BLACKHAWK NETWORK HOLDINGS, INC - FORM 8-K - EX-99.1 - EX 99.1 - July 16, 2014

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Exhibit 99.1
News Release

  INVESTORS/ANALYSTS:
MEDIA:
  Patrick Cronin
Teri Llach
  (925) 226-9973
(925) 226-9028
  investor.relations@bhnetwork.com
Teri.llach@bhnetwork.com



Blackhawk Announces Second Quarter 2014 Financial Results
Adjusted Operating Revenues Rise 29%


Pleasanton, California, July 16, 2014 — Blackhawk Network Holdings, Inc. (NASDAQ: HAWK / HAWKB) today announced financial results for the second quarter ended June 14, 2014.
CEO Bill Tauscher commented, “For the second consecutive quarter adjusted operating revenue growth was 29% driven by strong sales of open loop gift cards in the U.S., increases in international load value, and the addition of InteliSpend, the incentives and rewards business we acquired in late 2013. Worldwide load value grew 36%, or 25% excluding acquisitions, and international accounted for 21% of total load value during the second quarter.”
CFO Jerry Ulrich added, “Our bottom line financial performance for the quarter exceeded our expectations due mainly to a favorable court ruling on a patent litigation matter and the earlier than expected execution of a contractual change with an issuing bank in our InteliSpend incentives business unit.” The court decision resulted in the reversal of a fiscal year 2011 loss accrual which, together with interest, reduced second quarter general and administrative expenses by $3.9 million (a $2.3 million benefit after tax). Ulrich continued, “In addition, we were able to complete a contract amendment with our incentives products issuing bank that better matches fee revenue with delivery and use of our prepaid incentives cards as compared to the previous accounting treatment. Even without these items, results exceeded our guidance provided last quarter.”

GAAP financial results for the second quarter of 2014 compared to the second quarter of 2013

•
Operating revenues totaled $283.9 million, an increase of 26% from $225.9 million for the quarter ended June 15, 2013. This increase was due to a 22% increase in commissions and fees driven primarily by higher closed loop gift card sales, a 40% increase in program, interchange, marketing and other fees due to the acquisition of InteliSpend in late 2013 and strong open loop gift card sales in the U.S. that was partially offset by lower open loop card expiration revenues in Australia, and a 35% increase in product sales primarily driven by Cardpool.
•
Net income totaled $5.1 million compared to net income of $2.1 million for the quarter ended June 15, 2013. The increase was driven by overall business growth, the benefits from the favorable court ruling, the amended issuing bank contract described above, and lower mark-to-market partner equity expense, partially offset by lower open loop gift card revenues in Australia and intangible asset amortization expense related to the InteliSpend and Retailo acquisitions.
•
Earnings per diluted share was $0.09 compared to earnings per diluted share of $0.04 for the quarter ended June 15, 2013. Diluted shares outstanding increased 3% to 53.7 million.








Non-GAAP financial results for the second quarter of 2014 compared to the second quarter of 2013 (see Table 2 for Reconciliation of Non-GAAP Measures)

•
Adjusted operating revenues totaled $138.6 million, an increase of 29% from $107.7 million for the quarter ended June 15, 2013.
•
Adjusted EBITDA totaled $21.1 million, an increase of 14% from $18.5 million for the quarter ended June 15, 2013. Adjusted EBITDA growth was less than revenue growth due to investments in our distribution partner network including fixtures and program development funding as well as costs associated with the rollout of the T-Mobile Mobile Money product.
•
Adjusted net income totaled $8.9 million, an increase of 2% from $8.7 million for the quarter ended June 15, 2013 which was less than the Adjusted EBITDA growth rate due to higher depreciation expense resulting from prior year investments in new technology and increased interest expense related to debt incurred for acquisitions.
•
Adjusted diluted EPS was $0.17, an increase of 6% from $0.16 for the quarter ended June 15, 2013.



Conference Call

The Company will provide additional details on Q2 2014 performance and its outlook for Q3 2014 during a conference call scheduled for Wednesday, July 16, 2014 at 2:00 p.m. PDT / 5:00 p.m. EDT. Joining the call will be Blackhawk’s CEO, William Tauscher; President, Talbott Roche; and Chief Financial & Administrative Officer, Jerry Ulrich. Participants may listen to a real time audio webcast of the call by visiting the Company’s investor relations website located at http://ir.blackhawknetwork.com. Following the call, an archived webcast will be available on the Company’s investor relations website, or the replay can be accessed by dialing (888) 286-8010 and entering the participant passcode 42491284. The replay will be available until Wednesday, July 23, 2014.


