this temporary increased level of capital investment will continue past mid-2016. These expected temporary increases in capital spending levels are being driven by the upcoming EMV requirements discussed above, coupled with many other factors including: (1) our strategic initiatives to enhance the consumer experience at our ATMs and drive transaction growth; (2) increased demand from merchants and financial institutions for multi-function ATMs; (3) competition for new merchant and customer contracts and renewals of existing merchant contracts; (4) certain software and hardware enhancements required to facilitate our strategic initiatives and to continue running supported versions; and (5) other compliance related matters. As a result of the increased capital investments being planned, we are working to optimize our existing assets, but it is possible that as a result of this activity we could incur some asset write-offs or impairments and increased depreciation expense in the near term. However, we are expecting that the long-term revenue benefits of the investments will drive increased profitability in future periods and allow us to expand our position in the United States as the leading ATM operator of non-bank branch locations. Restrictions on EBT Cards. In the U.S., recently released regulations at both the federal and state level prohibit the use of debit cards loaded with government benefit payments (commonly called "EBT cards") from being used at ATMs established in certain locations, primarily casinos, liquor stores, and adult entertainment venues. Since we have not seen a significant use of EBT cards in such locations, we do not believe these restrictions will have any meaningful impact upon our revenues. However, if the scope and type of locations where EBT cards are prohibited were to expand, our transaction-based revenue may be adversely affected. 35 -------------------------------------------------------------------------------- United Kingdom Property Taxes. In the U.K., there is no requirement for property owners to declare ownership and valuation to taxing authorities for property tax purposes (referred to as "business rates" in the U.K.). Rather, the U.K. government sets the valuations on all the assessable properties that it is aware of and distributes the results to the various local government councils, who then may or may not send property tax bills to property owners at their discretion. Through mid-2013, we had only received tax bills for a portion of our ATMs in the U.K. and these amounts were not significant in the past. In May 2013, we received a notice from the U.K. governmental agency in charge of property taxes stating that it had obtained location and transaction count data for all ATMs in the U.K., and that it was in the process of creating or updating the valuations on many U.K. ATMs across the industry. In September 2013, we received a listing of those proposed valuations on ATMs, which indicated an annual incremental assessment of approximately £1.8 million ($2.9 million), net of amounts that may be contractually recovered from merchants and potential reductions resulting from successfully challenging the assessments with the U.K. government and local authorities. Under U.K. law, these taxes may be payable retroactive to April 2010 or to the date of first occupancy, whichever is later. As a result, we believe that it is probable that we will be assessed on significantly more ATMs than in the past, and as a result, we recorded an additional charge of $8.7 million in the third quarter of 2013 to account for not only 2013 taxes assessable but also an estimate for taxes assessable in previous years. We believe there are several strategies to mitigate these property tax assessments and we are currently in the process of implementing several of these strategies to not only reduce the retroactive portion of such assessments, but to also minimize the potential ongoing impact of this change in approach by the U.K. taxing authorities. Expansion into Germany. As noted in the Strategic Outlook section above, we entered the German market in August 2013 through our acquisition of Cardpoint. The German ATM market is highly fragmented and may be under-deployed based on its population's use of cash relative to other markets in which we operate, such as the U.S. and U.K. There are approximately 58,500 ATMs in Germany that are largely deployed in branch locations. This fragmented and potentially under-deployed market dynamic is attractive to us, and as a result, we believe there are a number of opportunities for growth in this market and we plan to pursue many of them. Mexico Operations. In September 2012, we completed a required migration of our U.S. dollar-dispensing ATMs in Mexico so that we could continue to settle our U.S. dollar-denominated transactions through Promoción y Operación S.A. de C.V. This process change, combined with the overall recent downward trend in surcharge transactions in Mexico stemming from regulatory changes in 2010, has resulted in a reduction of the revenues and profits we earn from our ATMs in Mexico. Additionally, during the fourth quarter of 2013, in response to increased physical ATM theft attempts and lower profitability on certain ATMs in Mexico, we took a number of ATMs out of service for a period of time to enhance some security features. As a result, we have reduced our ATM deployments in Mexico in recent years and we continue to evaluate each ATM's revenue and profit contributions to our Mexico operations. If the recent business performance trend was to continue and we are unable to capitalize on market opportunities in the near future, it is possible that we could incur asset write-offs, including fixed assets, goodwill and other assets, or incur accelerated depreciation expense on certain assets. However, we believe that there are several significant opportunities in this market to leverage our existing operations with both existing and new financial institution and retail customers. Despite some of the recent challenges of operating in this market, we currently believe that the aforementioned business opportunities are at advanced stages and would significantly improve profitability of our operations in this market within the next twelve months. Convertible Note Offering. In November 2013, we completed an underwritten private placement of convertible senior notes ("Convertible Notes"), generating gross proceeds of $287.5 million. The Convertible Notes pay semi-annual interest at a rate of 1.0% per annum on the $287.5 million aggregate principal balance and mature in December 2020. We are required to settle the principal balance of the Convertible Notes in cash and/or stock upon conversion or maturity at our election. Simultaneous with the issuance of the Convertible Notes, we entered into hedging transactions designed to offset dilution to our common stock in the event of a conversion under the Convertible Notes. The note hedge instruments ("Note Hedges") have a strike price of $52.35 which is equal to the conversion rate under the Convertible Notes, are exercisable by us upon any conversion under the Convertible Notes, and expire in December 2020. We also sold warrants ("Warrants") in our common stock with a strike price of $73.29. The net effect of the Note Hedges and Warrants was to raise the effective conversion price of the Convertible Notes to $73.29. Senior Note Offering. In July 2014, we completed an underwritten private placement of senior notes ("New Senior Notes"), generating gross proceeds of $250.0 million. The New Senior Notes pay semi-annual interest at a fixed rate of 5.125% and mature in 2022. Simultaneous with the New Senior Notes offering, we launched a tender offer (the "Tender Offer") for approximately $179.4 million principal amount of our outstanding 8.25% senior subordinated notes ("Old Senior Notes"). For any Old Senior Notes not tendered to us, we intend to call and retire them shortly after the Tender Offer has expired. We expect to use proceeds from the New Senior Notes to fund the Tender Offer. The remaining proceeds from the New Senior Notes will be used for general corporate purposes and may be used to fund a portion of the Welch ATM acquisition (discussed above), which we expect to complete during the third quarter of 2014. Factors Impacting Comparability between Periods · Foreign Currency Exchange Rates. Our reported financial results are subject to fluctuations in exchange rates. With relatively minor fluctuations in the average rates between 2013 and 2014, our overall results have not been significantly impacted. · Acquisitions. The results of operations for any acquired entities have been included in our consolidated results since the respective dates of acquisition. 