Coinstar Announces Third Quarter Results

BELLEVUE, Wash.--(BUSINESS WIRE)--Coinstar, Inc. (NASDAQ:CSTR) today announced results for the three-month and nine-month periods ended September 30, 2006.

Highlights for the third quarter ended September 30, 2006, were as follows:

• Revenue - $140.0 million
• EBITDA - $28.2 million (see Appendix A)
• Free cash flow - $17.5 million (see Appendix A)
• Adjusted earnings per fully taxed, fully diluted share of $0.26 (see reconciliation below)
• Net income of $5.3 million

Highlights for the nine months ended September 30, 2006, were as follows:

• Revenue - $396.4 million
• EBITDA - $78.9 million (see Appendix A)
• Free cash flow - $47.3 million (see Appendix A)
• Adjusted earnings per fully taxed, fully diluted share of $0.70 (see reconciliation below)
• Net income of $13.6 million

Included in GAAP net income for the third quarter were certain non-cash charges including $1.7 million in amortization of intangible assets, $1.4 million in non-cash stock based compensation and our portion of the non-cash losses in investments in DVD kiosk companies, and amortization of financing fees totaling $0.6 million. Excluding these items, net of taxes, Coinstar, Inc. reported adjusted net income of $7.3 million. A reconciliation of GAAP earnings per share to adjusted earnings per share is as follows:

		Quarter ended 9/30/06
GAAP fully taxed, fully diluted earnings per share		$ 0.19
Amortization of intangibles, net of tax		0.03
Stock based compensation, net of tax		0.03
Non-cash losses in investments in DVD kiosk companies and amortization of financing fees, net of tax		0.01
Adjusted fully taxed, fully diluted earnings per share		$ 0.26

Included in GAAP net income for the first nine months of 2006 were certain non-cash charges including $4.5 million in amortization of intangible assets, $0.8 million in amortization of financing fees, $4.3 million in non-cash stock based compensation, and our portion of the non-cash losses associated with our investments in DVD kiosk companies totaling $1.0 million. Excluding these items, net of taxes, Coinstar, Inc. reported adjusted net income of $19.6 million. A reconciliation of GAAP earnings per share to adjusted earnings per share is as follows:

		Nine Months ended 9/30/06
GAAP fully taxed, fully diluted earnings per share		$ 0.49
Amortization of intangibles, net of tax		0.09
Stock based compensation expense, net of tax		0.09
Non-cash losses in investments in DVD kiosk companies and amortization of financing fees, net of tax		0.03
Adjusted fully taxed, fully diluted earnings per share		$ 0.70

At September 30, 2006, Coinstar, Inc. had approximately $71.6 million in cumulative net operating loss carryforwards. Although Coinstar recorded $4.1 million in tax expense for the third quarter, cash paid for taxes during the three-month period ended September 30, 2006, totaled only $382,000 as a result of these net operating loss carryforwards.

“We are pleased with our operating performance announced today and we credit a focus on integration and execution. Our third quarter, more than any other period during 2006, demonstrates significant progress in this regard as we’re beginning to realize previously announced cost savings,” Dave Cole, Chief Executive Officer of Coinstar, Inc. stated. “We continue to experience solid momentum as we introduce our 4^th Wall management solution to new and existing retailers, and we are seeing an increasing number of customers embracing more than one Coinstar service. By continuing to execute this plan, we believe Coinstar is ideally positioned to grow its leadership position in the retail industry and drive substantial value for retailers and shareholders alike.”

Other Information

		Quarter ended 9/30/06		Quarter ended 9/30/05
Cash paid for capital expenditures (in thousands)		$ 9,040		$ 9,342
Installed Base
Coin		13,100		12,400
- Coin to card or e-certificate enabled		7,300		4,700
- E-payment enabled		3,100		4,100
Crane		31,000		24,000
Bulk heads and other		264,000		159,000
POSA terminals		19,500		17,800

Share Repurchase

For the three months ended September 30, 2006, Coinstar repurchased 105,918 shares of common stock at an average price of $26.62 per share. The aggregate expenditure during the quarter totaled $2.8 million.