About Blackhawk Network

Blackhawk Network Holdings, Inc. is a prepaid payment network which supports the physical and digital distribution of a variety of prepaid products. Blackhawk Network utilizes proprietary technology to provide consumers a wide selection of gift cards, prepaid telecom handsets, airtime cards and general purpose reloadable cards across a global network totaling over 180,000 stores. Through Blackhawk’s digital platform, the Company supports prepaid products and offers across a growing network of digital distribution partners including leading etailers, financial service providers, social apps, mobile wallets and other integrated physical-to-digital channels. Founded in 2001, Blackhawk Network is headquartered in Pleasanton, California, and offers products and services in the United States and 21 other countries. For more information, please visit www.blackhawknetwork.com and www.giftcardmall.com.


Use of Non-GAAP Financial Measures

Blackhawk regards the non-GAAP financial measures provided in this press release as useful measures of the operational and financial performance of its business. Reconciliations of non-GAAP financial measures to Blackhawk’s financial results as determined in accordance with GAAP are included at the end of this press release following the accompanying financial data. The use of non-GAAP financial measures has certain limitations as they do not reflect all items of income, expense, or cash flows that affect Blackhawk’s financial performance under GAAP. These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from, measures prepared in accordance with GAAP. In addition, these non-GAAP measures may differ from the non-GAAP information used by other companies, including peer companies, and therefore comparability may be limited. Blackhawk encourages investors and others to review Blackhawk’s financial information in its entirety and not rely on any single financial measure.









Forward Looking Statements

This press release may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are indicated by words or phrases such as "guidance," "believes," "expects," "anticipates," "estimates," "plans," "continuing," "ongoing," and similar words or phrases and the negative of such words and phrases. Forward-looking statements are based on our current plans and expectations and involve risks and uncertainties which are, in many instances, beyond our control, and which could cause actual results to differ materially from those included in or contemplated or implied by the forward-looking statements. Such risks and uncertainties include the following: our ability to grow adjusted operating revenues and adjusted net income as anticipated, our ability to grow at historic rates or at all, the consequences should we lose one or more of our top distribution partners or fail to attract new distribution partners to our network or if the financial performance of our distribution partners' businesses decline, our reliance on our content providers, the demand for their products and our exclusivity arrangements with them, our reliance on relationships with card issuing banks, the consequences to our future growth if our distribution partners fail to actively and effectively promote our products and services, the requirement that we comply with applicable laws and regulations, including increasingly stringent money-laundering rules and regulations, risks related to our ongoing relationship with Safeway and other risks and uncertainties described in our reports and filings with the Securities and Exchange Commission, including the risks and uncertainties set forth in Item 1A under the heading Risk Factors in our recent Annual Report on Form 10-K. We undertake no obligation to update forward-looking statements to reflect developments or information obtained after the date hereof and disclaim any obligation to do so other than as may be required by law.



BLACKHAWK NETWORK HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 
Twelve Weeks Ended
 
Twenty Four Weeks Ended
 
June 14, 2014
 
June 15, 2013
 
June 14, 2014
 
June 15, 2013
OPERATING REVENUES:
 
 
 
 
 
 
 
Commissions and fees
$
216,341

 
$
176,819

 
$
394,436

 
$
321,294

Program, interchange, marketing and other fees
40,421

 
28,907

 
76,086

 
53,265

Product sales
27,182

 
20,136

 
46,537

 
36,353

Total operating revenues
283,944

 
225,862

 
517,059

 
410,912

OPERATING EXPENSES:
 
 
 
 
 
 
 
Distribution partner commissions
144,023

 
118,153

 
262,617

 
214,135

Processing and services
45,314

 
34,258

 
86,939

 
66,394

Sales and marketing
45,779

 
39,932

 
84,570

 
68,257

Costs of products sold
25,495

 
18,509

 
44,799

 
34,359

General and administrative
10,934

 
11,015

 
25,537

 
22,795

Business acquisition expense (benefit) and amortization of acquisition intangibles
3,458

 
(1,384
)
 
7,869

 
(707
)
Total operating expenses
275,003

 
220,483

 
512,331

 
405,233

OPERATING INCOME
8,941

 
5,379

 
4,728

 
5,679

OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
Interest income and other income (expense), net
353

 
96

 
(56
)
 
373

Interest expense
(956
)
 
—

 
(1,001
)
 