36 -------------------------------------------------------------------------------- Results of Operations The following table sets forth line items from our Consolidated Statements of Operations as a percentage of total revenues for the periods indicated. Percentages may not add due to rounding. Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Revenues: ATM operating revenues 96.9 % 97.9 % 97.0 % 97.8 % ATM product sales and other revenues 3.1 2.1 3.0 2.2 Total revenues 100.0 100.0 100.0 100.0 Cost of revenues: Cost of ATM operating revenues (excludes depreciation, accretion, and amortization of intangible assets shown separately below) (1) 62.8 64.2 64.0 64.8 Cost of ATM product sales and other revenues 3.0 2.0 2.9 2.1 Total cost of revenues 65.8 66.2 66.9 66.9 Gross profit 34.2 33.8 33.1 33.1 Operating expenses: Selling, general, and administrative expenses 10.7 9.1 10.4 9.3 Acquisition-related expenses 2.9 0.6 2.1 1.0 Depreciation and accretion expense 7.5 7.6 7.5 7.9 Amortization of intangible assets 3.3 2.9 3.3 2.9 Loss on disposal of assets 0.1 0.1 0.1 0.1 Total operating expenses 24.6 20.3 23.4 21.3 Income from operations 9.6 13.5 9.7 11.8 Other expense (income): Interest expense, net 2.0 2.4 2.1 2.5 Amortization of deferred financing costs and note discount 1.1 0.1 1.1 0.1 Redemption costs for early extinguishment of debt 0.3 - 0.3 - Other income (2.0) (1.0) (1.0) (0.6) Total other expense 1.4 1.6 2.4 2.0 Income before income taxes 8.2 11.9 7.3 9.8 Income tax expense 3.1 4.8 2.7 3.9 Net income 5.2 7.1 4.5 5.9 Net loss attributable to noncontrolling interests (0.2) (0.3) (0.1) (0.2) Net income attributable to controlling interests and available to common stockholders 5.4 % 7.4 % 4.7 % 6.1 % _______________ (1) Excludes effects of depreciation, accretion, and amortization of intangible assets of $24.7 million and $19.9 million for the three months ended June 30, 2014 and 2013, respectively, and $ 48.5 million and $40.0 million for the six months ended June 30, 2014 and 2013, respectively. The inclusion of this depreciation, accretion, and amortization of intangible assets in Cost of ATM operating revenues would have increased our Cost of ATM operating revenues as a percentage of total revenues by 9.5% and 9.6% for the three months ended June 30, 2014 and 2013, respectively and by 9.6% and 9.9% for the six months ended June 30, 2014 and 2013. 37 -------------------------------------------------------------------------------- Key Operating Metrics We rely on certain key measures to gauge our operating performance, including total transactions, total cash withdrawal transactions, ATM operating revenues per ATM per month, and ATM operating gross profit margin. The following table sets forth information regarding certain of these key measures for the periods indicated, excluding the effect of the acquisitions during the periods presented for comparative purposes. EXCLUDING ACQUISITIONS: Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 Average number of transacting ATMs: United States: Company-owned 29,271 28,024 29,121 27,833 United Kingdom 4,975 4,311 4,806 4,314 Mexico 2,206 2,694 2,167 2,701 Canada 1,690 1,593 1,660 1,570 Subtotal 38,142 36,622 37,754 36,418 United States: Merchant-owned (1) 19,032 20,991 18,731 20,607 Average number of transacting ATMs - ATM operations 57,174 57,613 56,485 57,025 United States: Managed services - Turnkey 2,080 2,204 2,107 2,210 United States: Managed services - Processing Plus (1) 7,724 6,864 6,935 5,585 United Kingdom: Managed services 21 21 21 21 Canada: Managed services 274 318 270 310 Average number of transacting ATMs - Managed services 10,099 9,407 9,333 8,126 Total average number of transacting ATMs 67,273 67,020 65,818 65,151 Total transactions (in thousands): ATM operations 220,121 201,189 426,014 391,336 Managed services 15,803 13,617 29,321 24,063 Total transactions 235,924 214,806 455,335 415,399 Total cash withdrawal transactions (in thousands): ATM operations 130,297 124,629 251,103 241,713 Managed services 10,457 9,163 19,265 15,954 Total cash withdrawal transactions 140,754 133,792 270,368 257,667 Per ATM per month amounts (excludes managed services): Cash withdrawal transactions 760 721 741 706 ATM operating revenues $ 1,234 $ 1,144 $ 1,218 $ 1,129 Cost of ATM operating revenues (2) 810 745 810 744 ATM operating gross profit (2) (3) $ 424 $ 399 $ 408 $ 385 ATM operating gross profit margin (2) (3) 34.4 % 34.9 % 33.5 % 34.1 % ____________ (1) Approximately 700 ATMs moved from the U.S.: Merchant-owned category to the U.S.: Managed services - Processing Plus category subsequent to June 30, 2013. (2) Amounts presented exclude the effect of depreciation, accretion, and amortization of intangible assets, which is presented separately in our consolidated statements of operations. (3) ATM operating gross profit and ATM operating gross profit margin are measures of profitability that are calculated based on only the revenues and expenses that relate to operating ATMs in our portfolio. Revenues and expenses relating to managed services and ATM equipment sales and other ATM-related services are not included. 38 --------------------------------------------------------------------------------The following table sets forth information regarding certain of these key measures for the periods indicated, including the effect of the acquisitions in the periods presented for comparative purposes. INCLUDING ACQUISITIONS: Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 Average number of transacting ATMs: United States: Company-owned 29,806 28,024 29,656 27,833 United Kingdom 11,891 4,311 11,770 4,314 Mexico 2,206 2,694 2,167 2,701 Canada 1,690 1,593 1,660 1,570 Germany 874 - 865 - Subtotal 46,467 36,622 46,118 36,418 United States: Merchant-owned 22,536 20,991 22,241 20,607 Average number of transacting ATMs - ATM operations 69,003 57,613 68,359 57,025 United States: Managed services - Turnkey 2,080 2,204 2,107 2,210 United States: Managed services - Processing Plus 11,816 6,864 11,565 5,585 United Kingdom: Managed services 21 21 21 21 Canada: Managed services 274 318 270 310 Average number of transacting ATMs - Managed services 14,191 9,407 13,963 8,126 Total average number of transacting ATMs 83,194 67,020 82,322 65,151 Total transactions (in thousands): ATM operations 258,840 201,189 502,366 391,336 Managed services 18,584 13,617 36,113 24,063 Total transactions 277,424 214,806 538,479 415,399 Total cash withdrawal transactions (in thousands): ATM operations 153,652 124,629 297,065 241,713 Managed services 12,629 9,163 24,568 15,954 Total cash withdrawal transactions 166,281 133,792 321,633 257,667 Per ATM per month amounts (excludes managed services): Cash withdrawal transactions 742 721 724 706 ATM operating revenues $ 1,185 $ 1,144 $ 1,163 $ 1,129 Cost of ATM operating revenues (1) 768 745 766 744 ATM operating gross profit (1) (2) $ 417 $ 399 $ 397 $ 385 ATM operating gross profit margin (1) (2) 35.2 % 34.9 % 34.1 % 34.1 % ____________ (1) Amounts presented exclude the effect of depreciation, accretion, and amortization of intangible assets, which is presented separately in our consolidated statements of operations. (2) ATM operating gross profit and ATM operating gross profit margin are measures of profitability that are calculated based on only the revenues and expenses that relate to operating ATMs in our portfolio. Revenues and expenses relating to managed services and ATM equipment sales and other ATM-related services are not included. 