Year to date, Coinstar has repurchased 333,925 shares of common stock at an average price of $24.02 per share. The aggregate expenditure for the year to date period totaled $8.0 million.

Fourth Quarter Expectations

Management estimates that revenue for the fourth quarter ending December 31, 2006, will range from $135 million to $145 million. Management estimates that for the fourth quarter ending December 31, 2006, GAAP earnings per fully taxed, fully diluted share will range from $0.10 to $0.17 and adjusted earnings per fully taxed, fully diluted share will range from $0.17 to $0.24.

Conference Call

A conference call to discuss the third quarter will be broadcast live over the Internet today, Thursday, November 2, 2006, at 5:00 p.m. Eastern Time. The Webcast will be hosted at the About Us – Investor Relations section of Coinstar’s Web site at www.coinstar.com.

About Coinstar, Inc.

Coinstar, Inc. (NASDAQ:CSTR) is a multi-national company offering a range of 4th Wall^™ solutions for the retailers’ front of store consisting of self-service coin counting, electronic payment solutions, entertainment services, money transfer and self-service DVD rental. The company’s products and services can be found at more than 60,000 retail locations including supermarkets, drug stores, mass merchants, financial institutions, convenience stores and restaurants.

Certain statements in this press release are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The words "believe," "estimate," "expect," "intend," "anticipate," "goals," variations of such words, and similar expressions identify forward-looking statements, but their absence does not mean that the statement is not forward-looking. The forward-looking statements in this release include statements regarding Coinstar, Inc.’s anticipated growth and future operating results. Forward-looking statements are not guarantees of future performance and actual results may vary materially from the results expressed or implied in such statements. Differences may result from actions taken by Coinstar, Inc., as well as from risks and uncertainties beyond Coinstar, Inc.'s control. Such risks and uncertainties include, but are not limited to, the effect of and financing of recent acquisitions, the ability to successfully integrate acquired businesses, the ability to bring new and repeat customers to Coinstar^® machines, the ability to obtain new agreements with potential retailers for the installation of Coinstar machines and the retention of the current agreements with our existing retailers on terms that are not materially adverse to Coinstar, Inc., and legal or governmental regulatory action and uncertainties relating to the ultimate success of new business initiatives. The foregoing list of risks and uncertainties is illustrative, but by no means exhaustive. For more information on factors that may affect future performance, please review "Risk Factors" described in Item 1A of Part II of our most recent Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission. These forward-looking statements reflect Coinstar, Inc.'s expectations as of the date of this release. Coinstar, Inc. undertakes no obligation to update the information provided herein.

Appendix A

(in thousands unless otherwise noted)

Non GAAP measures

Non GAAP measures are provided as a complement to results provided in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Non GAAP measures are not a substitute for measures computed in accordance with GAAP. Definitions of such non GAAP measurements are provided below. These definitions are provided to allow the reader to reconcile non GAAP data to that presented in accordance with GAAP. Our non GAAP measures may be different from the presentation of financial information by other companies.

EBITDA represents earnings before net interest expense, income taxes, depreciation, amortization and other. We believe EBITDA is an important non GAAP measure as it provides useful information regarding our ability to service, incur or pay down indebtedness and for purposes of calculating certain debt covenants. In addition, management uses such non GAAP measures internally to evaluate the Company’s performance and manage its operations. See below for reconciliation of most comparable GAAP measurements to EBITDA.

	Quarter ended 09/30/06		Nine Months ended 09/30/06
Net income	$ 5,289		$ 13,587
Depreciation, amortization and other	15,071		44,062
Interest expense, net	3,712		10,657
Early retirement of debt	-		238
Income taxes	4,144		10,384
EBITDA	$ 28,216		$ 78,928

Free cash flow: we believe free cash flow is an important non GAAP measure as it provides useful cash flow information regarding our ability to service, incur or pay down indebtedness and repurchase our common stock. We use free cash flow as a measure to reflect cash available to service our debt as well as to fund our discretionary and non-discretionary expenditures. Free cash flow may be reconciled from net cash provided by operating activities, the most directly comparable GAAP measure, as follows:

	Quarter ended 09/30/06		Nine Months ended 09/30/06
Net cash provided by operating activities	$ 25,693		$ 68,065
Changes in operating assets and liabilities, net of acquisitions	802		4,094
Cash paid for capital expenditures	(9,040)		(24,904)
FREE CASH FLOW	$ 17,455		$ 47,255

Adjusted earnings per share: we believe adjusted earnings per share is an important non GAAP measure as it provides useful information about our results from operations excluding certain non-cash charges. We believe this measure provides an important comparison to prior period earnings and is representative of our operating results.