—

INCOME BEFORE INCOME TAX EXPENSE
8,338

 
5,475

 
3,671

 
6,052

INCOME TAX EXPENSE
3,275

 
3,470

 
1,492

 
3,788

NET INCOME BEFORE ALLOCATION TO NON-CONTROLLING INTEREST
5,063

 
2,005

 
2,179

 
2,264

Add: Net loss attributable to non-controlling interests
(net of tax)
53

 
126

 
96

 
213

NET INCOME ATTRIBUTABLE TO BLACKHAWK NETWORK HOLDINGS, INC.
$
5,116

 
$
2,131

 
$
2,275

 
$
2,477

EARNINGS PER SHARE:
 
 
 
 
 
 
 
Basic - Class A and Class B
$
0.10

 
$
0.04

 
$
0.04

 
$
0.05

Diluted - Class A and Class B
$
0.09

 
$
0.04

 
$
0.04

 
$
0.05

Weighted average shares outstanding - basic
52,307

 
51,056

 
52,201

 
50,713

Weighted average shares outstanding - diluted
53,740

 
52,240

 
53,725

 
51,746




BLACKHAWK NETWORK HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
(Unaudited)

 
 June 14, 2014
 
 December 28, 2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
299,727

 
$
550,380

Settlement receivables, net
276,447

 
813,448

Accounts receivable, net
121,766

 
126,369

Deferred income taxes
20,145

 
20,145

Prepaid expenses and other current assets
59,030

 
67,474

Total current assets
777,115

 
1,577,816

Property, equipment and technology, net
84,703

 
79,663

Intangible assets, net
87,972

 
98,689

Goodwill
133,088

 
133,521

Deferred income taxes
727

 
727

Other assets
83,358

 
90,678

TOTAL ASSETS
$
1,166,963

 
$
1,981,094

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Settlement payables
$
538,707

 
$
1,484,047

Consumer and customer deposits
57,423

 
54,915

Accounts payable and accrued operating expenses
81,890

 
99,499

Current portion of note payable
8,705

 
—

Other current liabilities
41,161

 
81,270

Total current liabilities
727,886

 
1,719,731

Deferred income taxes
24,376

 
24,488

Note payable
165,393

 
—

Other liabilities
9,629

 
8,711

Total liabilities
927,284

 
1,752,930

Stockholders’ equity:
 
 
 
Class A common stock
12

 
12

Class B common stock
41

 
41

Additional paid-in capital
117,457

 
107,139

Treasury stock
(472
)
 
(126
)
Accumulated other comprehensive loss
(3,396
)
 
(2,873
)
Retained earnings
119,177

 
116,975

Total Blackhawk Network Holdings, Inc. equity
232,819

 
221,168

Non-controlling interest
6,860

 
6,996

Total stockholders’ equity
239,679

 
228,164

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
1,166,963

 
$
1,981,094



BLACKHAWK NETWORK HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Twenty Four Weeks Ended
 
June 14, 2014
 
June 15, 2013
OPERATING ACTIVITIES:
 
 
 
Net income before allocation to non-controlling interest
$
2,179

 
$
2,264

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Depreciation and amortization
21,688

 
10,651

Program development cost amortization
11,551

 
8,748

Provision for doubtful accounts and sales adjustments
1,252

 
1,682

Employee stock-based compensation expense
6,090

 
3,462

Distribution partner mark-to-market expense
(88
)
 
6,995

Change in fair value of contingent consideration
—

 
(903
)
Reversal of reserve for patent litigation
(3,852
)
 
—

Excess tax benefit from stock-based awards
(1,024
)
 
(398
)
Other
1,134

 
—

Changes in operating assets and liabilities:
 
 
 
Settlement receivables
534,315

 
284,260

Settlement payables
(942,572
)
 
(775,899
)
Accounts receivable, current and long-term
14,061

 
20,626

Prepaid expenses and other current assets
4,224

 
7,420

Other assets
(12,259
)
 
(10,119
)
Consumer and customer deposits
(1,409
)
 
(61
)
Accounts payable and accrued operating expenses
(17,808
)
 
(13,278
)
Other current and long-term liabilities
(15,496
)
 
(17,662
)
Income taxes, net
(13,363
)
 
(16,457
)
Net cash used in operating activities
(411,377
)
 
(488,669
)
INVESTING ACTIVITIES:
 
 
 
Change in overnight cash advances to Safeway
0

 
430,000

Expenditures for property, equipment and technology
(18,241
)
 
(15,110
)
Payment for working capital adjustment for business acquisitions, net
(1,366
)
 