39 -------------------------------------------------------------------------------- Revenues Three Months Ended June 30, Six Months Ended June 30, 2014 2013 % Change 2014 2013 % Change (In thousands) (In thousands) ATM operating revenues $ 252,052 $ 203,599 23.8 % $ 490,191 $ 396,959 23.5 % ATM product sales and other revenues 7,977 4,385 81.9 % 14,910 8,763 70.1 % Total revenues $ 260,029 $ 207,984 25.0 % $ 505,101 $ 405,722 24.5 % Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013 ATM operating revenues. ATM operating revenues generated during the three months ended June 30, 2014 increased $48.5 million, or 23.8%, from the three months ended June 30, 2013. Below is the detail, by segment, of the changes in the various components of ATM operating revenues: Variance: Three Months Ended June 30, 2013 to Three Months Ended June 30, 2014 U.S. Europe Other International Eliminations Total Increase (decrease) (In thousands) Surcharge revenue $ 3,475 $ 20,929 $ (1,142) $ - $ 23,262 Interchange revenue 3,468 16,669 (209) - 19,928 Bank branding and surcharge-free network revenues 2,812 - 62 (2) 2,872 Managed services revenues 361 5 12 - 378 Other revenues 1,073 840 (14) 114 2,013 Total increase (decrease) in ATM operating revenues $ 11,189 $ 38,443 $ (1,291) $ 112 $ 48,453 United States. During the three months ended June 30, 2014, our U.S. operations experienced an $11.2 million, or 6.9%, increase in ATM operating revenues when compared to the same period in 2013. Acquisitions completed since the beginning of 2013 accounted for $3.9 million, or 2.4%, of this increase. The results of these acquired businesses (or a portion thereof) were included in the consolidated financial results for the three months ended June 30, 2014, but not in the comparable period in 2013. The remaining $7.3 million, or 4.5%, increase was due to growth achieved from a combination of revenue sources, including: (i) increased surcharge and interchange revenues primarily as a result of a higher machine count and total transaction count; (ii) an increase in bank branding and surcharge-free network revenues that resulted from the continued growth of participating banks and other financial institutions in our bank branding program and our Allpoint network; and (iii) an increase in managed services revenue as a result of an increase in new contracts entered into under this arrangement type. For additional information on recent trends that have impacted, and may continue to impact, the revenues generated by our U.S. operations, see Recent Events and Trends - Withdrawal Transaction and Revenue Trends - United States above. Europe. Our European operations, which include our operations in the U.K. and Germany, experienced a $38.4 million, or 118.3%, increase in ATM operating revenues during the three months ended June 30, 2014 when compared to the same period in 2013. Approximately $30.5 million, or 93.9%, of the increase, was attributable to our acquisition of Cardpoint, which was completed in August 2013. Approximately $4.8 million, or 14.8%, of the increase was primarily driven by higher interchange revenues, as a result of an increase in the number of total ATMs in our U.K. business. Foreign currency exchange rate movements accounted for approximately $3.1 million or approximately 9.6% of the increase from the prior year. For additional information on recent trends that have impacted, and may continue to impact, the revenues generated by our U.K. operations, see Recent Events and Trends - Withdrawal Transaction and Revenue Trends - United Kingdom above. Other International. ATM operating revenues generated by our other international segment, which includes our Mexico and Canadian operations, declined $1.3 million for the three months ended June 30, 2014, when compared to the same period in 2013. This decline was attributable to our Mexico operations, which generated $1.4 million less ATM operating revenues during the three months ended June 30, 2014 as compared to the same period in 2013 primarily due to an 18% lower average transacting machine count. The lower machine count was the result of an internal decision to remove a number of machines to improve profitability of the overall business. As a result of the lower transacting ATM count, our transactions in this market experienced a similar percentage decline, resulting in the reduced revenues. Foreign currency exchange rate movements did not have a material effect on the reported ATM operating revenues in this segment. 40 -------------------------------------------------------------------------------- ATM product sales and other revenues. ATM product sales and other revenues for the three months ended June 30, 2014 totaled $8.0 million, representing an increase of $3.6 million from the same period in 2013. This increase was primarily attributable to higher equipment and value-added reseller ("VAR") program sales to merchants and distributors during the period due to the continued replacement of certain ATMs that were not ADA-compliant and the replacement of older equipment with new EMV-compliant equipment. Under our VAR program, we primarily sell ATMs to associate VARs who in turn resell the ATMs to various financial institutions throughout the U.S. in territories authorized by the equipment manufacturer. Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013 ATM operating revenues. ATM operating revenues generated during the six months ended June 30, 2014 increased $93.2 million, or 23.5%, from the six months ended June 30, 2013. Below is the detail, by segment, of changes in the various components of ATM operating revenues: Variance: Six Months Ended June 30, 2013 to Six Months Ended June 30, 2014 U.S. Europe Other International Eliminations Total Increase (decrease) (In thousands) Surcharge revenue $ 6,887 $ 39,382 $ (3,395) $ - $ 42,874 Interchange revenue 7,927 31,086 (449) - 38,564 Bank branding and surcharge-free network revenues 5,892 - 417 (2) 6,307 Managed services revenues 1,144 9 12 - 1,165 Other revenues 2,314 2,567 (130) (429) 4,322 Total increase in ATM operating revenues $ 24,164 $ 73,044 $ (3,545) $ (431) $ 93,232 United States. During the six months ended June 30, 2014, our U. S. operations experienced a $24.2 million, or 7.6%, increase in ATM operating revenues compared to the same period in 2013. Acquisitions completed since the beginning of 2013 accounted for $9.0 million, or 2.8%, of the increase. The results of these acquired businesses (or a portion thereof) were included in the consolidated financial results for the six months ended June 30, 2014, but not in the comparable period in 2013. The remaining $15.2 million, or 4.8%, increase was primarily due to the following; (i) increased surcharge and interchange revenues primarily as a result of a higher machine count; (ii) an increase in bank branding and surcharge-free network revenues that resulted from the continued growth of participating banks and other financial institutions in our bank branding program and our Allpoint network; and (iii) an increase in managed services revenue as a result of an increase in new contracts entered into under this arrangement type. The increase in other revenues in the U.S. is primarily from intercompany transaction processing services to foreign subsidiaries, which is eliminated in consolidation. Europe. Our European operations also contributed to the higher ATM operating revenues for the six months ended June 30, 2014, which increased by $73.0 million, or 117.5%, from the six months ended June 30, 2013. As was the case with the three month period, an increase of $57.1 million, or 91.9%, was attributable to