Coinstar, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
		Three months ended				Nine months ended
		Sept. 30,		Sept. 30,		Sept. 30,		Sept. 30,
		2006		2005		2006		2005
REVENUE		$ 140,036		$ 118,707		$ 396,395		$ 334,132
EXPENSES:
Direct operating		90,719		78,022		263,455		225,291
Marketing		4,626		2,785		8,939		5,717
Research and development		1,457		1,445		4,091		4,270
General and administrative		14,654		9,546		41,231		26,825
Depreciation and other		13,410		11,696		39,564		33,460
Amortization of intangible assets		1,661		1,140		4,498		3,275
Income from operations		13,509		14,073		34,617		35,294
OTHER INCOME (EXPENSE):
Interest income and other, net		487		345		1,378		1,050
Interest expense		(4,120)		(3,353)		(11,838)		(9,303)
Income (loss) from equity investments		(443)		127		52		442
Early retirement of debt		-		-		(238)		-
Income before income taxes		9,433		11,192		23,971		27,483
Income taxes		(4,144)		(4,372)		(10,384)		(10,730)
NET INCOME		$ 5,289		$ 6,820		$ 13,587		$ 16,753
NET INCOME PER SHARE:
Basic		$ 0.19		$ 0.27		$ 0.49		$ 0.66
Diluted		$ 0.19		$ 0.27		$ 0.49		$ 0.65
WEIGHTED SHARES OUTSTANDING:
Basic		27,607		25,491		27,692		25,372
Diluted		27,910		25,685		27,977		25,637

Coinstar, Inc.
Non GAAP Consolidated Statements of Operations
Excluding Stock Based Compensation Expense(a)
(in thousands, except per share data)
(unaudited)
Income from operations before stock based compensation expense is a financial measure we use to evaluate the underlying results and operating performance of our business. The difference between income from operations (the most comparable GAAP measure) and income from operations before stock based compensation expense (the non GAAP measure) reflects the impact of adopting SFAS 123(R) on the current period results. We believe income from operations before stock based compensation expense is a useful measure that allows investors to draw comparisons between operating results reported prior to adoption of SFAS 123(R) and the current period which may mask underlying trends and make it difficult to give investors perspective on underlying business results.
	Three months ended Sept. 30, 2006						Three months ended
			Stock Based
	GAAP		Compensation		Pro Forma		Sept. 30,
	Results		Expense(a)		Results			2005
REVENUE	$	140,036	$		$	140,036	$	118,707
EXPENSES:
Direct operating		90,719		(249)		90,470		78,022
Marketing		4,626		(35)		4,591		2,785
Research and development		1,457		(78)		1,379		1,445
General and administrative		14,654		(870)		13,784		9,546
Depreciation and other		13,410				13,410		11,696
Amortization of intangible assets		1,661				1,661		1,140
Income from operations		13,509		1,232		14,741		14,073
OTHER INCOME (EXPENSE):
Interest income and other, net		487				487		345
Interest expense		(4,120)				(4,120)		(3,353)
Income (loss) from equity investments		(443)				(443)		127
Early retirement of debt		-				-		-
Income before income taxes		9,433		1,232		10,665		11,192
Income taxes		(4,144)		(294)		(4,438)		(4,372)
NET INCOME	$	5,289	$	938	$	6,227	$	6,820
NET INCOME PER SHARE:
Basic	$	0.19			$	0.23	$	0.27
Diluted	$	0.19			$	0.22	$	0.27
(a) Stock-based compensation expense represents the incremental expense recorded as a result of adopting SFAS 123(R), Share-Based Payment.