—

Cash received for assumption of liabilities from prior business acquisition
3,917

 
—

Change in restricted cash
—

 
8,968

Other
—

 
(250
)
Net cash provided by (used in) investing activities
(15,690
)
 
423,608

FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of note payable
175,000

 
0

Payments of costs for issuance of note payable
(2,452
)
 
0

Payments for acquisition liability
—

 
(1,881
)
Payments for initial public offering costs
—

 
(4,694
)
Reimbursements for initial public offering costs
—

 
5,540

Proceeds from issuance of common stock from exercise of employee stock options and employee stock purchase plans
3,620

 
235

Excess tax benefit from stock-based awards
1,024

 
398

Other
(694
)
 
(484
)
Net cash provided by (used in) financing activities
176,498

 
(886
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
(84
)
 
(2,335
)
DECREASE IN CASH AND CASH EQUIVALENTS
(250,653
)
 
(68,282
)
CASH AND CASH EQUIVALENTS - Beginning of year
550,380

 
172,665

CASH AND CASH EQUIVALENTS - End of period
$
299,727

 
$
104,383



BLACKHAWK NETWORK HOLDINGS, INC.
SUPPLEMENTAL INFORMATION
(In thousands except percentages, average transaction value and per share amounts)
(Unaudited)
TABLE 1: OTHER OPERATIONAL DATA
 
Twelve Weeks Ended
 
Twenty Four Weeks Ended
 
June 14, 2014
 
June 15, 2013
 
June 14, 2014
 
June 15, 2013
Load value
$
2,619,658

 
$
1,919,384

 
$
4,807,362

 
$
3,529,225

Commissions and fees as a % of load value
8.3
%
 
9.2
%
 
8.2
%
 
9.1
%
Distribution partner commissions paid as a % of commissions and fees
66.6
%
 
66.8
%
 
66.6
%
 
66.6
%
Number of load transactions
57,538

 
46,640

 
102,176

 
83,446

Average load transaction value
$
45.53

 
$
41.15

 
$
47.05

 
$
42.29


TABLE 2: RECONCILIATION OF NON-GAAP MEASURES
 
Twelve Weeks Ended
 
Twenty Four Weeks Ended
 
June 14, 2014
 
June 15, 2013
 
June 14, 2014
 
June 15, 2013
Adjusted operating revenues:
 
 
 
 
 
 
 
Total operating revenues
$
283,944

 
$
225,862

 
$
517,059

 
$
410,912

Issuing bank contract amendment
(1,325
)
 
—

 
—

 
—

Distribution partner commissions
(144,023
)
 
(118,153
)
 
(262,617
)
 
(214,135
)
Adjusted operating revenues
$
138,596

 
$
107,709

 
$
254,442

 
$
196,777

Adjusted EBITDA:
 
 
 
 
 
 
 
Net income before allocation to non-controlling interest
$
5,063

 
$
2,005

 
$
2,179

 
$
2,264

Interest income and other income (expense), net
(353
)
 
(96
)
 
56

 
(373
)
Interest expense
956

 
—

 
1,001

 
—

Income tax expense
3,275

 
3,470

 
1,492

 
3,788

Depreciation and amortization
10,770

 
5,924

 
21,688

 
10,651

EBITDA
19,711

 
11,303

 
26,416

 
16,330

Adjustments to EBITDA:
 
 
 
 
 
 
 
Employee stock-based compensation
3,420

 
1,828

 
6,090

 
3,462

Distribution partner mark-to-market expense
(710
)
 
6,878

 
(88
)
 
6,995

Issuing bank contract amendment adjustment
(1,325
)
 
—

 
—

 
—

Change in fair value of contingent consideration
—

 
(1,481
)
 
—

 
(903
)
Adjusted EBITDA
$
21,096

 
$
18,528

 
$
32,418

 
$
25,884

Adjusted EBITDA margin:
 
 
 
 
 
 
 
Total operating revenues
$
283,944

 
$
225,862

 
$
517,059

 
$
410,912

Operating income
$
8,941

 
$
5,379

 
$
4,728

 
$
5,679

Operating margin
3.1
%
 
2.4
%
 
0.9
%
 
1.4
%
Adjusted operating revenues
$
138,596

 
$
107,709

 
$
254,442

 
$
196,777

Adjusted EBITDA
$
21,096

 
$
18,528

 
$
32,418

 
$
25,884

Adjusted EBITDA margin
15.2
%
 
17.2
%
 
12.7
%
 
13.2
%
Adjusted net income:
 