our acquisition of Cardpoint, which were completed in March 2013 and August 2013, respectively. Approximately $10.9 million, or 17.5%, increase was driven by higher interchange revenues, primarily as a result of growth in the number of total ATMs in our U.K. business. Foreign currency exchange rate movements accounted for approximately $ 5.0 million or 8.1% of the year over year increase. Other International. ATM operating revenues generated by our other international segment, which includes our Mexico and Canadian operations, declined $3.5 million for the six months ended June 30, 2014, when compared to the same period in 2013. This decline was primarily attributable to our Mexico operations, which generated $3.0 million less ATM operating revenues during the six months ended June 30, 2014, than the same period in 2013, primarily due to a 20% lower average transacting machine count. The lower machine count was the result of an internal decision to remove a number of machines to improve profitability of the overall business. As a result of the lower transacting ATM count, our transactions in this market experienced a similar percentage decline, resulting in the reduced revenues. Foreign currency exchange rate movements did not have a material effect on the reported ATM operating revenues in this segment. ATM product sales and other revenues. ATM product sales and other revenues for the six months ended June 30, 2014, totaled $14.9 million, representing an increase of $6.1 million from the same period in 2013. This increase was primarily attributable to higher equipment and value-added reseller ("VAR") program sales to merchants and distributors during the period due to the continued replacement of certain ATMs that were not ADA-compliant and the replacement of older equipment with new EMV-compliant equipment. Under our VAR program, we primarily sell ATMs to associate VARs who in turn resell the ATMs to various financial institutions throughout the U.S. in territories authorized by the equipment manufacturer. 41 -------------------------------------------------------------------------------- Cost of Revenues Three Months Ended June 30, Six Months Ended June 30, 2014 2013 % Change 2014 2013 % Change (In thousands) (In thousands) Cost of ATM operating revenues (exclusive of depreciation, accretion, and amortization of intangible assets) $ 163,380 $ 133,482 22.4 % $ 323,139 $ 263,042 22.8 % Cost of ATM product sales and other revenues 7,754 4,228 83.4 % 14,564 8,357 74.3 % Total cost of revenues (exclusive of depreciation, accretion, and amortization of intangible assets) $ 171,134 $ 137,710 24.3 % $ 337,703 $ 271,399 24.4 % Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013 Cost of ATM operating revenues (exclusive of depreciation, accretion, and amortization of intangible assets). The cost of ATM operating revenues (exclusive of depreciation, accretion, and amortization of intangibles assets) for the three months ended June 30, 2014 increased $29.9 million when compared to the same period in 2013. The following is a detail, by segment, of changes in the various components of the cost of ATM operating revenues (exclusive of depreciation, accretion, and amortization of intangible assets): Variance: Three Months Ended June 30, 2013 to Three Months Ended June 30, 2014 U.S. Europe Other International Eliminations Total Increase (decrease) (In thousands) Merchant commissions $ 3,612 $ 11,146 $ (431) $ - $ 14,327 Vault cash rental 2,664 985 (20) - 3,629 Other costs of cash (760) 3,740 (238) - 2,742 Repairs and maintenance (56) 1,355 172 - 1,471 Communications 191 640 (77) 10 764 Transaction processing (132) 842 (196) 313 827 Stock-based compensation 148 - - - 148 Other expenses 513 5,999 (311) (211) 5,990 Total increase (decrease) in cost of ATM operating revenues $ 6,180 $ 24,707 $ (1,101) $ 112 $ 29,898 United States. During the three months ended June 30, 2014, our U.S. operations experienced a $6.2 million, or 6.1% increase in the cost of ATM operating revenues (exclusive of depreciation, accretion, and amortization of intangible assets) when compared to the same period in 2013, of which approximately $2.6 million was attributable to the acquisitions completed in 2013 and 2014. The remaining increase primarily resulted from higher transaction volumes and ATM unit growth driven by organic revenue growth, as well as other expenses from higher employee costs. Additionally, the increase in vault cash rental cost is attributable to higher interest rate swap expense associated with cash flow hedges that became effective on January 1, 2014. Europe. During the three months ended June 30, 2014, our European operations experienced a $24.7 million, or 100.3% increase in the cost of ATM operating revenues (exclusive of depreciation, accretion, and amortization of intangible assets) when compared to the same period in 2013, of which approximately $17.7 million was a result of the acquisitions completed in 2013. The remaining increase was the result of the increased number of transactions conducted on our machines in the European market as well as higher charges recorded in 2014 to accrue for estimated business rates (property taxes), which historically had not been as significant. For further details on this matter, see Recent Events and Trends - United Kingdom Property Taxes. Other International. The cost of ATM operating revenues (exclusive of depreciation, accretion, and amortization of intangible assets) from our Other International operations decreased by $1.1 million during the three months ended June 30, 2014, when compared to the same period in 2013. This decline was primarily the result of the lower average number of transacting ATMs in Mexico, as described above, which resulted in reduced transaction levels and operating costs on our ATMs in that market. 42 -------------------------------------------------------------------------------- Cost of ATM product sales and other revenues. The cost of ATM product sales and other revenues increased by $3.5 million during the three months ended June 30, 2014, when compared to the same period in 2013. This increase is consistent with the increase in related revenues, as discussed above, and is primarily related to increased equipment and VAR sales activity. Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013 Cost of ATM operating revenues (exclusive of depreciation, accretion, and amortization of intangible assets). The cost of ATM operating revenues (exclusive of depreciation, accretion, and amortization of intangible assets) for the six months ended June 30, 2014, increased $60.1 million when compared to the same period in 2013. Below is a detail, by segment, of changes in the various components of the cost of ATM operating revenues (exclusive of depreciation, accretion, and amortization of intangible assets): Variance: Six Months Ended June 30, 2013 to Six Months Ended June 30, 2014 U.S. Europe Other International Eliminations Total Increase (decrease) (In thousands) Merchant commissions $ 8,094 $ 21,550 $ (1,178) $ - $ 28,466 Vault cash rental 5,050 1,451 (108) - 6,393 Other costs of cash (901) 6,689 (1,614) - 4,174 Repairs and maintenance 918 3,372 598 - 4,888 Communications (190) 2,102 (123) 27 1,816 Transaction processing 146 2,652 (268) 126 2,656 Stock-based compensation 155 - - - 155 Other expenses 1,346 11,320 (534) (583) 11,549 Total increase in cost of ATM operating revenues $ 14,618 $ 49,136 $ (3,227) $ (430) $ 60,097 United States. During the six months ended June 30, 2014, our U.S. operations incurred an $14.6 million, or 7.3% increase in the cost of ATM operating revenues (exclusive of depreciation, accretion, and amortization of intangible assets) when compared to the same period in 2013, of which approximately $6.0 million was attributable to the acquisitions completed in 2013 and 2014. The remaining increase primarily resulted from higher transaction volumes and ATM unit growth driven by organic revenue