Coinstar, Inc.
Consolidated Balance Sheets
(in thousands)
(unaudited)
		Sept. 30, 2006		Dec. 31, 2005
CURRENT ASSETS:
Cash and cash equivalents		$ 30,737		$ 45,365
Cash in machine or in transit		61,380		60,070
Cash being processed		69,992		69,832
Trade accounts receivable, net of allowance for doubtful accounts of $955 and $469 at Sept. 30, 2006 and December 31, 2005, respectively		16,183		9,046
Inventory		38,748		31,234
Deferred income taxes		16,441		17,330
Prepaid expenses and other current assets		11,961		11,020
Total current assets		245,442		243,897
PROPERTY AND EQUIPMENT, NET		151,620		148,811
DEFERRED INCOME TAXES		216		5,385
OTHER ASSETS		4,469		5,392
EQUITY INVESTMENTS		19,284		19,966
INTANGIBLE ASSETS, NET		44,514		40,139
GOODWILL		206,818		179,811
TOTAL ASSETS		$ 672,363		$ 643,401
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$ 43,513		$ 34,760
Accrued liabilities payable to retailers		76,582		77,175
Other accrued liabilities		35,756		26,941
Current portion of long-term debt and capital lease obligations		7,903		3,850
Total current liabilities		163,754		142,726
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS		193,490		206,628
DEFERRED TAX LIABILITY		6,061		-
Total liabilities		363,305		349,354
STOCKHOLDERS’ EQUITY:
Common stock		337,571		328,951
Retained earnings (accumulated deficit)		429		(13,158)
Treasury stock		(30,806)		(22,783)
Accumulated other comprehensive income		1,864		1,037
Total stockholders’ equity		309,058		294,047
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$ 672,363		$ 643,401

COINSTAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
		Nine Month Periods Ended September 30,
		2006		2005
OPERATING ACTIVITIES:
Net income		$ 13,587		$ 16,753
Adjustments to reconcile income to net cash provided by operating activities:
Depreciation and other		39,564		33,460
Amortization of intangible assets		4,498		3,275
Amortization of deferred financing fees		570		582
Loss on early retirement of debt		238		—
Non-cash stock-based compensation		4,313		242
Deferred income taxes		8,827		9,620
Income from equity investments		(52)		(442)
Return on equity investments		720		628
Other		(106)		(14)
Cash provided (used) by changes in operating assets and liabilities, net of effects of business acquisitions:
Accounts receivable		(3,318)		(1,651)
Inventory		(8,705)		(783)
Prepaid expenses and other current assets		(1,081)		(160)
Other assets		119		51
Accounts payable		6,059		(168)
Accrued liabilities payable to retailers		(2,650)		(4,252)
Other accrued liabilities		5,482		(277)
Net cash provided by operating activities		68,065		56,864
INVESTING ACTIVITIES:
Purchase of available-for-sale securities		—		(2,000)
Purchase of property and equipment		(24,904)		(34,327)
Acquisitions, net of cash acquired of $2,801 in 2006 and $0 in 2005, respectively		(30,547)		(18,586)
Proceeds from sale of fixed assets		170		110
Issuance of note receivable		—		(1,500)
Net cash used by investing activities		(55,281)		(56,303)
FINANCING ACTIVITIES:
Principal payments on long-term debt and capital lease obligations		(22,418)		(2,750)
Proceeds from exercise of stock options and issuance of shares under employee stock purchase plan		2,719		3,090
Repurchase of common stock		(8,023)		—
Net cash (used by) provided by financing activities		(27,722)		340
Effect of exchange rate changes on cash		1,780		(1,380)
NET DECREASE IN CASH AND CASH EQUIVALENTS, CASH IN MACHINE OR IN TRANSIT, AND CASH BEING PROCESSED		(13,158)		(479)
CASH AND CASH EQUIVALENTS, CASH IN MACHINE OR IN TRANSIT, AND CASH BEING PROCESSED:
Beginning of period		175,267		156,787
End of period		$ 162,109		$ 156,308
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest		$ 11,075		$ 8,512
Cash paid during the period for income taxes		1,404		1,074
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Purchase of vehicles financed by capital lease obligations		$ 13,149		$ 1,710
Common stock issued in conjunction with acquisition, net of issue costs of $44 in 2005		—		1,183
Accrued acquisition costs		331		—