 
 
 
 
 
 
Income before income tax expense
$
8,338

 
$
5,475

 
$
3,671

 
$
6,052

Employee stock-based compensation
3,420

 
1,828

 
6,090

 
3,462

Distribution partner mark-to-market expense

(710
)
 
6,878

 
(88
)
 
6,995

Issuing bank contract amendment adjustment
(1,325
)
 
—

 
—

 
—

Change in fair value of contingent consideration
—

 
(1,481
)
 
—

 
(903
)
Amortization of intangibles
4,585

 
897

 
10,117

 
1,078

Adjusted income before income tax expense
14,308

 
13,597

 
19,790

 
16,684

Income tax expense
3,275

 
3,470

 
1,492

 
3,788

Tax expense on adjustments
2,146

 
1,516

 
6,060

 
2,411

Adjusted income tax expense
5,421

 
4,986

 
7,552

 
6,199

Adjusted net income before allocation to non-controlling interest
8,887

 
8,611

 
12,238

 
10,485

Add: Net loss attributable to non-controlling interests (net of tax)
53

 
126

 
96

 
213

Adjusted net income attributable to Blackhawk Network Holdings, Inc.
$
8,940

 
$
8,737

 
$
12,334

 
$
10,698



TABLE 2: RECONCILIATION OF NON-GAAP MEASURES (continued)
 
Twelve Weeks Ended
 
Twenty Four Weeks Ended
 
June 14, 2014
 
June 15, 2013
 
June 14, 2014
 
June 15, 2013
Adjusted EPS:
 
 
 
 
 
 
 
Net income attributable to Blackhawk Network Holdings, Inc.
$
5,116

 
$
2,131

 
$
2,275

 
$
2,477

Income allocated to participating securities
(13
)
 
(52
)
 
(47
)
 
(118
)
Net income attributable to common shareholders
$
5,103

 
$
2,079

 
$
2,228

 
$
2,359

Diluted weighted-average shares outstanding
53,740

 
52,240

 
53,725

 
51,746

Diluted earnings per share
$
0.09

 
$
0.04

 
$
0.04

 
$
0.05

Adjusted net income attributable to Blackhawk Network Holdings, Inc.
$
8,940

 
$
8,737

 
$
12,334

 
$
10,698

Adjusted income allocated to participating securities
(21
)
 
(138
)
 
(68
)
 
(267
)
Adjusted net income attributable to common shareholders
$
8,919

 
$
8,599

 
$
12,266

 
$
10,431

Diluted weighted-average shares outstanding
53,740

 
52,240

 
53,725

 
51,746

Adjusted diluted earnings per share
$
0.17

 
$
0.16

 
$
0.23

 
$
0.20


TABLE 3: RECONCILIATION OF GAAP CASH FLOW TO FREE CASH FLOW

A significant portion of gift card sales occurs in late December of each year as a result of the holiday selling season. The timing of December holiday sales, cash inflows from our distribution partners and cash outflows to our content providers results in significant but temporary increases in our Cash, cash equivalents and restricted cash, Overnight cash advances to Parent, Settlement receivables and Settlement payables balances at the end of each fiscal year relative to normal daily balances. As a result, the year over year comparison of cash generated by operating activities and total changes in cash can vary significantly. In light of this effect on interim periods, set forth below is a calculation of “free cash flow” which we calculate as the net cash flow from operating activities adjusted to exclude the impact from changes in Settlement payables and Settlement receivables, less expenditures for property, equipment and technology. Cash from the sale of prepaid products is held for a short period of time and then remitted, less our commissions, to our content providers, and is significantly impacted by the portion of gift card sales that occur in late December. Because this cash flow is temporary and highly seasonal, it is not available for other uses, and it is therefore excluded from our calculation of free cash flow. Free cash flow provides information regarding the cash that our business generates in interim periods without the fluctuations resulting from the timing of cash inflows and outflows from gift card sales in late December, which we believe is useful to understanding our business.

 
Twenty Four Weeks Ended
 
June 14, 2014
 
June 15, 2013
Net cash flow used in operating activities, as reported
$
(411,377
)
 
$
(488,669
)
Decrease in settlement payables, net of settlement receivables
408,257

 
491,639

Net cash provided by (used in) operating activities, as adjusted
(3,120
)
 
2,970

Expenditures for property, equipment and technology
(18,241
)
 
(15,110
)
Free cash flow
$
(21,361
)
 
$
(12,140
)


BLACKHAWK NETWORK HOLDINGS, INC Reports