growth, as well as other expenses from higher employee costs. Additionally, the increase in vault cash rental cost is attributable to higher interest rate swap expense associated with cash flow hedges that became effective on January 1, 2014. Europe. During the six months ended June 30, 2014, our European operations experienced a $49.1 million, or 102.3% increase in the cost of ATM operating revenues (exclusive of depreciation, accretion, and amortization of intangible assets) when compared to the same period in 2013, of which approximately $34.5 million was a result of the acquisitions completed in 2013. The remaining increase was the result of the higher ATM count in the U.K. as well as higher charges recorded in 2014 to accrue for estimated business rates (property taxes), which historically had not been as significant. For further details on this matter, see Recent Events and Trends - United Kingdom Property Taxes. Other International. The cost of ATM operating revenues (exclusive of depreciation, accretion, and amortization of intangible assets) from our Other International operations decreased by $3.2 million during the six months ended June 30, 2014, when compared to the same period in 2013. This decline was primarily the result of the lower average number of transacting ATMs in Mexico, as described above, which resulted in reduced transaction levels and operating costs on our ATMs in that market. Cost of ATM product sales and other revenues. The cost of ATM product sales and other revenues increased by $6.2 million during the six months ended June 30, 2014, when compared to the same period in 2013. This increase is consistent with the increase in related revenues, as discussed above, and is primarily related to increased equipment and VAR sales activity. 43 -------------------------------------------------------------------------------- Gross Profit Margin Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 ATM operating gross profit margin: Exclusive of depreciation, accretion, and amortization of intangible assets. 35.2 % 34.4 % 34.1 % 33.7 % Inclusive of depreciation, accretion, and amortization of intangible assets 25.4 % 24.6 % 24.2 % 23.7 % ATM product sales and other revenues gross profit margin 2.8 % 3.6 % 2.3 % 4.6 % Total gross profit margin: Exclusive of depreciation, accretion, and amortization of intangible assets. 34.2 % 33.8 % 33.1 % 33.1 % Inclusive of depreciation, accretion, and amortization of intangible assets 24.7 % 24.2 % 23.5 % 23.3 % ATM operating gross profit margin. For the three and six months ended June 30, 2014, our ATM operating gross profit margin exclusive of depreciation, accretion, and amortization of intangible assets increased slightly when compared to the same periods in 2013. The increase is primarily as a result of our revenue growth and higher incoming margins on the recently acquired businesses. ATM product sales and other revenues gross profit margin. For the three and six months ended June 30, 2014, our gross profit margin on ATM product sales and other revenues declined by 0.8 and 2.3 percentage points, respectively, primarily as a result of increased expenses related to higher service revenues which are lower margin than our other ATM product sales. Selling, General, and Administrative Expenses Three Months Ended June 30, Six Months Ended June 30, 2014 2013 % Change 2014 2013 % Change (In thousands) (In thousands) Selling, general, and administrative expenses $ 24,580 $ 16,560 48.4 % $ 46,103 $ 32,589 41.5 % Stock-based compensation 3,346 2,372 41.1 % 6,350 5,332 19.1 % Acquisition-related expenses 7,642 1,184 545.4 % 10,729 4,006 167.8 % Total selling, general, and administrative expenses $ 35,568 $ 20,116 76.8 % $ 63,182 $ 41,927 50.7 % Percentage of total revenues: Selling, general, and administrative expenses 9.5 % 8.0 % 9.1 % 8.0 % Stock-based compensation 1.3 % 1.1 % 1.3 % 1.3 % Acquisition-related expenses 2.9 % 0.6 % 2.1 % 1.0 % Total selling, general, and administrative expenses 13.7 % 9.7 % 12.5 % 10.3 % Selling, general, and administrative expenses ("SG&A expenses"), excluding stock-based compensation and acquisition-related expenses. SG&A expenses, excluding stock-based compensation and acquisition-related expenses, increased $8.0 million, or 48.4% and $13.5 million, or 41.5% for the three and six months ended June 30, 2014, when compared to the same periods in 2013. This increase was due to the following: (i) higher payroll-related costs compared to the same periods in 2013 due to increased headcount, including employees added from the acquisitions completed since the beginning of 2013; (ii) increased incentive-based compensation; (iii) increased office and facilities costs, a portion of which is attributable to the acquisitions completed since the beginning of 2013; (iv) higher marketing and professional expenses; and (v) increased costs related to strengthening our information technology and product development organizations. Stock-based compensation. The $1.0 million increase in stock-based compensation expense for both the three and six months ended June 30, 2014, was mostly attributable to the increase employee headcount. For additional details on equity awards, see Item 1. Financial Information, Note 3, Stock-Based Compensation. 44 -------------------------------------------------------------------------------- Acquisition-related expenses. Acquisition-related expenses increased $6.5 million, or 545.4% and $6.7 million, or 167.8% for the three and six months ended June 30, 2014, as compared to the same periods in 2013. The increase is primarily attributable to certain nonrecurring integration and transition-related costs associated with our 2013 acquisitions, including the recognition of a liability of approximately $3.1 million for the estimated remaining lease payments associated with facilities no longer expected to yield an economic benefit in future periods and other costs related to recently completed and pending acquisitions. Depreciation and Accretion Expense Three Months Ended June 30, Six Months Ended June 30, 2014 2013 % Change 2014 2013 % Change (In thousands) (In thousands) Depreciation expense $ 18,716 $ 15,271 22.6 % $ 36,249 $ 30,896 17.3 % Accretion expense 881 610 44.4 % 1,694 1,270 33.4 % Depreciation and accretion expense $ 19,597 $ 15,881 23.4 % $ 37,943 $ 32,166 18.0 % Percentage of total revenues: Depreciation expense 7.2 % 7.3 % 7.2 % 7.6 % Accretion expense 0.3 % 0.3 % 0.3 % 0.3 % Depreciation and accretion expense 7.5 % 7.6 % 7.5 % 7.9 % For the three and six months ended June 30, 2014, depreciation expense increased $3.4, million or 22.6% and $5.4 million, or 17.3% when compared to the same periods in 2013 primarily as a result of the deployment of additional Company-owned ATMs over the past year as a result of our organic ATM unit growth and the ATMs acquired through various acquisitions in 2013 and 2014. For the three and six months ended June 30, 2014, accretion expense increased $0.3 million, or 44.4% and $0.4 million, or 33.4% when compared to the same periods in 2013. The increase is due to our continued revenue growth, establishing additional asset retirement obligations in connection with newly deployed ATMs and acquired ATMs. When we install our ATMs, we estimate the fair value of future retirement obligations associated with those ATMs, including the anticipated costs to deinstall, and in some cases refurbish, the ATMs at certain merchant locations. Accretion expense represents the increase of this liability from the original discounted net present value to the amount we ultimately expect to incur. Amortization of Intangible Assets Three Months Ended June 30, Six Months Ended June 30, 2014 2013 % Change 2014 2013 % Change (In thousands) (In thousands) Amortization of intangible assets $ 8,465 $ 6,081 39.2 % $ 16,682 $ 11,829 41.0 % Percentage of total revenues 3.3 % 2.9 % 3.3 % 2.9 % Amortization of intangible assets relates primarily to merchant contracts and relationships recorded in connection with purchase price accounting valuations for completed acquisitions. The increase of $2.4 million, or 39.2% and $4.9 million, or 41.0% in amortization of intangible assets during the three and six months ended June 30, 2014 when compared to the same periods in 2013 was primarily due to the addition of intangible assets from the acquisitions completed since the beginning of 2013. Interest Expense, Net Three Months Ended June 30, Six Months Ended June 30, 2014 2013 % Change 2014 2013 % Change (In thousands) (In thousands) Interest expense, net $ 5,328 $ 5,059 5.3 % $ 10,744 $ 10,125 6.1 % Amortization of deferred financing costs and note discount 2,762 231 1,095.7 % 5,447 460 1,084.1 % Total interest expense, net $ 8,090 $ 5,290 52.9 % $ 16,191 $ 10,585 53.0 % Percentage of total revenues 3.1 % 2.5 % 3.2 % 2.6 % Interest expense, net. Interest expense, net increased $0.3 million, or 5.3% and $0.7 million, or 6.1% during the three and six months ended June 30, 2014, when compared to the same period in 2013. This increase was primarily as a result of higher debt outstanding due to the Cardpoint acquisition completed in August 2013. For additional details, see Item 1. Financial Information, Note 8, Long-Term Debt. 45 -------------------------------------------------------------------------------- Amortization of deferred financing costs and note discount. Amortization of deferred financing costs and note discount increased $2.5 million and $5.0 million during the three and six months ended June 30, 2014, over the same periods in 2013, primarily as a result of our issuance of $287.5 million of Convertible Notes in November 2013. As the Convertible Notes contain an embedded option feature, we attributed $71.7 million of the proceeds to additional paid-in capital at the time of funding. This resulted in an effective note discount, which is being accreted over the term of the Convertible Notes and drove the majority of the year-over-year increase in this expense. We also incurred $5.2 million in fees in conjunction with the issuance of the Convertible Notes, which are being amortized over the life of the Convertible Notes. Also contributing to the increase in the amortization of deferred financing costs during the current year were the modifications made to our $375.0 million revolving credit facility in August 2013, the costs of which are being amortized over the life of the revolver. In April 2014, we amended and restated our existing credit agreement and incurred approximately $1.0 million in fees which will be amortized over the term of the revolving credit facility, which runs through April 2019. Additionally, in July 2014 we incurred additional financing costs of approximately $4.1 million associated with the issuance of $250.0 million in senior notes. Going forward, we expect the amortization of deferred financing costs line item (which includes the note discount) to be higher as compared to prior periods, a result of the recent amendment and restatement of our credit agreement and new senior note issuance. Other Income (Expense) The increase in other income in the three and six months ended June 30, 2014 compared to the same periods in the prior year is primarily the result of a non-recurring gain as a result of a favorable settlement of a lawsuit during the quarter ended June 30, 2014. Income Tax Expense Three Months Ended June 30, Six Months Ended June 30, 2014 2013 % Change 2014 2013 % Change (In thousands) (In thousands) Income tax expense $ 8,015 $ 10,034 (20.1) % $ 13,788 $ 16,014 (13.9) % Effective tax rate 37.4 % 40.5 % 37.6 % 40.1 % The decrease in income tax expense is primarily related to lower income before income taxes in the three and six months ended June 30, 2014 when compared to the same period in 2013. The decrease in the effective tax rate is primarily attributable to the change in the mix of earnings across jurisdictions. We continue to maintain valuation allowances for our local net deferred tax asset positions for certain of our entities in the U.K. and Mexico, as we currently believe that it is more likely than not that these tax assets will not be realized. Non-GAAP Financial Measures Included below are certain non-GAAP financial measures that we use to evaluate the performance of our business. We believe that the presentation of these measures and the identification of unusual or certain non-recurring adjustments and non-cash items enhance an investor's understanding of the underlying trends in our business and provide for better comparability between periods in different years. EBITDA, Adjusted EBITDA, Adjusted Net Income, and Free Cash Flow are non-GAAP financial measures provided as a complement to results prepared in accordance with U.S. GAAP and may not be comparable to similarly-titled measures reported by other companies. The Company uses these non-GAAP financial measures in managing and measuring the performance of its business, including setting and measuring incentive based compensation for management. Adjusted EBITDA excludes depreciation, accretion, and amortization of intangible assets as these amounts can vary substantially from company to company within our industry depending upon accounting methods and book values of assets, capital structures, and the method by which the assets were acquired. Adjusted EBITDA also excludes acquisition-related expenses, certain other non-operating and nonrecurring costs, loss on disposal of assets, our obligations for the payment of income taxes, interest expense or other obligations such as capital expenditures, and an adjustment for noncontrolling interest. Adjusted Net Income represents net income computed in accordance with GAAP, before amortization of intangible assets, loss on disposal of assets, stock-based compensation expense, certain other expense (income) amounts, nonrecurring expenses, and acquisition-related expenses, and using an assumed tax rate of 32% for the quarter ended June 30, 2014, and 35% for the quarter ended June 30, 2013, with certain adjustments for noncontrolling interests. Adjusted EBITDA %, Adjusted Pre-tax %, and Adjusted Net Income % are calculated by taking the respective non-GAAP financial measures over GAAP total revenues. Adjusted Net Income per diluted share is calculated by dividing Adjusted Net Income by average weighted diluted shares outstanding. Free Cash Flow is defined as cash provided by operating activities less payments for capital expenditures, including those financed through direct debt but excluding acquisitions. The measure of Free Cash Flow does not take into consideration certain other non-discretionary cash requirements such as, for example, mandatory principal payments on portions of our long-term debt. The non-GAAP financial measures presented herein should not be considered in isolation or as a substitute for operating income, net income, cash flows from operating, investing, or financing activities, or other income or cash flow statement data prepared in accordance with U.S. GAAP. 46 -------------------------------------------------------------------------------- A reconciliation of EBITDA, Adjusted EBITDA, and Adjusted Net Income to Net Income Attributable to Controlling Interests, their most comparable U.S. GAAP financial measure, and a reconciliation of Free Cash Flow to cash provided by operating activities, the most comparable U.S. GAAP financial measure, are presented as follows: Reconciliation of Net Income Attributable to Controlling Interests to EBITDA, Adjusted EBITDA, and Adjusted Net Income Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (In thousands, except share and per share amounts) Net income attributable to controlling interests and available to common stockholders $ 13,989 $ 15,327 $ 23,554 $ 24,757 Adjustments: Interest expense, net 5,328 5,059 10,744 10,125 Amortization of deferred financing costs and note discount 2,762 231 5,447 460 Redemption costs for early extinguishment of debt 699 - 1,353 - Income tax expense 8,015 10,034 13,788 16,014 Depreciation and accretion expense 19,597 15,881 37,943 32,166 Amortization of intangible assets 8,465 6,081 16,682 11,829 EBITDA $ 58,855 $ 52,613 $ 109,511 $ 95,351 Add back: Loss on disposal of assets 316 157 584 360 Other income (1) (5,261) (2,050) (5,230) (2,471) Noncontrolling interests (2) (391) (536) (764) (955) Stock-based compensation expense (3) 3,692 2,568 6,903 5,725 Acquisition-related expenses (4) 7,642 1,184 10,729 4,006 Other adjustments to selling, general, and administrative expenses - - - 446 Adjusted EBITDA $ 64,853 $ 53,936 $ 121,733 $ 102,462 Less: Interest expense, net (3) 5,320 5,031 10,722 10,069 Depreciation and accretion expense (3) 19,234 15,459 37,236 31,328 Adjusted pre-tax income 40,299 33,446 73,775 61,065 Income tax expense (5) 12,895 11,706 23,607 21,373 Adjusted Net Income $ 27,404 $ 21,740 $ 50,168 $ 39,692 Adjusted Net Income per share $ 0.62 $ 0.49 $ 1.13 $ 0.90 Adjusted Net Income per diluted share $ 0.61 $ 0.49 $ 1.12 $ 0.89 Weighted average shares outstanding - basic 44,324,747 44,394,230 44,270,363 44,321,069 Weighted average shares outstanding - diluted 44,830,978 44,615,021 44,800,298 44,547,851 _______________ (1) 2014 amounts include non-recurring settlement gain of $4.8 million. (2) Noncontrolling interests adjustment made such that Adjusted EBITDA includes only the Company's 51% ownership interest in the Adjusted EBITDA of its Mexico subsidiary. (3) Amounts exclude 49% of the expenses incurred by the Company's Mexico subsidiary as such amounts are allocable to the noncontrolling interest stockholders. (4) Acquisition-related expenses include nonrecurring costs incurred for professional and legal fees and certain transition and integration-related costs, including contract termination costs, related to acquisitions. (5) Calculated using the Company's estimated long-term, cross-jurisdictional effective cash tax rate of 32% for the six months ended June 30, 2014 and 35% through June, 30, 2013. The change in the estimated non-GAAP tax rate is attributable to an increased portion of the Company's consolidated earnings occurring in lower tax rate jurisdictions. 47 -------------------------------------------------------------------------------- Calculation of Free Cash Flow Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (In thousands) Cash provided by operating activities $ 42,352 $ 38,974 $ 56,871 $ 80,354 Payments for capital expenditures: Cash used in investing activities, excluding acquisitions (25,041) (13,918) (41,753) (29,855) Free cash flow $ 17,311 $ 25,056 $ 15,118 $ 50,499 _______________ (1) Free cash flow for the six months ended June 30, 2013 included the collection of a $13.4 million insurance receivable. Liquidity and Capital Resources Overview As of June 30, 2014, we had $61.4 million in cash and cash equivalents on hand and $474.2 million in outstanding long-term debt. We have historically funded our operations primarily through cash flows from operations, borrowings under our revolving credit facilities, and the issuance of debt and equity securities. Furthermore, we have historically used cash to invest in additional ATMs, either through the acquisition of ATM networks or through organically-generated growth. We have also used cash to fund increases in working capital and to pay interest and principal amounts outstanding under our borrowings. Because we collect a sizable portion of our cash from sales on a daily basis but generally pay our vendors on 30-day terms and are not required to pay certain of our merchants until 20 days after the end of each calendar month, we are able to utilize the excess available cash flow to reduce borrowings made under our revolving credit facility and to fund our ongoing capital expenditure program. Accordingly, it is not uncommon for us to reflect a working capital deficit position on our Consolidated Balance Sheet. We believe that our cash on hand and our current bank credit facilities will be sufficient to meet our working capital requirements and contractual commitments for the next 12 months. We expect to fund our working capital needs from cash flows generated from our operations and borrowings under our revolving credit facility, to the extent needed. As we expect to continue to generate positive free cash flow in 2014 and beyond, we expect to repay the amounts outstanding under our revolving credit facility absent any acquisitions. See additional discussion under Financing Facilities below. Operating Activities Net cash provided by operating activities totaled $56.9 million for the six months ended June 30, 2014 as compared to $80.4 million during the same period in 2013. The year over year decrease in net cash provided by operating activities is attributable to the collection of a $13.4 million insurance receivable in the first quarter of 2013 and certain working capital increases that are not expected to continue. Investing Activities Net cash used in investing activities totaled $50.6 million for the six months ended June 30, 2014, compared to $59.5 million during the same period in 2013. The decrease in net cash used in investing activities is primarily the result of increased capital additions due to organic growth projects, offset with a decrease in acquisition expenditures in 2014. Anticipated Future Capital Expenditures. We currently anticipate that the majority of our capital expenditures for the foreseeable future will be driven by organic growth projects, including the purchase of ATMs for existing as well as new ATM management agreements and various compliance requirements as discussed in Recent Events and Trends - Capital Investments. We currently expect that our capital expenditures for the remainder of 2014 will total approximately $64 million, the majority of which will be utilized to purchase additional ATMs for our Company-owned accounts, to deploy ATMs at new merchant locations, for technology upgrades and compliance purposes and to enhance our existing devices with additional functionalities. We expect such expenditures to be funded primarily through cash generated from our operations. In addition, we will continue to evaluate selected acquisition opportunities that complement our existing ATM network. We believe that significant expansion opportunities continue to exist in all of our current markets, as well as in other international markets, and we will continue to pursue those opportunities as they arise. Such acquisition opportunities, individually or in the aggregate, could be material and may be funded by additional borrowings under our revolving credit facility or other financing sources that may be available to us. 48 -------------------------------------------------------------------------------- Welch ATM Acquisition. On July 21, 2014, we announced a definitive agreement to acquire the Welch ATM business for cash purchase consideration (to be paid at closing) of approximately $160.0 million. The completion of the transaction is subject to regulatory approvals established by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as well as the satisfaction of other customary closing conditions. The Company anticipates that the transaction will be completed during the third quarter of 2014. Financing Activities Net cash used in financing activities totaled $31.7 million and $12.5 million for the six months ended June 30, 2014 2013 respectively. During the six months ended June 30, 2014, we repurchased $20.6 million of outstanding senior subordinated notes and repurchased $6.1 million in capital stock associated with the surrender of shares by employees to satisfy their personal income tax obligations. Financing Facilities As of June 30, 2014, we had approximately $474.2 million in outstanding long-term debt, which was primarily comprised of: (1) $287.5 million of convertible notes of which $221.0 million was recorded on our balance sheet net of the unamortized note discount, (2) $179.4 million of 8.25% senior subordinated notes due September 2018, (3) $73.2 million in borrowings under our revolving credit facility, and (4) $0.6 million in notes payable outstanding under equipment financing lines of Cardtronics Mexico. Revolving Credit Facility. As of June 30, 2014, we had a $375.0 million revolving credit facility that was led by a syndicate of banks including JPMorgan Chase, N.A. and Bank of America, N.A. This revolving credit facility provides us with $375.0 million in available borrowings and letters of credit (subject to the covenants contained within the credit agreement governing the revolving credit facility) and can be increased to up to $500.0 million under certain conditions and subject to additional commitments from the lender group. The revolving credit facility has an expiration date of April 2019. Borrowings under our revolving credit facility accrue interest at a variable rate based upon our Total Net Leverage Ratio (as defined in the credit agreement) and the Alternate Base Rate (as defined in the credit agreement) or the Adjusted LIBO Rate (as defined in the credit agreement) at our option. Additionally, we are required to pay a commitment fee on the unused portion of the revolving credit facility. Substantially all of our domestic assets, including the stock of our wholly-owned domestic subsidiaries and 66% of the stock of our first-tier foreign subsidiaries, are pledged to secure borrowings made under the revolving credit facility. Furthermore, each of our material wholly-owned domestic subsidiaries has guaranteed the full and punctual payment of our obligations under the revolving credit facility. There are currently no restrictions on the ability of our wholly-owned subsidiaries to declare and pay dividends directly to us. The primary restrictive covenants within the credit agreement governing our revolving credit facility include (1) limitations on the amount of senior secured net debt and total net debt that we can have outstanding at any given point in time and (2) the maintenance of a set ratio of earnings to fixed charges, as computed quarterly on a trailing 12-month basis, adjusted for the pro forma effect of acquisitions. Additionally, we are limited on the amount of restricted payments, including dividends, which we can make pursuant to the terms of the credit agreement; however, we may generally make restricted payments so long as no event of default has occurred and is continuing and the total net leverage ratio is less than 3.0 to 1.0 at the time such restricted payment is made. As of June 30, 2014, the weighted average interest rate on our outstanding revolving credit facility borrowings was approximately 2.2%. Additionally, as of June 30, 2014, we were in compliance with all the covenants contained within the facility and would continue to be in compliance even in the event of substantially higher borrowings or substantially lower earnings. As of June 30, 2014, we had approximately $299.7 million in available borrowing capacity under the $375.0 million revolving credit facility. Convertible Notes. In November 2013, we completed a private placement of $287.5 million in Convertible Notes that pay interest semi-annually at a rate of 1.00% per annum and mature on December 1, 2020. There are no restrictive covenants associated with these Convertible Notes. In connection with the Convertible Notes, we also entered into Note Hedges at a purchase price of $72.6 million, and sold Warrants for proceeds of $40.5 million, the net effect of which was to raise the effective conversion price of the Convertible Notes to $73.29. We are required to pay interest semi-annually on June 1st and December 1st, and to make principal payments on the Convertible Notes at maturity or upon conversion. We are permitted to settle any conversion obligation under the Convertible Notes, in excess of the principal balance, in cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. We intend to satisfy any conversion premium by issuing shares of our common stock. For additional details, see Part I. Financial Information, Item 1. Notes to Consolidated Financial Statements, Note 8. Long-Term Debt. Senior Subordinated Notes due 2018. In August 2010, we issued $200.0 million of notes due 2018 ("2018 Notes"). The 2018 Notes are subordinate to borrowings made under the revolving credit facility and carry an 8.25% senior subordinated coupon. Interest is paid semi-annually in arrears on March 1st and September 1st of each year. The 2018 Notes, which are guaranteed by all of our 100% owned domestic subsidiaries, contain no maintenance covenants and only limited incurrence covenants, under which we have considerable flexibility. Pursuant to the terms of the indenture, we are limited on the amount of restricted payments including dividends that we can make. These limitations are generally governed by a fixed charge ratio incurrence test and an overall restricted payments basket. During the six months ended June 30, 2014, we made open market repurchases for $20.6 million of the principal amount of these the 2018 Notes and subsequently cancelled the acquired notes. In July 2014, we announced a tender offer for the remainder of our outstanding 2018 Notes ($179.4 million) to 49 -------------------------------------------------------------------------------- be funded with proceeds from a new senior note issuance (see further discussion in the paragraph that follows). For any 2018 Notes not tendered, we intend to call any remaining notes outstanding during the third quarter such that all remaining 2018 will be fully retired. Senior Notes due 2022. In July 2014, we completed a private offering of $250.0 million of 5.125% senior notes due 2022. The majority of the net proceeds from this offering will fund the Company's pending tender offer and consent solicitation of the Company's 8.25% senior subordinated notes due 2018. The remainder of the net proceeds will be used for general corporate purposes, including acquisitions. As of June 30, 2014, we were in compliance with all applicable covenants required under the 2018 Notes. Other Borrowing Facilities · Cardtronics Mexico equipment financing agreements. Between 2007 and 2010, Cardtronics Mexico entered into several separate five-year equipment financing agreements with a single lender, of which four agreements have remaining balances as of June 30, 2014. These agreements, which are denominated in pesos and bear interest at an average fixed rate of 9.79%, were utilized for the purchase of ATMs to support the growth in our Mexico operations. As of June 30, 2014, approximately $8.0 million pesos ($0.6 million U.S.) were outstanding under the agreements, with any future borrowings to be individually negotiated between the lender and Cardtronics Mexico. Pursuant to the terms of the loan agreements, we have issued guarantees for 51.0% of the obligations under these agreements (consistent with our ownership percentage in Cardtronics Mexico). As of June 30, 2014, the total amount of these guarantees was $4.1 million pesos ($0.3 million U.S.). · Cardtronics U.K. overdraft facility. Cardtronics U.K. has a £1.0 million overdraft facility. This overdraft facility, which bears interest at 1.0% over the Bank of England's base rate (0.5% as of June 30, 2014) and is secured by a letter of credit posted under our revolving credit facility, is utilized for general corporate purposes for our U.K. operations. The letter of credit we have posted that is associated with this overdraft facility reduces the available borrowing capacity under our corporate revolving credit facility discussed above. As of June 30, 2014, there were no amounts outstanding under the overdraft facility. New Accounting Standards See Part I Financial Information, Item 1. Notes to Consolidated Financial Statements, Note 17 New Accounting Pronouncements. 50 -------------------------------------------------------------------------------- |